SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of November, 2004
CHINA SOUTHERN AIRLINES COMPANY LIMITED
(Translation of registrant's name into English)
Baiyun International Airport
Guangzhou, People's Republic of China
(Address of principal executive offices)
(Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.)
Form 20-F. [X] Form 40-F. [ ]
(Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.)
Yes. [ ] No. [X]
(If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b):82-________.)
China Southern Airlines Company Limited (the "Company") on November 15,
2004 distributed its Circular regarding a very substantial acquisition and
connected transactions of the Company, in English and Chinese to its
shareholders. A copy of each of the documents is included in this Form 6-K of
the Company.
THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION
IF YOU ARE IN ANY DOUBT as to any aspect of this circular, you should consult a
stockbroker or other registered dealer in securities, bank manager, solicitor,
professional accountant or other professional adviser.
IF YOU HAVE SOLD OR TRANSFERRED all your shares of China Southern Airlines
Company Limited, you should at once hand this circular to the purchaser or
transferee or to the bank, stockbroker or other agent through whom the sale was
effected for transmission to the purchaser or the transferee.
The Stock Exchange of Hong Kong Limited takes no responsibility for the contents
of this circular, makes no representation as to its accuracy or completeness and
expressly disclaims any liability whatsoever for any loss however arising from
or in reliance upon the whole or any part of the contents of this circular.
[LOGO] [CHINESE CHARACTERS]
CHINA SOUTHERN AIRLINES COMPANY LIMITED
(a joint stock limited company incorporated in the People's
Republic of China with limited liability)
(STOCK CODE: 1055)
VERY SUBSTANTIAL ACQUISITION AND
CONNECTED TRANSACTIONS
FINANCIAL ADVISER
[JPMORGAN LOGO]
INDEPENDENT FINANCIAL ADVISER TO THE
INDEPENDENT BOARD COMMITTEE AND THE INDEPENDENT SHAREHOLDERS
[ICEA LOGO]
---------------------
A subsidiary of ICBC
A letter from the Independent Board Committee containing its advice to the
Independent Shareholders in respect of the terms of the Sale and Purchase
Agreement and the Financial Services Agreement is set out on pages 27 to 28 of
this circular. A letter from ICEA containing its advice to the Independent Board
Committee and the Independent Shareholders in respect of the terms of the Sale
and Purchase Agreement and the Financial Services Agreement is set out on pages
29 to 48 of this circular.
A notice convening an extraordinary general meeting of the Company to be held at
the headquarters of the Company at No. 278, Ji Chang Road, Guangzhou, Guangdong
Province, the PRC on 31 December, 2004 at 9:00 am is set out on pages 353 to 355
of this circular. If you are not able to attend and/or vote at the EGM, you are
strongly urged to complete the accompanying form of proxy in accordance with the
instructions printed thereon and return it to the Company's branch share
registrar in Hong Kong, Hong Kong Registrars Limited, at 46th Floor, Hopewell
Centre, 183 Queen's Road East, Hong Kong as soon as possible and in any event
not later than 24 hours before the time appointed for the holding of the EGM or
any adjournment thereof. Completion and return of the form of proxy will not
preclude you from attending and voting at the meeting or any adjourned meeting
should you so wish.
12 November, 2004
CONTENTS
Page
DEFINITIONS......................................................................... 1
GLOSSARY............................................................................ 6
LETTER FROM THE BOARD
1. Introduction............................................................. 7
2. The Sale and Purchase Agreement.......................................... 8
3. Reasons for and benefits of the Acquisition.............................. 10
4. Financial effect of the Acquisition...................................... 14
5. Implications under the Listing Rules..................................... 15
6. Prospective financial information........................................ 15
7. On-going Connected Transactions.......................................... 16
8. Financial Services Agreement............................................. 22
9. Recommendation........................................................... 25
10. EGM...................................................................... 25
11. Additional information................................................... 26
LETTER FROM THE INDEPENDENT BOARD COMMITTEE......................................... 27
LETTER FROM ICEA.................................................................... 29
APPENDIX I - INFORMATION REGARDING THE AIRLINE OPERATIONS OF NORTHERN
AIRLINES GROUP AND XINJIANG AIRLINES GROUP.......................... 49
APPENDIX II - ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP................... 65
APPENDIX III - ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF XINJIANG AIRLINES GROUP................... 112
APPENDIX IV - FINANCIAL INFORMATION OF THE LISTED GROUP........................... 156
APPENDIX V - FINANCIAL INFORMATION OF THE COMBINED GROUP......................... 236
APPENDIX VI - PROFIT FORECAST..................................................... 245
APPENDIX VII - ADDITIONAL INFORMATION TO SHAREHOLDERS.............................. 249
APPENDIX VIII - PROPERTY VALUATION.................................................. 270
APPENDIX IX - GENERAL INFORMATION................................................. 347
NOTICE OF THE EGM................................................................... 353
-i-
DEFINITIONS
In this circular, the following expressions have the following meanings,
unless the context requires otherwise:
"Acquisition" the acquisition of the Business and Assets by the
Company pursuant to the Sale and Purchase Agreement
and all transactions contemplated thereunder
"Airline Operations" the airlines and airlines-related operations
"Board" the board of Directors
"Business and Assets" certain Airline Operations, assets and properties of
Northern Airlines Group and Xinjiang Airlines Group to
be acquired by the Company from the Vendors pursuant
to the Sale and Purchase Agreement, including aircraft,
engines, spare parts, aviation equipment and facilities,
properties, office facilities, and other fixed, current and
intangible assets
"CAAC" Civil Aviation Administration of China
"Cap" the maximum aggregate annual value for each of the
continuing connected transactions under the Listing
Rules
"Catering Agreement" the catering agreement dated 12 November, 2004
between the Company and the Catering Company
"Catering Company" China Southern Airlines Group Air Catering Company
Limited, a company incorporated in the PRC with limited
liability
"CEIC" CEIC Data Co., Ltd.
"Chesterton" Chesterton Petty Limited, a chartered surveyor and
independent property valuer incorporated in Hong Kong
"Combined Group" the Listed Group together with the Airline Operations of
Northern Airlines Group and the Airline Operations of
Xinjiang Airlines Group
"Company" China Southern Airlines Company Limited, a joint stock
company incorporated in the PRC with limited liability
-1-
DEFINITIONS
"CSAHC" China Southern Air Holding Company, a state-owned
enterprise established under the laws of the PRC and the
controlling shareholder of the Company
"Debts" the debts and liabilities to be assumed by the Company
from the Vendors pursuant to the Sale and Purchase
Agreement
"Directors" directors of the Company
"Effective Date" the date when the Independent Shareholders approve the
Sale and Purchase Agreement and the Acquisition
"EGM" an extraordinary general meeting of the Company to be held to
approve, amongst other things, the Sale and Purchase
Agreement, the Financial Services Agreement, the
resignation of a director of the Company and the election
of a new director of the Company
"EIU" Economist Intelligence Unit
"Finance Company" Southern Airlines Group Finance Company Limited, a company
incorporated in the PRC with limited liability
"Financial Services Agreement" the financial services agreement dated 12 November, 2004 between
the Company and the Finance Company
"ICEA" ICEA Capital Limited, a deemed licensed corporation carrying
out Type 1 (dealing in securities), Type 4 (advising on
securities), Type 6 (advising on corporate finance) and
Type 9 (asset management) regulated activities under SFO,
which has been appointed as the independent financial
adviser to the Independent Board Committee in respect of
the Sale and Purchase Agreement, the Financial Services
Agreement and the transactions contemplated thereunder
"IFRS" International Financial Reporting Standards promulgated
by the International Accounting Standards Board
"ILFC" International Lease Finance Corporation, an independent
third party which is not connected to the Company
-2-
DEFINITIONS
"Independent Board Committee" the independent committee of the Board, the members of
which consist of Simon To, Peter Lok, Wei Ming Hai,
Wang Zhi and Sui Guang Jun, who are the independent
non-executive Directors of the Company, formed to
advise the Independent Shareholders with respect to the
Sale and Purchase Agreement, the Financial Services
Agreement and the transactions contemplated thereunder
"Independent Shareholders" shareholders of the Company other than CSAHC and its
associates
"JPMorgan" J.P. Morgan Securities (Asia Pacific) Limited, which is
licensed by the Securities and Futures Commission for Types 1,
4, 6 and 7 regulated activities under the Securities and
Futures Ordinance, being the financial adviser to the Company
in respect of the Acquisition
"KPMG" KPMG, Certified Public Accountants registered in Hong
Kong
"KPMG Huazhen" KPMG Huazhen, Certified Public Accountants registered
in the PRC
"Latest Practicable Date" 5 November, 2004, being the latest practicable date prior to
the printing for ascertaining certain information contained herein
"Lease Agreement 1" the lease agreement dated 12 November, 2004 between the Company,
CSAHC and Northern Airlines
"Lease Agreement 2" the lease agreement dated 12 November, 2004 between the Company,
CSAHC and Xinjiang Airlines
"Lease Agreement 3" the lease agreement dated 12 November, 2004 between the Company and CSAHC
"Lease Agreements" Lease Agreement 1, Lease Agreement 2 and Lease Agreement 3
"Listed Group" the Company and its subsidiaries
"Listing Rules" the Rules Governing the Listing of Securities on the
Stock Exchange
-3-
DEFINITIONS
"Northern Airlines" China Northern Airlines Company, a company
incorporated in the PRC with limited liability
"Northern Airlines Group" Northern Airlines and its subsidiaries
"On-going Connected the Lease Agreements and the Catering Agreement which
Transactions" will be entered into between the Company and connected
persons of the Company within the meaning of the
Listing Rules, which will constitute continuing connected
transactions of the Company under the Listing Rules
upon completion of the Acquisition, details of which are
set out in paragraph 7 headed "On-going Connected
Transactions" under the section headed "Letter from the
Board" of this circular
"Parties" the Company and the Vendors
"PBOC" the People's Bank of China, the central bank of the PRC
"PRC" or "China" the People's Republic of China (excluding, for the
purpose of this circular only, Hong Kong, Macau and
Taiwan)
"Provision of Deposit Service" the provision of deposit of money service by the Finance
Company to the Company pursuant to the Financial
Services Agreement
"Sale and Purchase Agreement" the sale and purchase agreement dated 12 November, 2004 between
the Company, CSAHC, Northern Airlines and Xinjiang
Airlines pursuant to which the Company agreed to acquire
and CSAHC, Northern Airlines and Xinjiang Airlines agreed
to sell the Business and Assets
"SASAC" State-owned Assets Supervision and Administration
Commission of the State Council
"SFO" Securities and Futures Ordinance (Chapter 571 of the
laws of Hong Kong)
"Stock Exchange" The Stock Exchange of Hong Kong Limited
"Target Group" Northern Airlines Group and Xinjiang Airlines Group
"Vendors" CSAHC, Northern Airlines and Xinjiang Airlines
-4-
DEFINITIONS
"Xinjiang Airlines" Xinjiang Airlines Company, a company incorporated in
the PRC with limited liabilities
"Xinjiang Airlines Group" Xinjiang Airlines and its subsidiaries
"Zhong Qi Hua Valuation the Valuation Report on the Transfer of Business and
Reports" Assets of Northern Airlines as of 31 December, 2003
(Zhongqihuapingbaozi (2004) Report No. 149-1) and the
Valuation Report on the Transfer of Business and Assets
of Xinjiang Airlines as of 31 December, 2003
(Zhongqihuapingbaozi (2004) Report No. 149-2)
prepared by China Enterprise Appraisal Co., Ltd.,
independent qualified valuers jointly appointed by
CSAHC and the Company, and approved by the SASAC
on 14 October, 2004
For the purpose of this circular, unless otherwise indicated, Renminbi
amounts have been translated into Hong Kong dollars using the rate of
HK$1:RMB1.06.
-5-
GLOSSARY
In this circular, the following terms shall have the meanings indicated,
unless the context otherwise requires:
CAPACITY MEASUREMENTS
"available seat kilometres" the number of seats made available for sale multiplied by
or "ASKs" the kilometres flown
"available tonne kilometres" the tonnes of capacity available for the transportation of
or "ATKs" revenue load (passengers and cargo) multiplied by the
kilometres flown
TRAFFIC MEASUREMENTS
"revenue passenger kilometres" the number of passengers carried multiplied by the
or "RPKs" kilometres flown
"revenue freight tonne the load of cargo in tonnes multiplied by the kilometres
kilometres" or "RFTKs" flown
"revenue tonne kilometres" the load (passengers and cargo) in tonnes multiplied by
or "RTKs" the kilometres flown
YIELD MEASUREMENTS
"passenger yield" revenue from passenger operations divided by RPKs
"cargo yield" revenue from cargo operations divided by cargo tonne
kilometres
"average yield" revenue from airline operations (passenger and cargo)
divided by RTKs
"tonne" 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
UTILISATION
"utilisation rates" the actual number of flight and taxi hours per aircraft per
operating day
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LETTER FROM THE BOARD
[LOGO] [CHINESE CHARACTERS]
CHINA SOUTHERN AIRLINES COMPANY LIMITED
(a joint stock limited company incorporated in the People's
Republic of China with limited liability)
DIRECTORS: REGISTERED ADDRESS:
Guangzhou Economic and
Executive Directors: Technology Development Zone
Yan Zhi Qing (Director) Guangdong Province
Liu Ming Qi (Vice Chairman of PRC
the Board of Directors)
Wang Chang Shun (Vice Chairman of PRINCIPAL PLACE OF BUSINESS
the Board of Directors, President) IN HONG KONG:
Peng An Fa (Director) Unit B1, 9th Floor
Wang Quan Hua (Director) United Centre
Zhao Liu An (Director) 95 Queensway
Zhou Yong Qian (Director) Hong Kong
Zhou Yong Jin (Director)
Xu Jie Bo (Director, Chief Financial Officer)
Wu Rong Nan (Director)
Independent Non-Executive Directors:
Simon To
Peter Lok
Wei Ming Hai
Wang Zhi
Sui Guang Jun
Supervisors:
Sun Xiao Yi (Chairman of the Supervisory
Committee)
Yang Guang Hua (Supervisor)
Yan Yi Hua (Supervisor)
12 November, 2004
To the Shareholders
Dear Sir or Madam,
VERY SUBSTANTIAL ACQUISITION AND
CONNECTED TRANSACTIONS
1. INTRODUCTION
On 12 November, 2004, the Board announced that the Sale and Purchase
Agreement was entered into by the Company as the purchaser and CSAHC, Northern
Airlines and Xinjiang Airlines as the vendors, whereby the Company will acquire
the Business and Assets and assume the Debts from the Vendors.
-7-
LETTER FROM THE BOARD
The Independent Board Committee, comprising the independent non-executive
Directors, namely Simon To, Peter Lok, Wei Ming Hai, Wang Zhi and Sui Guang Jun,
has been formed to advise the Independent Shareholders with respect to the Sale
and Purchase Agreement, the Financial Services Agreement and the transactions
contemplated thereunder. ICEA has been appointed as the independent financial
adviser to advise the Independent Board Committee and the Independent
Shareholders in respect of the Sale and Purchase Agreement, the Financial
Services Agreement and the transactions contemplated thereunder.
The purpose of this circular is (i) to give you further information
regarding the Acquisition, the On-going Connected Transactions which will
constitute continuing connected transactions of the Company after completion of
the Sale and Purchase Agreement, and the Financial Services Agreement; (ii) to
set out the recommendations from the Independent Board Committee to the
Independent Shareholders and the advice from ICEA to the Independent Board
Committee and the Independent Shareholders in respect of the Sale and Purchase
Agreement, the Financial Services Agreement and the transactions contemplated
thereunder; and (iii) to give you the notice of the EGM and other information
required under the Listing Rules.
2. THE SALE AND PURCHASE AGREEMENT
(1) DATE
12 November, 2004
(2) PARTIES
(a) The Company, as the purchaser. The principal business activity
of the Company is that of civil aviation.
(b) CSAHC, the controlling shareholder of the Company holding
approximately 50.30% equity interest in the Company as of the
Latest Practicable Date. The principal business activity of
CSAHC, based on its business licence, is that of operating and
managing, on behalf of the PRC government, certain state-owned
assets, including properties, and state-owned shareholdings in
various PRC companies.
(c) Northern Airlines, a wholly owned subsidiary of CSAHC, as the
vendor. The principal business activity of Northern Airlines
is that of civil aviation.
(d) Xinjiang Airlines, a wholly owned subsidiary of CSAHC, as the
vendor. The principal business activity of Xinjiang Airlines
is that of civil aviation.
(3) THE BUSINESS AND ASSETS TO BE ACQUIRED AND THE DEBTS TO BE ASSUMED
(a) The Business and Assets to be acquired consist of certain
Airline Operations, assets and properties of Northern Airlines
Group and Xinjiang Airlines Group, including aircraft,
engines, spare parts, aviation equipment and facilities,
properties, office facilities, and other fixed, current and
intangible assets.
-8-
LETTER FROM THE BOARD
(b) The Debts to be assumed consist of all indebtedness in the
aggregate sum of RMB15,090,109,000 owed by Xinjiang Airlines
Group or Northern Airlines Group in connection with their
civil aviation business.
(4) CONDITIONS PRECEDENT
The Sale and Purchase Agreement is subject to the following conditions
precedent:
(a) the Vendors obtaining all approvals of the Sale and Purchase
Agreement by the working meeting of the president of CSAHC and
the SASAC; and
(b) the Independent Shareholders approving the Sale and Purchase
Agreement and the transactions contemplated thereunder.
(5) CONSIDERATION AND PAYMENT TERMS
The provisional amount of the consideration of the Acquisition, and
of the Debts to be assumed under the Sale and Purchase Agreement are set
at RMB16,912,244,600 and RMB15,090,109,000 respectively. These amounts are
arrived at after arm's length negotiations between the Vendors and the
Company, with reference to the valuation of the Business and Assets, and
Debts set out in the Zhong Qi Hua Valuation Reports. The Zhong Qi Hua
Valuation Reports value the Business and Assets, Debts and net asset value
of the Target Group at RMB16,912,244,600, RMB15,090,109,000 and
RMB1,822,135,600 respectively as of 31 December, 2003.
The provisional amount of the consideration of the Acquisition, and
of the Debts to be assumed by the Company will be subject to adjustment
and finalisation based on the book value of the Business and Assets, and
of the Debts as of the Effective Date, as determined in the financial
statements of the Business and Assets of the Target Group prepared under
the PRC Accounting Rules and Regulations and audited by KPMG Huazhen. A
portion of the final adjusted consideration of the Acquisition will be
settled by way of assumption of the final adjusted Debts, with the
remaining balance to be payable by the Company to the bank account
designated by the Vendors in cash. On the assumption that the Acquisition
had taken place on 30 June, 2004, and based on the financial statements of
the Business and Assets of the Target Group prepared under the PRC
Accounting Rules and Regulations and audited by KPMG Huazhen on the same
date, the remaining balance payable by the Company in cash to the bank
account designated by the Vendors on that date would have been RMB1,897
million.
The Company shall make repayments of the Debts directly to the
creditors of such Debts in accordance with the terms and conditions of the
relevant agreements between the Vendors and the creditors in relation to
the Debts.
(6) FUNDING
The Company will finance the Acquisition and the assumption of the
Debts through its internal resources, and short term U.S. dollar
commercial loans from commercial
-9-
LETTER FROM THE BOARD
banks amounting to RMB1,000 million. Such commercial banks are not and
will not be connected persons (as defined in the Listing Rules) of the
Company. The Company will make use of its unutilised banking facilities to
draw down the required commercial loans.
(7) TRANSITION PERIOD
The terms of the Sale and Purchase Agreement provide for a
transition period commencing from 31 December, 2003 and ending on the
Effective Date, during which if a material change occurs such that any of
the Business and Assets is damaged, lost, or the ownership of which no
longer belongs to the Vendors, the Vendors shall give notice to the
Company immediately. The Vendors must obtain the prior consent of the
Company before disposing of any Business and Assets during the transition
period.
All profits and losses arising from the Business and Assets during
the transition period belong to the Vendors. All profits and losses from
the Effective Date thereon shall belong to the Company.
(8) DELIVERY TERMS AND OWNERSHIP
The Vendors shall deliver all the Business and Assets, together with
all documents evidencing or constituting ownership of such Business and
Assets, to the Company within five days of the Effective Date.
3. REASONS FOR AND BENEFITS OF THE ACQUISITION
The Directors believe that the Acquisition represents an attractive
opportunity for the Company to consolidate its strong market position and
improve its financial performance. Both Northern Airlines and Xinjiang Airlines
are leading airlines in their respective operating regions. The Acquisition will
bring various commercial benefits to the Company in terms of broadening its
flight service network, increasing its fleet size and transportation capacity,
reducing costs and boosting its overall efficiency, ultimately strengthening the
Listed Group's position as one of China's largest airlines and enhancing its
value for its investors.
(1) BROADEN FLIGHT NETWORK
(a) The Listed Group is headquartered in Guangzhou with 12
operational bases in central and Southern China, offering
regular flights on 248 domestic routes to over 69 cities in
China, 18 routes to Hong Kong, and 45 international routes to
24 cities in East and Southeast Asia, Australia, North America
and Europe, as of 30 June, 2004. However, due to the lack of
operational bases, the Company is only capable of offering
very limited flight services in Northern China and
Northwestern China.
(b) Northern Airlines Group is headquartered in Shenyang with
operational bases in Dalian, Changchun and Harbin. Northern
Airlines Group's operating region is predominantly in
Northeastern China. It is also the dominant Chinese airline
serving flight routes to Korea and Japan due to the proximity
of its operating region to those countries.
-10-
LETTER FROM THE BOARD
(c) Xinjiang Airlines Group is headquartered in Urumqi, with
operational bases and operating region in the Xinjiang
autonomous region. It also commands a strong market position
on domestic routes between Xinjiang and other parts of China,
and on international routes to Russia, the Middle East and
West Asia.
As the flight networks of the Listed Group, Northern Airlines Group
and Xinjiang Airlines Group are disparate and complementary to each other,
the Acquisition will significantly broaden the Company's flight network.
After the Acquisition, the Company will have a strong presence in
additional key markets in the Western and Northeastern part of China,
enabling it to provide more comprehensive civil aviation service to
customers.
The Directors believe that the Acquisition provides significant
growth potential for the Listed Group, particularly in light of the "Go
West" and "Redevelop the Northeast" campaigns initiated by the PRC
government. The Directors also believe that the huge investment made by
the PRC government in Western and Northeastern China will lead to rapid
economic growth in those regions over the next decade or more, which, in
turn, will result in rapid increase in air traffic volume to and from
those regions.
In addition, the Acquisition will also significantly enhance the
Company's international air transportation business. The Company will be
able to offer flight services between its bases in Southern, Northeastern
and Northwestern China and other international cities in North America,
Southeast Asia, North Asia, the Middle East as well as Europe.
The table below illustrates the Company's domestic base network
before and after the Acquisition:
BASE NETWORK BEFORE AND AFTER THE ACQUISITION
[BASE NETWORK MAP] Pre-transaction [BASE NETWORK MAP] Post-transaction
(2) INCREASE FLEET SIZE AND TRANSPORTATION CAPACITY
The Acquisition will substantially increase the fleet size of the
Listed Group. As of 30 June, 2004, the Listed Group owned and operated a
fleet of 139 medium and large size
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LETTER FROM THE BOARD
commercial passenger and cargo aircraft. The Acquisition will bring in 75
commercial passenger and cargo aircraft from Northern Airlines Group and
Xinjiang Airlines Group thereby increasing the Listed Group's fleet size
by 54% to 214 commercial aircraft. The increased economies of scale will
contribute to greater transportation capacity, higher operating
efficiency, lower operating and maintenance cost, more flexible flight
scheduling, greater bargaining power in aircraft acquisitions, better
financing terms for purchases and improved aircraft allocation for the
flight routes.
The tables below set out fleet and selected operating data of the
Target Group and the Listed Group individually, and on a combined basis,
for the year 2003 and the first half of 2004:
FIRST SIX MONTHS OF 2004
NORTHERN XINJIANG
LISTED AIRLINES AIRLINES
GROUP GROUP GROUP COMBINED
------ ----- -------- --------
Number of aircraft(1) 139 55 20 214
Passenger capacity
(ASK) (million) 25,928 7,693 3,722 37,343
Passenger traffic (RPK)
(million) 17,242 5,190 2,416 24,848
Passenger volume
(thousand) 13,315 3,621 1,264 18,200
Cargo and mail carried
(thousand tonne) 267 55 12 334
(1) As of 30 June, 2004 including owned and leased (on both finance and
operating lease basis) aircraft.
2003
NORTHERN XINJIANG
LISTED AIRLINES AIRLINES
GROUP GROUP GROUP COMBINED
------ -------- -------- --------
Number of aircraft(1) 132 50 20 202
Passenger capacity
(ASK) (million) 40,867 13,940 6,297 61,104
Passenger traffic (RPK)
(million) 26,387 9,147 4,092 39,626
Passenger volume
(thousand) 20,470 6,474 2,148 29,092
Cargo and mail carried
(thousand tonne) 464 111 21 596
(1) As of 31 December, 2003 including owned and leased (on both finance and
operating lease basis) aircraft.
-12-
LETTER FROM THE BOARD
(3) MINIMIZE ROUTE OVERLAP AND OPTIMIZE FLIGHT SCHEDULES
The Directors believe that the Acquisition will yield significant
benefits to the Listed Group through optimization of flight routes and
schedules.
Most of the major flight routes in the PRC are served by more than
one airline, and therefore the competition on most major flight routes is
intense. Although offering discounts on air ticket prices is still
regulated by the CAAC, many PRC airlines rely heavily on such measures to
attract passengers. As a result, the Listed Group faces significant
pressure on air ticket prices.
Prior to the Acquisition, the routes that the Listed Group shares
with Northern Airlines Group and Xinjiang Airlines Group account for
approximately 8.2% of the Listed Group's total routes. After the
Acquisition, the Listed Group will become the sole or main operator on
many of such shared flight routes. This reduction in route and slot
overlap will allow the Listed Group to gain advantageous air ticket
pricing power and improve its financial performance.
Moreover, the Listed Group could reduce the number of flights on
those shared routes without sacrificing sufficient coverage and service
quality. The Listed Group will then have additional capacity to support
other more profitable flight routes and thus generate additional revenue.
(4) ENHANCE AIR TICKET SALES NETWORK AND REDUCE OVERHEAD
Northern Airlines Group, Xinjiang Airlines Group and the Listed
Group each maintains an extensive air ticket sales network in major cities
and large ground services teams at major airports in China. The Listed
Group can achieve significant cost savings by rationalizing the sales
network and consolidating the ground service operations of the three
airlines. After the Acquisition, the Company plans to close a total of 14
geographically overlapping domestic air ticket sales offices (eight belong
to Northern Airlines Group, four belong to Xinjiang Airlines Group and two
to the Company) and four overseas air ticket sales offices (all belong to
Northern Airlines Group).
(5) IMPROVE ALLOCATION OF AIRCRAFT, ENGINES, SPARE PARTS AND CREWS
The Directors believe the expanded fleet will provide the Listed
Group greater flexibility in allocating aircraft between the combined
routes of the Listed Group, Northern Airlines Group and Xinjiang Airlines
Group.
For each of the three airlines, there is excess capacity in low
seasons, but limited or inadequate capacity during peak seasons. As most
of the flight routes served by them are different, each of the Listed
Group, Northern Airlines Group and Xinjiang Airlines Group has relatively
staggered peak and low seasons. After the Acquisition, the Company will be
able to re-deploy an enlarged team of aircraft, pilots and flight
personnel to the highest traffic routes and better ensure a balance of
demand and supply for capacity throughout the year.
-13-
LETTER FROM THE BOARD
Furthermore, since the Listed Group has already been operating
Boeing 737, 757 and Airbus 319, 320 aircraft that Xinjiang Airlines Group
and Northern Airlines Group are either currently operating or will be
acquiring according to their aircraft replacement schedules, the Listed
Group will be able to improve the internal allocation of engines and
high-value aircraft spare parts. For instance, the Directors believe that
after the Acquisition, the Listed Group may be able to purchase fewer
aircraft engines and spare parts and reduce inventory level of them.
Through redeployment of aircraft, pilots and crew, and better
allocation of spare parts, the Directors believe the Listed Group can
improve its operating efficiency and reduce operating costs and capital
expenditures.
(6) REDUCE MAINTENANCE COSTS
The Directors believe significant reduction in maintenance cost can
be achieved through more centralized maintenance functions and sharing of
maintenance personnel and equipment. The Company plans to centralize fleet
maintenance functions at five national maintenance bases which are
Guangzhou, Shenyang, Urumqi, Zhengzhou (or Wuhan) and Xiamen in the next
few years. These maintenance bases will be responsible for major overhauls
on all aircraft while the local bases will be responsible for minor
maintenance tasks on their own aircraft. The Directors believe that this
initiative will significantly improve efficiency and reduce the costs of
fleet maintenance.
(7) STRENGTHEN MARKETING EFFORTS
Since its listing on the Stock Exchange, the Company has implemented
many changes to its remuneration policies in order to improve the
effectiveness of marketing efforts by its business units. Under the
Company's current performance credit policy, its branch office located in
the city that a particular flight originates from (including both non-stop
and connecting flights) receives performance credit for the flights to the
immediate next destination. Previously, all performance credit earned by a
particular aircraft was given to the office in which that aircraft was
based in, which did not provide incentive for the offices in intermediate
cities to market the air ticket of that particular flight. After the
Acquisition, the Company plans to implement this remuneration policy to
the marketing units newly acquired from the Target Group. The Directors
believe that this will lead to a more effective and concerted marketing
effort by all the offices, and therefore resulting in higher sales
revenue.
4. FINANCIAL EFFECT OF THE ACQUISITION
Based on the pro forma financial information of the Combined Group
outlined in Appendix V of this circular, assuming that the Acquisition had taken
place on 30 June, 2004, there would not be any impact on the net assets of the
Listed Group following the Acquisition as of 30 June, 2004. On the same basis,
the total assets of the Listed Group would increase by 35%, or RMB15,179
million, which would be offset by an increase of RMB15,083 million in
liabilities and RMB96 million in minority interest.
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LETTER FROM THE BOARD
Based on the pro forma financial information of the Combined Group
outlined in Appendix V of this circular, assuming that the Acquisition had taken
place on 1 January, 2004, for the first six months ended 30 June, 2004, net
profit of the Listed Group would increase by 36%, or RMB95 million to RMB361
million following the Acquisition. On the same basis, basic earnings per share
would increase from RMB0.06 to RMB0.08, representing an accretion of 36%.
5. IMPLICATIONS UNDER THE LISTING RULES
The Acquisition exceeds 100% of the relevant percentage ratios under Rule
14.07 of the Listing Rules and therefore constitutes a very substantial
acquisition of the Company under the Listing Rules. Since CSAHC is the direct
controlling shareholder of the Company, the Acquisition also constitutes a
connected transaction for the Company under the Listing Rules and is therefore
subject to the approval by the Independent Shareholders at the EGM. The Board,
including the independent non-executive Directors, believes that the terms of
the Sale and Purchase Agreement and the Acquisition are fair and reasonable and
are in the interests of the Listed Group and its shareholders as a whole.
An Independent Board Committee has been formed to advise the Independent
Shareholders in respect of the Sale and Purchase Agreement and the Acquisition.
ICEA has been appointed as the independent financial adviser to advise the
Independent Board Committee and the Independent Shareholders in respect of the
Sale and Purchase Agreement and the Acquisition.
CSAHC and its associates are required to abstain from voting in respect of
the proposed resolution to approve the Sale and Purchase Agreement and the
Acquisition which will be conducted by poll.
6. PROSPECTIVE FINANCIAL INFORMATION
The Target Group has prepared certain prospective financial information in
respect of the Airline Operations of Northern Airlines Group and the Airline
Operations of Xinjiang Airlines Group for the year ending 31 December, 2004 in
compliance with Rule 14A.56(8) and Rule 14.62 of the Listing Rules. For further
details, please see Appendix VI. Neither the Target Group nor the Company
intends to update this information during the remainder of the year or to update
such information in future years, although the Directors are aware of the
requirements of Rule 13.09 notes 9 and 10 of the Listing Rules. This information
is necessarily based upon a number of assumptions (see Appendix VI) that, while
presented with numerical specificity and considered reasonable by the Target
Group, are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the control of the
Company or the Target Group, and upon assumptions with respect to future
business decisions which are subject to change. Accordingly, there can be no
assurance that these results will be realized. The prospective financial
information presented may vary from actual results, and these variations may be
material.
The Company and the Target Group believe that, on the bases and the
assumptions discussed in Appendix VI and in the absence of unforeseen
circumstances, the Target Group's
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LETTER FROM THE BOARD
forecast combined profit after taxation and minority interests but before the
extraordinary items for the year ending 31 December, 2004 under IFRS is unlikely
to be less than RMB148 million. Such forecast has been prepared based on the
principal assumptions set out in Appendix VI to this circular. In the event that
such forecast is not met, the Company will make further announcement to explain
the reasons. The texts of the letters from KPMG and JPMorgan in respect of the
profit forecast are set out in Appendix VI to this circular.
7. ON-GOING CONNECTED TRANSACTIONS
The Lease Agreements and the Catering Agreement will be entered into
between the Company and connected persons of the Company within the meaning of
the Listing Rules, which will constitute On-going Connected Transactions of the
Company under the Listing Rules upon completion of the Acquisition.
(A) LEASE AGREEMENTS
(1) LEASE AGREEMENT 1
Date
12 November, 2004
Parties
(a) CSAHC, as the lessor.
(b) Northern Airlines, as the lessor.
(c) The Company, as the lessee.
The property to be leased
CSAHC and Northern Airlines lease to the Company certain
buildings, facilities and other infrastructure related to the civil
aviation businesses of Northern Airlines situated at various
locations in Shenyang, Dalian, Jilin, Harbin, Chaoyang and Russia.
Term of Lease Agreement 1
Lease Agreement 1 is for a fixed term of three years,
commencing from the date of the lease, and is renewable, subject to
compliance with the relevant requirements of the Listing Rules by
the Company, by an application in writing by the Company to the
lessors three months before the end of the fixed term.
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LETTER FROM THE BOARD
Consideration and payment terms
The consideration for Lease Agreement 1 is RMB41,993,318.44
per year, payable in arrear by cheque, in cash or by bank transfer
on or before the 10th day of each calendar month, and is determined
after arm's length negotiation between the parties. Chesterton, an
independent qualified valuer in Hong Kong, has given its opinion
that the consideration for Lease Agreement 1 is not higher than the
current market prices of comparable properties. The consideration
will be funded wholly by the Company's internal resources.
The Cap
As the consideration has been determined after arm's length
negotiation between the parties and with regard to the current
market prices, the Cap for the Lease Agreement 1 is set at
RMB41,993,318.44 per year.
Reasons and benefits of the Lease Agreement 1
Following the Acquisition, the Company will expand its civil
aviation business to locations where the buildings, facilities and
infrastructure under the Lease Agreement 1 are situated at. The
purchase of such buildings, facilities and infrastructure by the
Company will involve the more time-consuming and costly process of
transferring to the Company the relevant titles, ownership or land
use rights relating thereto; whereas the entering into of the Lease
Agreement 1 allows the Company to use those buildings, facilities
and infrastructure to operate its expanded civil aviation business
from the commencement date of the Lease Agreement 1 at rents not
higher than the market rates for similar buildings, facilities and
infrastructure.
(2) LEASE AGREEMENT 2
Date
12 November, 2004
Parties
(a) CSAHC, as the lessor.
(b) Xinjiang Airlines, as the lessor.
(c) The Company, as the lessee.
The property to be leased
CSAHC and Xinjiang Airlines lease to the Company certain
buildings, facilities and other infrastructure related to the civil
aviation businesses of Xinjiang Airlines situated in Xinjiang and
Russia.
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LETTER FROM THE BOARD
Term of Lease Agreement 2
Lease Agreement 2 is for a fixed term of three years,
commencing from the effective date of the lease, and is renewable,
subject to compliance with the relevant requirements of the Listing
Rules by the Company, by an application in writing by the Company to
the lessor three months before the end of the fixed term.
Consideration and payment terms
The consideration for Lease Agreement 2 is RMB5,797,908.61 per
year, payable in arrear by cheque, in cash or by bank transfer on or
before the 10th day of each calendar month, and is determined after
arm's length negotiation between the parties. Chesterton, an
independent qualified valuer in Hong Kong, has given its opinion
that the consideration for Lease Agreement 2 is not higher than the
current market prices of comparable properties. The consideration
will be funded wholly by the Company's internal resources.
The Cap
As the consideration has been determined after arm's length
negotiation between the parties and with regard to the current
market prices, the Cap for the Lease Agreement 2 is set at
RMB5,797,908.61 per year.
Reasons and benefits of the Lease Agreement 2
Following the Acquisition, the Company will expand its civil
aviation business to locations where the buildings, facilities and
infrastructure under the Lease Agreement 2 are situated at. The
purchase of such buildings, facilities and infrastructure by the
Company will involve the more time-consuming and costly process of
transferring to the Company the relevant titles, ownership or land
use rights relating thereto; whereas the entering into of the Lease
Agreement 2 allows the Company to use those buildings, facilities
and infrastructure to operate its expanded civil aviation business
from the commencement date of Lease Agreement 2 at rents not higher
than the market rates for similar buildings, facilities and
infrastructure.
(3) LEASE AGREEMENT 3
Date
12 November, 2004
Parties
(a) CSAHC, as the lessor.
(b) The Company, as the lessee.
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LETTER FROM THE BOARD
The property to be leased
CSAHC leases to the Company certain lands by leasing the land
use rights of such lands to the Company. These lands had been
administratively allocated to Xinjiang Airlines and Northern
Airlines for the purposes of their civil aviation and related
businesses. Subsequently, CSAHC was authorised to deal with the land
use rights of such lands, including leasing, but not transferring,
such land use rights. Total area of the lands leased is 1,182,297
square metres, and the locations of such lands are in Urumqi,
Shenyang, Dalian and Harbin.
Term of Lease Agreement 3
Lease Agreement 3 is for a fixed term of three years,
commencing from the effective date of the lease, and is renewable,
subject to compliance with the relevant requirements of the Listing
Rules by the Company, by an application in writing by the Company to
the lessor three months before the end of the fixed term.
Consideration and payment terms
The rent for the land use rights of the designed lands under
Lease Agreement 3 is RMB22,298,033 per year, payable in arrear by
cheque, in cash or by bank transfer on or before the 10th day of
each calendar month, and is determined after arm's length
negotiation between the parties. Chesterton, an independent
qualified valuer in Hong Kong, has given its opinion that the
consideration for Lease Agreement 3 is not higher than the current
market prices of comparable properties. The consideration will be
funded wholly by the Company's internal resources.
The Cap
As the consideration has been determined after arm's length
negotiation between the parties and with regard to the current
market prices, the Cap for the Lease Agreement 3 is set at
RMB22,298,033 per year.
Benefits of the Lease Agreement 3
Following the Acquisition, the Company will expand its civil
aviation business to locations where the lands under the Lease
Agreement 3 are situated at. As CSAHC is prohibited from
transferring the land use rights of such lands to the Company, the
Company could only lease the land use rights of such lands from
CSAHC. The Lease Agreement 3 allows the Company to use those lands
to operate its expanded civil aviation business at rent not higher
than the market rates for similar lands.
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LETTER FROM THE BOARD
(B) CATERING AGREEMENT
DATE
12 November, 2004
PARTIES
(a) The Company.
(b) The Catering Company, which is wholly owned by CSAHC. The principal
business activity of the Catering Company is the provision of
in-flight meals to airlines.
CATERING SERVICE
The Catering Company will supply (1) in-flight meals in accordance
with the menus of in-flight meals agreed with the Company from time to
time, and in such quantity as the Company shall advise the Catering
Company in advance; and (2) catering services for different flights of the
Company (including normal, additional, chartered and temporary flights)
originating or stopping at the domestic airports, mainly in Northern China
and the Xinjiang regions where the Catering Company provides catering
services. The Combined Group will also obtain catering services and
in-flight meals from other catering companies.
TERM OF THE CATERING AGREEMENT
The Catering Agreement is for a fixed term of three years from the
date of the Catering Agreement.
CONSIDERATION AND PAYMENT TERMS
The parties have agreed, after arm's length negotiation, on the
price of each type of in-flight meals and the service charges for each
type of aircraft. The prices of in-flight meals and the service charges
are not higher than the market rate of comparable in-flight meals and
service charges. The Catering Company will issue an invoice listing out
the quantity of in-flight meals supplied, the agreed unit price and the
total price payable for each of the Company flight it provides service.
The invoice shall be verified and signed by the captain flight attendant
of that flight. At the end of each month, the Catering Company shall
deliver to the Company for its verification all the invoices issued during
that month. The Company will make payment to the Catering Company within
60 days of the receipt of the invoices.
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LETTER FROM THE BOARD
THE CAP
There are no historical figures available for the Catering Agreement
as it will only be entered into on 12 November, 2004. The Cap for the
Catering Agreement is set at RMB220 million per year. As discussed above,
the flight network of the Company will broaden following the Acquisition.
The Cap for the Catering Agreement is therefore determined on the basis of
the estimated number of passengers to be carried and the number of flights
per year mainly under the enlarged flight network in Northern China and
the Xinjiang regions of the Company during the term of the Catering
Agreement, the prices of the in-flight meals and the service charges of
the catering services under the Catering Agreement.
REASONS AND BENEFITS OF THE CATERING AGREEMENT
The Company can secure in-flight meals and catering services at
prices no higher than the market price for its flights originating or
stopping at domestic airports mainly in Northern China and the Xinjiang
regions where the Catering Company provides catering services. The Company
is not precluded from procuring in-flight meals and catering services from
other catering companies where the terms and conditions are favourable.
(C) IMPLICATIONS UNDER THE LISTING RULES
As each of CSAHC, Xinjiang Airlines, Northern Airlines and the Catering
Company is a connected person of the Company under the Listing Rules, each of
the Lease Agreements and Catering Agreement constitutes a continuing connected
transaction for the Company under the Listing Rules. The Board, including the
independent non-executive Directors, considers the On-going Connected
Transactions to be on normal commercial terms, in the ordinary and usual course
of business, fair and reasonable and in the interests of the Listed Group and
its shareholders as a whole.
Pursuant to the Listing Rules, each percentage ratio (other than the
profits ratio) for (i) the Lease Agreements, and (ii) the Catering Agreement is
on an annual basis less than 2.5%. Therefore, each of (i) the Lease Agreements,
and (ii) the Catering Agreement falls under Rule 14A.34 and is only subject to
the reporting and announcement requirements set out in Rules 14A.45 to 14A.47
and is exempt from the Independent Shareholders' approval requirements. The
Company undertakes to comply with the rules in relation to annual review of
continuing connected transactions set out in Rule 14A.37 to Rule 14A.41 of the
Listing Rules.
Pursuant to the relevant rules and regulations of the PRC, each of Lease
Agreement 1, Lease Agreement 2, Lease Agreement 3 and Catering Agreement is
conditional upon approval by the Independent Shareholders. In accordance with
the relevant rules and regulations of Shanghai Stock Exchange, China Galaxy
Securities Co., Limited has been appointed by the Company as the independent
financial adviser in China to prepare an independent financial report in
relation to each of Lease Agreement 1, Lease Agreement 2, Lease Agreement 3 and
Catering Agreement which is required to be published in the newspaper in the
PRC.
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LETTER FROM THE BOARD
8. FINANCIAL SERVICES AGREEMENT
The first financial services agreement between the Company and the Finance
Company was entered into on 22 May, 1997 for a term of three years. The Stock
Exchange had, in a letter dated 24 April, 1998, granted the Company waiver from
strict compliance with Chapter 14 under the then applicable Listing Rules in
relation to, among other transactions, the first financial services agreement
and the transactions contemplated thereunder. The first financial services
agreement was extended in 2000 for six years to 22 May, 2006. The Stock Exchange
is looking into the matter of whether the Company had complied with the
requirements of the Listing Rules during the extended term of the first
financial services agreement and the Company will publish further announcement
in this respect. In order to comply with the new requirements under the Listing
Rules, the Company and the Finance Company are now entering into the Financial
Services Agreement so that the Finance Company could continue to provide deposit
of money service and, subject to the execution of separate agreements with the
Company and further compliance with the Listing Rules, other financial services
to the Company. The Provision of Deposit Service constitutes a discloseable and
non-exempt continuing connected transaction, and is conditional upon approval by
the Independent Shareholders.
DATE
12 November, 2004
PARTIES
(a) The Company.
(b) The Finance Company, a subsidiary of CSAHC which is owned as to 42%
by CSAHC, 32% by the Company and 26% in aggregate by five
subsidiaries of the Company, namely 8% by Xiamen Airlines Company
Limited, 8% by Southern Airlines Group Shantou Airlines Company
Limited, 4% by Guangxi Airlines Company Limited, 4% by Zhuhai
Airlines Company Limited and 2% by Guangzhou Nanland Air Catering
Company Limited. The principal business activity of the Finance
Company is that of providing various financial services, which it is
authorised to carry out under the applicable rules and regulations
of the PRC.
FINANCIAL SERVICES
The Finance Company agrees to provide to the Company the following
financial services:
(1) Accept deposit of money from the Company at interest rates not
lower than those set by the PBOC for the same term of deposit.
The Finance Company will in turn deposit the whole of such
sums of money with certain banks including Bank of
Agriculture, Bank of Communications, China Construction Bank
and Industrial and Commercial Bank of China.
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LETTER FROM THE BOARD
(2) Make loans to the Company subject to the entering into of
separate loan agreements, which will set out the Cap, terms
and conditions of the loans, upon application by the Company
during the term of the Financial Services Agreement. The
Company will comply with the Listing Rules when entering into
such separate written agreements. The Finance Company shall
not charge interest rates higher than those set by the PBOC
for similar loans. The total amount of outstanding loans
extended by the Finance Company to the Company must not exceed
the sum of the Finance Company's shareholders' equity, capital
reserves and money deposit received from other parties (except
the Company).
(3) Provide credit facilities, financial guarantees, credit
references, and other financial services subject to the
entering into of separate agreements, which will set out the
Cap, terms and conditions of such services, upon request by
the Company during the term of the Financial Services
Agreement. The Company will comply with the Listing Rules when
entering into such separate written agreements.
TERM OF THE FINANCIAL SERVICES AGREEMENT
The Financial Services Agreement is for a fixed term of 3 years,
commencing from the date of the agreement, and is renewable, subject to
compliance with the requirements of the relevant Listing Rules by the
Company, by an application in writing by the Company not less than 30 days
before the end of the fixed term.
CONSIDERATION AND PAYMENT TERMS
The Company is not subject to any extra charges for depositing money
with the Finance Company. For the other financial services provided by the
Finance Company under the Financial Services Agreement, the Company is
liable to pay the Finance Company the standard charging rates set by the
PBOC. The PRC commercial banks also charge similar charging rates set by
the PBOC.
The Company will make payment for such interest, fees and
commissions in accordance with the payment terms of the separate
agreements for the provision of loans or other financial services as might
be entered into between the Company and the Finance Company.
THE CAP
The Cap for the Provision of Deposit Service under the Financial
Services Agreement is set at RMB1 billion per year, based on the past
figures on deposit of money with the Finance Company, and on the estimated
amount of money to be deposited with
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LETTER FROM THE BOARD
the Finance Company by the Company each year for the term of the Financial
Services Agreement. The Company's deposit of money with the Finance
Company was of the amount of RMB1,316,709,000, RMB877,499,000 and
RMB346,357,000 as of 31 December, 2001, 31 December, 2002 and 31 December,
2003 respectively. The Company believes that the demand for air
transportation will continue to increase following the growth trend in the
aviation transportation market, thus the Company expects that it will
substantially increase its deposits with the Finance Company for the next
three years, as compared to the year ended 31 December, 2003 when the
business of the Company was badly affected by the outbreak of severe acute
respiratory syndrome. Taking into account the historical amount of the
deposit of money with the Finance Company by the Company, the proposed Cap
will sufficiently cover the proposed amount of the deposit of money with
the Finance Company by the Company.
REASONS AND BENEFITS OF THE FINANCIAL SERVICES AGREEMENT
The Finance Company is a non-bank finance company established under
the direction of the PBOC with the main business scope of providing
various financial services, including deposit and loan facilities, credit
facilities, guarantee, remittance of money and credit references, to CSAHC
and its subsidiaries. The first financial services agreement between the
Company and the Finance Company was entered into on 22 May, 1997. As the
transactions under the first financial services agreement constituted
connected transactions of the Company, details of which had been disclosed
in the annual reports of the Company. In order to comply with the new
requirements under the Listing Rules, the Company and the Finance Company
are now entering into the Financial Services Agreement so that the Finance
Company could continue to provide deposit of money service and, subject to
the execution of separate agreements with the Company and further
compliance with the Listing Rules, other financial services to the
Company.
The Company usually receives interest on its money deposited with
the Finance Company at rates which are more favourable than the benchmark
interest rates set by the PBOC, usually in the range between the benchmark
interest rates set by the PBOC and the inter-bank offer rates of interest.
This arrangement allows the Company to achieve a more efficient use of its
current capital, since the Company can enjoy better interest rates on
depositing its current capital with the Finance Company than the benchmark
rates of interest set by the PBOC that the PRC commercial banks can offer
to the Company.
Subject to the entering into of further separate agreements, the
Company can borrow from the Finance Company at interest rates not higher
than those set by the PBOC for similar loans. In addition, the Company is
not precluded under the Financial Services Agreement to borrow money from
other PRC commercial banks where the terms and conditions are favourable.
The Company can also enjoy the convenience of other financial services at
the rates of fees and commissions set by the PBOC, which are comparable to
the rates charged by PRC commercial banks for similar services.
-24-
LETTER FROM THE BOARD
IMPLICATIONS UNDER THE LISTING RULES
As the Finance Company is a connected person of the Company under
the Listing Rules, the Provision of Deposit Service constitutes a
discloseable and non-exempt continuing connected transaction under Rule
14A.35 of the Listing Rules and requires the Company to comply with the
reporting and announcement requirement and the independent shareholders'
approval requirement under Rule 14A.48 of the Listing Rules. The Board,
including the independent non-executive Directors, believes that the terms
of the Financial Services Agreement and the Provision of Deposit Service
to be on normal commercial terms, in the ordinary and usual course of
business, fair and reasonable and in the interests of the Listed Group and
its shareholders as a whole.
An Independent Board Committee has been formed to advise the
Independent Shareholders in respect of the Financial Services Agreement
and the Provision of Deposit Service. ICEA has been appointed as the
independent financial adviser to advise the Independent Board Committee
and the Independent Shareholders in respect of the Financial Services
Agreement and the Provision of Deposit Service.
CSAHC and its associates are required to abstain from voting in
respect of the proposed resolution to approve the Financial Services
Agreement and the Provision of Deposit Service which will be conducted by
poll.
The Company will comply with the Listing Rules when it enters into
further separate agreements with the Finance Company in connection with
the provision of loan facilities and other financial services by the
Finance Company.
9. RECOMMENDATIONS
ICEA has been appointed to advise the Independent Board Committee and the
Independent Shareholders on the Sale and Purchase Agreement, the Financial
Services Agreement and the transactions contemplated thereunder. The Independent
Board Committee, having taken into account the advice of ICEA, considers that
the terms of the Sale and Purchase Agreement, the Financial Services Agreement
and the transactions contemplated thereunder are fair and reasonable and are in
the interests of the Listed Group and its shareholders as a whole. The
Independent Board Committee also considers the On-going Connected Transactions
to be in the ordinary course of business, on normal commercial terms and the
respective maximum aggregate annual values to be fair and reasonable. That being
the case, the Independent Board Committee recommends the Independent
Shareholders to vote in favour of the ordinary resolution to be proposed at the
EGM in respect of the Sale and Purchase Agreement, the Financial Services
Agreement and the transactions contemplated thereunder.
10. EGM
Set out on pages 353 to 355 is a notice convening the EGM to be held at
the headquarters of the Company at No. 278, Ji Chang Road, Guangzhou, Guangdong
Province, the PRC on 31 December, 2004 at 9:00 am. If you are not able to attend
and/or vote at the meeting, you are
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LETTER FROM THE BOARD
strongly urged to complete the accompanying form of proxy in accordance with the
instructions printed thereon and return it to the Company's branch share
registrar in Hong Kong, Hong Kong Registrars Limited, at 46th Floor, Hopewell
Centre, 183 Queen's Road East, Hong Kong as soon as possible and in any event
not later than 24 hours before the time appointed for the holding of the meeting
or any adjournment thereof. Completion and return of the form of proxy will not
preclude you from attending and voting at the meeting or any adjourned meeting
should you so wish.
11. ADDITIONAL INFORMATION
Your attention is drawn to the letter from the Independent Board Committee
to the Independent Shareholders set out on pages 27 to 28 of this circular, the
letter from ICEA to the Independent Board Committee and the Independent
Shareholders in respect of the terms of the Acquisition and the information set
out in the appendices to this circular.
The text of the letters and the valuation certificates issued by
Chesterton in connection with its valuation are set out in Appendix VIII
"Property Valuation". Since the parcels of lands and the number of buildings are
too numerous, the Company has applied to the Stock Exchange for a waiver from
strict compliance with Rule 5.06 of the Listing Rules regarding the form of
presentation in this circular of the valuation report on the following
conditions:
(1) the full valuation reports (which will be prepared in Chinese
language only) in compliance with the requirements of Chapter 5 and
Practice Note 12 of the Listing Rules will be available for public
inspection; and
(2) summary valuation reports prepared on the basis of the full
valuation reports which (i) set out separately the interests in land
and buildings according to the following groups, namely "Properties
to be acquired by the Company from CSAHC", "Properties under
construction to be acquired by the Company from CSAHC", "Properties
to be rented by the Company from CSAHC", "Properties held by the
Group in the PRC", "Properties held by the Group in Western
Australia", "Properties held by the Group in the Netherlands",
"Properties held under construction by the Group in the PRC", and
"Properties rented by the Group"; (ii) for each of the above groups
(except for "Properties to be rented by the Company from CSAHC" and
"Properties rented by the Group") set out separately interests in
land and buildings on the basis of the subsidiary or branch of CSAHC
or the Listed Group at different locations where the buildings and
lands are held.
By Order of the Board
YAN ZHI QING
Director
-26-
LETTER FROM THE INDEPENDENT BOARD COMMITTEE
[LOGO] [CHINESE CHARACTERS]
CHINA SOUTHERN AIRLINES COMPANY LIMITED
(a joint stock limited company incorporated in the People's
Republic of China with limited liability)
12 November, 2004
To the Independent Shareholders
Dear Sirs or Madams,
VERY SUBSTANTIAL ACQUISITION AND
CONNECTED TRANSACTIONS
We refer to the circular issued by the Company to its shareholders dated
12 November, 2004 (the "Circular"), of which this letter forms part. Terms
defined in the Circular shall have the same meanings in this letter unless the
context otherwise requires. The purpose of the Independent Board Committee is to
advise you as to whether, in our opinion, the terms of the Sale and Purchase
Agreement, Financial Services Agreement and the transactions contemplated
thereunder are fair and reasonable so far as the Independent Shareholders are
concerned and in the interest of the Company and its shareholders as a whole.
ICEA has been appointed as the independent financial adviser to advise the
Independent Board Committee and the Independent Shareholders in relation to the
fairness and reasonableness of the terms of the Sale and Purchase Agreement,
Financial Services Agreement and the transactions contemplated thereunder from a
financial perspective. Details of ICEA's conclusion and advice, together with
the principal factors and reasons considered in arriving at such conclusion and
advice, are set out in its letter on pages 29 to 48 of the Circular. We urge you
to read that letter carefully.
As your Independent Board Committee, we have discussed with the management
of the Company for the reasons for the Sale and Purchase Agreement, Financial
Services Agreement and the transactions contemplated thereunder, and the basis
upon which their terms have been determined. We have also taken into account the
principal factors and reasons considered by ICEA regarding the Sale and Purchase
Agreement, Financial Services Agreement and the transactions contemplated
thereunder, and its conclusion and advice.
The Independent Board Committee concurs with the view of ICEA that the
terms of the Sale and Purchase Agreement, Financial Services Agreement and the
transactions contemplated thereunder are fair and reasonable so far as the
Independent Shareholders are concerned and in the interests of the Company and
the shareholders as a whole. The Independent Board Committee also considers the
Financial Services Agreement and the transactions contemplated thereunder to be
in the ordinary course of business, on normal commercial terms and the
-27-
LETTER FROM THE INDEPENDENT BOARD COMMITTEE
respective maximum aggregate annual values to be fair and reasonable. That being
the case, we advise the Independent Shareholders to vote in favour of the
ordinary resolutions to approve the Sale and Purchase Agreement, the Financial
Services Agreement and the transactions contemplated thereunder at the EGM.
Yours faithfully,
THE INDEPENDENT BOARD COMMITTEE
SIMON TO
PETER LOK
WEI MING HAI
WANG ZHI
SUI GUANG JUN
Independent non-executive Directors
-28-
LETTER FROM ICEA
The following is the text of the letter of advice to the Independent Board
Committee and the Independent Shareholders from ICEA regarding the Acquisition
and the Provision of Deposit Service for the purpose of incorporation in this
circular.
[ICEA LOGO] ICEA CAPITAL LIMITED [CHINESE CHARACTERS]
A Subsidiary 42nd Floor, Jardine House, [CHINESE CHARACTERS]
of ICBC 1 Connaught Place, Central, Hong Kong [CHINESE CHARACTERS]
[CHINESE CHARACTERS] Tel:(852) 2231 8000 [CHINESE CHARACTERS]:(852) 2231 8000
Fax:(852) 2525 0967 [CHINESE CHARACTERS]:(852) 2525 0967
12 November, 2004
To the Independent Board Committee of
China Southern Airlines Company Limited
Dear Sirs,
VERY SUBSTANTIAL ACQUISITION AND
CONNECTED TRANSACTION
AND
DISCLOSEABLE AND CONTINUING CONNECTED TRANSACTION
INTRODUCTION
We refer to our engagement as independent financial adviser to advise the
Independent Board Committee and the Independent Shareholders with respect to the
Acquisition and the Provision of Deposit Service. This letter has been prepared
for inclusion in the circular dated 12 November, 2004 (the "Circular") issued to
the Shareholders and capitalised terms used in this letter shall have the same
meanings as defined in the Circular unless the context otherwise requires.
The Company entered into the Sale and Purchase Agreement with CSAHC,
Northern Airlines and Xinjiang Airlines on 12 November, 2004 and entered into
the Financial Services Agreement with the Finance Company on 12 November, 2004.
As at the Latest Practicable Date, CSAHC was interested in approximately 50.30%
of the existing issued share capital of the Company. Accordingly, CSAHC is a
controlling shareholder of the Company under the Listing Rules, and it and its
associates (as defined in the Listing Rules) are regarded as connected persons
of the Company under the Listing Rules. The Finance Company is owned as to 42%
by CSAHC and is therefore regarded as a connected person of the Company under
the Listing Rules. For details, please refer to the letter from the Board (the
"Letter from the Board") set out in the Circular. Pursuant to the Listing Rules,
the Acquisition constitutes both a very substantial acquisition and a connected
transaction for the Company, which will be subject to, inter alia, the
Independent Shareholders' approval at the EGM to be taken by poll. The Provision
of Deposit Service constitutes a discloseable and non-exempt continuing
connected transaction under the Listing Rules and requires compliance with the
reporting and announcement requirement and the independent shareholders'
approval requirement under the
-29-
LETTER FROM ICEA
Listing Rules. CSAHC, the controlling shareholder of the Company and its
associates will abstain from voting at the EGM to be convened to approve the
Sale and Purchase Agreement, the Financial Services Agreement and the
transactions contemplated thereunder which will be conducted by poll. The
Independent Board Committee has been formed to advise the Independent
Shareholders on whether the terms and conditions of the Sale and Purchase
Agreement and the Financial Services Agreement and the transactions contemplated
thereunder are fair and reasonable and in the interests of the Company and the
Shareholders as a whole.
We, ICEA Capital Limited, have been retained as the independent financial
adviser to advise the Independent Board Committee and the Independent
Shareholders as to whether the terms of the Sale and Purchase Agreement and the
Financial Services Agreement and the transactions contemplated thereunder, from
a financial perspective, are fair and reasonable and in the interest of the
Company as a whole so far as the Independent Shareholders are concerned.
In formulating our opinion with regard to the Acquisition and the
Provision of Deposit Service, we have reviewed, amongst other things, the
Circular, the Sale and Purchase Agreement, the financial projections and the
financial statements of the Airline Operations of Northern Airlines Group and
the Airline Operations of Xinjiang Airlines Group, the Zhong Qi Hua Valuation
Reports and the Financial Services Agreement. We considered information, given
in writing and orally, by the Directors, the Company's financial adviser, and
the management of the Company and the Target Group. We also reviewed such
research studies and publicly available information as we deemed necessary. We
have relied, without assuming any responsibility for independent verification,
on the information and facts about the Acquisition and the Provision of Deposit
Service supplied to us by the Company and have assumed that any information and
representations made to us are true, accurate and complete in all material
respects as at the date hereof and that they may be relied upon. We have also
assumed that all information, representations and opinions contained or referred
to in the Circular are true, accurate, and complete in all material respects as
of the date hereof and have relied upon them. We also assumed that all
statements of intention of the Company's management or its Directors, as set
forth in the Circular, will be implemented. With respect to any historical costs
and financial statements, financial forecasts, estimates, working capital
statements and projections relating to the Airline Operations of Northern
Airlines Group and the Airline Operations of Xinjiang Airlines Group and the
Provision of Deposit Service, we have assumed that each was prepared on bases
reflecting the best currently available information, views, and judgments of the
historical and future financial revenues and expenses involved in the Business
and Assets and the Provision of Deposit Service and may be relied upon by us in
formulating our opinion. We have also assumed that each of the Sale and Purchase
Agreement and the Financial Services Agreement, is enforceable against each of
the parties thereto in accordance with its terms and that each of the parties
will perform, and will be able to perform, its obligations thereunder, and as
otherwise described in the Circular, in full when due.
We have been advised by the Board that no material facts have been omitted
and we are not aware of any facts or circumstances which would render the
information provided and the representations made to us untrue, inaccurate or
misleading. We have no reason to doubt the truth, accuracy and completeness of
the information and representations provided to us by the
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LETTER FROM ICEA
Board. The Directors have collectively and individually accepted full
responsibility for the accuracy of the information contained in the Circular and
have confirmed, having made all reasonable enquiries, that to the best of their
knowledge and belief, there are no other facts the omission of which would make
any statement in the Circular misleading. We consider that we have reviewed
sufficient information to reach an informed view in order to provide a
reasonable basis for our advice. We have not, however, carried out any
independent verification of the information provided to us nor have we conducted
any form of independent in-depth investigation into the commercial viability or
the future prospects of the Acquisition or the financial condition or future
prospects of the Business and Assets or the Provision of Deposit Service or the
Company. We have further assumed that all material governmental, regulatory, or
other consents and approvals necessary for the effectiveness and implementation
of the Acquisition and the Provision of Deposit Service have been or will be
obtained without any adverse effect on the Business and Assets, the Company or
the contemplated benefits to the Company.
This letter is for the information of the Independent Board Committee and
the Independent Shareholders solely in connection with their consideration of
the Acquisition and the Provision of Deposit Service and, except for its
inclusion in the Circular, is not to be quoted or referred to, in whole or in
part, nor shall this letter be used for any other purpose, without our prior
written consent.
ICEA is a deemed licensed corporation to carry out regulated activities of
dealing in securities, advising on securities and corporate finance and asset
management under the SFO. ICEA and its affiliates, whose ordinary business
involves the trading of, dealing in and the holding of securities, may be
involved in the trading of, dealing in, and the holding of the securities of the
Company for client accounts.
PRINCIPAL FACTORS CONSIDERED
1. THE ACQUISITION
In arriving at our opinion, we have taken into consideration the following
principal factors and reasons. Our conclusions are based on the results of all
the analyses taken as a whole.
(a) PRINCIPAL BUSINESS OF THE LISTED GROUP
The Listed Group is one of the largest airlines in the PRC and is
headquartered in Guangzhou with 12 operational bases in central and
Southern China, offering regular flights on 248 domestic routes to over 69
cities in China, 18 routes to Hong Kong, and 45 international routes to 24
cities in East and Southeast Asia, Australia, North American and Europe,
as of 30 June, 2004. However, due to the lack of operational bases, the
Company is only capable of offering very limited flight services in
Northern China and Northwestern China.
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LETTER FROM ICEA
(b) CONSOLIDATION AND RESTRUCTURING TREND OF GLOBAL AVIATION INDUSTRY
In recent years, the global aviation industry has experienced a
period of consolidation and restructuring characterised by mergers and
acquisitions of airlines within and across the regions. The principal
rationale and objective of such wave of global consolidation and
restructuring is to achieve economies of scale by merging the operations
of different airlines, to reduce redundancies, and thus to enhance
operating efficiencies of the airlines.
(c) CONSOLIDATION AND RESTRUCTURING OF AVIATION INDUSTRY IN THE PRC
In the second half of 2000, the CAAC introduced a policy with the
principle of restructuring of the PRC aviation industry on a voluntary
basis under government directives and taking advantage of economies of
scale. Under the policy, domestic airlines are encouraged to consolidate,
centering around CSAHC, Air China Group and Eastern Air Group. On 27
April, 2001, the CAAC announced such consolidation and restructuring plan
of the PRC aviation industry in details. On the same date, CSAHC informed
the Company that in order to take advantage of economies of scale, the
CSAHC voluntarily participates in the consolidation and restructuring plan
of the PRC aviation industry under the government proposals.
On 11 October, 2002, the consolidation and restructuring proposal of
the PRC aviation industry was approved in principle by the State Council
of the PRC. As a result, all the equity interest of Northern Airlines and
Xinjiang Airlines were transferred to CSAHC. The Listed Group and CSAHC
since then have been preparing for the injection of the Business and
Assets into the Listed Group in order to achieve economies of scale and
enhance the competitiveness of the core business of the Listed Group.
(d) REASONS FOR AND BENEFITS OF THE ACQUISITION
We have considered the reasons for and benefits of the Acquisition
as highlighted in the Letter from the Board and we have noted the
following:
- the Acquisition is in line with the global trend of
consolidation and restructuring of the aviation industry;
- the Acquisition is in line with the consolidation and
restructuring strategy adopted by the Listed Group in light of
the proposed consolidation and restructuring plans of the PRC
aviation industry and the CSAHC;
We concur with the Board's view that:
- the Acquisition represents an attractive opportunity for the
Listed Group to consolidate its strong market position as both
Northern Airlines and Xinjiang Airlines are leading airlines
in their respective operating regions;
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LETTER FROM ICEA
- the Acquisition will bring various benefits to the Listed
Group, including broadening its flight network, enhancing its
international air transportation business, increasing its
fleet size and transportation capacity, enhancing its air
ticket sales network; strengthening its marketing efforts;
reducing its operating costs and boosting its overall
efficiency; and
- the Acquisition is in line with the non-competition
undertaking granted by the CSAHC to the Company when the
Company was listed on the Stock Exchange in 1997.
(e) PACKAGED DEAL
We notice that the Business and Assets to be acquired consist of
certain Airline Operations, assets and properties of Northern Airlines
Group and Xinjiang Airlines Group, including aircraft, engines, spare
parts, aviation equipment and facilities, properties, office facilities,
and other fixed, current and intangible assets. As the Acquisition is a
packaged deal, the Business and Assets cannot be divided up and the
Company can only acquire the Business and Assets as a whole.
(f) BUSINESS AND ASSETS TO BE ACQUIRED AND THE DEBTS TO BE ASSUMED
(a) The Business and Assets to be acquired consist of certain
Airline Operations, assets and properties of Northern Airlines
Group and Xinjiang Airlines Group, including aircraft,
engines, spare parts, aviation equipment and facilities,
properties, office facilities, and other fixed, current and
intangible assets.
(b) The Debts to be assumed consist of all indebtedness in the
aggregate sum of RMB15,090,109,000 (equivalent to
approximately HK$14,235,952,000) owed by Xinjiang Airlines
Group or Northern Airlines Group in connection with their
civil aviation business.
Both Northern Airlines and Xinjiang Airlines are leading airlines in
their respective operating regions offering passenger and cargo air
transportation and other related services.
Northern Airlines Group is headquartered in Shenyang with
operational bases in Dalian, Changchun and Harbin. Northern Airlines
Group's operating region is predominantly in Northeastern China. It is
also the dominant Chinese airline serving flight routes to Korea and Japan
due to the proximity of its operating region to those countries.
Xinjiang Airlines Group is headquartered in Urumqi, with operational
bases and operating region in the Xinjiang autonomous region. It also
commands a strong market position on domestic routes between Xinjiang and
other parts of China, and on international routes to Russia, the Middle
East and West Asia.
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LETTER FROM ICEA
We summarise below the operating revenue, operating profit before
interest, taxation, depreciation, amortization and rental under operating
leases ("EBITDAR"), the operating profit/loss, and the net profit/loss of
(i) the Airline Operations of Northern Airlines Group; and (ii) the
Airline Operations of Xinjiang Airlines Group for each of the years in the
three-year period ended 31 December, 2003 and the six-month period ended
30 June, 2004.
(i) The Airline Operations of Northern Airlines Group
FOR THE
SIX-MONTH
PERIOD
ENDED
FOR THE YEARS ENDED 31 DECEMBER, 30 JUNE,
----------------------------------------- --------
2001 2002 2003 2004
(RMB (RMB (RMB (RMB
million) million) million) million)
Operating revenue 5,203 5,244 5,929 3,465
EBITDAR 588 403 635 863
Operating
(loss)/profit (126) (308) (61) 369
Net (loss)/profit (502) (1,141) (1,234) 135
(ii) The Airline Operations of Xinjiang Airlines Group
FOR THE
SIX-MONTH
PERIOD
ENDED
FOR THE YEARS ENDED 31 DECEMBER, 30 JUNE,
----------------------------------------- --------
2001 2002 2003 2004
(RMB (RMB (RMB (RMB
million) million) million) million)
Operating revenue 2,174 2,353 2,152 1,215
EBITDAR 778 821 568 303
Operating
profit/(loss) 269 197 (39) (0.2)
Net profit/(loss) 41 3 (299) (44)
The Airline Operations of Northern Airlines Group
Operating revenue
For the year ended 31 December, 2002, the operating revenue of the
Airline Operations of Northern Airlines Group was approximately RMB5,244
million
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LETTER FROM ICEA
(equivalent to approximately HK$4,947 million), an increase of
approximately RMB41 million (equivalent to approximately HK$39 million)
from 2001. The increase was primarily due to the increase in cargo and
mail revenue driven by the increase in overall yield per RFTK resulting
from the suspension of certain routes with low yield in the year.
For the year ended 31 December, 2003, the operating revenue of the
Airline Operations of Northern Airlines Group was approximately RMB5,929
million (equivalent to approximately HK$5,593 million), an increase of
approximately RMB685 million (equivalent to approximately HK$646 million)
from 2002. The increase was primarily due to the increase in passenger
revenue resulting from increase in traffic volume and passenger yield in
the year. The increase in traffic volume was the result of rescheduling of
certain major routes in October 2002 while the increase in passenger yield
was mainly due to the exemption of the CAAC infrastructure fund and sales
tax during the period from 1 May, 2003 to 31 December, 2003.
For the six-month period ended 30 June, 2004, the operating revenue
of the Airline Operations of Northern Airlines Group was approximately
RMB3,465 million (equivalent to approximately HK$3,269 million).
EBITDAR
For the year ended 31 December, 2002, the EBITDAR of the Airline
Operations of Northern Airlines Group was approximately RMB403 million
(equivalent to approximately HK$380 million), a decrease of approximately
RMB185 million (equivalent to approximately HK$175 million) from 2001. The
decrease was primarily due to the increase in operating expenses resulting
from increase in landing and navigation fees and repair and maintenance.
For the year ended 31 December, 2003, the EBITDAR of the Airline
Operations of Northern Airlines Group was approximately RMB635 million
(equivalent to approximately HK$599 million), an increase of approximately
RMB232 million (equivalent to approximately HK$219 million) from 2002. The
increase was mainly due to the increase in operating revenue outweighing
the operating expenses in the year.
For the six-month period ended 30 June, 2004, the EBITDAR of the
Airline Operations of Northern Airlines Group was approximately RMB863
million (equivalent to approximately HK$814 million).
Operating profit/loss
As there were no significant changes in the depreciation and
amortisation expenses, as a result of the reasons mentioned in the
analysis of operating revenue and EBITDAR above, for each of the years in
the three-year period ended 31
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LETTER FROM ICEA
December, 2003, the operating loss of the Airline Operations of Northern
Airlines Group were approximately RMB126 million (equivalent to
approximately HK$119 million), approximately RMB308 million (equivalent to
approximately HK$291 million) and approximately RMB61 million (equivalent
to approximately HK$58 million) respectively.
For the six-month period ended 30 June, 2004, the Airline Operations
of Northern Airlines Group had an operating profit of approximately RMB369
million (equivalent to approximately HK$348 million).
The Airline Operations of Xinjiang Airlines Group
Operating revenue
For the year ended 31 December, 2002, the operating revenue of the
Airline Operations of Xinjiang Airlines Group was approximately RMB2,353
million (equivalent to approximately HK$2,220 million), an increase of
approximately RMB179 million (equivalent to approximately HK$169 million)
from 2001. The increase was mainly due to the increase in passenger
revenue driven by an increase in traffic volume.
For the year ended 31 December, 2003, the operating revenue of the
Airline Operations of Xinjiang Airlines Group was approximately RMB2,152
million (equivalent to approximately HK$2,030 million), a decrease of
approximately RMB201 million (equivalent to approximately HK$190 million).
The decrease was primarily due to the decrease in passenger revenue
resulting from a decrease in passenger yield.
For the six-month period ended 30 June, 2004, the operating revenue
of the Airline Operations of Xinjiang Airlines Group was approximately
RMB1,215 million (equivalent to approximately HK$1,146 million).
EBITDAR
For the year ended 31 December, 2002, the EBITDAR of the Airline
Operations of Xinjiang Airlines Group was approximately RMB821 million
(equivalent to approximately HK$775 million), an increase of approximately
RMB43 million (equivalent to approximately HK$41 million) from 2001. The
increase was mainly due to the increase in operating revenue outweighing
the increase in operating expenses.
For the year ended 31 December, 2003, the EBITDAR of the Airline
Operations of Xinjiang Airlines Group was approximately RMB568 million
(equivalent to approximately HK$536 million), a decrease of approximately
RMB253 million (equivalent to approximately HK$239 million) from 2002. The
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LETTER FROM ICEA
decrease was primarily due to increase in maintenance expenses resulting
from increase in utilisation rates of aircraft and increase in aircraft
and traffic servicing expenses as a result of increase in the charge rate
for domestic landing and navigation fees effective September 2002.
For the six-month period ended 30 June, 2004, the EBITDAR of the
Airline Operations of Xinjiang Airlines Group was approximately RMB303
million (equivalent to approximately HK$286 million).
Operating profit/loss
For the year ended 31 December, 2002, the operating profit of the
Airline Operations of Xinjiang Airlines Group was approximately RMB197
million (equivalent to approximately HK$186 million), a decrease of
approximately RMB72 million (equivalent to approximately HK$68 million)
from 2001. The decrease was mainly due to the increase of depreciation and
amortisation expenses as a result of addition of one Boeing 757-200
aircraft and two 757-200 jet engines during 2002 and the impairment loss
recognised on aircraft and other flight equipment.
As there was no significant changes in the depreciation and
amortisation expenses for the year ended 31 December, 2003, as a result of
the reasons mentioned in the analysis of EBITDAR above, for the year ended
31 December, 2003, the operating loss of the Airline Operations of
Xinjiang Airlines Group was approximately RMB39 million (equivalent to
approximately HK$37 million) as oppose to operating profit of
approximately RMB197 million (equivalent to approximately HK$186 million)
in 2002.
For the six-month period ended 30 June, 2004, the operating loss of
the Airline Operations of Xinjiang Airlines Group was approximately
RMB0.20 million (equivalent to approximately HK$0.19 million).
In addition, certain prospective financial information in respect of the
Airline Operations of Northern Airlines Group and the Airline Operations of
Xinjiang Airlines Group for the year ending 31 December, 2004 has been prepared
by the Target Group. Based on the assumptions set out in Appendix VI to the
Circular and in the absence of unforeseen circumstances, the Board believes that
the combined profit after taxation and minority interests but before the
extraordinary items for the year ending 31 December, 2004 under IFRS is unlikely
to be less than RMB148 million (equivalent to approximately HK$140 million). The
Company and the Target Group are not currently aware of any extraordinary items
which have arisen or are likely to arise in respect of the year ending 31
December, 2004 which would affect the prospective financial information
prepared.
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LETTER FROM ICEA
(g) FINANCIAL POSITION OF THE AIRLINE OPERATIONS OF THE TARGET GROUP
The table below sets forth the financial position of the Airline
Operations of Northern Airlines Group and the Airline Operations of
Xinjiang Airlines Group for the year ended 31 December, 2003 and the
six-month period ended 30 June, 2004:
NORTHERN AIRLINES GROUP XINJIANG AIRLINES GROUP
----------------------- -----------------------
FOR THE SIX- FOR THE SIX-
FOR THE YEAR MONTH PERIOD FOR THE YEAR MONTH PERIOD
ENDED ENDED 30 ENDED ENDED 30
31 DECEMBER, JUNE, 31 DECEMBER, JUNE,
2003 2004 2003 2004
(RMB million) (RMB million) (RMB million) (RMB million)
Net current liabilities 1,442 1,631 1,072 1,251
Net assets 821 956 929 885
Net cash flow from operating
activities 540 222 296 70
As revealed from the table above, both the Airline Operations of
Northern Airlines Group and the Airline Operations of Xinjiang Airlines
Group had net current liabilities position but positive net assets value
as at 30 June, 2004. We note that due to the capital intensive nature of
aviation industry, it is not unusual for aviation companies to have net
current liabilities position. We have also reviewed the working capital
statements of the Airline Operations of Northern Airlines Group and the
Airline Operations of Xinjiang Airlines Group for the eighteen months
ending 31 December, 2005 which have been prepared by the Company. We
concur with the Board's view that the Airline Operations of the Target
Group would have sufficient operating cash flow to support its operations.
(h) BASIS OF THE CONSIDERATION
The Sale and Purchase Agreement was entered into after arm's length
negotiations between the Company and the Vendors, and the provisional
amount of the consideration of the Acquisition, and of the Debts to be
assumed under the Sale and Purchase Agreement are set at RMB16,912,244,600
(equivalent to approximately HK$15,954,948,000) and RMB15,090,109,000
(equivalent to approximately HK$14,235,952,000) respectively. The amounts
are arrived at after arm's length negotiations between the Company and the
Vendors, with reference to the valuation of the Business and Assets, and
the Debts set out in the Zhong Qi Hua Valuation Reports.
The Zhong Qi Hua Valuation Reports value the Business and Assets at
RMB16,912,244,600 (equivalent to approximately HK$15,954,948,000), and the
Debts at RMB15,090,109,000 (equivalent to approximately HK$14,235,952,000)
respectively, as at 31 December, 2003 which is equivalent to the
provisional amount of the consideration of the Acquisition, and of the
Debt to be assumed under the Sale and Purchase Agreement respectively.
-38-
LETTER FROM ICEA
We have reviewed the Zhong Qi Hua Valuation Reports, we consider the
valuation methodologies used in appraising the Business and Assets, and
the Debts are fair and reasonable.
The provisional amount of the consideration of the Acquisition, and
of the Debts to be assumed by the Company will be subject to adjustment
and finalisation based on the book value of the Business and Assets, and
of the Debts as of the Effective Date, as determined in the financial
statements on the Business and Assets of the Target Group prepared in
accordance with the PRC Accounting Rules and Regulations and audited by
KPMG Huazhen. A portion of the final adjusted consideration of the
Acquisition will be settled by way of assumption of the final adjusted
Debts, with the remaining balance to be payable by the Company to the bank
account designated by the Vendors in cash.
(i) FINANCING OF THE ACQUISITION
Under the Sale and Purchase Agreement, the provisional amount of the
consideration of the Acquisition, and of the Debts to be assumed under the
Sale and Purchase Agreement are set at RMB16,912,244,600 (equivalent to
approximately HK$15,954,948,000) and RMB15,090,109,000 (equivalent to
approximately HK$14,235,952,000) respectively. The remaining balance of
approximately RMB1,822,135,600 (equivalent to approximately
HK$1,718,996,000), subject to adjustment, is to be payable by the Company
to the Vendors in cash. We understand from the Company that in determining
the payment method, the major portion of the consideration to be satisfied
through the assumption of Debts with the remaining to be settled in cash,
it took into consideration the current and future cash requirements of the
Listed Group and the Target Group. The Board believes that such
arrangement should not cause material negative impact to the Group's
business operations. The Company confirmed that it has sufficient internal
resources to fund the cash payment for the Acquisition without a material
negative impact on its ongoing operations and capital expenditure
requirements. As at 30 June, 2004, the Listed Group had cash and cash
equivalents of approximately RMB2,932 million (equivalent to approximately
HK$2,766 million). The Company further confirmed that it has sufficient
internal and external financial resources for its ongoing operations and
capital expenditure requirements.
Based on the above, we consider that the terms for the financing of
the Acquisition are fair and reasonable from a financial point of view,
insofar as the Independent Shareholders are concerned.
(j) VALUATION OF THE BUSINESS AND ASSETS
For aviation companies, due to the heavy capital investment in
aircraft, their profitability will, to a large extent be distorted by the
policy and the amount of depreciation and amortization of aircraft.
Further, the methods and terms of financing for aircraft will also
significantly affect the operating performance of an aviation company. Due
to the specific nature of aviation industry, in order to fairly compare
the operating profitability (without being distorted by depreciation,
amortization and financing terms) of the Target Group with those of other
comparable aviation companies in the market, in
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LETTER FROM ICEA
addition to price/earning ratio ("PER") analysis, we have made reference
to another commonly used market valuation benchmark for aviation
companies, the EV/EBITDAR factor, being the quotient of the enterprise
value ("EV") divided by the operating profit before interest, taxation,
depreciation, amortization and rental under the operating leases
("EBITDAR") in assessing the valuation of the Target Group. EV is defined
as the sum of the equity value of a company plus its total debt minus its
cash balances.
The total amount of consideration for the Acquisition of
RMB16,912,244,600 (equivalent to approximately HK$15,954,948,000) implies
an EV for the Target Group of approximately RMB16,390,513,600) (equivalent
to approximately HK$15,462,833,000) being the total amount of
consideration for the Acquisition minus the combined cash and cash
equivalents of the Target Group of approximately RMB521,731,000
(equivalent to approximately HK$492,115,000).
Set out below is the summary of the PER as well as the EV/EBITDAR
factor of 15 listed aviation comparables in the Asia Pacific region (the
"Aviation Comparables") (including five listed aviation comparables in the
PRC (the "PRC Aviation Comparables")) and the Target Group:
NAME OF AVIATION COMPARABLE ESTIMATE PER(1) EV/EBITDAR(2)
--------------------------- --------------- -------------
Air New Zealand Limited 9.24 2.00
All Nippon Airways Co., Ltd. 35.79 9.50
Cathay Pacific Airways Ltd. 11.90 9.98
China Airlines 15.60 11.38
China Eastern Airlines Corporation Limited(4) 11.88 10.68
China National Aviation Company Limited(4) 17.29 22.71
China Southern Airlines Company Limited(4) 20.27 8.43
Hainan Airlines Company Limited(4) 23.86 22.65
Japan Airlines Corporation 23.61 27.01
Korean Air Lines Co. Ltd. 14.53 5.41
Malaysian Airline System Berhad 15.76 5.45
Qantas Airways Limited 8.75 5.22
Shanghai Airlines Co., Ltd.(4) 25.84 0.02
Singapore Airlines Ltd. 12.44 6.18
Thai Airways International Public Company
Limited 7.92 3.87
Range for Aviation Comparables(3) 8.75-25.84 2.00-22.71
Average for Aviation Comparables(3) 16.23 9.50
Range for PRC Aviation Comparables(3) 17.29-23.86 8.43-22.65
Average for PRC Aviation Comparables(3) 20.47 13.92
Target Group(5) 12.31 13.63
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LETTER FROM ICEA
(1) Based on consensus brokers' estimates on the forth coming
financial year (source: Bloomberg).
(2) Calculated based on the latest audited results announced by
Aviation Comparables and their respective closing share prices
as at 10 November, 2004.
(3) Excluding the highest and lowest valuations.
(4) PRC Aviation Comparable.
(5) Calculated based on the forecasted combined profit after
taxation and minority interests but before the extraordinary
items of the Airline Operations of Northern Airlines Group and
the Airline Operations of Xinjiang Airlines Group for the year
ending 31 December, 2004 under IFRS of RMB148 million.
Based on the market comparables statistics, we note that the
consideration for the Acquisition is within the range of the valuation of
Aviation Comparables and slightly below the average of the valuation of
PRC Aviation Comparables. On these bases, we consider the acquisition
price is fair and reasonable so far as the Company and the Independent
Shareholders are concerned.
(k) PRO FORMA EFFECTS TO THE COMPANY
We have conducted various analyses on the potential financial
effects of the Acquisition on the Listed Group, which were extracted from
or prepared based on the accountants' report of the Listed Group and
unaudited pro forma financial information of the Listed Group and the
Target Group (collectively the "Combined Group") as set out in Appendix V
to the Circular.
(i) Earnings
The pro forma earnings per share of the Combined Group for the
six-month period ended 30 June, 2004, would be approximately RMB0.08
(equivalent to approximately HK$0.08), which is approximately 36%
higher than the actual earnings per share of the Listed Group for
the same period.
Based on our discussion with the Directors and certain
prospective financial information in respect of the Airline
Operations of the Target Group for the year ending 31 December, 2004
prepared by the Company and the Target Group, we understand that the
combined profit after taxation and minority interests but before the
extraordinary items for the year ending 31 December, 2004 under IFRS
is unlikely to be less than RMB148 million (equivalent to
approximately HK$140 million). Assuming the consideration of the
Acquisition is RMB1,897 million (equivalent to approximately
HK$1,790 million) (which represents the aggregate amount of the net
assets value of the Airline Operations of Northern Airlines Group
and the Airline Operations of Xinjiang Airlines Group as at 30 June,
2004 prepared under PRC Accounting Rules and Regulations) which will
be satisfied by short term U.S. dollar bank loans amounting to
RMB1,000 million (equivalent to approximately HK$943 million) and
cash of RMB897 million (equivalent to
-41-
LETTER FROM ICEA
approximately HK$846 million) and the Acquisition had taken place on
1 January, 2004, the annual interest expense arising from short term
U.S. dollar bank loans bearing interest at 2.17% per annum would
amount to approximately RMB21,700,000 (equivalent to approximately
HK$20,472,000) and the reduction in the annual interest income of
the cash consideration of RMB897 million (equivalent to
approximately HK$846 million) to be taken from the internal
resources depositing in certain PRC banks enjoying 0.72% deposit
rate per annum would amount to RMB6,458,000 (equivalent to
approximately HK$6,093,000). Taking into account the increase in
interest expense and the reduction in interest income as a result of
the Acquisition, the earnings of the Listed Group would increase by
approximately RMB120 million (equivalent to approximately HK$113
million) for the year ending 31 December, 2004.
(ii) Gearing
The pro forma total debt (including obligations under finance
lease) of the Combined Group would be approximately RMB34,974
million (equivalent to approximately HK$32,995 million) as at 30
June, 2004, representing an increase of approximately 57.97% from
the total debt of approximately RMB22,139 million (equivalent to
approximately HK$20,886 million) of the Listed Group at the same
date. The pro forma net debt (total debt less cash and cash
equivalents) of the Combined Group would increase to approximately
RMB32,417 million (equivalent to approximately HK$30,582 million)
from RMB19,207 (equivalent to approximately HK$18,120 million) for
the Listed Group as of 30 June, 2004. The pro forma ratio of the
Combined Group's net debt to total shareholders' equity would be
approximately 267% as at 30 June, 2004, compared to approximately
158% for the Listed Group as at the same date. On a pro forma basis,
the total debt to total capitalisation ratio would increase from 65%
for the Listed Group to approximately 74% for the Combined Group.
The increase in gearing ratio mainly results from the increase in
borrowings following the assumption of Debts by the Company. We
consider that the substantial increase in gearing ratio not only
will increase the overall financial risk of the Group but also
increase the financial burden and future financing costs of the
Group.
(iii) Working capital
It is noted that the provisional amount of the consideration
is set at approximately RMB16,912 million (equivalent to
approximately HK$15,955 million), of which approximately RMB15,090
million (equivalent to approximately HK$14,236 million) will be
settled by way of assumption of debt and the remaining balance of
approximately RMB1,822 million (equivalent to approximately HK$1,719
million) will be financed by short term U.S. dollar bank loans
amounting to RMB1,000 million, and the internal resources of the
Listed Group. We understand from the Directors that having taken
into account the existing cash and bank balance position of the
Listed Group, the operating cash flow of the Combined Group, the
-42-
LETTER FROM ICEA
estimated capital expenditure of the Listed Group in the near future
and the banking facilities available to the Listed Group, the
Directors consider that the Acquisition would not have a material
adverse impact on the normal operations of the Listed Group. We also
note that as at 30 June, 2004, the Listed Group had cash and bank
balances of approximately RMB2,932 million (equivalent to
approximately HK$2,766 million) and had total available banking
facilities of approximately RMB13,300 million (equivalent to
approximately HK$12,500 million). We have also reviewed the working
capital statements of the Listed Group, Northern Airlines Group and
Xinjiang Airlines Group, respectively for the eighteen months ending
31 December, 2005, we concur with the Board's view that the Combined
Group would have sufficient cash flow to support its operations and
the Acquisition will not have a material adverse impact on the
normal operations of the Listed Group.
2. PROVISION OF DEPOSIT SERVICE
In arriving at our opinion, we have considered, inter alia, the following
principal factors and reasons:
(a) FINANCIAL SERVICES AGREEMENT
Pursuant to the Financial Services Agreement, the Listed Group will
from time to time utilise the financial services available from the
Financial Company. Such financial services include:
(1) Accept deposit of money from the Company at interest rates not
lower than those set by the PBOC for the same term of deposit.
The Finance Company will in turn deposit the whole of such
sums of money with certain banks including Bank of
Agriculture, Bank of Communications, China Construction Bank
and Industrial and Commercial Bank of China.
(2) Make loans to the Company subject to the entering into of
separate loan agreements, which will set out the Cap, terms
and conditions of the loans, upon application by the Company
during the term of the Financial Services Agreement. The
Company will comply with the Listing Rules when entering into
such separate written agreements. The Finance Company shall
not charge interest rates higher than those set by the PBOC
for similar loans. The total amount of outstanding loans
extended by the Finance Company to the Company must not exceed
the sum of the Finance Company's shareholders' equity, capital
reserves and money deposit received from other parties (except
the Company).
(3) Provide credit facilities, financial guarantees, credit
references, and other financial services subject to the
entering into of separate agreements, which will set out the
Cap, terms and conditions of such services, upon request by
the Company during the term of the Financial Services
Agreement. The Company will comply with the Listing Rules when
entering into such separate written agreements.
-43-
LETTER FROM ICEA
The Financial Services Agreement is for a fixed term of three years,
commencing from the date of the agreement, and is renewable, subject to
compliance with the requirements of the relevant Listing Rules by the
Company, by an application in writing by the Company not less than 30 days
before the end of the fixed term. Upon the renewal of the Financial
Services Agreement, the Company will comply with all applicable
discloseable and connected transactions requirement of the Listing Rules,
including the Independent Shareholders' approval requirements under
Chapter 14A of the Listing Rules.
The Company is not subject to any extra charges for depositing money
with the Finance Company. For the other financial services provided by the
Finance Company under the Financial Services Agreement, the Company is
liable to pay the Finance Company the standard charging rates set by the
PBOC. The PRC commercial banks also charge similar charging rates set by
the PBOC.
The Company will make payment of such interest, fees and commissions
in accordance with the payment terms of the separate agreements for the
provision of loans or other financial services as might be entered into
between the Company and the Finance Company.
(b) INFORMATION RELATING TO THE FINANCE COMPANY
The Finance Company is a non-bank finance company established under
the direction of the PBOC with the main business scope of providing
various financial services, including deposit and loan facilities, credit
facilities, guarantee, remittance of money and credit references, to CSAHC
and its subsidiaries. The operations of the Finance Company are subject to
the on-going supervision of the PBOC. The registered capital of the
Finance Company is RMB424,329,500.
(c) DISCLOSEABLE AND CONTINUING CONNECTED TRANSACTION WITH THE FINANCE
COMPANY
CSAHC is the controlling shareholder of the Company with a
beneficial interest of approximately 50.30% of the existing issued share
capital of the Company as at the Latest Practicable Date.
The Finance Company, a subsidiary of CSAHC which is owned as to 42%
by CSAHC, 32% by the Company and 26% in aggregate by five subsidiaries of
the Company, and is a connected person of the Company under the Listing
Rules. Accordingly, the transactions with the Finance Company contemplated
under the Financial Services Agreement constitute continuing connected
transactions under the Listing Rules, and are subject to the approval of
the Independent Shareholders.
-44-
LETTER FROM ICEA
(d) REASONS FOR AND BENEFITS OF THE PROVISION OF DEPOSIT SERVICE
The pricing policy of the Finance Company and commercial banks in
China are subject to guidelines set by the PBOC. Therefore, the charges by
the Finance Company for its services to the Company is comparable to those
charged by PRC banks for similar services.
The Company usually receives interest on its money deposited with
the Finance Company at rates which are more favourable than the benchmark
interest rates set by the PBOC, usually in the range between the benchmark
interest rates set by the PBOC and the inter-bank offer rates of interest.
This arrangement allows the Company to achieve a more efficient use of its
current capital, since the Company can enjoy better interest rates on
depositing its current capital with the Finance Company than the benchmark
rates of interest set by the PBOC that the PRC commercial banks can offer
to the Company.
Subject to the entering into of further separate agreements, the
Company can borrow from the Finance Company at interest rates not higher
than those set by the PBOC for similar loans.
We have reviewed the Financial Services Agreement and we understand
that it does not preclude the Company from choosing similar services
provided by other commercial banks in the PRC where terms and conditions
offered by other commercial banks are more favourable to the Company than
those offered by the Finance Company. The Financial Services Agreement
also provides that the Finance Company will provide relevant services to
the Company on normal commercial terms, and on terms no less favourable
than those available to the Company from independent third parties.
Based on the above analysis, we are of the view that the terms of
the Financial Services Agreement are fair and reasonable.
-45-
LETTER FROM ICEA
(e) CAP FOR THE PROVISION OF DEPOSIT SERVICE
Set out below is a summary of the Cap for the deposit of money by
the Company with the Finance Company from time to time under the Financial
Services Agreement during the term of the Financial Services Agreement and
the basis of determination of the Cap:
PROVISION OF BASIS OF DETERMINATION
DEPOSIT SERVICE CAP OF THE CAP
--------------- --- ----------
The Cap for the deposit of RMB1 billion The Cap was determined
money with the Finance based on past figures on
Company from time to time deposit of money with the
during the term of the Finance Company, and on
Financial Services Agreement the estimated amount of
money to be deposited
with the Finance Company
by the Company each year
for the term of the
Financial Services
Agreement.
As at 31 December, 2001,
2002 and 2003, the
Company had deposits
placed with the Finance
Company amounted to
approximately 1.32
billion, approximately
0.88 billion and
approximately 0.35
billion.
We are given to understand that the low deposit of money by the
Company with the Finance Company as at 31 December, 2003 was mainly due to
material adverse impact caused by the outbreak of severe acute respiratory
syndrome on the business operations of the Company during the first half
of 2003.
We are of the view that the Cap for the deposit of money by the
Company with the Finance Company which is determined based on the past
figures on deposit of money with the Finance Company, and on the estimated
amount of money to be deposited with the Finance Company by the Company
each year for the term of the Financial Services Agreement to be fair and
reasonable.
SUMMARY
Having considered the above principal factors and reasons, we draw your
attention to the following key factors in arriving at our opinion:
(a) the Acquisition represents an attractive opportunity for the Listed
Group to consolidate its strong market position as both Northern
Airlines and Xinjiang Airlines are leading airlines in their
respective operating regions;
-46-
LETTER FROM ICEA
(b) the Board's representation that the terms of the Sale and Purchase
Agreement and the Financial Services Agreement were negotiated on an
arm's length basis;
(c) the provisional amount of the consideration of the Acquisition was
determined based on the valuation of the Business and Assets, and the
Debts set out in the Zhong Qi Hua Valuation Reports and will be
subject to adjustment and finalisation based on the book value of the
Business and Assets, and of the Debts as of the Effective Date;
(d) the consideration for the Acquisition is within the range of the
valuation of Aviation Comparables and slightly below the average of
the valuation of PRC Aviation Comparables;
(e) notwithstanding the gearing level of the Listed Group would be
increased substantially and the financial burden of the Company would
be increased as a result of the Acquisition, the Acquisition will
bring various benefits to the Listed Group, including broadening its
flight network, enhancing its international air transportation
business, increasing its fleet size and transportation capacity,
enhancing its air ticket sales network; strengthening its marketing
efforts; reducing its operating costs and boosting its overall
efficiency, which we consider is beneficial to the Group in the long
run;
(f) the representations made by the Directors that the Provision of
Deposit Service have been and will continue to be conducted in the
ordinary and usual course of business, on normal commercial terms,
and the terms have been determined after arm's length negotiation
between the parties;
(g) the waiver from strict compliance with the Listing Rules with respect
to the Provision of Deposit Service will be subject to the
satisfaction of various conditions, including that: (i) the
transactions have been approved by the Independent Shareholders; (ii)
the transactions will be entered into in the ordinary and usual
course of business and on normal commercial terms that are fair and
reasonable in so far as the Independent Shareholders are concerned;
(iii) the Company shall disclose in its annual reports sufficient
details of the transactions; (iv) the independent non-executive
Directors of the Company review the transactions annually; (v) the
Company's auditors review the transactions annually; and (vi) the
value of Provision of Deposit Service does not exceed RMB1 billion;
and
(h) the Stock Exchange has indicated that if the value of the Provision
of Deposit Service exceeds RMB1 billion or if any of the terms of the
Financial Services Agreement, or the nature of the Provision of
Deposit Service is altered or if the Company entered into any new
agreements with connected persons in the future, the Company will
need to comply fully with all the relevant provisions of Chapter 14A
of the Listing Rules.
-47-
LETTER FROM ICEA
RECOMMENDATION
Having considered the above principal factors and reasons and the terms of
the Sale and Purchase Agreement and the Financial Services Agreement, we
consider that the terms of the Acquisition and the Provision of Deposit Service,
from a financial perspective, to be fair and reasonable so far as the
Independent Shareholders are concerned and are in the interests of the Company
as a whole. We urge the Independent Shareholders to note that as a result of the
Acquisition, the gearing level of the Group would be increased substantially,
which could have an adverse impact on the financial position of the Group as
well as short term share price performance of the Company. However, as the
Acquisition will bring various benefits to the Listed Group as mentioned in the
Letter from the Board, we consider the Acquisition is beneficial to the Listed
Group in the long run. Accordingly, we advise the Independent Board Committee to
recommend the Independent Shareholders to vote in favour of ordinary resolutions
numbered 1 and 6 as detailed in the notice of the EGM set out at the end of the
Circular.
Yours faithfully,
For and on behalf of
ICEA CAPITAL LIMITED
GARY S K SIK
Managing Director
-48-
APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
(1) INDUSTRY BACKGROUND
The civil aviation industry in China has experienced rapid growth over the
past decade. According to the National Bureau of Statistics of China, annual
passenger number grew from 17 million in 1990 to 88 million in 2003, with a
compound annual growth rate of approximately 14%. Air cargo volume also grew
from 370 thousand tonnes in 1990 to 2 million tonnes in 2003, with a compound
annual growth rate of approximately 15%. The total number of China's aviation
routes also increased from 437 in 1990 to 1,176 by the end of 2003.
PASSENGER AND FREIGHT VOLUME CARRIED BY CHINESE AIRLINES (1990-2003)
[BAR CHARTS]
Passenger turnover(million)
1990-2003
1990 16.0
1991 21.8
1992 28.9
1993 33.8
1994 40.4
1995 51.2
1996 55.6
1997 56.3
1998 57.6
1999 60.9
2000 67.2
2001 75.2
2002 85.9
2003 87.6
Cargo turnover('000 tonnes)
1990-2003
1990 370
1991 452
1992 575
1993 694
1994 829
1995 1,011
1996 1,150
1997 1,247
1998 1,401
1999 1,700
2000 1,967
2001 1,710
2002 2,021
2003 2,190
Source: China Statistical Yearbook 2003
Despite rapid growth both in the passenger and cargo sectors, China's
aviation market remains underdeveloped by global standards. Per capita passenger
air trip numbers remain low relative to the more developed international
markets.
AIR TRANSPORT CAPACITY FOR SELECTED COUNTRIES
[BAR CHARTS]
ATK (mm tonne km)
United States 123,283
Japan 22,469
United Kingdom 20,022
Germany 19,156
China 16,200
France 15,592
Singapore 14,140
South Korea 13,859
Netherlands 11,294
Australia 9,507
ATK (tonne km per capita)
Singapore 3,401
Netherlands 702
Australia 484
United States 429
United Kingdom 333
South Korea 291
France 260
Germany 233
Japan 177
China 13
Source: China Statistics for Civil Aviation 2003, EIU
-49-
APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
Since the early 1990's, the Chinese government has begun to separate its
function as regulator of the PRC civil aviation industry from its business
management role at the major state-owned PRC airlines. As a result, CAAC ceased
its participation in airline operations but still continues to exercise
authority as the PRC civil aviation industry regulator. CAAC's regulatory roles
include developing rules and regulations for the PRC civil aviation industry,
directing the restructuring of the PRC airlines, enforcing flight safety rules
and standards, managing air traffic, regulating air ticket prices, and
overseeing aviation negotiations with foreign parties.
During the restructuring of the PRC airlines in 2002, the airlines
previously under the control of CAAC were reorganized under three holding
company groups. These three holding company groups were: (i) China National
Aviation Holding Company including Air China Limited, China National Aviation
Corporation, and China Southwest Airlines with main bases in Beijing, Hangzhou,
and Chengdu; (ii) China Eastern Air Holding Company consisting of China Eastern
Airlines Corporation Limited, China Eastern Yunnan Airlines, and China Eastern
Northwest Airlines with main bases in Shanghai, Kunming, and Xian; and (iii)
CSAHC, the largest of the three holding companies, comprising the Company,
Northern Airlines, and Xinjiang Airlines, with main bases in Guangzhou,
Shenyang, and Urumqi.
Despite strong growth during the 1990's, PRC civil aviation industry
suffered from the significant negative effects arising from the 911 attacks in
2001 and the outbreak of Severe Acute Respiratory Syndrome in early 2003. These
negative effects included lower revenue from reduced passenger and cargo traffic
and higher operating costs due to the increased cost of aviation insurance and
the heightened security and health precautions. Traffic volumes have been
recovering since Severe Acute Respiratory Syndrome was brought under control in
July 2003.
-50-
APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
In the post Severe Acute Respiratory Syndrome period, PRC civil aviation
industry demonstrated strong growth on the back of solid economic expansion and
a significant increase in commercial and leisure travel activities. On a
year-to-August basis, 2004 is the strongest year for China's airlines with
record turnover in both passenger and freight transportation.
PASSENGER VOLUME (MILLION)
PASSENGER VOLUME (MILLION)
[LINE GRAPH]
[PLOT POINTS TO COME]
Source: CEIC
REVENUE PASSENGER KILOMETRES (MILLION)
REVENUE PASSENGER KILOMETRES (MILLION)
[LINE GRAPH]
[PLOT POINTS TO COME]
Source: CEIC
FREIGHT CARRIED (MILLION TONNES)
[LINE GRAPH]
[PLOT POINTS TO COME]
FREIGHT CARRIED (MILLION )
Source: CEIC
As shown in the above charts, in the first eight months of 2004, passenger
turnover and RPKs (a measurement for distance that passengers travel), reached a
record of 80 million and 117 billion respectively compared to the same period of
the previous years. In the same period, cargo turnover also surpassed historical
levels, reaching 1.74 million tonnes.
-51-
APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
(2) OVERVIEW OF THE TARGET GROUP
Northern Airlines was established on 19 October, 1990 following its
separation from the Shenyang Bureau of the CAAC. Xinjiang Airlines, which began
operations on 1 January, 1985, was formally separated in 2001 from the Urumqi
Regional Bureau of the CAAC.
As part of the restructuring initiative of the PRC civil aviation industry
in late 2002, Southern Airlines (Group), Northern Airlines and Xinjiang Airlines
were restructured and consolidated into CSAHC.
Both Northern Airlines Group and Xinjiang Airlines Group are the leading
airlines in their respective regions, offering passenger and cargo air
transportation and other related services.
(a) KEY OPERATING DATA
Passenger and cargo air transportation are Northern Airlines Group's
principal businesses. However, due to its lack of freight aircraft,
Northern Airlines Group relies heavily on its passenger air transportation
business. In 2003, revenues generated from passenger air transportation
business accounted for approximately 93% of the total revenues while those
from cargo services accounted for approximately 7%. Northern Airlines
Group also provides aircraft maintenance and repair, and other aviation
related services.
In the past three and a half years, Northern Airlines Group's
passenger air transportation business continued to improve with overall
passenger load factor increasing from 60% for 2001 to 67% for the first
six months of 2004 and passenger yield per RPK rising from RMB0.58 for
2001 to RMB0.61 for the first six months of 2004. The cargo transportation
business also showed material improvement with cargo yield per RFTK
increasing 12% from RMB1.90 for year 2001 to RMB2.13 for the first six
months of 2004. Key operating benchmarks of Northern Airlines Group from
2001 to the first half of 2004 are summarized as follows:
NORTHERN AIRLINES GROUP'S KEY OPERATING BENCHMARKS
FIRST SIX
MONTHS
ENDED
30 JUNE,
2004 2003 2002 2001
--------- ----- ----- -----
PASSENGER TRAFFIC (RPK) (million)
Domestic 4,652 8,234 7,800 6,914
International 538 913 986 1,334
------- ----- ----- -----
Total 5,190 9,147 8,786 8,248
======= ===== ===== =====
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APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
FIRST SIX
MONTHS
ENDED
30 JUNE,
2004 2003 2002 2001
--------- ------ ------ ------
REVENUE TONNE KILOMETRES (RTK)
(million)
Domestic 504 904 707 619
International 57 101 90 72
------- ------ ------ ------
Total 561 1,005 797 691
======= ====== ====== ======
PASSENGER VOLUME (thousand)
Domestic 3,258 5,831 5,501 4,849
International 363 643 652 864
------- ------ ------ ------
Total 3,621 6,474 6,153 5,713
======= ====== ====== ======
CARGO AND MAIL CARRIED (thousand
tonne)
Domestic 47 94 74 62
International 8 17 13 9
------- ------ ------ ------
Total 55 111 87 71
======= ====== ====== ======
CARGO TRAFFIC (RFTK) (million)
Domestic 87 168 166 162
International 9 19 15 13
------- ------ ------ ------
Total 96 187 181 175
======= ====== ====== ======
PASSENGER CAPACITY (ASK) (million)
Domestic 6,722 12,226 12,232 11,412
International 971 1,714 1,800 2,334
------- ------ ------ ------
Total 7,693 13,940 14,032 13,746
======= ====== ====== ======
-53-
APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
FIRST SIX
MONTHS
ENDED
30 JUNE,
2004 2003 2002 2001
--------- ------ ------ ------
AVAILABLE TONNE KILOMETRES (ATK)
(million)
Domestic 805 1,451 1,193 1,035
International 115 205 186 131
------- ------ ------ ------
Total 920 1,656 1,379 1,166
======= ====== ====== ======
PASSENGER LOAD FACTOR
Domestic 69% 67% 64% 61%
International 55% 53% 55% 57%
Overall 67% 66% 63% 60%
======= ====== ====== ======
OVERALL LOAD FACTOR (RTK/ATK)
Domestic 63% 62% 59% 60%
International 50% 49% 48% 55%
Overall 61% 61% 58% 59%
======= ====== ====== ======
PASSENGER YIELD PER RPK (RMB)
Domestic 0.57 0.55 0.50 0.55
International 0.98 0.97 0.87 0.71
Overall 0.61 0.60 0.54 0.58
======= ====== ====== ======
CARGO YIELD PER RFTK (RMB)
Domestic 1.51 1.56 1.59 1.55
International 7.77 7.89 8.25 8.54
Overall 2.13 2.20 2.16 1.90
======= ====== ====== ======
YIELD PER RTK (RMB)
Domestic 5.53 5.33 5.90 6.53
International 10.53 10.27 10.90 14.75
Overall 6.04 5.82 6.47 7.38
======= ====== ====== ======
FLEET
Airbus 17 12 10 8
McDonald Douglas 35 35 36 37
Others 3 3 19 27
------- ------ ------ ------
Total 55 50 65 72
======= ====== ====== ======
-54-
APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
FIRST SIX
MONTHS
ENDED
30 JUNE,
2004 2003 2002 2001
--------- ------ ------ ------
OVERALL UTILISATION RATE
(hours per day)
Airbus 8.8 7.8 8.3 7.5
McDonald Douglas 9.1 7.8 8.2 8.4
Overall 9.0 7.8 8.3 7.8
======= ====== ====== ======
Passenger and cargo air transportation are Xinjiang Airlines Group's
principal businesses. In 2003, passenger air transportation business
generated 96% of total revenues with freight transportation business
accounting for 4%.
Xinjiang Airlines Group has managed to improve its domestic passenger
load factor to 66% in the first half of 2004 from 59% in 2001. Passenger
traffic as measured by RPK has also increased over the past three years.
However, passenger yields suffered in 2003 and first half of 2004 due to
increased competition. Key operating benchmarks from 2001 to the first half
2004 are summarized as follows:
XINJIANG AIRLINES GROUP'S KEY OPERATING BENCHMARKS
FIRST SIX
MONTHS
ENDED
30 JUNE,
2004 2003 2002 2001
--------- ------ ------ ------
PASSENGER TRAFFIC (RPK) (million)
Domestic 2,324 3,941 3,768 3,400
International 92 151 148 148
------- ------ ------ ------
Total 2,416 4,092 3,916 3,548
======= ====== ====== ======
REVENUE TONNE KILOMETRES (RTK)
(million)
Domestic 241 415 417 365
International 9 14 14 13
------- ------ ------ ------
Total 250 429 431 378
======= ====== ====== ======
-55-
APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
FIRST SIX
MONTHS
ENDED
30 JUNE,
2004 2003 2002 2001
--------- ------ ------ ------
PASSENGER VOLUME (thousand)
Domestic 1,209 2,062 1,753 1,510
International 55 86 75 61
------- ------ ------ ------
Total 1,264 2,148 1,828 1,571
======= ====== ====== ======
CARGO AND MAIL CARRIED (thousand
tonne)
Domestic 12 21 27 20
International - - - -
------- ------ ------ ------
Total 12 21 27 20
======= ====== ====== ======
CARGO TRAFFIC (RFTK) (million)
Domestic 33 62 81 62
International 1 1 1 1
------- ------ ------ ------
Total 34 63 82 63
======= ====== ====== ======
PASSENGER CAPACITY (ASK) (million)
Domestic 3,527 5,995 6,105 5,771
International 195 302 331 326
------- ------ ------ ------
Total 3,722 6,297 6,436 6,097
======= ====== ====== ======
AVAILABLE TONNE KILOMETRES (ATK)
(million)
Domestic 378 597 674 637
International 20 32 35 33
------- ------ ------ ------
Total 398 629 709 670
======= ====== ====== ======
PASSENGER LOAD FACTOR
Domestic 66% 66% 62% 59%
International 47% 50% 45% 45%
Overall 65% 65% 61% 58%
======= ====== ====== ======
-56-
APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
FIRST SIX
MONTHS
ENDED
30 JUNE,
2004 2003 2002 2001
---------- ---------- ---------- ----------
OVERALL LOAD FACTOR
(RTK/ATK)
Domestic 64% 70% 62% 57%
International 45% 44% 40% 39%
Overall 63% 68% 61% 56%
========== ========== ========== ==========
PASSENGER YIELD PER RPK (RMB)
Domestic 0.46 0.48 0.53 0.55
International 0.72 0.69 0.69 0.60
Overall 0.47 0.48 0.54 0.55
========== ========== ========== ==========
CARGO YIELD PER RFTK (RMB)
Domestic 1.44 1.44 1.33 1.49
International 2.09 4.43 5.00 5.00
Overall 1.45 1.48 1.36 1.54
========== ========== ========== ==========
YIELD PER RTK (RMB)
Domestic 4.75 4.70 5.51 5.83
International 8.12 7.74 8.25 7.74
Overall 4.87 4.80 5.56 5.86
========== ========== ========== ==========
FLEET
Boeing 15 15 15 14
ATR 72 and IL86 5 5 8 8
---------- ---------- ---------- ----------
Total 20 20 23 22
========== ========== ========== ==========
OVERALL UTILISATION RATE
(hours per day)
Boeing 10.0 8.8 8.9 10.1
ATR 72 and IL86 7.8 7.4 7.1 8.2
Overall 8.9 8.3 7.7 8.4
========== ========== ========== ==========
(b) OPERATIONAL BASES
Shenyang, Dalian, Harbin, and Changchun are the primary bases for
Northern Airlines Group. Urumqi is the principal base for Xinjiang Airlines
Group.
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APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
SHENYANG:
Taoxian Airport, located 22 kilometers south of Shenyang, was
opened on 10 April, 1989. In the first half of 2004, Northern
Airlines Group's passenger and cargo turnover at Taoxian Airport
accounted for 25% and 28% of its total passenger and cargo turnover
respectively.
The airport has a 3,200 meter runway, and is equipped with
modern communication and navigation systems. Taoxian Airport is
owned and operated by Shenyang Taoxian Airport Limited, which
estimates that Taoxian Airport handled approximately 31,400
landings, three million passengers and 88,000 tonnes cargo for the
year 2003, making it one of the busiest airports in Northeastern
China.
DALIAN:
Dalian Zhoushuizi Airport is located 10 kilometers northwest
of Dalian. The airport handled 26% of the passenger turnover and 29%
of the cargo turnover of Northern Airlines Group in the first half
of 2004.
Opened on 6 April, 1973, Zhoushuizi Airport is the busiest
airport in Northeastern China. The airport is owned and operated by
Dalian Zhoushuizi International Airport Limited. Zhoushuizi Airport
has a 3,300 meter runway, and is capable of handling commercial
aircraft of all types. According to Dalian Zhoushuizi International
Airport Limited, the airport handled 35,248 landings, three million
passengers and 74,784 tonnes of cargo in 2003.
HARBIN:
Harbin Taiping Airport is located 33 kilometers northwest of
Harbin. In the first half of 2004, the airport handled 16% of
passenger turnover and 15% of cargo turnover of Northern Airlines
Group.
Opened on 1 September, 1997, Taiping Airport is one of the
largest airports in Northeastern China. Taiping Airport has a 3,200
meter runway, and is capable of handling Boeing 767 or equivalent
aircraft. According to the airport, it handled 22,093 landings in
2003. Passenger and cargo turnover was two million and 31,300 tonnes
respectively for the year.
CHANGCHUN:
Dafangshen Airport is Northern Airlines Group's operational
base in Jilin province. Located 11 kilometers west of Changchun, the
airport handled 15% of Northern Airlines Group's passenger turnover
and 11% of cargo turnover in the first half of 2004.
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APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
Dafangshen Airport is the only international airport in Jilin
province. It has a 2,600 meter runway and is capable of handling
Boeing 737, Boeing 757 or equivalent aircraft. According to the
airport, it handled 13,880 landings in 2003. Passenger and cargo
turnover was one million and 15,700 tonnes respectively for the
year.
In light of the rapid growth of passenger and cargo turnover
at the Dafangshen Airport, CAAC and Jilin provincial government
began construction of Longjiabao Airport in May 2003. The new
airport is located 28 kilometers northeast of Changchun. Dafangshen
Airport will cease operations when the new airport comes into
operations.
URUMQI:
Urumqi Diwo Airport is located 17 kilometers northwest of
Urumqi. In 2003, it handled 82% of Xinjiang Airlines Group's total
passenger and cargo turnover.
Opened in 1973, Diwo Airport is currently one of the largest
airports in Northwestern China. Equipped with a 3,600 meter runway
and modern navigation systems, the airport is capable of handling
commercial aircraft of all types. According to the airport, it
handled 33,440 landings in 2003. Passenger and cargo turnover was
three million and 47,900 tonnes respectively for the year.
(c) ROUTES NETWORK
From the four bases in Northeastern China, Northern Airlines
currently offers regular flights on 106 domestic routes to over 46 cities
in China and 29 international routes to North Asia and Russia.
Headquartered in Urumqi, Xinjiang Airlines is the leading air
traffic service provider in Northwestern China. It offers regular flight
services on 42 domestic routes. It also offers regular flight services on
seven international routes to major cities in the Middle East, Russia and
West Asia.
TOP 10 ROUTES OF NORTHERN AIRLINES GROUP BY REVENUE
FIRST SIX MONTHS ENDED
30 JUNE, 2004 2003
----------------------- --------------------------
1. Changchun-Beijing Changchun-Beijing
2. Shenyang-Beijing Harbin-Shenyang-Shenzhen
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APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
FIRST SIX MONTHS ENDED
30 JUNE, 2004 2003
----------------------- --------------------------
3. Dalian-Beijing Harbin-Dalian-Guangzhou
4. Harbin-Beijing Harbin-Beijing
5. Dalian-Shanghai Pudong Dalian-Beijing
6. Harbin-Shenyang-Shenzhen Shenyang-Beijing
7. Harbin-Dalian-Guangzhou Shenyang-Wenzhou-Guangzhou
8. Shenyang-Shanghai Pudong Shenyang-Shanghai Pudong
9. Shenyang-Wenzhou-Guangzhou Dalian-Shanghai Pudong
10. Dalian-Hangzhou-Shenzhen Dalian-Hangzhou-Shenzhen
TOP 10 ROUTES OF XINJIANG AIRLINES GROUP BY REVENUE
FIRST SIX MONTHS ENDED
30 JUNE, 2004 2003
----------------------- ------------------------
1. Urumqi-Beijing Urumqi-Beijing
2. Urumqi-Shanghai Urumqi-Shanghai
3. Urumqi-Changsha-Shenzhen Urumqi-Kashi
4. Urumqi-Chengdu Urumqi-Changsha-Shenzhen
5. Urumqi-Guangzhou Urumqi-Guangzhou
6. Urumqi-Kashi Urumqi-Chengdu
7. Urumqi-Lanzhou-Hangzhou Urumqi-Lanzhou-Hangzhou
8. Urumqi-Zhengzhou-Qingdao Urumqi-Zhengzhou-Qingdao
9. Urumqi-Yili Urumqi-Xian
10. Urumqi-Xian Urumqi-Zhengzhou-Fuzhou
-60-
APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
(d) FLEET
As of 30 June, 2004, Northern Airlines Group owned and operated 55
medium to large size aircraft with an average fleet age of 8.08 years. The
table below sets out details of its fleet:
NORTHERN AIRLINES GROUP'S FLEET DETAILS (AS OF 30 JUNE, 2004)
FINANCING OPERATING
SELF-OWNED LEASE LEASE TOTAL
---------- ---------- ---------- ----------
MD82 10 1 11 22
MD90 3 10 - 13
A300 - 6 - 6
A321 4 4 - 8
A319 - - 3 3
Cessna 208B 3 - - 3
---------- ---------- ---------- ----------
Total 20 21 14 55
========== ========== ========== ==========
Xinjiang Airlines Group has gradually phased out the Soviet-made
TU-154 and IL-86 for commercial flights. The airline has recently
purchased and leased a large number of Boeing and ATR commercial aircraft.
As of 30 June, 2004, the average age of the 20 aircraft owned or operated
by Xinjiang Airlines Group was 5.90 years. Details of the fleet are set
out in the table below:
XINJIANG AIRLINES GROUP'S FLEET DETAILS (AS OF 30 JUNE, 2004)
OPERATING
SELF-OWNED LEASE TOTAL
---------- ---------- ----------
B757-200 6 3 9
B737-300 2 - 2
B737-700 - 4 4
ATR-72 5 - 5
---------- ---------- ----------
Total 13 7 20
========== ========== ==========
-61-
APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
(e) AIRCRAFT ACQUISITION AND DISPOSAL PROGRAM
Northern Airlines entered into an aircraft sale and leaseback
agreement on 4 November, 2003 with ILFC. Under the agreement, Northern
Airlines agreed to sell the 22 MD82 aircraft owned, or to be owned to ILFC
in four phases according to the schedule listed below:
MD82 AIRCRAFT TO BE SOLD UNDER THE AIRCRAFT SALE AND LEASEBACK AGREEMENT
NUMBER OF
PHASE DATE MD82 TO BE SOLD
----- --------------------------------- ---------------
I 14 November, 2003 4
II 1 March, 2004 7
III 1 July, 2005 and 1 June, 2006 6
IV 1 June, 2006 and 15 January, 2007 5
Under the same agreement, Northern Airlines Group also agreed to
lease back the above-mentioned MD82 aircraft from ILFC immediately after
the sale. The average term of the lease back agreements is 15 months. In
addition, Northern Airlines Group also agreed to replace each of the 22
MD82 aircraft with one new Airbus 319-100 aircraft or one new Airbus
320-200 aircraft from ILFC upon the termination of the lease back
agreements. The table below sets out the replacement schedule:
AIRCRAFT REPLACEMENT SCHEDULE
AIRCRAFT TYPE SCHEDULED DELIVERY DATE
------------- ---------------------------
PHASE I 1. A319-100 May 2004 (delivered)
2. A319-100 May 2004 (delivered)
3. A319-100 June 2004 (delivered)
4. A319-100 September 2004 (delivered)
PHASE II 5. A319-100 January 2005
6. A319-100 February 2005
7. A319-100 March 2005
8. A319-100 April 2005
9. A319-100 May 2005
10. A319-100 October 2005
11. A319-100 November 2005
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APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
AIRCRAFT TYPE SCHEDULED DELIVERY DATE
--------------------- -----------------------
PHASE III 12. A319-100/A320-200 January 2006
13. A319-100/A320-200 June 2006
14. A319-100/A320-200 October 2006
15. A319-100/A320-200 November 2006
16. A319-100/A320-200 November 2006
17. A319-100/A320-200 December 2006
PHASE IV 18. A319-100/A320-200 February 2007
19. A319-100/A320-200 June 2007
20. A319-100/A320-200 October 2007
21. A319-100/A320-200 October 2007
22. A319-100/A320-200 November 2007
In addition to the above agreement, Northern Airlines has also
committed to the addition of two more A321s by the end of 2005.
(f) SALES AND MARKETING
Northern Airlines Group and Xinjiang Airlines Group have
historically marketed their services under their own brands.
FREQUENT FLYER PROGRAM:
Both Northern Airlines Group and Xinjiang Airlines Group
operated their respective frequent flyer programs prior to
consolidation into CSAHC. Following the consolidation of Northern
Airlines Group and Xinjiang Airlines Group into CSAHC, the two
frequent flyer programs merged with the Company's frequent flyer
program, namely, the China Southern Airlines Sky Pearl Club.
TICKET SALES CHANNELS AND RESERVATION SYSTEM:
Northern Airlines Group and Xinjiang Airlines Group conduct
ticket sales through a variety of sales channels, including the
airlines' own network of exclusive sales offices, websites and
general sales agents. As of 30 June, 2004, Northern Airlines Group
has sales offices in nine cities in China. Xinjiang Airlines Group
has sales offices in seven cities in China and six outside China.
-63-
APPENDIX I INFORMATION REGARDING THE AIRLINE OPERATIONS OF
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
(g) SAFETY
Aircraft safety involves three major operational areas: flight
operations, aircraft maintenance and ground operations. Both Northern
Airlines Group and Xinjiang Airlines Group place great importance on
safety in each of the three areas, and comply with applicable safety and
security standards and regulations required by CAAC and other aviation
industry regulators in the jurisdictions they serve.
Xinjiang Airlines Group has established a reputation for safety. To
date, it maintains a record of transport flight safety since its founding
and is perceived to be one of the safest airline operators in China. On 7
May, 2002, a MD82 aircraft of the Northern Airlines crashed into the ocean
near Dalian, resulting in 112 passenger and crew fatalities. The aircraft
was fully insured and compensated under the insurance arrangement.
(h) EMPLOYEES
The table below sets forth information regarding the employees of
Northern Airlines Group and Xinjiang Airlines Group as at the end of 2003:
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP EMPLOYEE INFORMATION
(AS AT 31 DECEMBER, 2003)
NORTHERN XINJIANG
AIRLINES AIRLINES
GROUP GROUP TOTAL
-------- -------- --------
Flight personnel 1,864 726 2,590
Ground personnel 4,129 758 4,887
Sales, administration and back
office personnel 4,650 1,120 5,770
-------- -------- --------
Total headcount 10,643 2,604 13,247
======== ======== ========
(i) PROPERTIES
Both Northern Airlines Group and Xinjiang Airlines Group own certain
buildings and real estate properties, which are used for offices, retail
outlets, warehouses, aircraft maintenance workshops, ground services and
airport services.
-64-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
The following is the text of a report, prepared for the sole purpose of
inclusion in this circular, received from the independent reporting accountants,
KPMG, Certified Public Accountants, Hong Kong. As described in the section
headed "Documents available for inspection" in Appendix IX, a copy of the
following accountants' report is available for inspection.
[KPMG LOGO] 8th Floor
Prince's Building
10 Chater Road
Hong Kong
The Directors
China Southern Airlines Company Limited
Baiyun International Airport
Guangzhou
People's Republic of China
12 November, 2004
Dear Sirs,
INTRODUCTION
We set out below our report on the financial information relating to the
airline and airline related operations (the "Airline Operations") of China
Northern Airlines Company ("Northern Airlines") and its subsidiaries ("Northern
Airlines Group"), in Sections I to VII below (the "Financial Information"),
including the combined balance sheets as at 31 December, 2001, 2002 and 2003 and
30 June, 2004, the combined statements of operations, the combined statements of
changes in owner's fund and the combined statements of cash flows for each of
the years in the three-year period ended 31 December, 2003 and the six-month
period ended 30 June, 2004 (the "relevant period"), and the notes thereto, for
inclusion in the shareholders' circular of China Southern Airlines Company
Limited ("the Company") dated 12 November, 2004 (the "Circular").
Northern Airlines was established on 19 October, 1990 in the People's
Republic of China (the "PRC") and is a wholly-owned subsidiary of China Southern
Air Holding Company ("CSAHC"), the ultimate holding company of the Company. It
is principally engaged in the provision of domestic, and international
passenger, cargo and mail airline services, with flights operating primarily
from Shenyang Tao Xian International Airport which is the main base of Northern
Airlines in the PRC. In addition, Northern Airlines Group also engages in other
non airline related operations (the "Non Airline Operations") mainly consisting
of hotel and property operations which provide social and supporting services to
Northern Airlines Group.
-65-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
CSAHC has undergone a reorganisation (the "Reorganisation") in connection
with the proposed acquisition of the Airline Operations of Northern Airlines
Group by the Company. As part of the Reorganisation, the operations and
businesses and the assets and liabilities of Northern Airlines Group were
segregated into two operations, namely the Airline Operations and the Non
Airline Operations on 31 December, 2003.
Pursuant to the Sale and Purchase Agreement, as described more fully in
the section headed "The Sale and Purchase Agreement" in the letter from the
Board contained in the Circular, the Company will acquire the Airline Operations
of Northern Airlines Group together with the related assets and liabilities.
However, certain assets and liabilities within the Airline Operations of
Northern Airlines Group are not to be acquired by the Company.
Northern Airlines Group prepares financial statements in accordance with
the relevant accounting rules and regulations in the PRC. The financial
statements of the Airline Operations of Northern Airlines Group were not
required to be audited by independent auditors during the relevant period.
BASIS OF PREPARATION
The Financial Information has been prepared by management of the Airline
Operations of Northern Airlines Group based on the management accounts of the
Airline Operations of Northern Airlines Group and on the bases set out in
Section V Notes 2 and 3 to conform with International Financial Reporting
Standards ("IFRS") promulgated by the International Accounting Standards Board
and the disclosure requirements of the Rules Governing the Listing of Securities
on The Stock Exchange of Hong Kong Limited. IFRS includes International
Accounting Standards and interpretations.
RESPECTIVE RESPONSIBILITIES OF MANAGEMENT AND REPORTING ACCOUNTANTS
Management of the Airline Operations of Northern Airlines Group are
responsible for the preparation of the Financial Information which gives a true
and fair view. In preparing the Financial Information which gives a true and
fair view, it is fundamental that appropriate accounting policies are selected
and applied consistently, that judgements and estimates are made which are
prudent and reasonable and that the reasons for any significant departure from
applicable accounting standards are stated.
It is our responsibility to form an independent opinion, based on our
audit, on the Financial Information.
-66-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
BASIS OF OPINION
As a basis for forming an opinion on the Financial Information, for the
purpose of this report, we have audited the Financial Information of the Airline
Operations of Northern Airlines Group for the relevant period in accordance with
Statements of Auditing Standards and Guidelines issued by Hong Kong Institute of
Certified Public Accountants ("HKICPA") and we have carried out such additional
procedures as we considered necessary in accordance with the Auditing Guideline
"Prospectuses and the Reporting Accountant" issued by the HKICPA. We have not
audited any financial statements of the Airline Operations of Northern Airlines
Group in respect of any period subsequent to 30 June, 2004.
An audit includes examination, on a test basis, of evidence relevant to
the amounts and disclosures in the Financial Information. It also includes an
assessment of the significant estimates and judgements made by management of the
Airline Operations of Northern Airlines Group in the preparation of the
Financial Information, and of whether the accounting policies are appropriate to
the circumstances of the Airline Operations of Northern Airlines Group,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance as to whether the Financial
Information is free from material misstatement. In forming our opinion we also
evaluated the overall adequacy of the presentation of Financial Information. We
believe that our audit provides a reasonable basis for our opinion.
OPINION
In our opinion, the Financial Information for the purpose of this report,
and on the basis of presentation set out in Section V Notes 2 and 3, gives a
true and fair view of the combined state of affairs of the Airline Operations of
Northern Airlines Group as at 31 December, 2001, 2002 and 2003 and 30 June,
2004, and the combined results and combined cash flows of the Airline Operations
of Northern Airlines Group for each of the years in the three-year period ended
31 December, 2003 and the six-month period ended 30 June, 2004 and has been
properly prepared in accordance with IFRS.
-67-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(I) COMBINED STATEMENTS OF OPERATIONS
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------------------ ---------------------
2001 2002 2003 2003 2004
Note RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
OPERATING REVENUE
Traffic revenue 5,105,225 5,156,574 5,856,970 2,128,941 3,391,448
Other operating revenue 98,122 87,343 71,765 37,685 73,232
--------- ----------- ---------- --------- ---------
TOTAL OPERATING REVENUE 4 5,203,347 5,243,917 5,928,735 2,166,626 3,464,680
--------- ----------- ---------- --------- ---------
OPERATING EXPENSES
Flight operations 2,123,890 2,194,336 2,338,641 1,119,920 1,480,465
Maintenance 751,542 993,629 1,039,448 541,618 412,118
Aircraft and traffic servicing 667,950 717,332 759,704 319,939 464,035
Promotion and sales 408,994 415,806 425,466 166,296 219,471
General and administrative 162,719 218,594 225,464 99,245 114,849
Depreciation and amortisation 678,435 662,040 645,506 319,023 404,419
Others 535,321 349,856 555,349 - -
--------- ----------- ---------- --------- ---------
TOTAL OPERATING EXPENSES 5 5,328,851 5,551,593 5,989,578 2,566,041 3,095,357
--------- ----------- ---------- --------- ---------
OPERATING (LOSS)/PROFIT (125,504) (307,676) (60,843) (399,415) 369,323
--------- ----------- ---------- --------- ---------
NON-OPERATING INCOME/(EXPENSES)
Interest income 59,903 28,583 12,943 6,921 4,257
Interest expense 6 (724,605) (700,752) (627,190) (312,183) (195,027)
Exchange gain/(loss), net 232,409 (151,196) (217,539) (1,820) 23,567
Gain/(loss) on disposal of
property, plant and equipment 7 14,634 22,873 729 3,224 (439)
Deficit on revaluation of
property, plant and equipment 10 - - (492,369) - -
Others, net 3,589 (42,666) 15,540 13,540 -
--------- ----------- ---------- --------- ---------
TOTAL NON-OPERATING EXPENSES, NET (414,070) (843,158) (1,307,886) (290,318) (167,642)
--------- ----------- ---------- --------- ---------
(LOSS)/PROFIT BEFORE INCOME TAX
AND MINORITY INTERESTS (539,574) (1,150,834) (1,368,729) (689,733) 201,681
INCOME TAX 8 (572) (451) 117,262 - (67,300)
--------- ----------- ---------- --------- ---------
(LOSS)/PROFIT BEFORE MINORITY
INTERESTS (540,146) (1,151,285) (1,251,467) (689,733) 134,381
MINORITY INTERESTS 38,477 10,228 17,846 4,690 661
--------- ----------- ---------- --------- ---------
NET (LOSS)/PROFIT (501,669) (1,141,057) (1,233,621) (685,043) 135,042
========= =========== ========== ========= =========
-68-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(II) COMBINED BALANCE SHEETS
31 DECEMBER, 30 JUNE,
------------------------------------- ----------
2001 2002 2003 2004
Note RMB'000 RMB'000 RMB'000 RMB'000
NON-CURRENT ASSETS
Property, plant and equipment, net 10 8,843,881 8,766,726 8,844,541 9,141,267
Construction in progress 11 210,191 258,505 54,446 38,930
Lease prepayments 13,345 13,060 - -
Other investments 12 - 68,209 68,209 68,209
Lease and equipment deposits 778,182 640,286 1,334,818 437,117
Deferred expenditure 13 8,329 7,266 18,001 122,093
Deferred tax assets 23 - - 24,743 20,313
---------- ---------- ---------- ---------
TOTAL NON-CURRENT ASSETS 9,853,928 9,754,052 10,344,758 9,827,929
---------- ---------- ---------- ---------
CURRENT ASSETS
Inventories 14 625,704 693,960 534,968 544,093
Trade receivables 15 165,274 240,674 242,543 398,158
Other receivables and prepaid expenses 16 359,587 207,054 141,634 566,110
Cash and cash equivalents 17 1,308,902 755,218 542,046 234,733
---------- ---------- ---------- ---------
TOTAL CURRENT ASSETS 2,459,467 1,896,906 1,461,191 1,743,094
---------- ---------- ---------- ---------
CURRENT LIABILITIES
Bank and other loans 18 2,488,875 4,171,785 569,547 767,257
Obligations under finance leases 19 976,593 1,023,660 1,070,169 1,063,047
Other liabilities and accrued expenses 20 1,840,530 1,679,034 1,135,292 1,403,363
Accounts payable 21 255,771 206,659 122,259 140,026
Sales in advance of carriage 49,830 98,066 5,525 -
Tax payable 297 33 - -
---------- ---------- ---------- ---------
TOTAL CURRENT LIABILITIES 5,611,896 7,179,237 2,902,792 3,373,693
---------- ---------- ---------- ---------
NET CURRENT LIABILITIES (3,152,429) (5,282,331) (1,441,601) 1,630,599)
---------- ---------- ---------- ---------
TOTAL ASSETS LESS CURRENT LIABILITIES 6,701,499 4,471,721 8,903,157 8,197,330
---------- ---------- ---------- ---------
-69-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(II) COMBINED BALANCE SHEETS (CONTINUED)
31 DECEMBER, 30 JUNE,
----------------------------------- ---------
2001 2002 2003 2004
Note RMB'000 RMB'000 RMB'000 RMB'000
NON-CURRENT LIABILITIES AND DEFERRED
ITEMS
Bank and other loans 18 2,842,763 1,293,183 2,152,067 1,811,371
Obligations under finance leases 19 6,475,202 6,700,765 5,897,242 5,402,143
Deferred credit 22 47,815 38,989 30,163 25,750
---------- ---------- --------- ---------
TOTAL NON-CURRENT LIABILITIES 9,365,780 8,032,937 8,079,472 7,239,264
---------- ---------- --------- ---------
MINORITY INTERESTS 77,309 67,081 3,033 2,372
---------- ---------- --------- ---------
(2,741,590) (3,628,297) 820,652 955,694
========== ========== ========= =========
Representing:
OWNER'S FUND - (DEFICIT)/SURPLUS (2,741,590) (3,628,297) 820,652 955,694
========== ========== ========= =========
-70-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(III) COMBINED STATEMENTS OF CHANGES IN OWNER'S FUND
Note RMB'000
Deficit of owner's fund as at 1 January, 2001 (2,203,560)
Net loss for the year (501,669)
Distributions to owner (36,361)
----------
DEFICIT OF OWNER'S FUND AS AT 31 DECEMBER, 2001 (2,741,590)
==========
Deficit of owner's fund as at 1 January, 2002 (2,741,590)
Net loss for the year (1,141,057)
Distributions to owner (11,277)
Contributions from owner 265,627
----------
DEFICIT OF OWNER'S FUND AS AT 31 DECEMBER, 2002 (3,628,297)
==========
Deficit of owner's fund as at 1 January, 2003 (3,628,297)
Net loss for the year (1,233,621)
Net liabilities assumed by owner in connection
with the Reorganisation and Acquisition 2 4,599,709
Surplus arising from revaluation of property,
plant and equipment 10 1,175,668
Elimination of net deferred tax assets 23 (117,550)
Recognition of deferred tax assets 23 24,743
----------
SURPLUS OF OWNER'S FUND AS AT 31 DECEMBER, 2003 820,652
==========
Surplus of owner's fund as at 1 January, 2004 820,652
Net profit for the period 135,042
----------
SURPLUS OF OWNER'S FUND AS AT 30 JUNE, 2004 955,694
==========
-71-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(IV) COMBINED STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
-------------------------------------- ---------------------
2001 2002 2003 2003 2004
Note RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
NET CASH FROM/(USED IN) OPERATING
ACTIVITIES 29(i) 390,115 102,830 540,228 (489,653) 221,973
---------- ---------- ---------- ---------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from disposal of property,
plant and equipment 163,223 223,375 122,227 8,143 136,846
Increase in deferred expenditure - (183) (27,890) (13,067) -
Decrease in long term receivable 28,338 - - - -
Net cash proceeds from
manufacturers' credit 29(ii) 414,722 547,629 - - -
Payment of lease and equipment
deposits (239,160) (241,880) (1,904,415) (939,931) (84,961)
Refund of lease and equipment
deposits 333,811 383,563 1,214,509 1,062,275 158,265
Capital expenditures (332,622) (667,041) (1,411,666) (1,030,723) (117,418)
Purchase of long term investments - (68,209) - - -
---------- ---------- ---------- ---------- --------
NET CASH FROM/(USED IN) INVESTING
ACTIVITIES 368,312 177,254 (2,007,235) (913,303) 92,732
---------- ---------- ---------- ---------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from bank and other loans 2,709,000 3,363,281 9,409,078 5,801,892 309,490
Repayment of bank and other loans (2,329,796) (3,229,998) (7,069,770) (3,691,226) (452,427)
Repayment of principal under
finance lease obligations (994,221) (1,221,401) (1,006,097) (500,815) (479,081)
Contributions from owner - 265,627 - - -
Distributions to owner (36,361) (11,277) - - -
Cash distributed to owner upon the
Reorganisation 2 - - (79,376) - -
---------- ---------- ---------- ---------- --------
NET CASH (USED IN)/FROM FINANCING
ACTIVITIES (651,378) (833,768) 1,253,835 1,609,851 (622,018)
---------- ---------- ---------- ---------- --------
NET INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 107,049 (553,684) (213,172) 206,895 (307,313)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR/PERIOD 1,201,853 1,308,902 755,218 755,218 542,046
---------- ---------- ---------- ---------- --------
CASH AND CASH EQUIVALENTS AT END
OF YEAR/PERIOD 1,308,902 755,218 542,046 962,113 234,733
========== ========== ========== ========== ========
-72-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE
AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION
1. PRINCIPAL ACTIVITIES AND REORGANISATION
China Northern Airlines Company ("Northern Airlines") was established on
19 October, 1990 in the People's Republic of China (the "PRC") and is a
wholly-owned subsidiary of China Southern Air Holding Company ("CSAHC"), the
ultimate holding company of China Southern Airlines Company Limited (the
"Company"). Northern Airlines together with its subsidiaries ("Northern Airlines
Group") is principally engaged in the provision of domestic and international
passenger, cargo and mail airline services, with flights operating primarily
from Shenyang Tao Xian International Airport which is the main base of Northern
Airlines in the PRC. In addition, Northern Airlines Group also engages in other
non airline related operations (the "Non Airline Operations") mainly consisting
of hotel and property operations which provide social and supporting services to
Northern Airlines Group.
CSAHC has undergone a reorganisation (the "Reorganisation") in connection
with the proposed acquisition of the airline and airline related operations (the
"Airline Operations") of Northern Airlines Group by the Company (the
"Acquisition"). As part of the Reorganisation, the operations and businesses and
the assets and liabilities of Northern Airlines Group were segregated into two
operations, namely the Airline Operations and the Non Airline Operations on 31
December, 2003.
Pursuant to the Sale and Purchase Agreement, as described more fully in
the section headed "The Sale and Purchase Agreement" in the letter from the
Board contained in the Circular, the Company will acquire the Airline Operations
of Northern Airlines Group together with the related assets and liabilities.
However, certain assets and liabilities within the Airline Operations of
Northern Airlines Group are not to be acquired by the Company.
2. BASIS OF PRESENTATION
The Financial Information for each of the years in the three-year period
ended 31 December, 2003 and for the six-month period ended 30 June, 2004
presents the results of the Airline Operations of Northern Airlines Group as if
the Reorganisation had taken place and the Airline Operations of Northern
Airlines Group had been in operation on a stand alone basis as of the earliest
date presented and had been in existence throughout the relevant period. The
Financial Information for each of the years in the three-year period ended 31
December, 2003 includes the results related to those assets and liabilities that
were not to be acquired by the Company, but were historically associated with
the Airline Operations of Northern Airlines Group. As at 31 December, 2003, the
assets and liabilities not to be acquired by the Company consisted of the
following:
RMB'000
ASSETS
Property, plant and equipment, net 595,576
Construction in progress 298,198
Trade and other receivables 195,263
Cash and cash equivalents 79,376
Other assets 135,953
----------
1,304,366
----------
LIABILITIES
Bank and other loans 5,082,599
Other liabilities and accrued expenses 643,292
Accounts payable 110,422
Other liabilities 17,911
----------
5,854,224
----------
MINORITY INTERESTS 49,851
----------
NET LIABILITIES ASSUMED BY OWNER (4,599,709)
==========
-73-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE
AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
2. BASIS OF PRESENTATION (Continued)
The assets and liabilities within the Airline Operations of Northern
Airlines Group not to be acquired by the Company on 31 December, 2003 was
reflected as net liabilities assumed by owner of Northern Airlines in the
combined statements of owner's fund as at 31 December, 2003.
As a result of the assumption of the above net liabilities as at 31
December, 2003 by the owner, the Financial Information for the six-month period
ended 30 June, 2004 presents the results of the assets and liabilities, revenues
and expenses of the Airline Operations of Northern Airlines Group to be acquired
by the Company.
Notwithstanding the Airline Operations of Northern Airlines Group having
net current liabilities as at 30 June, 2004, the Financial Information has been
prepared on a going concern basis on the assumption that the Airline Operations
of Northern Airlines Group will be able to generate adequate cash flows from
operations and to obtain adequate external financing to enable the Airline
Operations of Northern Airlines Group to meet its debts as they fall due and to
meet its committed future capital expenditure (see Note 26).
3. PRINCIPAL ACCOUNTING POLICIES
(a) STATEMENT OF COMPLIANCE
The Financial Information has been prepared in accordance with
International Financial Reporting Standards ("IFRS") promulgated by the
International Accounting Standards Board. IFRS includes International
Accounting Standards ("IAS") and interpretations.
(b) BASIS OF PREPARATION
The Financial Information is prepared on the historical cost basis
as modified by the revaluation of property, plant and equipment, as
explained in Note 10. The accounting policies described below have been
consistently applied during the relevant period.
(c) BASIS OF CONSOLIDATION
A subsidiary is an enterprise controlled by the Airline Operations
of Northern Airlines. Control exists when the Airline Operations of
Northern Airlines 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 results of subsidiaries are included in the Financial
Information from the date that control commences until the date that
control ceases, and the share attributable to minority interests is
deducted from or added to the profit/loss after income tax. All
significant intercompany balances and transactions and any unrealised
gains/losses arising from intercompany transactions are eliminated on
consolidation.
The particulars of the subsidiary are set out in Note 28.
-74-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE
AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
3. PRINCIPAL ACCOUNTING POLICIES (Continued)
(d) PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION
(i) Property, plant and equipment are initially stated at cost
less accumulated depreciation and impairment losses (see Note
(f)). The cost of an asset comprises its purchase price, any
directly attributable costs of bringing the asset to working
condition and location for its intended use and the cost of
borrowed funds used during the period of construction.
Expenditure incurred after the asset has been put into
operation is capitalised only when it increases the future
economic benefits embodied in the item of property, plant and
equipment. All other expenditure including the cost of repairs
and maintenance, is expensed as it is incurred.
(ii) Subsequent to the revaluation carried out as at 31 December,
2003, which was based on depreciated replacement costs (Note
10), property, plant and equipment are carried at revalued
amount, being the fair value at the date of the revaluation,
less subsequent accumulated depreciation and impairment
losses. When an item of property, plant and equipment is
revalued, any accumulated depreciation and impairment losses
at the date of revaluation is eliminated against the gross
carrying amount of the asset and the net asset restated to the
revalued amount of the asset. When an item of property, plant
and equipment is revalued, the entire class of property, plant
and equipment to which the asset belongs is revalued
simultaneously. When an asset's carrying amount is increased
as a result of a revaluation, the increase is credited
directly to owner's fund. However, a revaluation increase is
recognised as an income to the extent that it reverses a
revaluation decrease of the same asset previously recognised
as an expense. When an asset's carrying amount is decreased as
a result of a revaluation, the decrease is recognised as an
expense in the combined statements of operations. However, a
revaluation decrease is charged directly against owner's fund
to the extent that the decrease does not exceed the amount
previously credited to owner's fund in respect of the same
asset. Revaluations are performed with sufficient regularity
such that the carrying amount does not differ materially from
that which would be determined using fair value at the balance
sheet date.
(iii) Gains or losses arising from the retirement or disposal of
property, plant and equipment are determined as the difference
between the net disposal proceeds and the carrying amount of
the asset and are recognised as income or expense in the
combined statements of operations on the date of retirement or
disposal.
(iv) Depreciation is calculated to write off the cost, or revalued
amount, where appropriate, of property, plant and equipment on
a straight line basis over their estimated useful lives, to
residual values, using the following depreciation rates:
DEPRECIATION RATES
------------------
Buildings 2.43% - 6.17%
Owned and finance leased aircraft 4.75% - 9.70%
Other flight equipment
- Jet engines 4.75% - 9.70%
- Others, including rotable spares 9.79% - 12.13%
Machinery and equipment 9.70% - 11.40%
Vehicles 16.17%
-75-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE
AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
3. PRINCIPAL ACCOUNTING POLICIES (Continued)
(e) LEASED ASSETS
Flight equipment under finance leases is stated at an amount equal
to the lower of its fair value and the present value of minimum lease
payments at inception of the lease, and is amortised on a straight line
basis over the shorter of the lease term or estimated useful life of the
asset to residual value. In cases where title to the asset will be
acquired by the Airline Operations of Northern Airlines Group at the end
of the lease, the asset is amortised on a straight line basis over the
estimated useful life of the asset to its residual value.
Amounts payable in respect of finance leases are apportioned between
charges and reductions of obligations based on the interest rates implicit
in the leases. Interest charges are included in the combined statements of
operations to provide a constant periodic rate of charge over the lease
term.
Gains or losses on aircraft sale and leaseback transactions which
result in finance leases are deferred and amortised over the terms of the
related leases. Gains or losses on other aircraft sale and leaseback
transactions are recognised immediately if the transactions are
established at fair value. Any difference between the sales price and the
fair value is deferred and amortised over the period the assets are
expected to be used.
Operating lease payments are charged to the combined statements of
operations on a straight line basis over the terms of the related leases.
(f) IMPAIRMENT OF ASSETS
The carrying amounts of the assets, other than inventories (see Note
(j)), trade and other receivables (see Note (k)) and deferred tax assets
(see Note (n)), of the Airline Operations of Northern Airlines Group 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 recognised as an expense in the combined statements of
operations.
The Airline Operations of Northern Airlines Group assesses at each
balance sheet date whether there is any indication that an impairment loss
recognised for an asset in prior years may no longer exist. An impairment
loss is reversed if there has been a favourable 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 recognised as income.
The reversal is reduced by the amount that would have been recognised as
depreciation had the write-down or write-off not occurred.
(g) CONSTRUCTION IN PROGRESS
Construction in progress is stated in the combined balance sheets at
cost less impairment losses (see Note (f)). Cost comprises direct costs of
construction as well as interest expense and exchange differences on
related borrowed funds to the extent that they are regarded as an
adjustment to interest charge during the periods of construction and
installation.
Capitalisation of these costs ceases and the construction in
progress is transferred to property, plant and equipment when
substantially all the activities necessary to prepare the asset for its
intended use are completed. No depreciation is provided in respect of
construction in progress until it is completed and ready for its intended
use.
(h) LEASE PREPAYMENTS
Lease prepayments represent the purchase costs of land use rights
and are amortised on a straight line basis over the period of land use
rights.
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APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
3. PRINCIPAL ACCOUNTING POLICIES (Continued)
(i) INVESTMENTS
Investments, which represent unquoted available-for-sale equity
securities of companies established in the PRC, are stated at cost less
impairment losses (see Note (f)). 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.
(j) 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 are stated at the
lower of cost and net realisable value. Net realisable value represents
estimated resale price.
(k) TRADE AND OTHER RECEIVABLES
Trade and other receivables are stated at cost less provision for
doubtful accounts. Provision for doubtful accounts is established based on
evaluation of the recoverability of these accounts at the balance sheet
date.
(l) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in hand and balance with
banks and other financial institutions with an original maturity within
three months. Cash equivalents are stated at cost, which approximates fair
value.
(m) INTEREST-BEARING BORROWINGS
Interest-bearing borrowings are recognised at cost.
(n) INCOME TAXES
Income tax comprises current and deferred tax. Current tax is
calculated on the taxable income for the relevant period by applying the
applicable tax rates.
Deferred tax is provided using the balance sheet liability method,
providing for all temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for taxation purposes. The amount of deferred tax provided is based
on the expected manner of realisation or settlement of the carrying amount
of assets and liabilities, using tax rates enacted or substantially
enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is
probable that future taxable profits will be available against which the
asset can be utilised. Deferred tax assets are reduced to the extent that
it is no longer probable that the related tax benefit will be realised.
(o) DEFERRED CREDIT
Cash benefit received under finance lease arrangements is initially
deferred and amortised over the terms of the respective leases to reduce
the future finance lease charges.
-77-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
3. PRINCIPAL ACCOUNTING POLICIES (Continued)
(p) PROVISIONS AND CONTINGENT LIABILITIES
Provisions are recognised for liabilities of uncertain timing or
amount when the Airline Operations of Northern Airlines Group has a legal
or constructive obligation arising as a result of a past event, it is
probable that an outflow of economic benefits will be required to settle
the obligation and a reliable estimate can be made. Where the time value
of money is material, provisions are stated at the present value of the
expenditures expected to settle the obligation.
Where it is not probable that an outflow of economic benefits will
be required, or the amount cannot be estimated reliably, the obligation is
disclosed as a contingent liability, unless the probability of outflow of
economic benefits is remote. Possible obligations, whose existence will
only be confirmed by the occurrence or non-occurrence of one or more
future events are also disclosed as contingent liabilities unless the
probability of outflow of economic benefits is remote.
(q) REVENUE RECOGNITION
(i) Passenger, cargo and mail transportation revenues are
recognised when the transportation is provided. Ticket sales
for transportation not yet provided are included in current
liabilities. Revenues from airline-related business are
recognised when services are rendered.
Revenue is stated net of sales tax. In addition, revenue for
each of the years in the three-year period ended 31 December,
2003 and the three-month period ended 31 March, 2004 was
stated net of contributions to the Civil Aviation
Administration of China ("CAAC") Infrastructure Development
Fund. Effective from 1 April, 2004, contributions to the CAAC
Infrastructure Development Fund form part of the flight
operations expenses instead of being netted off with revenue.
(ii) Interest income is recognised as it accrues unless
collectability is in doubt.
(iii) Operating lease income is recognised on a straight line basis
over the terms of the respective leases.
(r) TRAFFIC COMMISSIONS
Traffic commissions are expensed when the transportation is provided
and the related revenue is recognised. Traffic commissions for
transportation not yet provided are recorded in the combined balance
sheets as prepaid expense.
(s) MAINTENANCE AND OVERHAUL COST
Routine maintenance and repairs and overhauls in respect of owned
aircraft and aircraft held under finance leases are expensed in the
combined statements of operations 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 overhauls required to be performed on the
related aircraft prior to their return to the lessors.
(t) TRANSLATION OF FOREIGN CURRENCIES
The functional currency of the operations of the Airline Operations
of Northern Airlines Group is Renminbi. Foreign currency transactions are
translated into Renminbi at the applicable rates of exchange ruling at the
transaction dates. Monetary assets and liabilities denominated in foreign
currencies are translated into Renminbi at the exchange rates ruling at
the balance sheet date. Exchange gains and losses, other than those
capitalised as construction in progress (See Note (g)), are recognised in
the combined statements of operations.
-78-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(v) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
3. PRINCIPAL ACCOUNTING POLICIES (Continued)
(u) BORROWING COSTS
Borrowing costs are expensed in the combined statements of
operations in the period in which they are incurred, except to the extent
that they are capitalised 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 (See Note
(g)).
(v) RETIREMENT BENEFITS
Contributions to defined contribution retirement schemes made by the
Airline Operations of Northern Airlines Group are charged to the combined
statements of operations as and when incurred (see Note 25).
(w) RELATED PARTIES
For the purposes of the Financial Information set out below, parties
are considered to be related to the Airline Operations of Northern
Airlines Group if the Airline Operations of Northern Airlines 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 Airline Operations of Northern
Airlines Group and the party are subject to common control or common
significant influence. Related parties may be individuals or other
entities.
(x) SEGMENT REPORTING
A segment is a distinguishable component of the Airline Operations
of Northern Airlines Group that is engaged either in providing products or
services (business segment), or in providing products or services within a
particular economic environment (geographical segment), which is subject
to risks and rewards that are different from those of other segments.
The Airline Operations of Northern Airlines Group operates
principally as a single business segment for the provision of air
transportation services. The analysis of operating revenue 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 overseas destinations is attributed to the
international operation.
(ii) Other revenue from ticket selling, general aviation and ground
services, air catering and other miscellaneous services are
attributed on the basis of where the services are performed.
(y) USE OF ESTIMATES
The preparation of the Financial Information in accordance with IFRS
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as at 31 December, 2001, 2002 and 2003
and 30 June, 2004 and the reported amounts of revenues and expenses during
the relevant period. Actual results could differ from those estimates.
-79-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
4. OPERATING REVENUE
Operating revenue comprises revenues from airline and airline related
business and is stated net of sales tax. In addition, the operating revenue for
each of the years in the three-year period ended 31 December, 2003 and the
three-month period ended 31 March, 2004 was stated net of contributions to the
CAAC Infrastructure Development Fund. An analysis of operating revenue is as
follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------------- ----------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
TRAFFIC REVENUE
Passenger 4,773,253 4,764,754 5,446,013 1,962,218 3,186,835
Cargo and mail 331,972 391,820 410,957 166,723 204,613
--------- --------- --------- ---------- ---------
5,105,225 5,156,574 5,856,970 2,128,941 3,391,448
--------- --------- --------- ---------- ---------
OTHER OPERATING REVENUE
Commission income 25,758 24,379 9,415 7,684 1,811
Maintenance services income 5,041 22,259 29,487 7,542 5,071
Hotel operations income* 6,356 6,903 10,083 4,789 5,783
Ground services income 5,631 6,927 10,092 7,936 7,748
Aircraft lease income 40,884 7,286 - - 49,152
Income on transfer of
surplus pilot trainees - 9,555 - - -
Others 14,452 10,034 12,688 9,734 3,667
--------- --------- --------- ---------- ---------
98,122 87,343 71,765 37,685 73,232
--------- --------- --------- ---------- ---------
5,203,347 5,243,917 5,928,735 2,166,626 3,464,680
========= ========= ========= ========== =========
* Hotel operations income arises from the operations associated with the
Airline Operations of Northern Airlines Group.
Pursuant to various sales tax rules and regulations, the Airline
Operations of Northern Airlines Group is required to pay sales tax to national
and local tax authorities at the following rates during the relevant period:
TYPES OF REVENUE APPLICABLE SALES TAX RATES
--------------- --------------------------------------------
Traffic revenue 3% of traffic revenue in respect of domestic
flights and international outbound flights
during the relevant period, except for the
period from 1 May, 2003 to 31 December, 2003,
during which passenger revenue was exempted
from sales tax.
Other operating revenue 3% of commission income, general aviation
income and ground services income, and 3% to
5% of other operating revenue.
-80-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
4. OPERATING REVENUE (Continued)
The amount of sales tax incurred during the relevant period is as follows:
SIX-MONTH PERIODS
YEAR ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------- --------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Sales tax netted off against
operating revenue 190,885 181,528 72,544 56,755 108,086
======= ======= ======= =========== =======
In addition, the Airline Operations of Northern Airlines Group is
required to pay contributions to the CAAC Infrastructure Development Fund. Prior
to 1 April, 2004, contributions to the CAAC Infrastructure Development Fund were
payable at 5% and 2% respectively of the domestic and international traffic
revenue of the Airline Operations of Northern Airlines Group, except for the
period from 1 May, 2003 to 31 March, 2004 during which the Airline Operations of
Northern Airlines Group was exempted from contributions to the CAAC
Infrastructure Development Fund. Effective from 1 April, 2004, contributions to
the CAAC Infrastructure Development Fund are payable based on the traffic
capacity of the Airline Operations of Northern Airlines Group deployed on its
routes. The contributions now form part of the flight operations expenses.
Contributions made to the CAAC Infrastructure Development Fund during the
relevant period are as follows:
SIX-MONTH PERIODS
YEAR ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------- -------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Contributions made to the CAAC
Infrastructure Development Fund
- netted off against traffic
revenue 234,929 241,576 86,161 84,737 -
- included in flight operations
expenses - - - - 36,329
------- ------- ------- ----------- ------
234,929 241,576 86,161 84,737 36,329
======= ======= ======= =========== ======
-81-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
4. OPERATING REVENUE (Continued)
An analysis of the operating revenue of the Airline Operations of Northern
Airlines Group by geographical segment is set out as below:
DOMESTIC *INTERNATIONAL TOTAL
--------- -------------- ---------
RMB'000 RMB'000 RMB'000
YEAR ENDED 31 DECEMBER, 2001
Traffic revenue 4,042,914 1,062,311 5,105,225
Other revenue 98,122 - 98,122
--------- -------------- ---------
Total operating revenue 4,141,036 1,062,311 5,203,347
========= ============== =========
YEAR ENDED 31 DECEMBER, 2002
Traffic revenue 4,175,833 980,741 5,156,574
Other revenue 87,343 - 87,343
--------- -------------- ---------
Total operating revenue 4,263,176 980,741 5,243,917
========= ============== =========
YEAR ENDED 31 DECEMBER, 2003
Traffic revenue 4,819,899 1,037,071 5,856,970
Other revenue 71,765 - 71,765
--------- -------------- ---------
Total operating revenue 4,891,664 1,037,071 5,928,735
========= ============== =========
SIX-MONTH PERIOD ENDED 30 JUNE, 2003
(UNAUDITED)
Traffic revenue 1,728,202 400,739 2,128,941
Other revenue 37,685 - 37,685
--------- -------------- ---------
Total operating revenue 1,765,887 400,739 2,166,626
========= ============== =========
SIX-MONTH PERIOD ENDED 30 JUNE, 2004
Traffic revenue 2,791,181 600,267 3,391,448
Other revenue 73,232 - 73,232
--------- -------------- ---------
Total operating revenue 2,864,413 600,267 3,464,680
========= ============== =========
* Routes are mainly between the PRC and Hong Kong, Japan, Korea and other
Asian countries.
The major revenue-earning assets of the Airline Operations of Northern
Airlines Group are its aircraft fleet, most of which are registered in the PRC.
Since the aircraft of the Airline Operations of Northern Airlines Group are
employed flexibly across its route network, there is no suitable basis of
allocating such assets to geographic segments. Substantially all of the
non-aircraft identifiable assets of the Airline Operations of Northern Airlines
Group are located in the PRC.
-82-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
5. OPERATING EXPENSES
An analysis of the operating expenses during the relevant period is set
out below:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
-------------------------------- ---------------------
2001 2002 2003 2003 2004
Note RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Jet fuel 1,284,917 1,235,717 1,314,282 579,259 815,900
Aircraft maintenance 682,020 921,163 972,324 472,731 373,135
Routes 1,142,689 1,201,567 1,215,101 547,775 690,186
Depreciation and amortisation
- owned assets 355,011 362,335 358,016 176,307 231,422
- assets held under finance
leases 321,992 298,174 284,805 142,084 172,411
Amortisation of deferred
expenditure 1,432 1,531 2,685 632 586
Operating lease charges
- aircraft and other flight
equipment - - 18,587 - 41,635
- land and buildings 35,475 48,368 31,907 31,993 47,131
Staff costs
- salaries, wages and
welfare 368,382 449,825 530,600 250,682 305,524
- contributions to defined
contribution retirement
schemes 42,513 65,282 86,476 36,898 43,815
Office and administration 184,981 213,773 213,593 98,954 104,250
Impairment loss on aircraft
and other flight equipment (i) 433,378 346,654 555,349 - -
Lump sum housing subsidy to
eligible employees (ii) 101,943 3,202 - - -
Others 374,118 404,002 405,853 228,726 269,362
--------- --------- --------- ---------- ---------
5,328,851 5,551,593 5,989,578 2,566,041 3,095,357
========= ========= ========= ========== =========
Note:
(i) In light of the gradual opening of the aviation market in the PRC
and the rapid change of the market price of aircraft during the
relevant period, management reviewed the recoverable amount of its
aircraft based on the estimated net cashflows. As a result,
impairment losses of approximately RMB433 million and RMB347 million
were recorded for the years ended 31 December, 2001 and 2002
respectively to write down the carrying amount of certain aircraft.
The impairment losses were recognised in the combined statements of
operations.
In addition, in November 2003, the Airline Operations of Northern
Airlines entered into agreements with an independent third party to
dispose of its twenty-three McDonald Douglas 82 aircraft during the
years 2003 to 2007 and then immediately lease back the aircraft
under operating leases for a period of one to two years.
Accordingly, the Airline Operations of Northern Airlines Group
recorded an impairment loss for the year ended 31 December, 2003 of
approximately RMB555 million, being the excess of the carrying
amount of the aircraft over their recoverable amount as determined
based on the agreed selling prices of the aircraft and estimated
future cash flows from operating the aircraft prior to their
disposals. The impairment loss was recognised in the combined
statements of operations.
-83-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
5. OPERATING EXPENSES (Continued)
(ii) Pursuant to the housing policy executed by the Airline Operations of
Northern Airlines Group, the Airline Operations of Northern Airlines
Group made payments totalling approximately RMB102 million and RMB3
million to eligible employees in 2001 and 2002 respectively for the
purpose of subsidising the employees in purchasing their houses.
Management considered that the lump sum payments were one-off in
nature and the Airline Operations of Northern Airlines Group has no
further obligation in relation to providing lump sum housing
subsidies for its employees under PRC regulations.
6. INTEREST EXPENSE
An analysis of the interest expense is set out below:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------------ ----------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Finance charges on obligations
under finance leases 436,537 395,361 346,673 178,234 154,369
Interest on bank and other
loans wholly repayable
within five years 310,272 316,046 202,127 121,712 10,914
Interest on other loans 20,305 26,655 94,090 20,112 34,157
-------- -------- -------- ----------- --------
767,114 738,062 642,890 320,058 199,440
Less: Borrowing costs capitalised (33,683) (28,484) (6,874) (3,462) -
Amortisation of deferred
credit (Note 22) (8,826) (8,826) (8,826) (4,413) (4,413)
-------- -------- -------- ----------- --------
Net interest expense 724,605 700,752 627,190 312,183 195,027
======== ======== ======== =========== ========
Borrowing costs have been capitalised at the following rates per annum
during the relevant period:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
---------------------------- ----------------------
2001 2002 2003 2003 2004
(unaudited)
Capitalisation rates 6.5% 6.5% 5.9% 5.9% -
====== ====== ====== =========== ======
7. GAIN/(LOSS) ON DISPOSAL OF PROPERTY, PLANT AND EQUIPMENT
On 7 May, 2002, a McDonald Douglas 82 aircraft was crashed and had caused
fatalities. Investigations with respect to the accident have been conducted by
the CAAC and relevant PRC government departments. However, the results of the
investigations have not yet been announced. The aircraft and passenger
liabilities were fully insured. The Airline Operations of Northern Airlines
Group recognised in the year ended 31 December, 2002 a gain of approximately
RMB23 million, being the excess of insurance compensation received from the
People's Insurance (Property) Company of China over the aggregate of the
carrying amount of the aircraft and certain expenses incurred in connection with
the accident.
-84-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
8. INCOME TAX
Income tax in the combined statements of operations represents:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
-------------------------- --------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
PRC income tax 572 451 288 - 62,870
Deferred taxation (Note 23) - - (117,550) - 4,430
------- ------- -------- ----------- -------
572 451 (117,262) - 67,300
======= ======= ======== =========== =======
Pursuant to the income tax rules and regulations of the PRC, the Airline
Operations of Northern Airlines Group is liable to PRC income tax at a rate of
33%.
In respect of the overseas airline activities, the Airline Operations of
Northern Airlines Group has either obtained exemptions from overseas taxation
pursuant to the bilateral aviation agreements between the overseas governments
and the PRC government, or has sustained tax losses in these overseas
jurisdictions. Accordingly, no provision for overseas tax has been made for the
relevant period.
A reconciliation of the expected tax expense with the actual tax expense
is as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------------- -----------------
2001 2002 2003 2003 2004
Note RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
(Loss)/profit before income
tax and minority interests (539,574) (1,150,834) (1,368,729) (689,733) 201,681
======== ========== ========== ======== =======
Expected PRC income tax
(credit)/expense at 33% (178,059) (379,776) (451,681) (227,612) 66,555
Adjustments:
- Non-deductible expenses (i) 79,105 87,000 7,232 2,421 745
- Deferred tax assets not
recognised (ii) 226,617 194,027 327,187 225,191 -
- Provision for doubtful
accounts made on
inter-company balances (iii) (101,704) (3,300) - - -
- Differences in income
and expense
recognition for certain
inter-company
transactions (iv) (25,387) 102,500 - - -
-------- ---------- ---------- -------- -------
572 451 (117,262) - 67,300
======== ========== ========== ======== =======
Note:
(i) Non-deductible expenses mainly represent personnel and other miscellaneous
expenses in excess of statutory deductible limits for taxation purpose and
non-deductible one-off housing subsidies paid to eligible employees.
-85-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
8. INCOME TAX (Continued)
(ii) Amounts mainly represent deferred tax assets in respect of taxable
losses, provision for doubtful accounts, and repair charges
capitalised which are not recognised. Based on projections for
future taxable income, management did not forecast that sufficient
taxable profits would arise to utilise these deferred tax assets.
(iii) Amounts represent tax effects of provision for doubtful accounts
made on inter-company balances, of which the corresponding deferred
tax asset was not recognised as described in (ii) above. Such
provision for doubtful accounts is eliminated on consolidation.
(iv) Amounts represent tax effects of differences in the recognition of
income and expenses in respect of certain inter-company
transactions. Such differences in recognition of income and expenses
are eliminated on consolidation.
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 Tax Bureau, lease arrangements executed prior to 1
September, 1999 are exempted from PRC withholding tax.
During the relevant period, PRC withholding tax payable in respect of the
leases executed on or after 1 September, 1999, which has been included as part
of the operating lease charges, are as follows:
SIX MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------- -------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
PRC withholding tax - - 214 - 2,295
======= ======= ======= =========== =======
9. DIRECTORS' EMOLUMENTS AND INDIVIDUALS WITH HIGHEST EMOLUMENTS
(i) DIRECTORS' EMOLUMENTS
No board of directors or similar corporate governance body was
established by the Airline Operations of Northern Airlines during the
relevant period. Accordingly, no directors' emoluments were paid during
the relevant period.
(ii) INDIVIDUALS WITH HIGHEST EMOLUMENTS
Details of emoluments paid to the five highest paid individuals are
as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------- -------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Salaries, allowances and
benefits in kind 569 582 1,234 268 340
Retirement benefits 143 146 311 156 81
------- ------- ------- ----------- -------
712 728 1,545 424 421
======= ======= ======= =========== =======
-86-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
9. DIRECTORS' EMOLUMENTS AND INDIVIDUALS WITH HIGHEST EMOLUMENTS (Continued)
(ii) INDIVIDUALS WITH HIGHEST EMOLUMENTS (Continued)
An analysis of emoluments paid to the five highest paid individuals
by number of individuals and emolument ranges is as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------ -----------------
2001 2002 2003 2003 2004
(unaudited)
RMB Nil - RMB1,060,000
(HK$1,000,000 equivalent) 5 5 5 5 5
======== ======== ======== =========== ========
None of these employees received any inducements or compensation for
loss of office, or waived any emoluments during the relevant period.
10. PROPERTY, PLANT AND EQUIPMENT, NET
OTHER
AIRCRAFT FLIGHT
--------------------- EQUIPMENT, MACHINERY,
HELD UNDER INCLUDING EQUIPMENT
FINANCE ROTABLE AND
BUILDINGS OWNED LEASES SPARES VEHICLES TOTAL
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
COST:
At 1 January, 2001 931,775 2,606,648 8,238,950 1,580,127 727,929 14,085,429
Reclassification on exercise of
purchase options - 414,712 (414,712) - - -
Additions 7,311 - 744,089 164,153 71,795 987,348
Transferred from construction
in progress 107,590 - 17,511 - 5,364 130,465
Disposals (50,884) - - (150,376) (13,356) (214,616)
--------- --------- ---------- ---------- ----------- ----------
At 31 December, 2001 995,792 3,021,360 8,585,838 1,593,904 791,732 14,988,626
--------- --------- ---------- ---------- ----------- ----------
ACCUMULATED DEPRECIATION
AND IMPAIRMENT LOSSES:
At 1 January, 2001 98,237 956,558 2,896,764 742,195 406,637 5,100,391
Reclassification on exercise of
purchase options - 232,187 (232,187) - - -
Depreciation for the year 25,598 114,287 321,992 142,325 72,801 677,003
Impairment loss for the year - - 433,378 - - 433,378
Written back on disposal (4,551) - - (51,263) (10,213) (66,027)
--------- --------- ---------- ---------- ----------- ----------
At 31 December, 2001 119,284 1,303,032 3,419,947 833,257 469,225 6,144,745
--------- --------- ---------- ---------- ----------- ----------
NET BOOK VALUE:
At 31 December, 2001 876,508 1,718,328 5,165,891 760,647 322,507 8,843,881
========= ========= ========== ========== =========== ==========
-87-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
10. PROPERTY, PLANT AND EQUIPMENT, NET (Continued)
OTHER
AIRCRAFT FLIGHT
----------------------- EQUIPMENT, MACHINERY,
HELD UNDER INCLUDING EQUIPMENT
FINANCE ROTABLE AND
BUILDINGS OWNED LEASES SPARES VEHICLES TOTAL
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
COST:
At 1 January, 2002 995,792 3,021,360 8,585,838 1,593,904 791,732 14,988,626
Reclassification on exercise of
purchase options - 134,394 (134,394) - - -
Additions 9,932 1,805 783,098 131,758 69,778 996,371
Transferred from construction
in progress 106,948 - 23,930 - 3,261 134,139
Disposals (132,730) (26,628) (130,233) (14,811) (32,795) (337,197)
--------- ---------- ---------- ---------- ----------- ----------
At 31 December, 2002 979,942 3,130,931 9,128,239 1,710,851 831,976 15,781,939
--------- ---------- ---------- ---------- ----------- ----------
ACCUMULATED DEPRECIATION
AND IMPAIRMENT LOSSES:
At 1 January, 2002 119,284 1,303,032 3,419,947 833,257 469,225 6,144,745
Reclassification on exercise of
purchase options - 63,837 (63,837) - - -
Depreciation for the year 28,106 131,487 298,174 141,686 61,056 660,509
Impairment loss for the year - 76,075 270,579 - - 346,654
Written back on disposal (13,203) (26,002) (69,078) (13,944) (14,468) (136,695)
--------- ---------- ---------- ---------- ----------- ----------
At 31 December, 2002 134,187 1,548,429 3,855,785 960,999 515,813 7,015,213
--------- ---------- ---------- ---------- ----------- ----------
NET BOOK VALUE:
At 31 December, 2002 845,755 1,582,502 5,272,454 749,852 316,163 8,766,726
========= ========== ========== ========== =========== ==========
-88-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
10. PROPERTY, PLANT AND EQUIPMENT, NET (Continued)
OTHER
AIRCRAFT FLIGHT
----------------------- EQUIPMENT, MACHINERY,
HELD UNDER INCLUDING EQUIPMENT
FINANCE ROTABLE AND
BUILDINGS OWNED LEASES SPARES VEHICLES TOTAL
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
COST OR VALUATION:
At 1 January, 2003 979,942 3,130,931 9,128,239 1,710,851 831,976 15,781,939
Transferred to owner upon the
Reorganisation (595,923) (188,265) - (45,212) (148,678) (978,078)
Reclassification on exercise of
purchase options - 316,734 (316,734) - - -
Additions 19,777 842,368 - 378,451 31,492 1,272,088
Transferred from construction
in progress 21,454 27,289 - - 3,570 52,313
Disposals (9,930) (407,619) - - (66,702) (484,251)
Revaluation (59,821) (1,720,993) (3,902,701) (768,623) (347,332) (6,799,470)
---------- ---------- ---------- ---------- ---------- -----------
At 31 December, 2003 355,499 2,000,445 4,908,804 1,275,467 304,326 8,844,541
---------- ---------- ---------- ---------- ---------- -----------
REPRESENTING:
Valuation - 2003 355,499 2,000,445 4,908,804 1,275,467 304,326 8,844,541
---------- ---------- ---------- ---------- ---------- -----------
ACCUMULATED DEPRECIATION
AND IMPAIRMENT LOSSES:
At 1 January, 2003 134,187 1,548,429 3,855,785 960,999 515,813 7,015,213
Transferred to owner upon the
Reorganisation (75,631) (138,686) - (38,964) (129,221) (382,502)
Reclassification on exercise of
purchase options - 242,435 (242,435) - - -
Depreciation for the year 23,170 143,777 284,805 128,743 62,326 642,821
Impairment loss for the year - 417,598 137,751 - - 555,349
Written back on disposal (7,313) (312,825) - - (27,974) (348,112)
Elimination on revaluation (74,413) (1,900,728) (4,035,906) (1,050,778) (420,944) (7,482,769)
---------- ---------- ---------- ---------- ---------- -----------
At 31 December, 2003 - - - - - -
---------- ---------- ---------- ---------- ---------- -----------
NET BOOK VALUE:
At 31 December, 2003 355,499 2,000,445 4,908,804 1,275,467 304,326 8,844,541
========== ========== ========== ========== ========== ===========
-89-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
10. PROPERTY, PLANT AND EQUIPMENT, NET (Continued)
OTHER
AIRCRAFT FLIGHT
----------------------- EQUIPMENT, MACHINERY,
HELD UNDER INCLUDING EQUIPMENT
FINANCE ROTABLE AND
BUILDINGS OWNED LEASES SPARES VEHICLES TOTAL
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
COST OR VALUATION:
At 1 January, 2004 355,499 2,000,445 4,908,804 1,275,467 304,326 8,844,541
Reclassification on exercise of
purchase options - 29,299 (29,299) - - -
Additions 4,678 824,946 - 68,570 19,304 917,498
Transferred from construction
in progress - 32,084 - - 9,295 41,379
Disposals - (265,840) - - (1,799) (267,639)
---------- ---------- ---------- ---------- ---------- ----------
At 30 June, 2004 360,177 2,620,934 4,879,505 1,344,037 331,126 9,535,779
---------- ---------- ---------- ---------- ---------- ----------
REPRESENTING:
Cost 4,678 857,030 - 68,570 28,599 958,877
Valuation - 2003 355,499 1,763,904 4,879,505 1,275,467 302,527 8,576,902
---------- ---------- ---------- ---------- ---------- ----------
360,177 2,620,934 4,879,505 1,344,037 331,126 9,535,779
---------- ---------- ---------- ---------- ---------- ----------
ACCUMULATED DEPRECIATION
AND IMPAIRMENT LOSSES:
At 1 January, 2004 - - - - - -
Reclassification on exercise of
purchase options - 3,834 (3,834) - - -
Depreciation for the period 8,155 97,982 172,411 82,383 42,902 403,833
Written back on disposal - (7,737) - - (1,584) (9,321)
---------- ---------- ---------- ---------- ---------- ----------
At 30 June, 2004 8,155 94,079 168,577 82,383 41,318 394,512
---------- ---------- ---------- ---------- ---------- ----------
NET BOOK VALUE:
At 30 June, 2004 352,022 2,526,855 4,710,928 1,261,654 289,808 9,141,267
========== ========== ========== ========== ========== ==========
All of the buildings of the Airline Operations of Northern Airlines Group
are located in the PRC.
As required by the relevant PRC rules and regulations with respect to the
Acquisition, the property, plant and equipment of the Airline Operations of
Northern Airlines Group as at 31 December, 2003 were revalued for each asset
class by China Enterprise Appraisal Co., Ltd. (the "PRC Valuers"), independent
valuers registered in the PRC, on a depreciated replacement cost basis. The
value of property, plant and equipment of the Airline Operations of Northern
Airlines Group as at 31 December, 2003 has been determined at approximately
RMB8,845 million. Such amount will serve as the tax base for such assets for
future years (see Note 23). Surplus arising from revaluation of certain
property, plant and equipment totalling approximately RMB1,176 million has been
credited to the owner's fund while deficit arising from the revaluation of
certain property, plant and equipment totalling approximately RMB492 million has
been charged as an expense for the year ended 31 December, 2003. The net surplus
on the revaluation of the property, plant and equipment of approximately RMB684
million has been incorporated in the combined balance sheet of the Airline
Operations of Northern Airlines Group as at 31 December, 2003.
-90-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
10. PROPERTY, PLANT AND EQUIPMENT, NET (Continued)
The properties of the Airline Operations of Northern Airlines Group were
also valued separately by Chesterton, independent qualified valuers in Hong
Kong, as at 31 December, 2003. The value arrived at by Chesterton was
approximately the same as that arrived at by the PRC valuers.
The historical carrying amounts of the property, plant and equipment of
the Airline Operations of Northern Airlines Group as at 31 December, 2003 and
the revalued amounts of these assets were as follows:
HISTORICAL
CARRYING REVALUATION REVALUATION REVALUED
AMOUNT SURPLUS DEFICIT AMOUNT
----------- ----------- ----------- -----------
RMB'000 RMB'000 RMB'000 RMB'000
Buildings 340,907 47,689 33,097 355,499
Aircraft
- owned 1,820,710 247,993 68,258 2,000,445
- held under finance leases 4,775,599 211,730 78,525 4,908,804
Other flight equipment,
including rotable spares 993,312 557,299 275,144 1,275,467
Machinery, equipment and vehicles 230,714 110,957 37,345 304,326
----------- ----------- ----------- -----------
8,161,242 1,175,668 492,369 8,844,541
=========== =========== =========== ===========
The effect of the above revaluation is to increase annual depreciation
charges by approximately RMB154 million for year beginning 1 January, 2004. Had
the property, plant and equipment been stated at cost less accumulated
depreciation and impairment losses, the net book value of the property, plant
and equipment of the Airline Operations of Northern Airlines Group as at 30
June, 2004 would have been approximately RMB8,622 million, made up as follows:
30 JUNE,
2004
----------
RMB'000
Buildings 338,774
Aircraft
- owned 2,453,130
- held under finance leases 4,600,945
Other flight equipment, including rotable spares 995,468
Machinery, equipment and vehicles 233,469
----------
8,621,786
==========
As at 31 December, 2001, 2002 and 2003 and 30 June, 2004, certain aircraft
of the Airline Operations of Northern Airlines Group with an aggregate carrying
value of approximately RMB6,044 million, RMB6,396 million, RMB6,475 million and
RMB6,941 million respectively, were mortgaged under certain loan and lease
agreements (See Notes 18 and 19).
-91-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED
10. PROPERTY, PLANT AND EQUIPMENT, NET (Continued)
During the relevant period, the Airline Operations of Northern Airlines
Group entered into certain lease agreements to lease several of its aircraft to
other airlines. The terms of such leases generally range from one month to five
years. As at 31 December, 2001, 2002 and 2003 and 30 June, 2004, the cost or
valuation and accumulated depreciation and impairment losses of the relevant
aircraft were set out below:
31 DECEMBER, 30 JUNE,
--------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Cost or valuation - - - 148,869
Accumulated depreciation and
impairment losses - - - (21,156)
---- ---- ---- -------
- - - 127,713
==== ==== ==== =======
Total future minimum lease payments under non-cancellable operating leases
of the Airline Operations of Northern Airlines Group are receivable as follows:
31 DECEMBER, 30 JUNE,
-------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Within one year - - - 51,395
After one year but within
five years - - - 88,405
---- ---- ---- -------
- - - 139,800
==== ==== ==== =======
11. CONSTRUCTION IN PROGRESS
SIX-MONTH
PERIOD ENDED
YEARS ENDED 31 DECEMBER, 30 JUNE,
----------------------------------- ------------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Balance at 1 January, 217,610 210,191 258,505 54,446
Additions 123,046 182,453 146,452 25,863
Transferred to property, plant and
equipment (130,465) (134,139) (52,313) (41,379)
Transferred to owner upon the
Reorganisation - - (298,198) -
-------- -------- -------- -------
Balance at 31 December/30 June, 210,191 258,505 54,446 38,930
======== ======== ======== =======
- 92 -
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
12. OTHER INVESTMENTS
31 DECEMBER, 30 JUNE,
-------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Unlisted equity investment, at cost - 68,209 68,209 68,209
=== ====== ====== ======
Unlisted equity investment of the Airline Operations of Northern Airlines
Group represents an interest in a PRC enterprise which is mainly engaged in the
provision of general aviation services.
13. DEFERRED EXPENDITURE
31 DECEMBER, 30 JUNE,
-------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Losses deferred in connection
with aircraft sale and
leaseback arrangements (Note) - - 14,641 134,677
Others 10,497 10,725 9,869 9,780
------ ------ ------ -------
10,497 10,725 24,510 144,457
Less: Accumulated amortisation (2,168) (3,459) (6,509) (22,364)
------ ------ ------ -------
8,329 7,266 18,001 122,093
====== ====== ====== =======
Note: Pursuant to certain sale and leaseback arrangements, the Airline
Operations of Northern Airlines Group disposed of its four McDonald
Douglas 82 aircraft and seven McDonald Douglas 82 aircraft during
the year ended 31 December, 2003 and the six-month period ended 30
June, 2004 respectively to independent third parties and then
entered into operating leases with such parties to lease back the
aircraft for a period of one to two years. The excess of the
aircraft's fair value over the sales proceeds on the date of
disposal were initially deferred and amortised over the period the
aircraft were expected to be used to increase the future operating
lease charges.
14. INVENTORIES
31 DECEMBER, 30 JUNE,
------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Expendable spare parts and
maintenance materials 588,136 661,456 517,350 534,870
Other supplies 44,224 41,665 23,689 18,046
------- ------- ------- -------
632,360 703,121 541,039 552,916
Less: Provision for obsolescence (6,656) (9,161) (6,071) (8,823)
------- ------- ------- -------
625,704 693,960 534,968 544,093
======= ======= ======= =======
No significant amount of inventories was carried at net realisable value
as at 31 December, 2001, 2002 and 2003 and 30 June, 2004.
- 93 -
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
15. TRADE RECEIVABLES
Credit terms granted by the Airline Operations of Northern Airlines Group
to sales agents and other customers generally range from one to three months. An
aging analysis of trade receivables, net of provision for doubtful accounts, is
set out below:
31 DECEMBER, 30 JUNE,
--------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Within 1 month 147,399 183,834 219,014 359,003
More than 1 month but less than 3 months 14,257 37,623 18,938 38,375
More than 3 months but less than 12
months 3,618 19,217 4,591 780
------- ------- ------- -------
165,274 240,674 242,543 398,158
======= ======= ======= =======
As at 31 December, 2003 and 30 June, 2004, the Airline Operations of
Northern Airlines Group had amount due from a fellow subsidiary of approximately
RMB186 million and RMB345 million respectively which was included in trade
receivables.
16. OTHER RECEIVABLES AND PREPAID EXPENSES
Other receivables and prepaid expenses comprise:
31 DECEMBER, 30 JUNE,
------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Prepaid expenses and deposits 25,152 23,502 19,581 36,486
Amount due from CSAHC - - 15,284 426,374
Amounts due from related companies 29,463 2,177 4,408 5,435
Loans receivable 88,928 60,269 - -
Manufacturers' credit receivables 77,535 105,215 60,257 78,238
Amount due from insurance company 4,490 38,248 26,111 25,905
Property, plant and equipment and
spare part sale receivable 148,503 - - -
Other receivables 77,103 68,150 41,977 28,337
------- ------- ------- -------
451,174 297,561 167,618 600,775
Less: Provision for doubtful accounts (91,587) (90,507) (25,984) (34,665)
------- ------- ------- -------
359,587 207,054 141,634 566,110
======= ======= ======= =======
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APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
17. CASH AND CASH EQUIVALENTS
31 DECEMBER, 30 JUNE,
----------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Cash at bank and in hand 1,049,413 589,740 542,046 234,733
Time deposits with maturity within
three months 259,489 165,478 - -
--------- ------- ------- -------
1,308,902 755,218 542,046 234,733
========= ======= ======= =======
18. BANK AND OTHER LOANS
The bank and other loans of the Airline Operations of Northern Airlines
Group under current liabilities comprise:
31 DECEMBER, 30 JUNE,
------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Short term bank loans 1,377,200 1,226,373 194,502 120,011
Short term loans from CSAHC - 1,750,000 - 309,490
Current portion of long term bank loans 1,111,675 1,195,412 375,045 337,756
--------- --------- ------- -------
2,488,875 4,171,785 569,547 767,257
========= ========= ======= =======
The weighted average interest rate on short term bank loans of the Airline
Operations of Northern Airlines Group was 6.1%, 5.1%, 1.7% and 3.1% as at 31
December, 2001, 2002 and 2003 and 30 June, 2004 respectively.
The short term loans from CSAHC, which bear interest rates ranging from
1.9% to 6.0% per annum, were unsecured.
In addition, in 2003, CSAHC made short term advances amounting to
approximately RMB500 million to the Airline Operations of Northern Airlines
Group. These advances are unsecured, interest free and repayable on demand.
These advances were fully repaid during 2003.
- 95 -
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
18. BANK AND OTHER LOANS (Continued)
The long term bank loans of the Airline Operations of Northern Airlines
Group comprise:
31 DECEMBER, 30 JUNE,
INTEREST RATES AND -------------------------------- --------
BANK LOANS FINAL MATURITY 2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Renminbi denominated Floating interest rates
as specified by the
People's Bank of China
ranging from 5.76% to
7.15% per annum as at
30 June, 2004, with
maturities through 2014 3,223,228 1,890,657 643,058 381,335
Fixed interest rates ranging
from 5.94% to 6.53% per
annum, with maturities
through 2003 128,400 109,800 - -
US dollars denominated Floating interest rate of
6 months LIBOR+0.3% per
annum, being 1.72% per
annum as at 30 June, 2004,
with maturities through 2013 - - 1,613,986 1,531,172
Fixed interest rates ranging
from 6.13% to 8.18% per
annum, with maturities
through 2009 602,810 488,138 270,068 236,620
--------- --------- --------- ---------
3,954,438 2,488,595 2,527,112 2,149,127
Less: loans due within one
year classified as
current liabilities 1,111,675 1,195,412 375,045 337,756
--------- --------- --------- ---------
2,842,763 1,293,183 2,152,067 1,811,371
========= ========= ========= =========
The aggregate maturities of the bank and other loans of the Airline
Operations of Northern Airlines Group are analysed as follows:
31 DECEMBER, 30 JUNE,
------------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
BANK AND OTHER LOANS DUE:
Within one year 2,488,875 4,171,785 569,547 767,257
In the second year 1,597,315 449,515 420,045 261,209
In the third to fifth year, inclusive 1,161,894 616,064 777,993 709,652
After the fifth year 83,554 227,604 954,029 840,510
---------- ---------- --------- ---------
5,331,638 5,464,968 2,721,614 2,578,628
Portion classified as current liabilities (2,488,875) (4,171,785) (569,547) (767,257)
---------- ---------- --------- ---------
2,842,763 1,293,183 2,152,067 1,811,371
========== ========== ========= =========
- 96 -
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
18. BANK AND OTHER LOANS (Continued)
As at 31 December, 2001, 2002 and 2003 and 30 June, 2004, bank loans of
the Airline Operations of Northern Airlines Group totalling approximately
RMB1,074 million, RMB1,259 million, RMB2,527 million and RMB2,149 million
respectively were secured by mortgages over certain aircraft (See Note 10).
In connection with the Reorganisation, bank loans totalling approximately
RMB5,083 million as at 31 December, 2003 were assumed by the owner of Northern
Airlines.
As at 31 December, 2001, 2002 and 2003 and 30 June, 2004, certain bank
loans of the Airline Operations of Northern Airlines Group were guaranteed by
the following parties:
31 DECEMBER, 30 JUNE,
--------------------------------- ---------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
CAAC 550,350 399,800 - -
CSAHC 575,000 695,000 1,808,488 1,651,183
China Aviation Supplies Import
and Export Corporation 2,090,000 972,773 - -
Bank of China 341,907 262,251 81,496 67,606
The Industrial and Commercial Bank
of China 260,903 225,887 188,572 169,014
--------- --------- --------- ---------
3,818,160 2,555,711 2,078,556 1,887,803
========= ========= ========= =========
19. OBLIGATIONS UNDER FINANCE LEASES
The Airline Operations of Northern Airlines Group has commitments under
finance lease agreements in respect of aircraft and related equipment expiring
through 2012, which are repayable as follows:
31 DECEMBER, 2001 31 DECEMBER, 2002
-------------------------------------- ------------------------------------
PAYMENTS INTEREST OBLIGATIONS PAYMENTS INTEREST OBLIGATIONS
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
BALANCE DUE:
Within one year 1,369,844 393,251 976,593 1,354,214 330,554 1,023,660
In the second year 1,286,131 321,344 964,787 1,335,380 274,436 1,060,944
In the third to fifth year,
inclusive 4,084,664 663,123 3,421,541 4,400,721 551,095 3,849,626
After the fifth year 2,370,131 281,257 2,088,874 1,958,013 167,818 1,790,195
---------- ---------- ----------- ---------- ---------- -----------
9,110,770 1,658,975 7,451,795 9,048,328 1,323,903 7,724,425
========== ========== ========== ==========
Less: Balance due within
one year classified
as current liabilities (976,593) (1,023,660)
----------- -----------
6,475,202 6,700,765
=========== ===========
-97-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
19. OBLIGATIONS UNDER FINANCE LEASES (Continued)
31 DECEMBER, 2003 30 JUNE, 2004
----------------------------------------- ---------------------------------------
PAYMENTS INTEREST OBLIGATIONS PAYMENTS INTEREST OBLIGATIONS
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
BALANCE DUE:
Within one year 1,335,091 264,922 1,070,169 1,300,241 237,194 1,063,047
In the second year 1,210,381 210,740 999,641 1,213,393 180,150 1,033,243
In the third to fifth year,
inclusive 4,266,482 390,900 3,875,582 3,858,697 304,988 3,553,709
After the fifth year 1,078,942 56,923 1,022,019 854,606 39,415 815,191
----------- ----------- ----------- ----------- ----------- -----------
7,890,896 923,485 6,967,411 7,226,937 761,747 6,465,190
=========== =========== =========== ===========
Less: Balance due within
one year classified
as current liabilities (1,070,169) (1,063,047)
----------- -----------
5,897,242 5,402,143
=========== ===========
The obligations under finance leases by currency are analysed as follows:
31 DECEMBER, 30 JUNE,
------------------------------------ ----------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
US dollars denominated 5,748,520 5,862,948 4,841,087 4,346,698
Japanese yen denominated 1,703,275 1,861,477 2,126,324 2,118,492
---------- ---------- ---------- ----------
7,451,795 7,724,425 6,967,411 6,465,190
========== ========== ========== ==========
Under the terms of the leases, the Airline Operations of Northern Airlines
Group has an 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.
As at 31 December, 2001, 2002 and 2003 and 30 June, 2004, certain aircraft
with carrying amount of approximately RMB5,166 million, RMB5,272 million,
RMB4,909 million and RMB4,711 million respectively were mortgaged to secure
facilities with financial institutions granted to lessors with outstanding
obligations totalling approximately RMB7,452 million, RMB7,724 million, RMB6,967
million and RMB6,465 million respectively. In addition, the relevant insurance
policies in respect of the aircraft held under finance leases are assigned to
the lessors.
-98-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
20. OTHER LIABILITIES AND ACCRUED EXPENSES
Other liabilities and accrued expenses represent:
31 DECEMBER, 30 JUNE,
------------------------------------ ----------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Accrued expenses 841,095 1,058,025 885,134 1,146,534
CAAC Infrastructure Development
Fund payable 512,137 288,722 54,994 38,745
Business and other taxes payable 33,053 26,518 3,457 21,347
Salary and staff welfare payable 26,178 36,535 26,424 31,187
Property, plant and equipment
purchase payable 183,382 8,670 8,710 -
Other liabilities 244,685 260,564 156,573 165,550
---------- ---------- ---------- ----------
1,840,530 1,679,034 1,135,292 1,403,363
========== ========== ========== ==========
21. ACCOUNTS PAYABLE
An ageing analysis of accounts payable is as follows:
31 DECEMBER, 30 JUNE,
--------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Due within 1 month or on demand 56,838 45,924 27,169 31,117
Due after 1 month but within 3 months 85,257 68,887 40,753 46,675
Due after 3 months but within 6 months 113,676 91,848 54,337 62,234
------- ------- ------- --------
255,771 206,659 122,259 140,026
======= ======= ======= ========
22. DEFERRED CREDIT
Deferred credit comprises:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
----------------------------- ------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Balance at 1 January, 56,641 47,815 38,989 38,989 30,163
Amortisation for the year/period (Note 6) (8,826) (8,826) (8,826) (4,413) (4,413)
------- ------- ------- ------- -------
Balance at 31 December/30 June, 47,815 38,989 30,163 34,576 25,750
======= ======= ======= ======= =======
The Airline Operations of Northern Airlines Group entered into several
aircraft finance lease arrangements with certain independent third parties,
under which the Airline Operations of Northern Airlines Group received cash
benefits of approximately Rmb88 million upon the inception of the respective
leases. The benefits are initially deferred and amortised over the terms of the
respective leases to reduce the future finance lease charges.
-99-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
23. DEFERRED TAXATION
Movements in deferred tax assets are as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------------ ---------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Balance at 1 January, - - - - 24,743
Transferred from/(to)
combined statements of
operations (Note 8) - - 117,550 - (4,430)
Recognised in owner's fund - - 24,743 - -
Net deferred tax assets eliminated
against owner's fund - - (117,550) - -
-------- -------- -------- -------- --------
Balance at 31 December/30 June, - - 24,743 - 20,313
======== ======== ======== ======== ========
The deferred taxation assets were made up of the following taxation
effect:
31 DECEMBER, 30 JUNE,
-------------------------------------- ----------
2001 2002 2003 2004
Note RMB'000 RMB'000 RMB'000 RMB'000
DEFERRED TAX ASSETS:
Impairment losses on property, plant
and equipment (ii) 473,140 587,536 - -
Provision for doubtful accounts 74,544 - - -
Repair charges (ii) 438,979 490,550 - -
Inventories (iii) - - 24,743 20,313
---------- ---------- ---------- ----------
TOTAL DEFERRED TAX ASSETS 986,663 1,078,086 24,743 20,313
---------- ---------- ---------- ----------
DEFERRED TAX LIABILITIES:
Tax depreciation in excess of
accounting depreciation (ii) (986,663) (1,078,086) - -
---------- ---------- ---------- ----------
TOTAL DEFERRED TAX LIABILITIES (986,663) (1,078,086) - -
---------- ---------- ---------- ----------
- - 24,743 20,313
========== ========== ========== ==========
Note:
(i) The balance of tax losses as at 31 December, 2003 will no longer be
available to be carried forward to off-set future taxable income of
the Airline Operations of Northern Airlines Group upon completion of
the Reorganisation and Acquisition. In this connection, deferred tax
asset arising from tax losses amounting to approximately RMB118
million as at 31 December, 2003 was eliminated against owner's fund.
-100-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
23. DEFERRED TAXATION (Continued)
(ii) As described in Note 10, in connection with the Reorganisation and
Acquisition, property, plant and equipment of the Airline Operations
of Northern Airlines Group were revalued as at 31 December, 2003.
Such revalued amount will serve as the tax base for these assets for
future years. As a result, the temporary differences that gave rise
to the deferred tax assets and liabilities relating to the items
above as at 31 December, 2003 were eliminated against owner's fund.
An analysis of the deferred tax assets/(liabilities) which have been
eliminated against owner's fund is set out below:
RMB'000
DEFERRED TAX ASSETS:
Impairment losses on property, plant and equipment 762,115
Repair charges 410,739
----------
TOTAL DEFERRED TAX ASSETS 1,172,854
----------
DEFERRED TAX LIABILITIES:
Tax depreciation in excess of accounting depreciation (1,172,854)
----------
TOTAL DEFERRED TAX LIABILITIES (1,172,854)
----------
-
==========
(iii) In connection with the Reorganisation and Acquisition, inventories
of the Airline Operations of Northern Airlines Group, which as at 31
December, 2003 had a carrying amount of approximately RMB534
million, were revalued as required by the relevant PRC rules and
regulations. The revalued amount of inventories has been determined
at approximately RMB609 million. Such amount will serve as the tax
base for future years. The inventories were not revalued for
financial reporting purposes and accordingly, a deferred tax asset
of approximately RMB25 million was created with a corresponding
increase in owner's fund. Based upon projections of future taxable
income, management believes it is more likely than not the Airline
Operations of Northern Airlines Group will realise the benefits of
the deferred tax asset.
An analysis of the amount of deductible temporary differences for which no
deferred tax asset is recognised in the combined balance sheets is set out
below:
31 DECEMBER, 30 JUNE,
--------------------------------- ---------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Tax losses 558,506 840,382 - -
Provision for doubtful accounts 548,361 795,321 - -
Repair charges 64,221 123,345 - -
--------- --------- --------- ---------
1,171,088 1,759,048 - -
========= ========= ========= =========
-101-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
24. RELATED PARTY TRANSACTIONS
During the period from 1 January, 2001 to 31 December, 2002, the Airline
Operations of Northern Airlines Group was under the direct control of the CAAC
and therefore, the transactions conducted with the CAAC and its affiliates
during the period from 1 January, 2001 to 31 December, 2002 are presented as
related party transactions. However, such control was shifted to CSAHC during
late 2002. Consequently, transactions with the CAAC and its affiliates are no
longer presented as related party transactions from 1 January, 2003 onward.
The principal recurring and non-recurring related party transactions
between the Airline Operations of Northern Airlines Group and the CAAC and its
affiliates, and CSAHC and its affiliates during the relevant period are
summarised as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
--------------------------------- ---------------------
2001 2002 2003 2003 2004
Note RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
EXPENSES
PAID TO CAAC AND ITS AFFILIATES
Handling charges (i) 2,377 2,428 - - -
Jet fuel supplies (ii) 1,130,283 1,142,378 - - -
Aircraft insurance (iii) 36,136 72,907 - - -
Ticket reservation service charges (iv) 62,635 67,133 - - -
Passenger departure and cargo handling charges (v) 18,526 19,140 - - -
Aircraft and traffic service charges (vi) 456,482 541,488 - - -
Commission expense (vii) 22,751 17,726 - - -
PAID TO CSAHC AND ITS AFFILIATES
Interest expense (viii) - 8,155 - - 185
Rentals for land and buildings (ix) - - - - 32,035
Air catering expenses (x) - - - - 32,105
INCOME
RECEIVED FROM CAAC AND ITS AFFILIATES
Maintenance service income (xi) 23,740 22,259 - - -
Ground service income (xii) 7,428 6,927 - - -
Aircraft lease income (xiii) - 7,286 - - -
Commission income (xiv) 25,279 19,695 - - -
RECEIVED FROM CSAHC AND ITS AFFILIATES
Aircraft lease income (xiii) - - - - 49,152
-102-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
24. RELATED PARTY TRANSACTIONS (Continued)
Note:
(i) Handling charges represent fees payable to China Aviation Supplies
Import and Export Corporation, a corporation controlled by the
CAAC, in connection with the procurement of aircraft and flight
equipment on behalf of the Airline Operations of Northern Airlines
Group. Handling charges are calculated based on a fixed percentage
of the purchase value and other charges.
(ii) Jet fuel supplies represent purchases of jet fuel at the then
prevailing state controlled prices from China Aviation Oil Supply
Company, Lan Tian Oil Supply Company and certain other suppliers,
which are controlled by the CAAC.
(iii) Aircraft insurance represents insurance premiums payable to the
CAAC which arranges aviation insurance covering hull, war and
passenger liability risk on behalf of the PRC airlines with the
People's Insurance (Property) Company of China. Insurance premiums
are allocated to individual PRC airlines by the CAAC based on the
value of the airlines' aircraft and after taking into account the
claims history of the airlines.
(iv) Ticket reservation service charges represent fees payable to the
CAAC in respect of computer reservation services rendered by the
CAAC at charge rates determined based on the utilisation of the
computer reservation system.
(v) Passenger departure and cargo handling charges are payable to the
CAAC for use of the computerised passenger departure and cargo
handling systems installed at certain PRC airports. The charges are
levied based on the utilisation of these systems.
(vi) Aircraft and traffic service charges represent landing and take-off
fees payable to various PRC airports in respect of landing and
take-off slots allocated to the Airline Operations of Northern
Airlines Group and other ancillary services provided. Fees are
payable by the Airline Operations of Northern Airlines Group based
on the scale rates published by the CAAC.
(vii) Commission expense represents commissions payable to CAAC's sales
offices and other PRC airlines in connection with services provided
in exchange for air tickets sold by them. These commissions are
calculated based on a fixed rate ranging from 1.5% to 9% on the
ticket value as stipulated by the CAAC.
(viii) Interest expense represents the interest incurred on certain
unsecured loans from CSAHC. The applicable interest rates are in
accordance with the rates published by the People's Bank of China
(see Note 18).
(ix) Rentals were paid to CSAHC under lease arrangements for certain
land and buildings in the PRC. The rentals are determined based on
prevailing market rates.
(x) Air catering expenses represent purchases of in-flight meals and
related services from certain affiliates of CSAHC. Prices charged
by these suppliers to the Airline Operations of Northern Airlines
Group are similar to those charged to other PRC airlines.
(xi) Maintenance service income represents the fees received in
connection with the provision of aircraft maintenance services to
other airlines controlled by the CAAC.
(xii) Ground service income represents the fees receivable from certain
airlines controlled by the CAAC in respect of ground services
provided by the Airline Operations of Northern Airlines Group in
certain PRC airports.
(xiii) Aircraft lease income for the years in the two-year period ended 31
December, 2002 represent rentals receivable in respect of short
term leasing of aircraft to certain PRC airlines controlled by the
CAAC.
Aircraft lease income for the six-month period ended 30 June, 2004
represents rentals receivable in respect of short term leasing of
aircraft to a CSAHC's affiliate. The rentals are determined based
on prevailing market rates.
(xiv) Commission income represents commission receivable from certain PRC
airlines controlled by the CAAC in connection with air tickets sold
by the Airline Operations of Northern Airlines Group for which the
carriage was provided by such airlines. Commission is calculated
based on a fixed rate ranging from 3% to 9% on the ticket value as
stipulated by the CAAC.
-103-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
24. RELATED PARTY TRANSACTIONS (Continued)
Details of loans borrowed from and/or guaranteed by CSAHC and loans
guaranteed by the CAAC and its affiliates are disclosed in Note 18.
Management of the Airline Operations of Northern Airlines Group is of the
opinion that the above transactions with related parties were entered into in
the normal course of business and on normal commercial terms or in accordance
with the relevant government regulations governing such transactions.
25. RETIREMENT BENEFITS
Employees of the Airline Operations of Northern Airlines Group participate
in several defined contribution retirement schemes organised separately by PRC
municipal governments in regions where the major operations of the Airline
Operations of Northern Airlines Group are located. The Airline Operations of
Northern Airlines Group is required to contribute to these schemes at rates
ranging from 14% to 20% 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 Airline Operations
of Northern Airlines Group are assumed by these schemes. Contributions to the
retirement schemes made by the Airline Operations of Northern Airlines Group
during the relevant period are as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
--------------------------- -----------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Amounts of contributions 42,513 65,282 86,476 36,898 43,815
======= ======= ======= ======= =======
26. COMMITMENTS AND CONTINGENCIES
(i) CAPITAL COMMITMENTS
The Airline Operations of Northern Airlines Group had capital
commitments as follows:
31 DECEMBER, 30 JUNE,
--------------------------------- ---------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Commitments in respect of aircraft
and related equipment:
- authorised and contracted for 3,608,101 2,618,215 917,874 860,435
--------- --------- --------- ---------
Other commitments:
- authorised and contracted for 2,606 2,109 7,355 2,279
- authorised but not contracted for 29,971 40,076 38,472 46,627
--------- --------- --------- ---------
32,577 42,185 45,827 48,906
--------- --------- --------- ---------
3,640,678 2,660,400 963,701 909,341
========= ========= ========= =========
-104-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
26. COMMITMENTS AND CONTINGENCIES (Continued)
(i) CAPITAL COMMITMENTS (Continued)
As at 30 June, 2004, the Airline Operations of Northern Airlines
Group had on order two Airbus 321-200 aircraft and certain flight
equipment, scheduled for deliveries in the second half of 2004 and in
2005. Deposits of approximately RMB185 million have been made towards the
purchase of these aircraft and related equipment. As at 30 June, 2004, the
approximate total future payments, including estimated amounts for price
escalation through anticipated delivery dates for these aircraft and
related equipment are as follows:
RMB'000
Payments due
- within one year 112,025
- in the second year 748,410
-------
860,435
=======
(ii) OPERATING LEASE COMMITMENTS
The total future minimum lease payments payable by the Airline
Operations of Northern Airlines Group under non-cancellable operating
leases in respect of aircraft and flight equipment are payable as follows:
31 DECEMBER, 30 JUNE,
--------------------------------- ---------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Payments due
- within one year - - 92,130 166,408
- in the second to fifth year, inclusive - - 1,614,070 1,780,561
- after the fifth year - - 3,765,609 3,497,896
--------- --------- --------- ---------
- - 5,471,809 5,444,865
========= ========= ========= =========
Leases for aircraft and flight equipment are generally run for an
initial period of between one to ten years. The rental payments for
aircraft and flight equipment are fixed during the lease period. None of
the leases includes contingent rentals.
(iii) CONTINGENT LIABILITIES
Pursuant to a purchase agreement dated 6 April, 2000, the Airline
Operations of Northern Airlines Group placed a procurement order for
certain aircraft with a PRC manufacturer, at a total purchase price of
approximately RMB180 million, with deliveries in 2002. In 2002, prior to
the deliveries of aircraft, the Airline Operations of Northern Airlines
Group decided to terminate the procurement order due to a change of its
air fleet requirements. Currently, the Airline Operations of Northern
Airlines Group has been working with the manufacturer in getting an
appropriate new buyer for the aircraft.
In this connection, a provision for termination charge of
approximately RMB17 million was recognised in the combined statement of
operations for the year ended 31 December, 2002. The provision made was
recorded under sub-item "Others, net" under Non-operating
income/(expenses) in the combined statement of operations. Such provision
has been arrived at by management of the Airline Operations of Northern
Airlines Group after taking into account all relevant information
available to the Airline Operations of Northern Airlines Group, including
the estimated differences between the purchase prices committed by the
Airline Operations of Northern Airlines Group and the purchase prices that
may be probably agreed by the new buyer.
-105-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
26. COMMITMENTS AND CONTINGENCIES (Continued)
(iii) CONTINGENT LIABILITIES (Continued)
As part of the Acquisition, CSAHC has agreed to indemnify the
Company against any losses caused by the termination of the aircraft
procurement order in excess of approximately RMB17 million.
27. CONCENTRATION OF RISKS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
LIQUIDITY RISK
The liquidity of the Airline Operations of Northern Airlines Group
is primarily dependent on its ability to maintain adequate cash inflow
from operations to meet its debt obligations as they fall due and to
renew/refinance these debt obligations where necessary and, on its ability
to obtain adequate external loan finance to meet its committed future
capital expenditures. With the support of certain PRC banks and CSAHC, the
Airline Operations of Northern Airlines Group was able to renew its short
term debts and refinance part of its long term debts during the relevant
period. With regards to the twelve-month period ending 30 June, 2005, the
Airline Operations of Northern Airlines Group has planned to seek the
renewals of short term debts amounting to RMB430 million. The Airline
Operations of Northern Airlines Group has planned to finance its committed
capital expenditures and other financing requirements through available
internal funds. Based on the recent negotiations with the principal
bankers of the Airline Operations of Northern Airlines Group, management
believes that the planned loan renewals will be available to the Airline
Operations of Northern Airlines Group.
Management has carried out a detailed review of the cash flow
forecast of the Airline Operations of Northern Airlines Group for the
twelve-month period ending 30 June, 2005. Based on the results of such
review, management has determined that adequate liquidity exists to
finance the working capital, debt repayment obligations and capital
expenditure requirements of the Airline Operations of Northern Airlines
Group during the forecasted period. In preparing the cash flow forecast,
management has considered historical cash requirements of the Airline
Operations of Northern Airlines Group as well as other key factors,
including the availability of the above-mentioned loan renewals which may
impact the operations of the Airline Operations of Northern Airlines Group
during the next twelve-month period. Management is 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 realised.
BUSINESS AND ECONOMIC RISKS
The Airline Operations of Northern Airlines Group conducts its
principal operations in the PRC and accordingly is subject to special
considerations and significant risk 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 airlines services industry.
INTEREST RATE RISK
The Airline Operations of Northern Airlines Group has significant
exposure to interest rate fluctuation as a significant portion of its
loans are interest bearing at floating rates. Fluctuation in interest
rates affects the results of the Airline Operations of Northern Airlines
Group significantly because the Airline Operations of Northern Airlines
Group is not able to hedge its interest rate exposure effectively. The
interest rates and maturity information of the bank and other loans of the
Airline Operations of Northern Airlines Group and the maturity information
of the finance lease obligations of the Airline Operations of Northern
Airlines Group are disclosed in Notes 18 and 19 respectively.
-106-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
27. CONCENTRATION OF RISKS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
FOREIGN CURRENCY RISK
The Airline Operations of Northern Airlines Group has significant
exposure to foreign currency as substantially all of its lease obligations
and a significant portion of its bank loans are denominated in foreign
currencies, principally US dollars, and to a lesser extent, Japanese yen.
Depreciation or appreciation of Renminbi against foreign currencies
affects the results of the Airline Operations of Northern Airlines Group
significantly because the foreign currency payments of the Airline
Operations of Northern Airlines Group significantly exceed its foreign
currency receipts. The Airline Operations of Northern Airlines 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, by entering into forward
foreign exchange contracts with authorised PRC banks.
CREDIT RISKS
Substantially all of the cash and cash equivalents of the Airline
Operations of Northern Airlines Group are deposited with PRC financial
institutions.
Prior to 2003, a significant portion of the air tickets of the
Airline Operations of Northern Airlines Group were sold by agents
participating in the Billing and Settlement Plan ("BSP"), a clearing
scheme between airlines and sales agents organised by International Air
Transportation Association. As at 31 December, 2001 and 2002, the balance
due from BSP agents amounted to approximately RMB77 million and RMB98
million respectively.
Beginning in 2003, a significant portion of the air tickets of the
Airline Operations of Northern Airlines Group are sold through the sale
network of the Company and flight revenue uplifted by the Airline
Operations of Northern Airlines Group is billed and collected from the
Company. As at 31 December, 2003 and 30 June, 2004, the receivable due
from the Company amounted to approximately RMB186 million and RMB345
million respectively.
SELF INSURANCE RISK
The Airline Operations of Northern Airlines Group maintains a
limited amount of property insurance in respect of certain personal and
real property.
FAIR VALUE
Financial assets of the Airline Operations of Northern Airlines
Group include cash and cash equivalents, other investments, trade
receivables, and other receivables and prepaid expenses. Financial
liabilities of the Airline Operations of Northern Airlines Group include
bank and other loans, obligations under finance leases, other liabilities
and accrued expenses and accounts payable. The Airline Operations of
Northern Airlines Group did not hold nor issue any financial instruments
for trading purposes during the relevant period. The Airline Operations of
Northern Airlines Group did not have any positions in derivative contracts
as at 31 December, 2001, 2002 and 2003 and 30 June, 2004.
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of IAS 32
"Financial Instruments: Disclosure and Presentation" and IAS 39 "Financial
Instruments: Recognition and Measurement". Fair value estimates, methods
and assumptions, set forth below for the financial instruments of the
Airline Operations of Northern Airlines Group are made solely to comply
with the requirements of IAS 32 and IAS 39, and should be read in
conjunction with the Financial Information. The estimated fair value
amounts have been determined by the Airline Operations of Northern
Airlines Group using market information and valuation methodologies
considered appropriate. However, considerable judgement is required to
interpret market data to develop the estimates of fair values.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts the Airline Operations of Northern Airlines Group could
realise in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
-107-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
27. CONCENTRATION OF RISKS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
FAIR VALUE (Continued)
The following summarise the major methods and assumptions used in
estimating the fair values of the financial instruments of the Airline
Operations of Northern Airlines Group.
Long term debts
The fair values of the long term debts are estimated by discounting
future cash flows using current market interest rates offered to the
Airline Operations of Northern Airlines Group for debts with substantially
the same characteristics and maturities. As at 31 December, 2001, 2002 and
2003 and 30 June, 2004, the carrying amounts and fair values of the long
term debts of the Airline Operations of Northern Airlines Group are as
follows:
31 DECEMBER, 30 JUNE,
------------------------------------------------------------------- ---------------------
2001 2002 2003 2004
-------------------- --------------------- --------------------- ---------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Long term debts 3,954,438 3,962,240 2,488,595 2,526,135 2,527,112 2,549,524 2,149,127 2,166,144
========= ========= ========= ========= ========= ========= ========= =========
Other investments
Other investments are unlisted equity interests and there are no
quoted market prices for such interests in the PRC. Accordingly, a
reasonable estimate of fair value could not be made without incurring
excessive costs.
Finance lease obligations
The economic characteristics of the leases of the Airline Operations
of Northern Airlines Group 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.
Other financial instruments
The fair values of all other financial instruments approximate their
carrying amounts due to the nature or short term maturity of these
instruments.
28. SUBSIDIARY
The particulars of the subsidiary of the Airline Operations of Northern
Airlines as at 30 June, 2004 are as follows:
ATTRIBUTABLE
PLACE AND DATE OF EQUITY INTEREST
ESTABLISHMENT/ ----------------- ISSUED/REGISTERED
NAME OF COMPANY OPERATION DIRECT INDIRECT CAPITAL PRINCIPAL ACTIVITIES
% %
China Northern Airlines PRC 75 - USD3,800,000 Aircraft repair and
Aircraft Maintenance 8 November, 1997 maintenance
Co., Ltd. services
-108-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
29. RECONCILIATION AND SUPPLEMENTARY COMBINED STATEMENTS OF CASH FLOWS
INFORMATION
(i) Reconciliation of (loss)/profit before income tax and minority
interests to net cash from/(used in) operating activities is as
follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
----------------------------------------- --------------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
(Loss)/profit before income tax and
minority interests (539,574) (1,150,834) (1,368,729) (689,733) 201,681
Depreciation and amortisation 678,435 662,040 647,263 319,023 419,777
Amortisation of deferred credit (8,826) (8,826) (8,826) (4,413) (4,413)
Impairment loss on aircraft and
other flight equipment 433,378 346,654 555,349 - -
Deficit on revaluation of property,
plant and equipment - - 492,369 - -
(Gain)/loss on disposal of property,
plant and equipment (14,634) (22,873) (729) (3,224) 439
Interest income (59,903) (28,583) (12,943) (6,921) (4,257)
Interest expense 724,605 700,752 627,190 312,183 195,027
Unrealised exchange (gain)/loss, net (254,610) 161,210 246,001 568 (22,880)
(Increase)/decrease in inventories (69,439) (68,256) 118,253 14,508 (9,125)
Decrease/(increase) in trade
receivables 139,044 (75,400) (49,909) 45,005 (155,615)
(Increase)/decrease in other
receivables and prepaid expenses (35,626) 152,533 (136,603) (320,635) (487,346)
Increase/(decrease) in accounts
payable 94,680 (49,112) 26,022 22,408 17,767
(Decrease)/increase in sales in
advance of carriage (47,933) 48,236 (92,039) (68,108) (5,525)
Increase in other liabilities and
accrued expenses 51,849 158,730 144,465 222,361 272,890
----------- ----------- ----------- ----------- -----------
Cash generated from/(used in)
operations 1,091,446 826,271 1,187,134 (156,978) 418,420
Interest received 58,506 26,938 11,337 6,828 3,399
Interest paid (759,523) (749,664) (657,922) (339,503) (199,846)
Income tax paid (314) (715) (321) - -
----------- ----------- ----------- ----------- -----------
Net cash from/(used in)
operating activities 390,115 102,830 540,228 (489,653) 221,973
=========== =========== =========== =========== ===========
-109-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
29. RECONCILIATION AND SUPPLEMENTARY COMBINED STATEMENTS OF CASH FLOWS
INFORMATION (Continued)
(ii) DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
(a) Acquisition of aircraft
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
--------------------------------- ---------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Aircraft acquired under
finance leases 744,089 783,098 - - -
Net cash proceeds from
manufacturers' credit 414,722 547,629 - - -
--------- --------- --------- --------- ---------
Finance lease obligations
incurred 1,158,811 1,330,727 - - -
========= ========= ========= ========= =========
(b) Net liabilities assumed by owner of Northern Airlines
As disclosed in Note 2, in connection with the Reorganisation
and the Acquisition, certain assets and liabilities that were not to
be acquired by the Company, but were historically associated with
the Airline Operations of Northern Airlines Group, were assumed by
owner of Northern Airlines. The net liabilities assumed by owner of
Northern Airlines other than cash and cash equivalents amounted to
approximately RMB4,679 million.
30. ULTIMATE HOLDING COMPANY
Management of the Airline Operations of Northern Airlines consider the
ultimate holding company to be CSAHC, a state-owned enterprise established in
the PRC.
(VI) SUBSEQUENT EVENTS
In July 2001, the Airline Operations of Northern Airlines Group filed a
claim with a PRC court against a shareholder (the "minority shareholder") of a
previous non-wholly owned subsidiary, China Northern Swan Airlines Co. Ltd.
("CNSA") for its failure to contribute capital of approximately RMB62 million to
the subsidiary. In 2002, the minority shareholder filed a defence and a
counterclaim against the Airline Operations of Northern Airlines Group demanding
(i) a monetary compensation of approximately RMB0.3 million plus legal costs;
(ii) voidance of certain transactions conducted by CNSA with the Airline
Operations of Northern Airlines Group which could result in losses to the
Airline Operations of Northern Airlines Group in the estimated sum of
approximately RMB50 million; and (iii) restoration of certain operating lease
arrangements for eight McDonald Douglas 82 aircraft previously leased by the
Airline Operations of Northern Airlines Group to CNSA.
-110-
APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
(VI) SUBSEQUENT EVENTS (CONTINUED)
The Airline Operations of Northern Airlines Group made a provision of
approximately RMB32 million in the combined statement of operation for the year
ended 31 December, 2002. The provision was recorded under sub-item "Others, net"
under Non-operating income/(expenses) in the combined statement of operations.
Such provision was arrived at by management of the Airline Operations of
Northern Airlines Group after taking into account all relevant information of
available to the Airline Operations of Northern Airlines Group.
In August 2004, an out-of-court settlement was reached amongst the
parties. Pursuant to the out-of-court settlement agreement, the Airline
Operations of Northern Airlines Group paid approximately RMB32 million to the
minority shareholder and in return the minority shareholder revoked its
counterclaim against the Airline Operations of Northern Airlines Group.
(VII) SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements have been prepared by the Airline
Operations of Northern Airlines Group in respect of any period subsequent to 30
June, 2004.
Yours faithfully,
KPMG
Certified Public Accountants
Hong Kong
-111-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
The following is the text of a report, prepared for the sole purpose of
inclusion in this circular, received from the independent reporting accountants,
KPMG, Certified Public Accountants, Hong Kong. As described in the section
headed "Documents available for inspection" in Appendix IX, a copy of the
following accountants' report is available for inspection.
[KPMG LOGO] 8th Floor
Prince's Building
10 Chater Road
Hong Kong
The Directors
China Southern Airlines Company Limited
Baiyun International Airport
Guangzhou
People's Republic of China
12 November, 2004
Dear Sirs,
INTRODUCTION
We set out below our report on the financial information relating to the
airline and airline related operations (the "Airline Operations") of Xinjiang
Airlines Company ("Xinjiang Airlines") and its subsidiaries ("Xinjiang Airlines
Group"), in Sections I to VI below (the "Financial Information"), including the
combined balance sheets as at 31 December, 2001, 2002 and 2003 and 30 June,
2004, the combined statements of operations, the combined statements of changes
in owner's fund and the combined statements of cash flows for each of the years
in the three-year period ended 31 December, 2003 and the six-month period ended
30 June, 2004 (the "relevant period"), and the notes thereto, for inclusion in
the shareholders' circular of China Southern Airlines Company Limited (the
"Company") dated 12 November, 2004 (the "Circular").
Xinjiang Airlines was established on 1 January, 1985 in the People's
Republic of China (the "PRC") and is a wholly-owned subsidiary of China Southern
Air Holding Company ("CSAHC"), the ultimate holding company of the Company. It
is principally engaged in the provision of domestic and international passenger,
cargo and mail airline services, with flights operating primarily from Urumqi
International Airport which is the main base of Xinjiang Airlines in the PRC. In
addition, Xinjiang Airlines Group also engages in other non airline related
operations (the "Non Airline Operations") mainly consisting of property
operations which provide supporting services to Xinjiang Airlines Group.
-112-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
CSAHC has undergone a reorganisation (the "Reorganisation") in connection
with the proposed acquisition of the Airline Operations of Xinjiang Airlines
Group by the Company. As part of the Reorganisation, the operations and
businesses and the assets and liabilities of Xinjiang Airlines Group were
segregated into two operations, namely the Airline Operations and the Non
Airline Operations on 31 December, 2003.
Pursuant to the Sale and Purchase Agreement, as described more fully in
the section headed "The Sale and Purchase Agreement" in the letter from the
Board contained in the Circular, the Company will acquire the Airline Operations
of Xinjiang Airlines Group together with the related assets and liabilities.
However, certain assets within the Airline Operations of Xinjiang Airlines Group
are not to be acquired by the Company.
Xinjiang Airlines Group prepares financial statements in accordance with
the relevant accounting rules and regulations in the PRC. The financial
statements of the Airline Operations of Xinjiang Airlines Group were not
required to be audited by independent auditors during the relevant period.
BASIS OF PREPARATION
The Financial Information has been prepared by management of the Airline
Operations of Xinjiang Airlines Group based on the management accounts of the
Airline Operations of Xinjiang Airline Group and on the bases set out in Section
V Notes 2 and 3 to conform with International Financial Reporting Standards
("IFRS") promulgated by the International Accounting Standards Board and the
disclosure requirements of the Rules Governing the Listing of Securities on The
Stock Exchange of Hong Kong Limited. IFRS includes International Accounting
Standards and interpretations.
RESPECTIVE RESPONSIBILITIES OF MANAGEMENT AND REPORTING ACCOUNTANTS
Management of the Airline Operations of Xinjiang Airlines Group are
responsible for the preparation of the Financial Information which gives a true
and fair view. In preparing the Financial Information which gives a true and
fair view, it is fundamental that appropriate accounting policies are selected
and applied consistently, that judgements and estimates are made which are
prudent and reasonable and that the reasons for any significant departure from
applicable accounting standards are stated.
It is our responsibility to form an independent opinion, based on our
audit, on the Financial Information.
-113-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
BASIS OF OPINION
As a basis for forming an opinion on the Financial Information, for the
purpose of this report, we have audited the Financial Information of the Airline
Operations of Xinjiang Airlines Group for the relevant period in accordance with
Statements of Auditing Standards and Guidelines issued by Hong Kong Institute of
Certified Public Accountants ("HKICPA") and we have carried out such additional
procedures as we considered necessary in accordance with the Auditing Guidelines
"Prospectuses and the Reporting Accountant" issued by the HKICPA. We have not
audited any financial statements of the Airline Operations of Xinjiang Airlines
Group in respect of any period subsequent to 30 June, 2004.
An audit includes examination, on a test basis, of evidence relevant to
the amounts and disclosures in the Financial Information. It also includes an
assessment of the significant estimates and judgements made by management of the
Airline Operations of Xinjiang Airlines Group in the preparation of the
Financial Information, and of whether the accounting policies are appropriate to
the circumstances of the Airline Operations of Xinjiang Airlines Group,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance as to whether the Financial
Information is free from material misstatement. In forming our opinion we also
evaluated the overall adequacy of the presentation of Financial Information. We
believe that our audit provides a reasonable basis for our opinion.
OPINION
In our opinion, the Financial Information for the purpose of this report,
and on the basis of presentation set out in Section V Notes 2 and 3, gives a
true and fair view of the combined state of affairs of the Airline Operations of
Xinjiang Airlines Group as at 31 December, 2001, 2002 and 2003 and 30 June,
2004, and of the combined results and combined cash flows of the Airline
Operations of Xinjiang Airlines Group for each of the years in the three-year
period ended 31 December, 2003 and the six-month period ended 30 June, 2004 and
has been properly prepared in accordance with IFRS.
-114-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(I) COMBINED STATEMENTS OF OPERATIONS
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
----------------------------------------- --------------------------
2001 2002 2003 2003 2004
Note RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
OPERATING REVENUE
Traffic revenue 2,048,009 2,215,380 2,075,074 717,310 1,176,300
Other operating revenue 126,231 137,732 76,559 55,840 38,776
----------- ----------- ----------- ----------- -----------
TOTAL OPERATING REVENUE 4 2,174,240 2,353,112 2,151,633 773,150 1,215,076
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES
Flight operations 1,001,641 1,036,133 1,061,919 486,999 639,339
Maintenance 200,572 203,311 250,380 108,795 126,536
Aircraft and traffic servicing 201,941 205,208 275,658 111,190 134,088
Promotion and sales 99,966 117,333 137,562 54,577 80,877
General and administrative 86,380 98,247 119,052 51,434 61,279
Depreciation and amortisation 314,991 352,150 346,304 166,247 173,177
Others - 143,717 - - -
----------- ----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 5 1,905,491 2,156,099 2,190,875 979,242 1,215,296
----------- ----------- ----------- ----------- -----------
OPERATING PROFIT/(LOSS) 268,749 197,013 (39,242) (206,092) (220)
----------- ----------- ----------- ----------- -----------
NON-OPERATING INCOME/(EXPENSES)
Interest income 2,530 1,347 1,776 347 746
Interest expense 6 (189,165) (184,018) (201,415) (81,352) (69,417)
Exchange gain/(loss), net 3,198 (345) 792 534 (64)
Loss on disposal of property, plant
and equipment (8,581) (2,219) (7,943) (3,893) (800)
Deficit on revaluation of property,
plant and equipment 9 - - (234,835) - -
----------- ----------- ----------- ----------- -----------
TOTAL NON-OPERATING EXPENSES, NET (192,018) (185,235) (441,625) (84,364) (69,535)
----------- ----------- ----------- ----------- -----------
PROFIT/(LOSS) BEFORE INCOME TAX
AND MINORITY INTERESTS 76,731 11,778 (480,867) (290,456) (69,755)
Income tax 7 (35,782) (9,492) 155,808 95,258 24,048
----------- ----------- ----------- ----------- -----------
PROFIT/(LOSS) BEFORE MINORITY
INTERESTS 40,949 2,286 (325,059) (195,198) (45,707)
Minority interests - 522 25,957 824 1,396
----------- ----------- ----------- ----------- -----------
NET PROFIT/(LOSS) 40,949 2,808 (299,102) (194,374) (44,311)
=========== =========== =========== =========== ===========
-115-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(II) COMBINED BALANCE SHEETS
31 DECEMBER, 30 JUNE,
-------------------------------------- ----------
2001 2002 2003 2004
Note RMB'000 RMB'000 RMB'000 RMB'000
NON-CURRENT ASSETS
Property, plant and equipment, net 9 4,127,530 4,387,744 4,140,976 4,043,708
Construction in progress 10 61,450 66,144 32,223 13,404
Other investments 890 890 - -
Lease and equipment deposits 243,256 53,715 53,715 53,620
Deferred tax assets 19 - - - 19,195
---------- ---------- ---------- ----------
TOTAL NON-CURRENT ASSETS 4,433,126 4,508,493 4,226,914 4,129,927
---------- ---------- ---------- ----------
CURRENT ASSETS
Inventories 11 73,117 60,056 59,231 71,311
Trade receivables 12 162,634 183,623 96,288 125,212
Other receivables and prepaid
expenses 13 117,134 168,737 130,234 169,295
Cash and cash equivalents 14 256,685 246,387 376,781 286,998
---------- ---------- ---------- ----------
TOTAL CURRENT ASSETS 609,570 658,803 662,534 652,816
---------- ---------- ---------- ----------
CURRENT LIABILITIES
Bank and other loans 15 693,027 890,271 932,780 1,056,639
Other liabilities and accrued
expenses 16 521,511 637,228 702,481 718,783
Accounts payable 17 71,643 92,603 93,987 128,638
Sales in advance of carriage 36,947 19,488 3,268 -
Tax payable 17,267 14,267 1,857 -
---------- ---------- ---------- ----------
TOTAL CURRENT LIABILITIES 1,340,395 1,653,857 1,734,373 1,904,060
---------- ---------- ---------- ----------
NET CURRENT LIABILITIES (730,825) (995,054) (1,071,839) (1,251,244)
---------- ---------- ---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 3,702,301 3,513,439 3,155,075 2,878,683
---------- ---------- ---------- ----------
-116-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(II) COMBINED BALANCE SHEETS (CONTINUED)
31 DECEMBER, 30 JUNE,
--------------------------------- ---------
2001 2002 2003 2004
Note RMB'000 RMB'000 RMB'000 RMB'000
NON-CURRENT LIABILITIES AND
DEFERRED ITEMS
Bank and other loans 15 2,384,972 2,051,386 1,960,461 1,735,037
Provision for major overhauls 18 150,708 161,594 182,727 182,319
Deferred tax liabilities 19 122,691 132,183 4,853 -
--------- --------- --------- ---------
TOTAL NON-CURRENT LIABILITIES 2,658,371 2,345,163 2,148,041 1,917,356
--------- --------- --------- ---------
MINORITY INTERESTS - 94,735 78,173 76,777
--------- --------- --------- ---------
1,043,930 1,073,541 928,861 884,550
========= ========= ========= =========
Representing:
OWNER'S FUND - SURPLUS 1,043,930 1,073,541 928,861 884,550
========= ========= ========= =========
-117-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(III) COMBINED STATEMENTS OF CHANGES IN OWNER'S FUND
Note RMB'000
Surplus of owner's fund as at 1 January, 2001 1,018,312
Net profit for the year 40,949
Distributions to owner (15,331)
-----------
SURPLUS OF OWNER'S FUND AS AT 31 DECEMBER, 2001 1,043,930
===========
Surplus of owner's fund as at 1 January, 2002 1,043,930
Net profit for the year 2,808
Contributions from owner 26,803
-----------
SURPLUS OF OWNER'S FUND AS AT 31 DECEMBER, 2002 1,073,541
===========
Surplus of owner's fund as at 1 January, 2003 1,073,541
Net loss for the year (299,102)
Assets distributed to owner in connection with the
Reorganisation and Acquisition 2 (47,802)
Surplus arising from revaluation of property, plant and
equipment, net of minority interests' share 9 227,452
Elimination of net deferred tax assets 19 (23,625)
Recognition of deferred tax liabilities 19 (4,853)
Contributions from owner 3,250
-----------
SURPLUS OF OWNER'S FUND AS AT 31 DECEMBER, 2003 928,861
===========
Surplus of owner's fund as at 1 January, 2004 928,861
Net loss for the period (44,311)
-----------
SURPLUS OF OWNER'S FUND AS AT 30 JUNE, 2004 884,550
===========
-118-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(IV) COMBINED STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------------------ ------------------------
2001 2002 2003 2003 2004
Note RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES 25(i) 326,210 560,964 295,738 23,699 69,672
---------- ---------- ---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property,
plant and equipment 21,183 25,119 39,398 16,107 286
Proceeds from disposal of
long term investment - - 890 890 -
Payment of lease and
equipment deposits (22,365) - - - -
Refund of lease and equipment
deposits 207,984 189,541 - - -
Capital expenditures (1,071,705) (697,919) (157,216) (102,804) (58,176)
Purchase of long term investments (890) - - - -
---------- ---------- ---------- ----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (865,793) (483,259) (116,928) (85,807) (57,890)
---------- ---------- ---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank and other loans 1,195,000 1,435,000 1,656,259 645,000 297,770
Repayment of bank and other loans (528,315) (1,568,342) (1,704,675) (563,080) (399,335)
Capital contribution received from
minority shareholders 92,394 45,339 - - -
Repayment of principal under
finance lease obligations (129,712) - - - -
---------- ---------- ---------- ----------- ----------
NET CASH FROM/(USED IN) FINANCING ACTIVITIES 629,367 (88,003) (48,416) 81,920 (101,565)
---------- ---------- ---------- ----------- ----------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 89,784 (10,298) 130,394 19,812 (89,783)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR/PERIOD 166,901 256,685 246,387 246,387 376,781
---------- ---------- ---------- ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR/PERIOD 256,685 246,387 376,781 266,199 286,998
========== ========== ========== =========== ==========
-119-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION
1. PRINCIPAL ACTIVITIES AND REORGANISATION
Xinjiang Airlines Company ("Xinjiang Airlines") was established on 1
January, 1985 in the People's Republic of China (the "PRC") and is a
wholly-owned subsidiary of China Southern Air Holding Company ("CSAHC"), the
ultimate holding company of China Southern Airlines Company Limited (the
"Company"). Xinjiang Airlines together with its subsidiaries ("Xinjiang Airlines
Group") is principally engaged in the provision of domestic and international
passenger, cargo and mail airline services, with flights operating primarily
from Urumqi International Airport which is the main base of Xinjiang Airlines in
the PRC. In addition, Xinjiang Airlines Group also engages in other non airline
related operations (the "Non Airline Operations") mainly consisting of property
operations which provide supporting services to Xinjiang Airlines Group.
CSAHC has undergone a reorganisation (the "Reorganisation") in connection
with the proposed acquisition of the airline and airline related operations (the
"Airline Operations") of Xinjiang Airlines Group by the Company (the
"Acquisition"). As part of the Reorganisation, the operations and businesses and
the assets and liabilities of Xinjiang Airlines Group were segregated into two
operations, namely the Airline Operations and the Non Airline Operations on 31
December, 2003.
Pursuant to the Sale and Purchase Agreement, as described more fully in
the section headed "The Sale and Purchase Agreement" in the letter from the
Board contained in the Circular, the Company will acquire the Airline Operations
of Xinjiang Airlines Group together with the related assets and liabilities.
However, certain assets within the Airline Operations of Xinjiang Airlines Group
are not to be acquired by the Company.
2. BASIS OF PRESENTATION
The Financial Information for each of the years in the three-year period
ended 31 December, 2003 and for the six-month period ended 30 June, 2004
presents the results of the Airline Operations of Xinjiang Airlines Group as if
the Reorganisation had taken place and the Airline Operations of Xinjiang
Airlines Group had been in operation on a stand alone basis as of the earliest
date presented and had been in existence throughout the relevant period. The
Financial Information for each of the years in the three-year period ended 31
December, 2003 includes the results related to those assets that were not to be
acquired by the Company, but were historically associated with the Airline
Operations of Xinjiang Airlines Group. As at 31 December, 2003, the assets not
to be acquired by the Company consisted of the following:
RMB'000
Property, plant and equipment, net 46,272
Trade and other receivables 1,530
-------
Assets distributed to owner 47,802
=======
The assets within the Airline Operations of Xinjiang Airlines Group not to
be acquired by the Company on 31 December, 2003 were reflected as assets
distributed to owner of Xinjiang Airlines in the combined statements of owner's
fund as at 31 December, 2003.
As a result of the distribution of the above assets as at 31 December,
2003 to the owner, the Financial Information for the six-month period ended 30
June, 2004 presents the results of the assets and liabilities, revenues and
expenses of the Airline Operations of Xinjiang Airlines Group to be acquired by
the Company.
Notwithstanding the Airline Operations of Xinjiang Airlines Group having
net current liabilities as at 30 June, 2004, the Financial Information has been
prepared on a going concern basis on the assumption that the Airline Operations
of Xinjiang Airlines Group will be able to generate adequate cash flows from
operations and to obtain adequate external financing to enable the Airline
Operations of Xinjiang Airlines Group to meet its debts as they fall due and to
meet its committed future capital expenditure (see Note 22).
-120-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
3. PRINCIPAL ACCOUNTING POLICIES
(a) STATEMENT OF COMPLIANCE
The Financial Information has been prepared in accordance with
International Financial Reporting Standards ("IFRS") promulgated by the
International Accounting Standards Board. IFRS includes International
Accounting Standards ("IAS") and interpretations.
(b) BASIS OF PREPARATION
The Financial Information is prepared on the historical cost basis
as modified by the revaluation of property, plant and equipment, as
explained in Note 9. The accounting policies described below have been
consistently applied during the relevant period.
(c) BASIS OF CONSOLIDATION
A subsidiary is an enterprise controlled by the Airline Operations
of Xinjiang Airlines. Control exists when the Airline Operations of
Xinjiang Airlines 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 results of subsidiaries are included in the Financial
Information from the date that control commences until the date that
control ceases, and the share attributable to minority interests is
deducted from or added to the profit/loss after income tax. All
significant intercompany balances and transactions and any unrealised
gains and losses arising from intercompany transactions are eliminated on
consolidation.
The particulars of the principal subsidiaries are set out in Note
24.
(d) PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION
(i) Property, plant and equipment are initially stated at cost
less accumulated depreciation and impairment losses (see Note
(f)). The cost of an asset comprises its purchase price, any
directly attributable costs of bringing the asset to working
condition and location for its intended use and the cost of
borrowed funds used during the period of construction.
Expenditure incurred after the asset has been put into
operation is capitalised only when it increases the future
economic benefits embodied in the item of property, plant and
equipment. All other expenditure including the cost of repairs
and maintenance, is expensed as it is incurred.
(ii) Subsequent to the revaluation carried out as at 31 December,
2003, which was based on depreciated replacement costs (Note
9), property, plant and equipment are carried at revalued
amount, being the fair value at the date of the revaluation,
less subsequent accumulated depreciation and impairment
losses. When an item of property, plant and equipment is
revalued, any accumulated depreciation and impairment losses
at the date of revaluation is eliminated against the gross
carrying amount of the asset and the net asset restated to the
revalued amount of the asset. When an item of property, plant
and equipment is revalued, the entire class of property, plant
and equipment to which the asset belongs is revalued
simultaneously. When an asset's carrying amount is increased
as a result of a revaluation, the increase is credited
directly to owner's fund. However, a revaluation increase is
recognised as an income to the extent that it reverses a
revaluation decrease of the same asset previously recognised
as an expense. When an asset's carrying amount is decreased as
a result of a revaluation, the decrease is recognised as an
expense in the combined statements of operations. However, a
revaluation decrease is charged directly against owner's fund
to the extent that the decrease does not exceed the amount
previously credited to owner's fund in respect of the same
asset. Revaluations are performed with sufficient regularity
such that the carrying amount does not differ materially from
that which would be determined using fair value at the balance
sheet date.
-121-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
3. PRINCIPAL ACCOUNTING POLICIES (Continued)
(d) PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION (Continued)
(iii) Gains or losses arising from the retirement or disposal of
property, plant and equipment are determined as the difference
between the net disposal proceeds and the carrying amount of
the asset and are recognised as income or expense in the
combined statements of operations on the date of retirement or
disposal.
(iv) Depreciation is calculated to write off the cost, or revalued
amount, where appropriate, of property, plant and equipment on
a straight line basis over their estimated useful lives, to
residual values, using the following depreciation rates:
DEPRECIATION RATES
------------------
BUILDINGS 2.43% - 6.17%
Owned and finance leased aircraft 4.75% - 12.13%
Other flight equipment
- Jet engines 4.75% - 12.13%
- Others, including rotable spares 9.79% - 12.13%
Machinery and equipment 9.70% - 11.40%
Vehicles 16.17%
(e) LEASED ASSETS
Flight equipment under finance leases is stated at an amount equal
to the lower of its fair value and the present value of minimum lease
payments at inception of the lease, and is amortised on a straight line
basis over the shorter of the lease term or estimated useful life of the
asset to residual value. In cases where title to the asset will be
acquired by the Airline Operations of Xinjiang Airlines Group at the end
of the lease, the asset is amortised on a straight line basis over the
estimated useful life of the asset to its residual value.
Amounts payable in respect of finance leases are apportioned between
charges and reductions of obligations based on the interest rates implicit
in the leases. Interest charges are included in the combined statements of
operations to provide a constant periodic rate of charge over the lease
term.
Operating lease payments are charged to the combined statements of
operations on a straight line basis over the terms of the related leases.
(f) IMPAIRMENT OF ASSETS
The carrying amounts of the assets, other than inventories (see Note
(i)), trade and other receivables (see Note (j)) and deferred tax assets
(see Note (m)) of the Airline Operations of Xinjiang Airlines Group, 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 recognised as an expense in the combined statements of
operations.
The Airline Operations of Xinjiang Airlines Group assesses at each
balance sheet date whether there is any indication that an impairment loss
recognised for an asset in prior years may no longer exist. An impairment
loss is reversed if there has been a favourable 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 recognised as income.
The reversal is reduced by the amount that would have been recognised as
depreciation had the write-down or write-off not occurred.
-122-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
3. PRINCIPAL ACCOUNTING POLICIES (Continued)
(g) CONSTRUCTION IN PROGRESS
Construction in progress is stated in the combined balance sheets at
cost less impairment losses (see Note (f)). Cost comprises direct costs of
construction as well as interest expense and exchange differences on
related borrowed funds to the extent that they are regarded as an
adjustment to interest charge during the periods of construction and
installation.
Capitalisation of these costs ceases and the construction in
progress is transferred to property, plant and equipment when
substantially all the activities necessary to prepare the asset for its
intended use are completed. No depreciation is provided in respect of
construction in progress until it is completed and ready for its intended
use.
(h) INVESTMENTS
Investments, which represent unquoted available-for-sale equity
securities of companies established in the PRC, are stated at cost less
impairment losses (see Note (f)). 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.
(i) 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 are stated at the
lower of cost and net realisable value. Net realisable value represents
estimated resale price.
(j) TRADE AND OTHER RECEIVABLES
Trade and other receivables are stated at cost less provision for
doubtful accounts. Provision for doubtful accounts is established based on
evaluation of the recoverability of these accounts at the balance sheet
date.
(k) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in hand and balance with
banks and other financial institutions with an original maturity within
three months. Cash equivalents are stated at cost, which approximates fair
value.
(l) INTEREST-BEARING BORROWINGS
Interest-bearing borrowings are recognised at cost.
(m) INCOME TAXES
Income tax comprises current and deferred tax. Current tax is
calculated on the taxable income for the relevant period by applying the
applicable tax rates.
Deferred tax is provided using the balance sheet liability method,
providing for all temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for taxation purposes. The amount of deferred tax provided is based
on the expected manner of realisation or settlement of the carrying amount
of assets and liabilities, using tax rates enacted or substantially
enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is
probable that future taxable profits will be available against which the
asset can be utilised. Deferred tax assets are reduced to the extent that
it is no longer probable that the related tax benefit will be realised.
-123-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
3. PRINCIPAL ACCOUNTING POLICIES (Continued)
(n) PROVISIONS AND CONTINGENT LIABILITIES
Provisions are recognised for liabilities of uncertain timing or
amount when the Airline Operations of Xinjiang Airlines Group has a legal
or constructive obligation arising as a result of a past event, it is
probable that an outflow of economic benefits will be required to settle
the obligation and a reliable estimate can be made. Where the time value
of money is material, provisions are stated at the present value of the
expenditures expected to settle the obligation.
Where it is not probable that an outflow of economic benefits will
be required, or the amount cannot be estimated reliably, the obligation is
disclosed as a contingent liability, unless the probability of outflow of
economic benefits is remote. Possible obligations, whose existence will
only be confirmed by the occurrence or non-occurrence of one or more
future events are also disclosed as contingent liabilities unless the
probability of outflow of economic benefits is remote.
(o) REVENUE RECOGNITION
(i) Passenger, cargo and mail transportation revenues are
recognised when the transportation is provided. Ticket sales
for transportation not yet provided are included in current
liabilities. Revenues from airline-related business are
recognised when services are rendered.
Revenue is stated net of sales tax. In addition, revenue for
each of the years in the three-year period ended 31 December,
2003 and the three-month period ended 31 March, 2004 was
stated net of contributions to the Civil Aviation
Administration of China ("CAAC") Infrastructure Development
Fund. Effective from 1 April, 2004, contributions to the CAAC
Infrastructure Development Fund form part of the flight
operations expenses instead of being netted off with revenue.
(ii) Interest income is recognised as it accrues unless
collectability is in doubt.
(iii) Operating lease income is recognised on a straight line basis
over the terms of the respective leases.
(p) TRAFFIC COMMISSIONS
Traffic commissions are expensed when the transportation is provided
and the related revenue is recognised. Traffic commissions for
transportation not yet provided are recorded in the combined balance
sheets as prepaid expense.
(q) MAINTENANCE AND OVERHAUL COST
Routine maintenance and repairs and overhauls in respect of owned
aircraft and aircraft held under finance leases are expensed in the
combined statements of operations 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 overhauls required to be performed on the
related aircraft prior to their return to the lessors.
(r) TRANSLATION OF FOREIGN CURRENCIES
The functional currency of the operations of the Airline Operations
of Xinjiang Airlines Group is Renminbi. Foreign currency transactions are
translated into Renminbi at the applicable rates of exchange ruling at the
transaction dates. Monetary assets and liabilities denominated in foreign
currencies are translated into Renminbi at the exchange rates ruling at
the balance sheet date. Exchange gains and losses, other than those
capitalised as construction in progress (See Note (g)), are recognised in
the combined statements of operations.
(s) BORROWING COSTS
Borrowing costs are expensed in the combined statements of
operations in the period in which they are incurred, except to the extent
that they are capitalised 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 (See Note
(g)).
-124-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
3. PRINCIPAL ACCOUNTING POLICIES (Continued)
(t) RETIREMENT BENEFITS
Contributions to defined contribution retirement schemes made by the
Airline Operations of Xinjiang Airlines Group are charged to the combined
statements of operations as and when incurred (see Note 21).
(u) RELATED PARTIES
For the purposes of the Financial Information set out below, parties
are considered to be related to the Airline Operations of Xinjiang
Airlines Group if the Airline Operations of Xinjiang Airlines 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 Airline Operations of Xinjiang
Airlines Group and the party are subject to common control or common
significant influence. Related parties may be individuals or other
entities.
(v) SEGMENT REPORTING
A segment is a distinguishable component of the Airline Operations
of Xinjiang Airlines Group that is engaged either in providing products or
services (business segment), or in providing products or services within a
particular economic environment (geographical segment), which is subject
to risks and rewards that are different from those of other segments.
The Airline Operations of Xinjiang Airlines Group operates
principally as a single business segment for the provision of air
transportation services. The analysis of operating revenue 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 overseas destinations is attributed to the
international operation.
(ii) Other revenue from ticket selling, general aviation and ground
services, air catering and other miscellaneous services are
attributed on the basis of where the services are performed.
(w) USE OF ESTIMATES
The preparation of the Financial Information in accordance with IFRS
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as at 31 December, 2001, 2002 and 2003
and 30 June, 2004 and the reported amounts of revenues and expenses during
the relevant period. Actual results could differ from those estimates.
-125-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
4. OPERATING REVENUE
Operating revenue comprises revenues from airline and airline related
business and is stated net of sales tax. In addition, the operating revenue for
each of the years in the three-year period ended 31 December, 2003 and the
three-month period ended 31 March, 2004 was stated net of contributions to the
CAAC Infrastructure Development Fund. An analysis of operating revenue is as
follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------------- ----------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
TRAFFIC REVENUE
Passenger 1,950,343 2,104,039 1,982,250 675,798 1,126,626
Cargo and mail 97,666 111,341 92,824 41,512 49,674
--------- --------- --------- ----------- ---------
2,048,009 2,215,380 2,075,074 717,310 1,176,300
--------- --------- --------- ----------- ---------
OTHER OPERATING REVENUE
Commission income 5,209 5,382 7,840 3,459 6,139
Ground services income - 8,784 14,098 4,671 6,589
Aircraft lease income 114,427 112,370 35,729 34,196 7,116
Others 6,595 11,196 18,892 13,514 18,932
--------- --------- --------- ----------- ---------
126,231 137,732 76,559 55,840 38,776
--------- --------- --------- ----------- ---------
2,174,240 2,353,112 2,151,633 773,150 1,215,076
========= ========= ========= =========== =========
-126-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
4. OPERATING REVENUE (Continued)
Pursuant to various sales tax rules and regulations, the Airline
Operations of Xinjiang Airlines Group is required to pay sales tax to national
and local tax authorities at the following rates during the relevant period:
TYPES OF REVENUE APPLICABLE SALES TAX RATES
---------------- -----------------------------------------------------------------------
Traffic revenue 3% of traffic revenue in respect of domestic flights and international
outbound flights during the relevant period, except for the period from
1 May, 2003 to 31 December, 2003, during which passenger revenue was
exempted from sales tax.
Other operating 3% of commission income, general aviation income and ground services
revenue income, and 3% to 5% of other operating revenue.
The amount of sales tax incurred during the relevant period is as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------- --------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Sales tax netted off against
operating revenue 68,057 74,528 21,516 17,827 39,550
======= ======= ======= =========== =======
In addition, the Airline Operations of Xinjiang Airlines Group is required
to pay contributions to the CAAC Infrastructure Development Fund. Prior to 1
April, 2004, contributions to the CAAC Infrastructure Development Fund were
payable at 5% and 2% respectively of the domestic and international traffic
revenue of the Airline Operations of Xinjiang Airlines Group except for the
period from 1 May, 2003 to 31 March, 2004 during which the Airline Operations of
Xinjiang Airlines Group was exempted from contributions to the CAAC
Infrastructure Development Fund. Effective from 1 April, 2004, contributions to
the CAAC Infrastructure Development Fund are payable based on the traffic
capacity of the Airline Operations of Xinjiang Airlines Group deployed on its
routes. The contributions now form part of the flight operations expenses.
Contributions made to the CAAC Infrastructure Development Fund during the
relevant period are as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------- --------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Contributions made to the
CAAC Infrastructure
Development Fund
- netted off against traffic
revenue 108,283 117,522 28,238 28,238 -
- included in flight
operations expenses - - - - 18,703
------- ------- ------- ----------- -------
108,283 117,522 28,238 28,238 18,703
======= ======= ======= =========== =======
-127-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
4. OPERATING REVENUE (Continued)
An analysis of the operating revenue of the Airline Operations of Xinjiang
Airlines Group by geographical segment is set out as below:
DOMESTIC *INTERNATIONAL TOTAL
--------- -------------- ---------
RMB'000 RMB'000 RMB'000
YEAR ENDED 31 DECEMBER, 2001
Traffic revenue 1,955,009 93,000 2,048,009
Other revenue 126,231 - 126,231
--------- -------------- ---------
Total operating revenue 2,081,240 93,000 2,174,240
========= ============== =========
YEAR ENDED 31 DECEMBER, 2002
Traffic revenue 2,110,380 105,000 2,215,380
Other revenue 137,732 - 137,732
--------- -------------- ---------
Total operating revenue 2,248,112 105,000 2,353,112
========= ============== =========
YEAR ENDED 31 DECEMBER, 2003
Traffic revenue 1,967,212 107,862 2,075,074
Other revenue 76,559 - 76,559
--------- -------------- ---------
Total operating revenue 2,043,771 107,862 2,151,633
========= ============== =========
SIX-MONTH PERIOD ENDED 30 JUNE, 2003 (UNAUDITED)
Traffic revenue 679,912 37,398 717,310
Other revenue 55,840 - 55,840
--------- -------------- ---------
Total operating revenue 735,752 37,398 773,150
========= ============== =========
SIX-MONTH PERIOD ENDED 30 JUNE, 2004
Traffic revenue 1,109,261 67,039 1,176,300
Other revenue 38,776 - 38,776
--------- -------------- ---------
Total operating revenue 1,148,037 67,039 1,215,076
========= ============== =========
* Routes are mainly between the PRC and Hong Kong, Pakistan and Russia.
The major revenue-earning assets of the Airline Operations of Xinjiang
Airlines Group are its aircraft fleet, most of which are registered in the PRC.
Since the aircraft of the Airline Operations of Xinjiang Airlines Group are
employed flexibly across its route network, there is no suitable basis of
allocating such assets to geographic segments. Substantially all of the
non-aircraft identifiable assets of the Airline Operations of Xinjiang Airlines
Group are located in the PRC.
-128-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
5. OPERATING EXPENSES
An analysis of the operating expenses during the relevant period is set
out below:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------------- ----------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Jet fuel 536,466 472,855 481,198 211,472 314,402
Aircraft maintenance 189,487 196,739 245,065 108,682 122,283
Routes 317,150 334,768 406,533 179,463 213,694
Depreciation and amortisation
- owned assets 312,814 352,150 346,304 166,247 173,177
- assets held under finance
leases 2,177 - - - -
Operating lease charges
- aircraft and other
flight equipment 183,686 263,970 253,621 125,171 125,980
- buildings 10,606 7,857 6,893 4,111 4,565
Staff costs
- salaries, wages and
welfare 139,999 160,259 230,165 94,081 114,730
- contributions to defined
contribution retirement
schemes 7,265 7,119 13,972 6,517 16,259
Office and administration 16,709 27,157 93,990 37,010 45,532
Impairment loss on aircraft and
other flight equipment (Note) - 131,710 - - -
Provision for obsolescence of
inventories (Note) - 12,007 - - -
Others 189,132 189,508 113,134 46,488 84,674
--------- --------- --------- ----------- ---------
1,905,491 2,156,099 2,190,875 979,242 1,215,296
========= ========= ========= =========== =========
Note: In accordance with the regulations announced by the CAAC in 2002, IL86
aircraft were not allowed to fly unless they were installed with
additional security modules starting from 1 January, 2003. After having
evaluated the costs and benefits, management decided to ground the
aircraft. Management assessed the recoverable amount of the IL86 aircraft
and their related flight equipment and spare parts. Impairment loss and
provision for obsolescence of inventories approximately RMB132 million and
RMB12 million respectively were provided for to write down the carrying
value of the aircraft and their related assets to their estimated net
realisable value.
-129-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
6. INTEREST EXPENSE
An analysis of the interest expense is set out below:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------- --------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Finance charges on obligations
under finance leases 1,541 - - - -
Interest on bank and other
loans wholly repayable
within five years 38,099 48,809 110,559 33,780 39,523
Interest on other loans 149,525 135,209 90,856 47,572 29,894
------- ------- ------- ----------- -------
189,165 184,018 201,415 81,352 69,417
======= ======= ======= =========== =======
7. INCOME TAX
Income tax in the combined statements of operations represents:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
-------------------------- --------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Deferred taxation (Note 19) 35,782 9,492 (155,808) (95,258) (24,048)
======= ======= ======== =========== =======
Pursuant to the income tax rules and regulations of the PRC, the Airline
Operations of Xinjiang Airlines Group is liable to PRC income tax at a rate of
33%.
In respect of the overseas airline activities, the Airline Operations of
Xinjiang Airlines Group has either obtained exemptions from overseas taxation
pursuant to the bilateral aviation agreements between the overseas governments
and the PRC government, or has sustained tax losses in these overseas
jurisdictions. Accordingly, no provision for overseas tax has been made for the
relevant period.
-130-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
7. INCOME TAX (Continued)
A reconciliation of the expected tax expense with the actual tax expense
is as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
-------------------------- --------------------
2001 2002 2003 2003 2004
Note RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Profit/(loss) before income
tax and minority interests 76,731 11,778 (480,867) (290,456) (69,755)
======= ======= ======== ========== =======
Expected PRC income tax
expense/(credit) at 33% 25,321 3,887 (158,686) (95,850) (23,019)
Adjustments:
- Non-deductible
expenses (i) 10,461 5,605 2,878 1,205 2,081
- Non-taxable income - - - - (746)
- Differences in income
and expense recognition for
certain inter-company transactions (ii) - - - (613) (2,364)
------- ------- -------- ---------- -------
35,782 9,492 (155,808) (95,258) (24,048)
======= ======= ======== ========== =======
Notes:
(i) Non-deductible expenses mainly represent personnel and other
miscellaneous expenses in excess of statutory deductible limits for
taxation purpose.
(ii) Amounts represent tax effects of differences in the recognition of
income and expenses in respect of certain inter-company
transactions. Such differences in recognition of income and expenses
are eliminated on consolidation.
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 Tax Bureau, lease arrangements executed prior to 1
September, 1999 are exempted from PRC withholding tax.
During the relevant period, PRC withholding tax payable in respect of the
leases executed on or after 1 September, 1999, which has been included as part
of the operating lease charges, are as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------- --------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
PRC withholding tax 1,818 7,601 7,957 3,824 3,948
======= ======= ======= =========== =======
-131-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
8. DIRECTORS' EMOLUMENTS AND INDIVIDUALS WITH HIGHEST EMOLUMENTS
(i) DIRECTORS' EMOLUMENTS
No board of directors or similar corporate governance body was
established by the Airline Operations of Xinjiang Airlines during the
relevant period. Accordingly, no directors' emoluments were paid during
the relevant period.
(ii) INDIVIDUALS WITH HIGHEST EMOLUMENTS
Details of emoluments paid to the five highest paid individuals are
as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------- --------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Salaries, allowances and
benefits in kind 286 214 420 172 388
Retirement benefits 37 23 62 29 29
------- ------- ------- ----------- -------
323 237 482 201 417
======= ======= ======= =========== =======
An analysis of emoluments paid to the five highest paid individuals by
number of individuals and emolument ranges is as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------- --------------------
2001 2002 2003 2003 2004
(unaudited)
RMB Nil - RMB1,060,000
(HK$1,000,000
equivalent) 5 5 5 5 5
======= ======= ======= =========== =======
None of these employees received any inducements or compensation for loss
of office, or waived any emoluments during the relevant period.
-132-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
9. PROPERTY, PLANT AND EQUIPMENT, NET
OTHER
AIRCRAFT FLIGHT
--------------------------- EQUIPMENT, MACHINERY,
HELD UNDER INCLUDING EQUIPMENT
FINANCE ROTABLE AND
BUILDINGS OWNED LEASES SPARES VEHICLES TOTAL
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
COST:
At 1 January, 2001 552,094 2,943,879 289,321 940,429 271,622 4,997,345
Reclassification on
exercise of purchase options - 289,321 (289,321) - - -
Additions - 948,783 - 50,788 13,537 1,013,108
Transferred from
construction in progress - 7,806 - - 13,214 21,020
Disposals (4,064) (246,033) - (155,878) (23,384) (429,359)
------------ ------------ ------------ ------------ ------------ ------------
At 31 December, 2001 548,030 3,943,756 - 835,339 274,989 5,602,114
ACCUMULATED DEPRECIATION
AND IMPAIRMENT LOSSES:
At 1 January, 2001 51,853 840,805 98,490 470,834 97,206 1,559,188
Reclassification on
exercise of purchase
options - 100,667 (100,667) - - -
Depreciation for the year 17,288 195,539 2,177 73,538 26,449 314,991
Written back on disposal (1,548) (235,050) - (150,286) (12,711) (399,595)
------------ ------------ ------------ ------------ ------------ ------------
At 31 December, 2001 67,593 901,961 - 394,086 110,944 1,474,584
------------ ------------ ------------ ------------ ------------ ------------
NET BOOK VALUE:
At 31 December, 2001 480,437 3,041,795 - 441,253 164,045 4,127,530
============ ============ ============ ============ ============ ============
-133-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
9. PROPERTY, PLANT AND EQUIPMENT, NET (Continued)
OTHER
AIRCRAFT FLIGHT
----------------------- EQUIPMENT, MACHINERY,
HELD UNDER INCLUDING EQUIPMENT
FINANCE ROTABLE AND
BUILDINGS OWNED LEASES SPARES VEHICLES TOTAL
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
COST:
At 1 January, 2002 548,030 3,943,756 - 835,339 274,989 5,602,114
Additions 40,810 501,775 - 142,435 20,035 705,055
Transferred from
construction in progress 33,920 - - - 32,437 66,357
Disposals (16,961) - - - (29,399) (46,360)
--------- --------- ---------- ---------- ---------- ---------
At 31 December, 2002 605,799 4,445,531 - 977,774 298,062 6,327,166
--------- --------- ---------- ---------- ---------- ---------
ACCUMULATED DEPRECIATION
AND IMPAIRMENT LOSSES:
At 1 January, 2002 67,593 901,961 - 394,086 110,944 1,474,584
Depreciation for the year 18,678 231,434 - 71,655 30,383 352,150
Impairment loss for
the year - 80,074 - 51,636 - 131,710
Written back on disposal (4,846) - - - (14,176) (19,022)
--------- --------- ---------- ---------- ---------- ---------
At 31 December, 2002 81,425 1,213,469 - 517,377 127,151 1,939,422
--------- --------- ---------- ---------- ---------- ---------
NET BOOK VALUE:
At 31 December, 2002 524,374 3,232,062 - 460,397 170,911 4,387,744
========= ========= ========== ========== ========== =========
-134-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
9. PROPERTY, PLANT AND EQUIPMENT, NET (Continued)
OTHER
AIRCRAFT FLIGHT
----------------------- EQUIPMENT, MACHINERY,
HELD UNDER INCLUDING EQUIPMENT
FINANCE ROTABLE AND
BUILDINGS OWNED LEASES SPARES VEHICLES TOTAL
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
COST OR VALUATION:
At 1 January, 2003 605,799 4,445,531 - 977,774 298,062 6,327,166
Transferred to owner upon
the Reorganisation (56,351) - - - (3,776) (60,127)
Additions 569 - - 94,841 7,568 102,978
Transferred from
construction in progress 47,554 - - - 40,605 88,159
Disposals (2,770) (317,719) - (336,451) (12,998) (669,938)
Revaluation (101,385) (1,145,358) - (253,365) (147,154) (1,647,262)
--------- ---------- ---------- ---------- ---------- ----------
At 31 December, 2003 493,416 2,982,454 - 482,799 182,307 4,140,976
--------- ---------- ---------- ---------- ---------- ----------
REPRESENTING:
Valuation - 2003 493,416 2,982,454 - 482,799 182,307 4,140,976
--------- ---------- ---------- ---------- ---------- ----------
ACCUMULATED DEPRECIATION
AND IMPAIRMENT LOSSES:
At 1 January, 2003 81,425 1,213,469 - 517,377 127,151 1,939,422
Transferred to owner upon
the Reorganisation (11,692) - - - (2,163) (13,855)
Depreciation for the year 17,093 222,771 - 58,845 47,595 346,304
Written back on disposal (90) (297,328) - (323,302) (1,877) (622,597)
Elimination on revaluation (86,736) (1,138,912) - (252,920) (170,706) (1,649,274)
--------- ---------- ---------- ---------- ---------- ----------
At 31 December, 2003 - - - - - -
--------- ---------- ---------- ---------- ---------- ----------
NET BOOK VALUE:
At 31 December, 2003 493,416 2,982,454 - 482,799 182,307 4,140,976
========= ========== ========== ========== ========== ==========
-135-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
9. PROPERTY, PLANT AND EQUIPMENT, NET (Continued)
OTHER
AIRCRAFT FLIGHT
----------------------- EQUIPMENT, MACHINERY,
HELD UNDER INCLUDING EQUIPMENT
FINANCE ROTABLE AND
BUILDINGS OWNED LEASES SPARES VEHICLES TOTAL
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
COST OR VALUATION:
At 1 January, 2004 493,416 2,982,454 - 482,799 182,307 4,140,976
Additions 16 - - 39,899 3,349 43,264
Transferred from
construction in progress 31,515 - - - 2,216 33,731
Disposals (148) - - - (4,716) (4,864)
---------- ----------- ---------- ---------- ---------- ----------
At 30 June, 2004 524,799 2,982,454 - 522,698 183,156 4,213,107
---------- ----------- ---------- ---------- ---------- ----------
REPRESENTING:
Cost 31,531 - - 39,899 5,565 76,995
Valuation - 2003 493,268 2,982,454 - 482,799 177,591 4,136,112
---------- ----------- ---------- ---------- ---------- ----------
524,799 2,982,454 - 522,698 183,156 4,213,107
---------- ----------- ---------- ---------- ---------- ----------
ACCUMULATED DEPRECIATION
AND IMPAIRMENT LOSSES:
At 1 January, 2004 - - - - - -
Depreciation for the period 11,330 117,652 - 25,233 18,962 173,177
Written back on disposal (8) - - - (3,770) (3,778)
---------- ----------- ---------- ---------- ---------- ----------
At 30 June, 2004 11,322 117,652 - 25,233 15,192 169,399
---------- ----------- ---------- ---------- ---------- ----------
NET BOOK VALUE:
At 30 June, 2004 513,477 2,864,802 - 497,465 167,964 4,043,708
========== =========== ========== ========== ========== ==========
All of the buildings of the Airline Operations of Xinjiang Airlines Group
are located in the PRC.
As required by the relevant PRC rules and regulations with respect to the
Acquisition, the property, plant and equipment of the Airline Operations of
Xinjiang Airlines Group as at 31 December, 2003 were revalued for each asset
class by China Enterprise Appraisal Co., Ltd. (the "PRC Valuers"), independent
valuers registered in the PRC, on a depreciated replacement cost basis. The
value of property, plant and equipment of the Airline Operations of Xinjiang
Airlines Group as at 31 December, 2003 has been determined at approximately
RMB4,141 million. Such amount will serve as the tax base for such assets for
future years (see Note 19). Surplus arising from revaluation of certain
property, plant and equipment totalled approximately RMB237 million. The amount
of approximately RMB227 million, net of minority interests' share of
approximately RMB10 million, has been credited to the owner's fund. Deficit
arising from the revaluation of certain property, plant and equipment totalling
approximately RMB235 million has been charged as an expense for the year ended
31 December, 2003. The net surplus on the revaluation of the property, plant and
equipment of approximately RMB2 million has been incorporated in the combined
balance sheet of the Airline Operations of Xinjiang Airlines Group as at 31
December, 2003.
The properties of the Airline Operations of Xinjiang Airlines Group were
also valued separately by Chesterton, independent qualified valuers in Hong
Kong, as at 31 December, 2003. The value arrived at by Chesterton was
approximately the same as that arrived at by the PRC valuers.
-136-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
9. PROPERTY, PLANT AND EQUIPMENT, NET (Continued)
The historical carrying amounts of the property, plant and equipment of
the Airline Operations of Xinjiang Airlines Group as at 31 December, 2003 and
the revalued amounts of these assets were as follows:
HISTORICAL
CARRYING REVALUATION REVALUATION REVALUED
AMOUNT SURPLUS DEFICIT AMOUNT
---------- ----------- ----------- ---------
RMB'000 RMB'000 RMB'000 RMB'000
Buildings 508,065 47,162 61,811 493,416
Owned aircraft 2,988,900 89,883 96,329 2,982,454
Other flight equipment, including
rotable spares 483,244 59,284 59,729 482,799
Machinery, equipment and vehicles 158,755 40,518 16,966 182,307
--------- ------- ------- ---------
4,138,964 236,847 234,835 4,140,976
========= ======= ======= =========
The effect of the above revaluation is to increase annual depreciation
charges by approximately RMB6 million for year beginning 1 January, 2004. Had
the property, plant and equipment been stated at cost less accumulated
depreciation and impairment losses, the net book value of the property, plant
and equipment of the Airline Operations of Xinjiang Airlines Group as at 30
June, 2004 would have been approximately RMB4, 044 million, made up as follows:
30 JUNE,
2004
---------
RMB'000
Buildings 527,872
Owned aircraft 2,879,824
Other flight equipment, including rotable spares 490,944
Machinery, equipment and vehicles 145,802
---------
4,044,442
=========
As at 31 December, 2001, 2002 and 2003 and 30 June, 2004, certain aircraft
of the Airline Operations of Xinjiang Airlines Group with an aggregate carrying
value of approximately RMB1,935 million, RMB 1,786 million, RMB 1,772 million
and RMB1,689 million respectively, were mortgaged under certain loan agreements
(See Note 15).
- 137 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
9. PROPERTY, PLANT AND EQUIPMENT, NET (Continued)
During the relevant period, the Airline Operations of Xinjiang Airlines
Group entered into certain lease agreements to lease several of its aircraft to
other airlines. The terms of such leases generally range from one to six months.
As at 31 December, 2001, 2002 and 2003 and 30 June, 2004, the cost or valuation
and accumulated depreciation and impairment losses of the relevant aircraft were
set out below:
31 DECEMBER, 30 JUNE,
---------------------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Cost or valuation 287,874 436,493 402,190 -
Accumulated depreciation and
impairment losses (110,786) (95,028) - -
-------- ------- ------- --------
177,088 341,465 402,190 -
======== ======= ======= ========
Total future minimum lease payments under non-cancellable operating leases
of the Airline Operations of Xinjiang Airlines Group are receivable as follows:
31 DECEMBER, 30 JUNE,
--------------------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Within one year 37,802 32,861 3,953 -
======= ======= ======= ========
10. CONSTRUCTION IN PROGRESS
SIX-MONTH
PERIOD ENDED
YEARS ENDED 31 DECEMBER, 30 JUNE,
-------------------------------------------- ------------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Balance at 1 January, 23,873 61,450 66,144 32,223
Additions 58,597 71,051 54,238 14,912
Transferred to property, plant
and equipment (21,020) (66,357) (88,159) (33,731)
------- ------- ------- -------
Balance at 31 December/30 June, 61,450 66,144 32,223 13,404
======= ======= ======= =======
- 138 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
11. INVENTORIES
31 DECEMBER, 30 JUNE,
------------------------------------------ --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Expendable spare parts and
maintenance materials 66,645 65,611 57,452 69,558
Other supplies 6,472 6,452 1,779 1,753
------- ------- ------- -------
73,117 72,063 59,231 71,311
Less: Provision for obsolescence - (12,007) - -
------- ------- ------- -------
73,117 60,056 59,231 71,311
======= ======= ======= =======
No significant amount of inventories was carried at net realisable value
as at 31 December, 2001, 2002 and 2003 and 30 June, 2004.
12. TRADE RECEIVABLES
Credit terms granted by the Airline Operations of Xinjiang Airlines Group
to sales agents and other customers generally range from one to three months. An
aging analysis of trade receivables, net of provision for doubtful accounts, is
set out below:
31 DECEMBER, 30 JUNE,
----------------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Within 1 month 142,086 114,605 47,533 19,330
More than 1 month but less than 3 months 12,932 24,521 31,886 34,730
More than 3 months but less than
12 months 7,616 44,497 16,869 71,152
------- ------- ------- -------
162,634 183,623 96,288 125,212
======= ======= ======= =======
As at 31 December, 2003 and 30 June, 2004, the Airline Operations of
Xinjiang Airlines Group had amount due from a fellow subsidiary of approximately
RMB38 million and RMB1 million respectively which was included in trade
receivables.
- 139 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
13. OTHER RECEIVABLES AND PREPAID EXPENSES
Other receivables and prepaid expenses comprise:
31 DECEMBER, 30 JUNE,
-------------------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Prepaid expenses and deposits 28,248 28,321 27,171 38,046
Amount due from CSAHC - 42,585 67,952 82,545
Amounts due from related companies - - 4,033 7,849
Manufacturers' credit receivables 67,532 61,552 14,420 13,558
Custom duties refundable 14,728 16,104 3,844 1,800
Aircraft lease receivables 3,342 10,002 7,348 10,242
Other receivables 3,284 14,825 10,118 19,907
------- ------- ------- -------
117,134 173,389 134,886 173,947
Less: Provision for doubtful accounts - (4,652) (4,652) (4,652)
------- ------- ------- -------
117,134 168,737 130,234 169,295
======= ======= ======= =======
14. CASH AND CASH EQUIVALENTS
31 DECEMBER, 30 JUNE,
----------------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Cash at bank and in hand 248,685 246,387 362,779 263,984
Time deposits with maturity within
three months 8,000 - 14,002 23,014
------- ------- ------- -------
256,685 246,387 376,781 286,998
======= ======= ======= =======
- 140 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
15. BANK AND OTHER LOANS
The bank and other loans of the Airline Operations of Xinjiang Airlines
Group under current liabilities comprise:
31 DECEMBER, 30 JUNE,
--------------------------------------------- ---------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Short term bank loans 400,000 680,000 438,980 611,745
Short term loans from CSAHC - - 345,000 200,000
Current portion of long term bank loans 293,027 210,271 148,800 244,894
------- ------- ------- ---------
693,027 890,271 932,780 1,056,639
======= ======= ======= =========
The weighted average interest rate on short term bank loans of the Airline
Operations of Xinjiang Airlines Group was 6.0%, 5.0%, 3.7% and 3.6% as at 31
December, 2001, 2002 and 2003 and 30 June, 2004 respectively.
The short term loans from CSAHC of approximately RMB345 million as at 31
December, 2003 were unsecured and interest free. The short term loans from CSAHC
of approximately RMB200 million as at 30 June, 2004 are unsecured and interest
bearing at 4.8% per annum.
The long term bank loans of the Airline Operations of Xinjiang Airlines
Group comprise:
31 DECEMBER, 30 JUNE,
INTEREST RATE AND ------------------------------------- ---------
BANK LOANS FINAL MATURITY 2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Renminbi denominated Floating interest rates as
specified by the People's
Bank of China ranging from
4.94% to 5.94% per annum
as at 30 June, 2004, with
maturities through 2011 1,093,450 871,000 910,000 945,000
US dollars denominated Fixed interest rates ranging
from 2.38% to 7.63% per
annum, with maturities
through 2013 1,584,549 1,390,657 1,199,261 1,034,931
--------- --------- --------- ---------
2,677,999 2,261,657 2,109,261 1,979,931
Less: loans due within one
year classified as
current liabilities (293,027) (210,271) (148,800) (244,894)
--------- --------- --------- ---------
2,384,972 2,051,386 1,960,461 1,735,037
========= ========= ========= =========
- 141 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
15. BANK AND OTHER LOANS (Continued)
The aggregate maturities of the bank and other loans of the Airline
Operations of Xinjiang Airlines Group are analysed as follows:
31 DECEMBER, 30 JUNE,
--------------------------------------- ----------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
BANK AND OTHER LOANS DUE:
Within one year 693,027 890,271 932,780 1,056,639
In the second year 328,251 224,031 326,098 319,701
In the third to fifth year, inclusive 799,418 943,667 901,177 735,526
After the fifth year 1,257,303 883,688 733,186 679,810
--------- --------- --------- ----------
3,077,999 2,941,657 2,893,241 2,791,676
Portion classified as current liabilities (693,027) (890,271) (932,780) (1,056,639)
--------- --------- --------- ----------
2,384,972 2,051,386 1,960,461 1,735,037
========= ========= ========= ==========
As at 31 December, 2001, 2002 and 2003 and 30 June, 2004, bank loans of
the Airline Operations of Xinjiang Airlines Group totalling approximately
RMB1,585 million, RMB1,391 million, RMB1,199 million and RMB1,035 million
respectively were secured by mortgages over certain aircraft (See Note 9).
As at 31 December, 2001, 2002 and 2003 and 30 June, 2004, certain bank
loans of the Airline Operations of Xinjiang Airlines Group were guaranteed by
the following parties:
31 DECEMBER, 30 JUNE,
---------------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
CAAC 303,950 21,000 - -
CSAHC - - 60,000 95,000
Export-Import Bank of the United States 797,514 716,159 629,307 583,798
Bank of China 71,017 61,572 - -
The Industrial and Commercial
Bank of China 716,018 612,926 205,779 178,005
--------- --------- ------- -------
1,888,499 1,411,657 895,086 856,803
========= ========= ======= =======
- 142 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
16. OTHER LIABILITIES AND ACCRUED EXPENSES
Other liabilities and accrued expenses represent:
31 DECEMBER, 30 JUNE,
-------------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Accrued expenses 242,418 406,949 476,640 500,030
CAAC Infrastructure Development
Fund payable 61,086 13,902 20,050 12,697
Business and other taxes payable 57,445 36,565 20,491 11,646
Salary and staff welfare payable 11,204 17,143 71 -
Other liabilities 149,358 162,669 185,229 194,410
------- ------- ------- -------
521,511 637,228 702,481 718,783
======= ======= ======= =======
As at 31 December, 2001, 2002 and 2003 and 30 June, 2004, the Airline
Operations of Xinjiang Airlines Group had amounts due to related companies of
approximately RMB12 million, RMB19 million, RMB22 million and RMB10 million
respectively which were included in other liabilities and accrued expenses.
These amounts are unsecured, interest free and repayable on demand.
17. ACCOUNTS PAYABLE
An ageing analysis of accounts payable is as follows:
31 DECEMBER, 30 JUNE,
-------------------------------------- --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Due within 1 month or on demand 53,893 68,142 22,916 48,008
Due after 1 month but within 3 months 17,553 24,264 36,002 71,481
Due after 3 months but within 6 months 197 197 35,069 9,149
------- ------- ------- -------
71,643 92,603 93,987 128,638
======= ======= ======= =======
As at 30 June, 2004, the Airline Operations of Xinjiang Airlines Group had
amounts due to a fellow subsidiary of approximately RMB9 million which were
included in accounts payable. These amounts are unsecured and interest free.
- 143 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF
THE AIRLINE OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
18. PROVISION FOR MAJOR OVERHAULS
Details of provision for major overhauls in respect of aircraft held under
operating leases are as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
---------------------------------- ------------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Balance at 1 January, 153,014 159,918 259,889 259,889 356,721
Additional amount provided 79,975 110,846 111,249 58,064 56,939
Amount utilised (73,071) (10,875) (14,417) (6,475) (8,820)
------- ------- ------- --------- --------
Balance at 31 December/
30 June, 159,918 259,889 356,721 311,478 404,840
Less: Current portion included
in other liabilities and
accrued expenses (9,210) (98,295) (173,994) (143,095) (222,521)
------- ------- ------- --------- --------
150,708 161,594 182,727 168,383 182,319
======= ======= ======= ========= ========
19. DEFERRED TAXATION
Movements in net deferred tax (liabilities)/assets are as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------------------ ------------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Balance at 1 January, (86,909) (122,691) (132,183) (132,183) (4,853)
Transferred from/(to) combined
statements of operations
(Note 7) (35,782) (9,492) 155,808 95,258 24,048
Recognised in owner's fund - - (4,853) - -
Net deferred tax assets
eliminated against
owner's fund - - (23,625) - -
-------- -------- -------- -------- -------
Balance at 31 December/
30 June, (122,691) (132,183) (4,853) (36,925) 19,195
======== ======== ======== ======== =======
- 144 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
19. DEFERRED TAXATION (Continued)
The net deferred taxation (liabilities)/assets were made up of the
following taxation effect:
31 DECEMBER, 30 JUNE,
------------------------------------- --------
2001 2002 2003 2004
Note RMB'000 RMB'000 RMB'000 RMB'000
DEFERRED TAX ASSETS:
Tax losses (i) 16,121 40,177 - 22,547
Repair charges (ii) 44,025 60,182 - -
Provision for doubtful
accounts (ii) 1,689 3,224 - -
-------- -------- ------- -------
TOTAL DEFERRED TAX ASSETS 61,835 103,583 - 22,547
-------- -------- ------- -------
DEFERRED TAX LIABILITIES:
Tax depreciation in excess of
accounting depreciation (ii) (137,819) (186,057) - -
Repairs and maintenance
accruals (ii) (46,707) (49,709) - -
Inventories (iii) - - (4,853) (3,352)
-------- -------- ------- -------
TOTAL DEFERRED TAX LIABILITIES (184,526) (235,766) (4,853) (3,352)
-------- -------- ------- -------
NET DEFERRED TAX
(LIABILITIES)/ASSETS (122,691) (132,183) (4,853) 19,195
======== ======== ======= =======
Notes:
(i) The balance of tax losses as at 31 December, 2003 will no longer be
available to be carried forward to off-set future taxable income of the
Airline Operations of Xinjiang Airlines Group upon completion of the
Reorganisation and Acquisition. In this connection, deferred tax asset
arising from tax losses amounting to approximately RMB58 million as at 31
December, 2003 was eliminated against owner's fund.
- 145 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
19. DEFERRED TAXATION (Continued)
(ii) As described in Note 9, in connection with the Reorganisation and
Acquisition, property, plant and equipment of the Airline Operations
of Xinjiang Airlines Group were revalued as at 31 December, 2003.
Such revalued amount will serve as the tax base for these assets for
future years. In addition, in connection with the Reorganisation and
Acquisition, the tax base of other assets and liabilities of the
Airline Operations of Xinjiang Airlines Group that gave rise to the
temporary differences above have been adjusted to conform to the
related financial reporting carrying amounts. As a result, the
temporary differences that gave rise to the deferred tax assets and
liabilities relating to the items above as at 31 December, 2003 were
eliminated against owner's fund.
An analysis of the net deferred tax liabilities which have been
eliminated against owner's fund is set out below:
RMB'000
DEFERRED TAX ASSETS:
Repair charges 74,148
Provision for doubtful accounts 5,363
--------
TOTAL DEFERRED TAX ASSETS 79,511
--------
DEFERRED TAX LIABILITIES:
Tax depreciation in excess of accounting depreciation (114,354)
--------
TOTAL DEFERRED TAX LIABILITIES (114,354)
--------
NET DEFERRED TAX LIABILITIES (34,843)
========
(iii) In connection with the Reorganisation and Acquisition, inventories
of the Airline Operations of the Xinjiang Airlines Group, which as
at 31 December, 2003 had a carrying amount of approximately RMB59
million, were revalued as required by the relevant PRC rules and
regulations. The revalued amount of inventories has been determined
at approximately RMB44 million. Such amount will serve as the tax
base for future years. The inventories were not revalued for
financial reporting purposes and accordingly, a deferred tax
liability of approximately RMB5 million was created with a
corresponding decrease in owner's fund.
- 146 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
20. RELATED PARTY TRANSACTIONS
During the period from 1 January, 2001 to 31 December, 2002, the Airline
Operations of Xinjiang Airlines Group was under the direct control of the CAAC
and therefore, the transactions conducted with the CAAC and its affiliates
during the period from 1 January, 2001 to 31 December, 2002 are presented as
related party transactions. However, such control was shifted to CSAHC during
late 2002. Consequently, transactions with the CAAC and its affiliates are no
longer presented as related party transactions from 1 January, 2003 onward.
The principal recurring and non-recurring related party transactions
between the Airline Operations of Xinjiang Airlines Group and the CAAC and its
affiliates, and CSAHC and its affiliates during the relevant period are
summarised as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------------- --------------------
2001 2002 2003 2003 2004
Note RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
EXPENSES
PAID TO CAAC AND
ITS AFFILIATES
Handling charges (i) 1,129 1,988 - - -
Jet fuel supplies (ii) 536,466 472,855 - - -
Aircraft insurance (iii) 16,531 31,598 - - -
Ticket reservation service
charges (iv) 8,444 11,314 - - -
Passenger departure and
cargo handling charges (v) 6,908 9,257 - - -
Aircraft and traffic service
charges (vi) 170,399 167,166 - - -
Commission expense (vii) 53,057 57,951 - - -
PAID TO CSAHC AND
ITS AFFILIATES
Interest expense (viii) - - - - 3,771
Rentals for land and
buildings (ix) - - - - 8,989
Air catering expenses (x) - - - - 9,390
Repairing charges (xi) - - 7,971 - 3,680
Flight simulation service
charges (xii) - - 3,259 1,208 3,102
INCOME
RECEIVED FROM CAAC
AND ITS AFFILIATES
Ground service income (xiii) - 5,881 - - -
Aircraft lease income (xiv) 11,083 55,436 - - -
Commission income (xv) 5,209 5,382 - - -
RECEIVED FROM CSAHC
AND ITS AFFILIATES
Aircraft lease income (xvi) - 26,164 35,751 35,751 7,413
-147-
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
20. RELATED PARTY TRANSACTIONS (Continued)
Notes:
(i) Handling charges represent fees payable to China Aviation Supplies
Import and Export Corporation, a corporation controlled by the
CAAC, in connection with the procurement of aircraft and flight
equipment on behalf of the Airline Operations of Xinjiang Airlines
Group. Handling charges are calculated based on a fixed percentage
of the purchase value and other charges.
(ii) Jet fuel supplies represent purchases of jet fuel at the then
prevailing state controlled prices from China Aviation Oil Supply
Company, Lan Tian Oil Supply Company and certain other suppliers,
which are controlled by the CAAC.
(iii) Aircraft insurance represents insurance premiums payable to the
CAAC which arranges aviation insurance covering hull, war and
passenger liability risk on behalf of the PRC airlines with the
People's Insurance (Property) Company of China. Insurance premiums
are allocated to individual PRC airlines by the CAAC based on the
value of the airlines aircraft and after taking into account the
claims history of the airlines.
(iv) Ticket reservation service charges represent fees payable to the
CAAC in respect of computer reservation services rendered by the
CAAC at charge rates determined based on the utilisation of the
computer reservation system.
(v) Passenger departure and cargo handling charges are payable to the
CAAC for use of the computerised passenger departure and cargo
handling systems installed at certain PRC airports. The charges are
levied based on the utilisation of these systems.
(vi) Aircraft and traffic service charges represent landing and take-off
fees payable to various PRC airports in respect of landing and
take-off slots allocated to the Airline Operations of Xinjiang
Airlines Group and other ancillary services provided. Fees are
payable by the Airline Operations of Xinjiang Airlines Group based
on the scale rates published by the CAAC.
(vii) Commission expense represents commissions payable to CAAC's sales
offices and other PRC airlines in connection with services provided
in exchange for air tickets sold by them. These commissions are
calculated based on a fixed rate ranging from 1.5% to 9% on the
ticket value as stipulated by the CAAC.
(viii) Interest expense represents the interest incurred on certain
unsecured loans from CSAHC. The applicable interest rates are in
accordance with the rates published by the People's Bank of China
(See Note 15).
(ix) Rentals were paid to CSAHC under lease arrangements for certain
land and buildings in the PRC. The rentals are determined based on
prevailing market rates.
(x) Air catering expenses represent purchases of in-flight meals and
related services from certain affiliates of CSAHC. Prices charged
by these suppliers to the Airline Operations of Xinjiang Airlines
Group are similar to those charged to other PRC airlines.
(xi) Repairing charges represent fees incurred by the Airline Operations
of Xinjiang Airlines Group in connection with aircraft repair and
maintenance services rendered by Guangzhou Aircraft Maintenance
Engineering Company Limited ("GAMECO"). GAMECO is a jointly
controlled entity of the Company.
(xii) Flight simulation service charges represent fees incurred by the
Airline Operations of Xinjiang Airlines Group in connection with
flight simulation services provided by Zhuhai Xiang Yi Aviation
Technology Company Limited, a jointly controlled entity of the
Company.
(xiii) Ground service income represents the fees receivable from certain
airlines controlled by the CAAC in respect of ground services
provided by the Airline Operations of Xinjiang Airlines Group in
Xinjiang International Airport.
- 148 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
20. RELATED PARTY TRANSACTIONS (Continued)
(xiv) Aircraft lease income represent rentals receivable in respect of
short term leasing of aircraft to certain PRC airlines controlled by
the CAAC.
(xv) Commission income represents commission receivable from certain PRC
airlines controlled by the CAAC in connection with air tickets sold
by the Airline Operations of Xinjiang Airlines Group for which the
carriage was provided by such airlines. Commission is calculated
based on a fixed rate ranging from 3% to 9% on the ticket value as
stipulated by the CAAC.
(xvi) Aircraft lease income represents rentals receivable from the Company
pursuant to a wet lease agreement in respect of a Boeing 757-200
aircraft. The wet lease rental was determined based on prevailing
market rates.
Details of loans borrowed from and/or guaranteed by CSAHC and loans
guaranteed by the CAAC and its affiliates are disclosed in Note 15.
Management of the Airline Operations of Xinjiang Airlines Group is of the
opinion that the above transactions with related parties were entered into in
the normal course of business and on normal commercial terms or in accordance
with the relevant government regulations governing such transactions.
21. RETIREMENT BENEFITS
Employees of the Airline Operations of Xinjiang Airlines Group participate
in several defined contribution retirement schemes organised separately by PRC
municipal governments in regions where the major operations of the Airline
Operations of Xinjiang Airlines Group are located. The Airline Operations of
Xinjiang Airlines Group is required to contribute to these schemes at rates
ranging from 14% to 20% 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 Airline Operations
of Xinjiang Airlines Group are assumed by these schemes. Contributions to the
retirement schemes made by the Airline Operations of Xinjiang Airlines Group
during the relevant period are as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
----------------------------------- ------------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Amounts of contributions 7,265 7,119 13,972 6,517 16,259
===== ===== ====== ===== ======
- 149 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
22. COMMITMENTS
(i) CAPITAL COMMITMENTS
The Airline Operations of Xinjiang Airlines Group had capital
commitments as follows:
31 DECEMBER, 30 JUNE,
------------------------------------ --------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Commitments in respect of aircraft
and related equipment:
- authorised and contracted for 310,787 - - -
------- ------- ------- --------
Other commitments:
- authorised and contracted for 8,981 10,307 21,050 11,703
- authorised but not contracted for 233,153 164,479 3,467 -
------- ------- ------- --------
242,134 174,786 24,517 11,703
------- ------- ------- --------
552,921 174,786 24,517 11,703
======= ======= ======= ========
(ii) OPERATING LEASE COMMITMENTS
The total future minimum lease payments payable by the Airline Operations
of Xinjiang Airlines Group under non-cancellable operating leases in respect of
aircraft and flight equipment are payable as follows:
31 DECEMBER, 30 JUNE,
-------------------------------------- -------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
Payments due
- within one year 220,398 225,424 212,165 156,730
- in the second to fifth year,
inclusive 648,616 523,568 390,821 324,699
- after the fifth year 222,599 122,297 41,901 14,898
--------- ------- ------- -------
1,091,613 871,289 644,887 496,327
========= ======= ======= =======
Leases for aircraft and flight equipment are generally run for an initial
period of between six and eight years. The rental payments for aircraft and
flight equipment are fixed during the lease period. None of the leases includes
contingent rentals.
- 150 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
23. CONCENTRATION OF RISKS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
LIQUIDITY RISK
The liquidity of the Airline Operations of Xinjiang Airlines Group
is primarily dependent on its ability to maintain adequate cash inflow
from operations to meet its debt obligations as they fall due and to
renew/refinance these debt obligations where necessary and, on its ability
to obtain adequate external loan finance to meet its committed future
capital expenditures. With the support of certain PRC banks and CSAHC, the
Airline Operations of Xinjiang Airlines Group was able to renew its short
term debts and refinance part of its long term debts during the relevant
period. With regards to the twelve-month period ending 30 June, 2005, the
Airline Operations of Xinjiang Airlines Group has planned to seek the
renewals of short term debts amounting to RMB205 million and refinance
part of the long term debts due in 2004 of RMB488 million through loan
finance to be obtained from certain PRC banks. Based on the recent
negotiations with the principal bankers of the Airline Operations of
Xinjiang Airlines Group, management believes that the planned loan
renewals and loan refinance will be available to the Airline Operations of
Xinjiang Airlines Group.
Management has carried out a detailed review of the cash flow
forecast of the Airline Operations of Xinjiang Airlines Group for the
twelve-month period ending 30 June, 2005. Based on the results of such
review, management has determined that adequate liquidity exists to
finance the working capital, debt repayment obligations and capital
expenditure requirements of the Airline Operations of Xinjiang Airlines
Group during the forecasted period. In preparing the cash flow forecast,
management has considered historical cash requirements of the Airline
Operations of Xinjiang Airlines Group as well as other key factors,
including the availability of the above-mentioned loan renewals and
refinance which may impact the operations of the Airline Operations of
Xinjiang Airlines Group during the next twelve-month period. Management is
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 realised.
BUSINESS AND ECONOMIC RISKS
The Airline Operations of Xinjiang Airlines Group conducts its
principal operations in the PRC and accordingly is subject to special
considerations and significant risk 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 airlines services industry.
INTEREST RATE RISK
The Airline Operations of Xinjiang Airlines Group has significant
exposure to interest rate fluctuation as a significant portion of its
loans are interest bearing at floating rates. Fluctuation in interest
rates affects the results of the Airline Operations of Xinjiang Airlines
Group significantly because the Airline Operations of Xinjiang Airlines
Group is not able to hedge its interest rate exposure effectively. The
interest rates and maturity information of the bank and other loans of the
Airline Operations of Xinjiang Airlines Group are disclosed in Note 15.
FOREIGN CURRENCY RISK
The Airline Operations of Xinjiang Airlines Group has significant
exposure to foreign currency as significant portion of its bank loans are
denominated in foreign currencies, principally US dollars. Depreciation or
appreciation of the Renminbi against foreign currencies affects the
results of the Airline Operations of Xinjiang Airlines significantly
because the foreign currency payments of the Airline Operations of
Xinjiang Airlines Group significantly exceed its foreign currency
receipts. The Airline Operations of Xinjiang Airlines 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, by entering into forward foreign exchange
contracts with authorised PRC banks.
- 151 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
23. CONCENTRATION OF RISKS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
CREDIT RISKS
Substantially all of the cash and cash equivalents of the Airline
Operations of Xinjiang Airlines Group are deposited with PRC financial
institutions.
Prior to 2003, a significant portion of the air tickets of the
Airline Operations of Xinjiang Airlines Group were sold by agents
participating in the Billing and Settlement Plan ("BSP"), a clearing
scheme between airlines and sales agents organised by International Air
Transportation Association. As at 31 December, 2001 and 2002, the balance
due from BSP agents amounted to approximately RMB74 million and RMB32
million respectively.
Beginning in 2003, a significant portion of the air tickets of the
Airline Operations of Xinjiang Airlines Group are sold through the sale
network of the Company and flight revenue uplifted by the Airline
Operations of Xinjiang Airlines Group is billed and collected from the
Company. As at 31 December, 2003 and 30 June, 2004, the receivable due
from the Company amounted to approximately RMB38 million and RMB1 million
respectively.
SELF INSURANCE RISK
The Airline Operations of Xinjiang Airlines Group maintains a
limited amount of property insurance in respect of certain personal and
real property.
FAIR VALUE
Financial assets of the Airline Operations of Xinjiang Airlines
Group include cash and cash equivalents, other investments, trade
receivables, and other receivables and prepaid expenses. Financial
liabilities of the Airline Operations of Xinjiang Airlines Group include
bank and other loans, accounts payable and other payables. The Airline
Operations of Xinjiang Airlines Group did not hold nor issue any financial
instruments for trading purposes during the relevant period. The Airline
Operations of Xinjiang Airlines Group did not have any positions in
derivative contracts as at 31 December, 2001, 2002 and 2003 and 30 June,
2004.
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of IAS 32
"Financial Instruments: Disclosure and Presentation" and IAS 39 "Financial
Instruments: Recognition and Measurement". Fair value estimates, methods
and assumptions, set forth below for the financial instruments of the
Airline Operations of Xinjiang Airlines Group are made solely to comply
with the requirements of IAS 32 and IAS 39, and should be read in
conjunction with the Financial Information. The estimated fair value
amounts have been determined by the Airline Operations of Xinjiang
Airlines Group using market information and valuation methodologies
considered appropriate. However, considerable judgement is required to
interpret market data to develop the estimates of fair values.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts the Airline Operations of Xinjiang Airlines Group could
realise in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
- 152 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
23. CONCENTRATION OF RISKS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
FAIR VALUE (Continued)
The following summarise the major methods and assumptions used in
estimating the fair values of the financial instruments of the Airline
Operations of Xinjiang Airlines Group.
Long term debts
The fair values of long term debts are estimated by discounting
future cash flows using current market interest rates offered to the
Airline Operations of Xinjiang Airlines Group for debts with substantially
the same characteristics and maturities. As at 31 December, 2001, 2002 and
2003 and 30 June, 2004, the carrying amounts and fair values of the long
term debts of the Airline Operations of Xinjiang Airlines Group are as
follows:
31 DECEMBER, 30 JUNE,
---------------------------------------------------------------------- ----------------------
2001 2002 2003 2004
CARRYING FAIR CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Long term debts 2,677,999 2,847,219 2,261,657 2,365,801 2,109,261 2,130,199 1,979,931 1,998,721
========= ========= ========= ========= ========= ========= ========= =========
Other investments
Other investments are unlisted equity interests and there are no
quoted market prices for such interests in the PRC. Accordingly, a
reasonable estimate of fair value could not be made without incurring
excessive costs.
Other financial instruments
The fair values of all other financial instruments approximate their
carrying amounts due to the nature or short term maturity of these
instruments.
24. SUBSIDIARIES
The particulars of principal subsidiaries of the Airline Operations of
Xinjiang Airlines as at 30 June, 2004 are as follows:
ATTRIBUTABLE
PLACE AND DATE OF EQUITY INTEREST
ESTABLISHMENT/ ----------------- ISSUED/REGISTERED PRINCIPAL
NAME OF COMPANY OPERATION DIRECT INDIRECT CAPITAL ACTIVITIES
% %
Xinjiang Aviation Ground PRC 60 - RMB 15,000,000 Ground services
Services Co., Ltd. 27 May, 2002
Xinjiang Civil Aviation PRC 51.8 - RMB 185,043,676 Utility services
Property Management 12 December, 2002
Limited
- 153 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
25. RECONCILIATION AND SUPPLEMENTARY COMBINED STATEMENTS OF CASH FLOWS
INFORMATION
(i) Reconciliation of profit/(loss) before income tax and minority
interests to cash flows from operating activities is as follows:
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
----------------------------------- ------------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
Profit/(loss) before
income tax and
minority interests 76,731 11,778 (480,867) (290,456) (69,755)
Depreciation and
amortisation 314,991 352,150 346,304 166,247 173,177
Impairment loss on
aircraft and other
flight equipment - 131,710 - - -
Provision for
obsolescence of
inventories - 12,007 - - -
Deficit on revaluation of
property, plant and
equipment - - 234,835 - -
Loss on disposal of
property, plant and
equipment 8,581 2,219 7,943 3,893 800
Interest income (2,530) (1,347) (1,776) (347) (746)
Interest expense 189,165 184,018 201,415 81,352 69,417
(Increase)/decrease in
inventories (14,445) 1,054 825 4,683 (12,080)
Decrease/(increase) in
trade receivables 60,588 (20,989) 87,335 81,137 (28,924)
Decrease/(increase) in
other receivables and
prepaid expenses 23,318 (51,603) 36,973 25,960 (39,061)
Increase in accounts
payable 23,372 20,960 1,384 15,188 34,651
Decrease in sales in
advance of carriage (5,612) (17,459) (16,220) (13,417) (3,268)
(Decrease)/increase in
other liabilities and
accrued expenses (187,570) 121,537 78,789 24,287 7,968
Increase/(decrease) in
provision for major
overhauls 61,499 10,886 21,133 8,935 (408)
-------- -------- -------- ------- -------
Cash generated from
operations 548,088 756,921 518,073 107,462 131,771
Interest received 2,530 1,347 1,776 347 746
Interest paid (185,925) (194,304) (211,701) (83,200) (60,988)
Income tax paid (38,483) (3,000) (12,410) (910) (1,857)
-------- -------- -------- ------- -------
Cash flows from
operating activities 326,210 560,964 295,738 23,699 69,672
======== ======== ======== ======= =======
- 154 -
APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AIRLINE
OPERATIONS OF XINJIANG AIRLINES GROUP
(V) NOTES TO THE FINANCIAL INFORMATION (CONTINUED)
25. RECONCILIATION AND SUPPLEMENTARY COMBINED STATEMENTS OF CASH FLOWS
INFORMATION (Continued)
(ii) DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
As disclosed in Note 2, in connection with the Reorganisation and
the Acquisition, certain assets that were not to be acquired by the
Company but were historically associated with the Airline Operations of
Xinjiang Airlines Group, were distributed to the owner of Xinjiang
Airlines. The assets distributed to owner of Xinjiang Airlines amounted to
approximately RMB48 million.
26. ULTIMATE HOLDING COMPANY
Management of the Airline Operations of Xinjiang Airlines consider the
ultimate holding company to be CSAHC, a state-owned enterprise established in
the PRC.
(VI) SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements have been prepared by the Airline
Operations of Xinjiang Airlines Group in respect of any period subsequent to 30
June, 2004.
Yours faithfully,
KPMG
Certified Public Accountants
Hong Kong
- 155 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
A. SUMMARY OF FINANCIAL STATEMENTS
The following consolidated balance sheets of China Southern Airlines
Company Limited ( "the Company") as at 31 December, 2001, 2002 and 2003 and the
consolidated statements of operations, consolidated statements of changes in
shareholders' equity and consolidated cash flow statements for each of the years
in the three-year period ended 31 December, 2003 are derived from the audited
financial statements of the Company prepared under IFRS. All such financial
information should be read in conjunction with the audited consolidated
financial statements and accompanying notes, which are included in the Company's
annual reports. The audited financial statements of the Company for the year
ended 31 December, 2003, as extracted from the Company's 2003 annual report, are
set out in Part B of this Appendix.
In addition, the following consolidated balance sheet of the Company as at
30 June, 2004 and the consolidated statements of operations, consolidated
statements of changes in shareholders' equity and the condensed consolidated
cash flow statements for the six-month periods ended 30 June, 2003 and 2004 are
derived from the unaudited interim financial reports of the Listed Group
prepared under IFRS. All such financial information should be read in
conjunction with the unaudited interim financial reports and accompanying notes,
which are included in the Company's interim reports. The unaudited interim
financial report of the Company for the six-month period ended 30 June, 2004, as
extracted from the Company's 2004 interim report, are set out in Part C of this
Appendix.
CONSOLIDATED BALANCE SHEETS
31 DECEMBER, 30 JUNE,
------------------------------------------- ----------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
NON-CURRENT ASSETS
Fixed assets 22,352,215 26,920,829 28,535,907 29,128,791
Construction in progress 340,063 661,352 1,629,689 2,189,052
Lease prepayments 357,622 201,854 348,652 344,755
Interest in associated companies 531,055 692,026 422,201 443,780
Interest in jointly controlled
entities 174,338 461,962 731,323 787,874
Other investments 195,201 201,854 204,971 199,007
Lease and equipment deposits 2,265,003 2,147,038 2,932,591 4,717,553
Deferred expenditure 48,183 283,303 248,853 233,726
Long term receivables 11,091 12,034 6,380 6,648
---------- ---------- ---------- ----------
TOTAL NON-CURRENT ASSETS 26,274,771 31,582,252 35,060,567 38,051,186
---------- ---------- ---------- ----------
CURRENT ASSETS
Inventories 467,018 545,700 543,777 572,457
Trade receivables 556,542 671,776 833,604 1,210,680
Other receivables 196,751 372,586 296,047 310,365
Prepaid expenses and other assets 340,157 244,690 247,926 323,947
Cash and cash equivalents 2,817,863 3,771,043 2,080,174 2,931,786
---------- ---------- ---------- ----------
TOTAL CURRENT ASSETS 4,378,331 5,605,795 4,001,528 5,349,235
---------- ---------- ---------- ----------
- 156 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
CONSOLIDATED BALANCE SHEETS (CONTINUED)
31 DECEMBER, 30 JUNE,
------------------------------------------ -----------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
CURRENT LIABILITIES
Bank and other loans 2,177,516 5,240,726 7,096,846 9,931,236
Obligations under finance leases 1,451,929 1,566,698 1,297,855 1,138,495
Amounts due to related companies 718,265 525,090 929,003 906,353
Other liabilities 678,133 646,989 1,019,811 1,176,852
Accounts payable 590,700 532,480 928,093 841,409
Bills payable - 1,299,680 438,135 -
Sales in advance of carriage 370,546 390,531 466,087 386,255
Accrued expenses 2,013,555 2,341,454 2,527,794 3,217,955
Tax payable 73,464 78,145 89,954 72,954
---------- ---------- ----------- -----------
TOTAL CURRENT LIABILITIES 8,074,108 12,621,793 14,793,578 17,671,509
---------- ---------- ----------- -----------
NET CURRENT LIABILITIES (3,695,777) (7,015,998) (10,792,050) (12,322,274)
---------- ---------- ----------- -----------
TOTAL ASSETS LESS CURRENT
LIABILITIES 22,578,994 24,566,254 24,268,517 25,728,912
---------- ---------- ----------- -----------
NON-CURRENT LIABILITIES AND
DEFERRED ITEMS
Bank and other loans 3,627,594 5,835,434 4,521,735 6,062,819
Obligations under finance leases 7,691,634 6,631,751 5,543,084 5,006,135
Provision for major overhauls 125,661 141,887 189,464 230,525
Deferred credits 15,072 48,095 46,554 44,983
Deferred taxation 519,577 779,234 398,305 456,354
---------- ---------- ----------- -----------
TOTAL NON-CURRENT LIABILITIES AND
DEFERRED ITEMS 11,979,538 13,436,401 10,699,142 11,800,816
---------- ---------- ----------- -----------
10,599,456 11,129,853 13,569,375 13,928,096
========== ========== =========== ===========
REPRESENTING:
SHARE CAPITAL 3,374,178 3,374,178 4,374,178 4,374,178
RESERVES 5,847,485 6,239,029 7,521,529 7,787,713
---------- ---------- ----------- -----------
SHAREHOLDERS' EQUITY 9,221,663 9,613,207 11,895,707 12,161,891
MINORITY INTERESTS 1,377,793 1,516,646 1,673,668 1,766,205
---------- ---------- ----------- -----------
10,599,456 11,129,853 13,569,375 13,928,096
========== ========== =========== ===========
- 157 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
---------------------------------------- -----------------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited) (unaudited)
OPERATING REVENUE
Traffic revenue 16,461,532 17,481,892 16,964,800 6,537,679 10,834,278
Other revenue 418,126 536,728 505,323 195,193 259,659
---------- ---------- ---------- ---------- ----------
TOTAL OPERATING REVENUE 16,879,658 18,018,620 17,470,123 6,732,872 11,093,937
---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Flight operations 6,905,628 6,732,543 7,070,031 3,516,885 4,722,442
Maintenance 2,014,579 2,333,419 2,588,613 1,218,488 1,409,841
Aircraft and traffic
servicing 2,297,521 2,511,284 2,767,488 1,197,273 1,688,612
Promotion and sales 1,540,780 1,499,587 1,480,168 673,965 874,393
General and
administrative 892,233 1,060,010 1,053,319 480,598 551,719
Depreciation and
amortisation 1,814,974 1,839,871 2,037,971 1,016,530 1,083,346
Others 13,270 15,829 16,804 3,465 8,244
---------- ---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 15,478,985 15,992,543 17,014,394 8,107,204 10,338,597
========== ========== ========== ========== ==========
OPERATING PROFIT/(LOSS) 1,400,673 2,026,077 455,729 (1,374,332) 755,340
---------- ---------- ---------- ---------- ----------
NON-OPERATING
INCOME/(EXPENSES)
Interest income 49,878 52,618 13,061 5,842 8,994
Interest expense (933,717) (959,193) (823,725) (455,456) (343,620)
Exchange gain/(loss),
net 296,777 (175,451) (164,443) (4,774) 15,397
Share of associated
companies' results 53,077 36,988 47,798 2,825 21,156
Share of jointly
controlled entities'
results (4,034) (3,352) (39,495) (21,654) 4,351
(Loss)/gain on sale of
fixed assets (55,889) 170,740 (22,217) (22,679) 2,999
Others, net (11,509) (9,328) 21,682 (287) 4,531
---------- ---------- ---------- ---------- ----------
TOTAL NET NON-OPERATING
EXPENSES (605,417) (886,978) (967,339) (496,183) (286,192)
========== ========== ========== ========== ==========
- 158 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------------------- ----------------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
PROFIT/(LOSS) BEFORE
TAXATION AND MINORITY
INTERESTS 795,256 1,139,099 (511,610) (1,870,515) 469,148
TAXATION (EXPENSE)/
CREDIT (320,519) (398,227) 324,277 544,992 (94,790)
-------- --------- --------- ---------- --------
PROFIT/(LOSS) BEFORE
MINORITY INTERESTS 474,737 740,872 (187,333) (1,325,523) 374,358
MINORITY INTERESTS (134,512) (165,111) (170,934) 93,910 (108,174)
-------- --------- --------- ---------- --------
PROFIT/(LOSS) ATTRIBUTABLE
TO SHAREHOLDERS 340,225 575,761 (358,267) (1,231,613) 266,184
======== ========= ========= ========== ========
BASIC EARNINGS/(LOSSES)
PER SHARE RMB0.10 RMB0.17 RMB(0.09) RMB(0.37) RMB0.06
======== ========= ========= ========== ========
- 159 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SHARE SHARE OTHER RETAINED
CAPITAL PREMIUM RESERVES EARNINGS TOTAL
--------- --------- -------- --------- ----------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
At 1 January, 2001 3,374,178 3,813,659 664,945 1,028,656 8,881,438
Profit for the year - - - 340,225 340,225
Appropriations to reserves - - 22,229 (22,229) -
--------- --------- -------- --------- ----------
At 31 December, 2001 3,374,178 3,813,659 687,174 1,346,652 9,221,663
========= ========= ======== ========= ==========
At 1 January, 2002 3,374,178 3,813,659 687,174 1,346,652 9,221,663
Land use rights adjustment - (129,703) - 12,970 (116,733)
Adjustments from adoption
of new PRC accounting
regulations - - (185,540) 185,540 -
Dividends paid - - - (67,484) (67,484)
Profit for the year - - - 575,761 575,761
Appropriations to reserves - - 83,738 (83,738) -
--------- --------- -------- --------- ----------
At 31 December, 2002 3,374,178 3,683,956 585,372 1,969,701 9,613,207
========= ========= ======== ========= ==========
At 1 January, 2003 3,374,178 3,683,956 585,372 1,969,701 9,613,207
Issue of A shares 1,000,000 1,640,767 - - 2,640,767
Loss for the year - - - (358,267) (358,267)
Appropriations to reserves - - 24,969 (24,969) -
--------- --------- -------- --------- ----------
At 31 December, 2003 4,374,178 5,324,723 610,341 1,586,465 11,895,707
========= ========= ======== ========= ==========
At 1 January, 2004 4,374,178 5,324,723 610,341 1,586,465 11,895,707
Profit for the period
(unaudited) - - - 266,184 266,184
--------- --------- -------- --------- ----------
At 30 June, 2004
(unaudited) 4,374,178 5,324,723 610,341 1,852,649 12,161,891
========= ========= ======== ========= ==========
- 160 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
CONSOLIDATED CASH FLOW STATEMENTS
YEARS ENDED 31 DECEMBER,
---------------------------------------------
2001 2002 2003
Note RMB'000 RMB'000 RMB'000
---------- ---------- ----------
NET CASH FROM OPERATING ACTIVITIES (a) 2,223,943 3,697,544 2,128,749
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 605,385 825,197 57,077
Proceeds from sale of investments - 68 -
Dividends received from associated
companies 5,946 3,093 -
(Increase)/decrease in long term
receivables (345) (943) 5,654
Payment of lease and equipment deposits (2,027,063) (1,999,233) (1,851,726)
Refund of lease and equipment deposits 200,029 2,117,386 1,066,086
Capital expenditures (1,492,126) (6,351,030) (4,706,740)
Purchase of investments in equity
securities (1,241) (6,721) (1,065)
Investment in associated company (147,875) (136,500) -
Investments in jointly controlled entities (178,372) (295,670) (2,999)
Governmental subsidy for safety related
capital expenditures - 40,240 -
Effect of acquisition of subsidiaries (c) - (90,491) -
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (3,035,662) (5,894,604) (5,433,713)
========== ========== ==========
NET CASH OUTFLOWS BEFORE FINANCING
ACTIVITIES (811,719) (2,197,060) (3,304,964)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from A share issue, net of
issuance costs - - 2,640,767
Proceeds from bank and other loans 2,123,613 6,996,780 8,913,992
Repayment of bank and other loans (890,228) (2,194,630) (8,371,362)
Repayment of principal under finance
lease obligations (1,756,098) (1,546,185) (1,555,390)
Capital contributions received from
minority shareholders 707 10,625 1,050
Dividends paid to shareholders - (67,484) -
Dividends paid to minority shareholders (45,867) (48,866) (14,962)
---------- ---------- ----------
NET CASH (OUTFLOWS)/INFLOWS FROM
FINANCING ACTIVITIES (567,873) 3,150,240 1,614,095
========== ========== ==========
(DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS (1,379,592) 953,180 (1,690,869)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 4,197,455 2,817,863 3,771,043
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR 2,817,863 3,771,043 2,080,174
========== ========== ==========
- 161 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
RECONCILIATION AND SUPPLEMENTARY STATEMENTS OF CASH FLOWS INFORMATION
(a) The reconciliation of profit/(loss) before taxation and minority
interests to net cash from operations is as follows:
YEARS ENDED 31 DECEMBER,
-------------------------------------------
2001 2002 2003
RMB'000 RMB'000 RMB'000
Profit/(loss) before taxation and
minority interests 795,256 1,139,099 (511,610)
Depreciation and amortisation of fixed
assets 1,802,462 1,839,293 1,997,882
Other amortisation 12,512 9,816 40,089
Amortisation of deferred credits (18,483) (7,217) (1,541)
Share of associated companies' results (53,077) (36,988) (47,798)
Share of jointly controlled entities'
results 4,034 3,352 39,495
Loss/(gain) on sale of fixed assets 55,889 (170,740) 22,217
Interest income (49,878) (52,618) (13,061)
Interest expense 933,717 959,193 823,725
Unrealised exchange (gain)/loss, net (292,630) 174,978 177,356
(Increase)/decrease in inventories (2,033) (76,472) 1,923
Decrease/(increase) in trade receivables 232,228 (110,749) (161,828)
Decrease/(increase) in other receivables 42,938 (166,004) 76,539
(Increase)/decrease in prepaid expenses
and other assets (136,600) 123,924 (6,045)
Increase/(decrease) in amounts due to
related companies 98,040 (193,175) 403,913
(Decrease)/increase in accounts payable (167,599) (61,843) 395,613
Increase/(decrease) in bills payable - 1,299,680 (861,545)
Increase in sales in advance of carriage 31,036 19,985 75,556
(Decrease)/increase in accrued expenses (132,121) 86,215 203,439
Increase/(decrease) in other liabilities 70,254 (33,032) 372,822
(Decrease)/increase in provision for
major overhauls (40,422) 16,226 47,577
--------- ---------- ---------
Cash generated from operations 3,185,523 4,762,923 3,074,718
Interest received 49,878 52,618 13,061
Interest paid (970,734) (1,051,027) (923,901)
Income tax paid (40,724) (66,970) (35,129)
--------- ---------- ---------
Net cash from operating activities 2,223,943 3,697,544 2,128,749
========= ========== =========
(b) DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During 2002, the Listed Group assumed from Zhongyuan Airlines debts
totalling RMB964,736,000 in partial satisfaction of the consideration payable
for acquisition of five Boeing 737-300/37K aircraft and other assets from
Zhongyuan Airlines.
- 162 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
(c) EFFECT OF ACQUISITION OF SUBSIDIARIES
YEARS ENDED 31 DECEMBER,
-------------------------------------------
2001 2002 2003
RMB'000 RMB'000 RMB'000
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 -
------- ------- -------
Net assets value - 119,829 -
======= ======= =======
Consideration paid - 107,846 -
Cash and cash equivalents acquired - 17,355 -
------- ------- -------
Net cash outflow from acquisition
of subsidiaries - 90,491 -
======= ======= =======
- 163 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
SIX-MONTH PERIODS ENDED
30 JUNE,
-----------------------------
2003 2004
RMB'000 RMB'000
(unaudited) (unaudited)
Net cash from operating activities 1,199,731 1,217,840
Net cash used in investing activities (1,886,023) (4,050,525)
---------- ----------
Net cash outflows before financing activities (686,292) (2,832,685)
Net cash (outflows)/inflows from financing activities (803,404) 3,684,297
---------- ----------
(Decrease)/increase in cash and cash equivalents (1,489,696) 851,612
Cash and cash equivalents as at 1 January, 3,771,043 2,080,174
---------- ----------
Cash and cash equivalents as at 30 June, 2,281,347 2,931,786
========== ==========
- 164 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
B. FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEAR ENDED 31 DECEMBER, 2003
CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the year ended 31 December, 2003
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2003 2002
Note RMB'000 RMB'000
---- ---------- ----------
Operating revenue:
Traffic revenue 16,964,800 17,481,892
Other revenue 505,323 536,728
---------- ----------
Total operating revenue 3 17,470,123 18,018,620
---------- ----------
Operating expenses:
Flight operations 7,070,031 6,732,543
Maintenance 2,588,613 2,333,419
Aircraft and traffic servicing 2,767,488 2,511,284
Promotion and sales 1,480,168 1,499,587
General and administrative 1,053,319 1,060,010
Depreciation and amortisation 2,037,971 1,839,871
Other 16,804 15,829
---------- ----------
Total operating expenses 4 17,014,394 15,992,543
---------- ----------
Operating profit 455,729 2,026,077
---------- ----------
Non-operating income/(expenses):
Share of associated companies' results 47,798 36,988
Share of jointly controlled entities' results 14 (39,495) (3,352)
(Loss)/gain on sale of fixed assets 5 (22,217) 170,740
Interest income 13,061 52,618
Interest expense 4 (823,725) (959,193)
Exchange loss, net (164,443) (175,451)
Other, net 21,682 (9,328)
---------- ----------
Total net non-operating expenses (967,339) (886,978)
---------- ----------
(Loss)/profit before taxation and minority interests 4 (511,610) 1,139,099
Taxation credit/(expense) 7 324,277 (398,227)
---------- ----------
(Loss)/profit before minority interests (187,333) 740,872
Minority interests (170,934) (165,111)
---------- ----------
(Loss)/profit attributable to shareholders (358,267) 575,761
========== ==========
Basic (loss)/earnings per share 9 RMB(0.09) RMB0.17
========== ==========
The notes on pages 172 to 223 form part of these financial statements.
- 165 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
CONSOLIDATED BALANCE SHEET
As at 31 December, 2003
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2003 2002
Note RMB'000 RMB'000
---- ----------- ----------
NON-CURRENT ASSETS
Fixed assets 10 28,535,907 26,920,829
Construction in progress 11 1,629,689 661,352
Lease prepayments 348,652 201,854
Interest in associated companies 13 422,201 692,026
Interest in jointly controlled companies 14 731,323 461,962
Other investments 204,971 201,854
Lease and equipment deposits 2,932,591 2,147,038
Deferred expenditure 15 248,853 283,303
Long-term receivables 6,380 12,034
----------- ----------
35,060,567 31,582,252
----------- ----------
CURRENT ASSETS
Inventories 17 543,777 545,700
Trade receivables 18 833,604 671,776
Other receivables 296,047 372,586
Prepaid expenses and other assets 247,926 244,690
Cash and cash equivalents 20 2,080,174 3,771,043
----------- ----------
4,001,528 5,605,795
----------- ----------
CURRENT LIABILITIES
Bank and other loans 21 7,096,846 5,240,726
Obligations under finance leases 22 1,297,855 1,566,698
Amounts due to related companies 19 929,003 525,090
Other liabilities 1,019,811 646,989
Accounts payable 23 928,093 532,480
Bills payable 438,135 1,299,680
Sales in advance of carriage 466,087 390,531
Accrued expenses 2,527,794 2,341,454
Taxes payable 89,954 78,145
----------- ----------
14,793,578 12,621,793
----------- ----------
NET CURRENT LIABILITIES (10,792,050) (7,015,998)
----------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 24,268,517 24,566,254
----------- ----------
The notes on pages 172 to 223 form part of these financial statements.
- 166 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
CONSOLIDATED BALANCE SHEET (Cont'd)
As at 31 December, 2003
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2003 2002
Note RMB'000 RMB'000
---- ---------- -----------
LONG TERM LIABILITIES AND DEFERRED ITEMS
Bank and other loans 21 4,521,735 5,835,434
Obligations under finance leases 22 5,543,084 6,631,751
Provision for major overhauls 24 189,464 141,887
Deferred credits 46,554 48,095
Deferred taxation 16 398,305 779,234
---------- ----------
10,699,142 13,436,401
---------- ----------
13,569,375 11,129,853
========== ==========
REPRESENTING:
SHARE CAPITAL 25 4,374,178 3,374,178
RESERVES 26 7,521,529 6,239,029
---------- ----------
SHAREHOLDERS' EQUITY 11,895,707 9,613,207
MINORITY INTERESTS 1,673,668 1,516,646
---------- ----------
13,569,375 11,129,853
========== ==========
Approved and authorised for issue by the board of directors on 23 April, 2004
YAN ZHI QING WANG CHANG SHUN XU JIE BO
Director Director Director
The notes on pages 172 to 223 form part of these financial statements.
- 167 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
BALANCE SHEET
As at 31 December, 2003
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2003 2002
Note RMB'000 RMB'000
---- ---------- -----------
NON-CURRENT ASSETS
Fixed assets 10 22,610,251 19,530,908
Construction in progress 11 1,532,462 615,511
Lease prepayments 116,276 15,502
Interest in subsidiaries 12 1,445,831 1,406,010
Interest in associated companies 13 287,235 367,573
Interest in jointly controlled entities 14 563,736 474,042
Other investments 106,548 106,009
Lease and equipment deposits 2,228,754 2,065,192
Deferred expenditure 15 240,514 272,636
---------- -----------
29,131,607 24,853,383
---------- -----------
CURRENT ASSETS
Inventories 17 213,219 118,134
Trade receivables 18 683,206 464,930
Other receivables 222,438 239,601
Prepaid expenses and other assets 181,856 141,591
Cash and cash equivalents 20 1,404,874 2,960,337
---------- -----------
2,705,593 3,924,593
---------- -----------
CURRENT LIABILITIES
Bank and other loans 21 5,958,968 3,479,322
Obligations under finance leases 22 1,297,855 1,566,698
Amounts due to related companies 19 870,682 358,077
Other liabilities 854,057 411,218
Accounts payable 23 745,888 296,989
Bills payable 438,135 1,299,680
Sales in advance of carriage 405,851 340,457
Accrued expenses 1,628,072 1,049,806
Tax payable 48,142 48,143
---------- -----------
12,247,650 8,850,390
---------- -----------
NET CURRENT LIABILITIES (9,542,057) (4,925,797)
---------- -----------
TOTAL ASSETS LESS CURRENT LIABILITIES 19,589,550 19,927,586
---------- -----------
The notes on pages 172 to 223 form part of these financial statements.
- 168 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
BALANCE SHEET (Cont'd)
As at 31 December, 2003
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2003 2002
Note RMB'000 RMB'000
---- ---------- -----------
NON-CURRENT LIABILITIES AND DEFERRED ITEMS
Bank and other loans 21 3,670,499 4,628,372
Obligations under finance leases 22 5,543,084 6,631,751
Provision for major overhauls 24 130,992 63,389
Deferred credits 6,317 7,855
Deferred taxation 16 89,708 507,077
---------- ----------
9,440,600 11,838,444
---------- ----------
NET ASSETS 10,148,950 8,089,142
========== ==========
REPRESENTING:
SHARE CAPITAL 25 4,374,178 3,374,178
RESERVES 26 5,774,772 4,714,964
---------- ----------
SHAREHOLDERS' EQUITY 10,148,950 8,089,142
========== ==========
Approved and authorised for issue by the board of directors on 23 April, 2004
YAN ZHI QING WANG CHANG SHUN XU JIE BO
Director Director Director
The notes on pages 172 to 223 form part of these financial statements.
- 169 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the year ended 31 December, 2003
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
SHARE SHARE OTHER RETAINED
CAPITAL PREMIUM RESERVES EARNINGS TOTAL
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
--------- --------- -------- --------- ----------
At 1 January, 2002 3,374,178 3,813,659 687,174 1,346,652 9,221,663
Land use rights adjustment
(Note 26 (f)) - (129,703) - 12,970 (116,733)
Adjustments from adoption
of new PRC accounting
regulations (Note 26 (c)) - - (185,540) 185,540 -
Dividend paid (Note 8) (67,484) (67,484)
Profit for the year - - - 575,761 575,761
Appropriations to reserves - - 83,738 (83,738) -
--------- --------- -------- --------- ----------
At 31 December, 2002 3,374,178 3,683,956 585,372 1,969,701 9,613,207
========= ========= ======== ========= ==========
At 1 January, 2003 3,374,178 3,683,956 585,372 1,969,701 9,613,207
Issue of A shares (Note 25) 1,000,000 1,640,767 - - 2,640,767
Loss for the year - - - (358,267) (358,267)
Appropriations to reserves - - 24,969 (24,969) -
--------- --------- -------- --------- ----------
At 31 December, 2003 4,374,178 5,324,723 610,341 1,586,465 11,895,707
========= ========= ======== ========= ==========
The notes on pages 172 to 223 form part of these financial statements.
- 170 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER, 2003
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
2003 2002
Note RMB'000 RMB'000
------ ---------- ----------
Cash inflows from operations 33 (a) 3,074,718 4,762,923
Interest received 13,061 52,618
Interest paid (923,901) (1,051,027)
Income tax paid (35,129) (66,970)
---------- ----------
Net cash inflows from operating activities 2,128,749 3,697,544
---------- ----------
Investing activities:
Proceeds from sale of fixed assets 57,077 825,197
Proceeds from sale of investments - 68
Dividends received from associated companies - 3,093
Decrease/(increase) in long term receivables 5,654 (943)
Payment of lease and equipment deposits (1,851,726) (1,999,233)
Refund of lease and equipment deposits 1,066,086 2,117,386
Capital expenditures (4,706,740) (6,351,030)
Purchase of investments in equity securities (1,065) (6,721)
Investment in associated company - (136,500)
Investments in jointly controlled entities (2,999) (295,670)
Governmental subsidy for safety related
capital expenditures - 40,240
Effect of acquisition of subsidiaries 33 (c) - (90,491)
---------- ----------
Net cash used in investing activities (5,433,713) (5,894,604)
---------- ----------
Net cash outflows before financing activities (3,304,964) (2,197,060)
---------- ----------
Financing activities:
Proceeds from A share issue, net of issuance costs 2,640,767 -
Proceeds from bank and other loans 8,913,992 6,996,780
Repayment of bank and other loans (8,371,362) (2,194,630)
Repayment of principal under finance lease obligations (1,555,390) (1,546,185)
Capital contribution received from minority shareholders 1,050 10,625
Dividends paid to shareholders - (67,484)
Dividends paid to minority shareholders (14,962) (48,866)
---------- ----------
Net cash inflows from financing activities 1,614,095 3,150,240
---------- ----------
(Decrease)/Increase in cash and cash equivalents (1,690,869) 953,180
Cash and cash equivalents at beginning of year 3,771,043 2,817,863
---------- ----------
Cash and cash equivalents at end of year 2,080,174 3,771,043
========== ==========
The notes on pages 172 to 223 form part of these financial statements.
- 171 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
1 BACKGROUND OF THE COMPANY
China Southern Airlines Company Limited (the "Company") and its subsidiary
companies (collectively the "Group") are principally engaged in the
provision of domestic, Hong Kong regional and international passenger,
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 25 March, 1995 as a joint stock limited company
as part of the reorganisation (the "Reorganisation") of the Company's
holding company, China Southern Air Holding Company ("CSAHC"). 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. In
July 2003, the Company issued 1,000,000,000 A shares which are listed on
the Shanghai Stock Exchange.
2 PRINCIPAL ACCOUNTING POLICIES
(a) STATEMENT OF COMPLIANCE
The financial statements of the Group and the Company have been
prepared in accordance with International Financial Reporting
Standards ("IFRS") promulgated by the International Accounting
Standards Board and the disclosure requirements of the Hong Kong
Companies Ordinance. IFRS includes International Accounting
Standards ("IAS") and related interpretations.
(b) BASIS OF PREPARATION
The financial statements of the Group and the Company are prepared
on the historical cost basis as modified by the revaluation of
certain fixed assets. The accounting policies have been consistently
applied by the Group and the Company and are consistent with those
used in the previous year.
(c) BASIS OF CONSOLIDATION
The consolidated financial statements of the Group include the
financial statements of the Company and all of its subsidiaries made
up to 31 December 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.
- 172 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
2 PRINCIPAL ACCOUNTING POLICIES (cont'd)
(c) BASIS OF CONSOLIDATION (cont'd)
The results of subsidiaries are included in the consolidated profit
and loss account and the share attributable to minority shareholders
is deducted from or added to the consolidated profit 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 recognised initially at cost, less
attributable transaction costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortised cost with any
difference between cost and redemption value being recognised in the
profit and loss account over the period of the borrowings on an
effective interest basis.
(e) INVESTMENTS
(i) Investments in subsidiaries
Investments in subsidiaries in the Company's balance sheet are
stated at cost less impairment losses (refer to accounting
policy n).
(ii) Investments in associated companies and jointly controlled
entities
An associated company is an entity in which the Group or the
Company 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 which operates under
a contractual agreement between the Group or the Company and
other parties, where the contractual agreement establishes the
Group or the Company and one or more of the other parties
share joint control over the economic activity of the entity.
The consolidated profit and loss account includes the Group's
share of the results of its associated companies and jointly
controlled entities for the year. In the consolidated balance
sheet, the investments in associated 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 associated 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 associated company or jointly controlled entity.
- 173 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
2 PRINCIPAL ACCOUNTING POLICIES (cont'd)
(e) INVESTMENTS (cont'd)
The results of associated companies and jointly controlled
entities are included in the Company's profit and loss account
to the extent of dividends received and receivable, providing
such dividends are in respect of a period ending on or before
that of the Company and the Company's right to receive the
dividend is established before 31 December each year. In the
Company's balance sheet, investments in associated companies
and jointly controlled entities are stated at cost, less
impairment losses (refer to accounting policy n).
(iii) Other investments
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.
(f) FIXED ASSETS AND DEPRECIATION
Fixed assets are stated at cost or revalued amount 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 cost, or revalued amount
where appropriate, of the fixed assets over their estimated useful
lives on a straight line basis, after taking into account their
estimated residual values, as follows:
DEPRECIABLE LIFE RESIDUAL VALUE
Buildings 15 to 40 years Nil
Owned & 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.
- 174 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
2 PRINCIPAL ACCOUNTING POLICIES (cont'd)
(g) LEASED ASSETS
Flight equipment under finance 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 amortised on a straight
line basis over the shorter of the lease term or estimated useful
life of the asset to residual value. In cases where title to the
asset will be acquired by the Group at the end of the lease, the
asset is amortised on a straight line basis over the estimated
useful life of the asset to its residual value.
Amounts payable in respect of finance 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
profit and loss account to provide a constant periodic rate of
charge over the lease term.
Gains on aircraft sale and leaseback transactions which result in
finance leases are deferred and amortised over the terms of the
related leases. Gains on other aircraft sale and leaseback
transactions are recognised as income immediately if the
transactions are established at fair value. Any excess of the sales
price over fair value is deferred and amortised over the period the
assets are expected to be used.
Operating lease payments are charged to the profit and loss account
on a straight line basis over the terms of the related leases.
(h) 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. Capitalisation 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.
(i) LEASE PREPAYMENTS
Lease prepayments represent the purchase costs of land use rights
and are amortised on a straight line basis over the period of land
use rights (Note 26).
(j) 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 realisable value. Net realisable
value represents estimated resale price.
- 175 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
2 PRINCIPAL ACCOUNTING POLICIES (cont'd)
(k) TRADE AND OTHER RECEIVABLES
Trade and other receivables are stated at cost less impairment
losses. Impairment losses are established based on evaluation of the
recoverability of these accounts at the balance sheet date.
(l) DEFERRED EXPENDITURE
Custom duties and other direct costs in relation to modifying,
introducing and certifying certain operating leased aircraft are
deferred and amortised over the terms of the related leases.
Lump sum housing benefits payable to employees of the Group are
deferred and amortised on a straight line basis over a period of 10
years, which represents the benefit vesting period of the employees.
(m) 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 purpose of the consolidated cash flow
statement, cash and cash equivalents are presented net of bank
overdrafts, if any.
(n) IMPAIRMENT LOSS
The carrying amounts of the Group's and the Company's assets, other
than inventories (refer to accounting policy j) 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 recognised as an
expense in the profit and loss account.
The Group and the Company assess at each balance sheet date whether
there is any indication that an impairment loss recognised for an
asset in prior years may no longer exist. An impairment loss is
reversed if there has been a favourable 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
recognised as income. The reversal is reduced by the amount that
would have been recognised as depreciation had the write-down or
write-off not occurred.
- 176 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
2 PRINCIPAL ACCOUNTING POLICIES (cont'd)
(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 amortised as a reduction of rental expense
for aircraft and engines under operating leases.
(p) REVENUE RECOGNITION
Passenger, cargo and mail revenues are recognised when the
transportation is provided. Ticket sales for transportation not yet
provided are included in current liabilities as sales in advance of
carriage. Revenues from airline-related business are recognised when
services are rendered. Revenue is stated net of sales tax and
contributions to the CAAC Infrastructure Development Fund.
Interest income is recognised as it accrues unless collectability is
in doubt. Dividend income is recognised when the Group's right to
receive the dividend is established.
Operating lease income is recognised 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 recognised. Traffic commissions for
transportation not yet provided are recorded on the 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 finance leases are expensed in the
profit and loss account 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.
(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 that date. Exchange differences are
dealt with in the profit and loss account.
- 177 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
2 PRINCIPAL ACCOUNTING POLICIES (cont'd)
(t) BORROWING COSTS
Borrowing costs are expensed in the profit and loss account as and
when incurred, except to the extent that they are capitalised 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 utilisation
against future taxable income is recognised 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 realised.
(v) RETIREMENT BENEFITS
Contributions to retirement schemes and additional retirement
benefits paid to retired employees are charged to the profit and
loss account as and when incurred.
(w) FREQUENT FLYER AWARD PROGRAMMES
The Group maintains two frequent flyer award programmes, namely, the
China Southern Airlines Sky Pearl Club and the Egret Mileage Plus,
which provide travel awards to members based on accumulated mileage.
The estimated incremental cost to provide free travel is recognised
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.
Revenue from mileage sales to third parties under the frequent flyer
award programmes is recognised when the related transportation
services are provided.
(x) PROVISIONS
A provision is recognised in the 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.
- 178 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
2 PRINCIPAL ACCOUNTING POLICIES (cont'd)
(y) RELATED PARTIES
For the purposes of these 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.
(z) SEGMENTAL REPORTING
The Group operates principally as a single business segment for the
provision of air transportation services. The analysis of turnover
and operating profit by geographical segment is based on the
following criteria:
(i) Traffic revenue from domestic services within the PRC
(excluding Hong Kong) 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.
(aa) USE OF ESTIMATES
The preparation of the financial statements of the Group and the
Company 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 financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
- 179 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
3 TURNOVER
Turnover comprises revenues from airline and airline-related business and
is stated net of sales tax and contributions to the CAAC Infrastructure
Development Fund. An analysis of turnover is as follows:
2003 2002
RMB'000 RMB'000
---------- ----------
Traffic revenue
Passenger 15,009,885 15,695,622
Cargo and mail 1,954,915 1,786,270
---------- ----------
16,964,800 17,481,892
---------- ----------
Other operating revenue
Commission income 140,180 137,928
General aviation income 40,309 68,225
Ground services income 99,130 78,616
Air catering income 30,756 38,077
Net income from lease arrangements (Note 10) 69,121 51,682
Rental income 40,307 -
Aircraft lease income - 46,640
Other 85,520 115,560
---------- ----------
505,323 536,728
---------- ----------
17,470,123 18,018,620
========== ==========
Pursuant to various sales tax rules and regulations, the Group is required
to pay sales tax to national and local tax authorities at the following
rates:
TYPES OF REVENUE APPLICABLE SALES TAX RATES
Traffic revenue 3% (2002: 3%) of traffic revenue, except
for the period from 1 May, 2003 to 31 December,
2003 during which passenger revenue was exempted
from sales tax. All inbound international and Hong
Kong regional flights are exempted from sales tax.
Other operating revenue 3% (2002: 3%) of commission income, general
aviation income and ground services income, and 3%
to 5% (2002: 3% to 5%) of other operating revenue.
- 180 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
3 TURNOVER (cont'd)
Sales tax incurred during the year ended 31 December, 2003, netted off
against revenue, amounted to RMB205,925,000 (2002: RMB557,784,000). In
addition, the Group is required to pay contributions to the CAAC
Infrastructure Development Fund which are calculated at the rates of 5%
and 2%, respectively (2002: 5% and 2%, respectively) of the domestic and
international/Hong Kong regional traffic revenue, except for the period
from 1 May, 2003 to 31 December, 2003 during which the Group was exempted
from paying the contributions. Contributions to the CAAC Infrastructure
Development Fund payable by the Group for the year ended 31 December, 2003
totalled RMB250,802,000 (2002: RMB798,386,000).
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 certain prescribed rates on ticket fares. The fuel
surcharge forms part of the traffic revenue of the Group. For the year
ended 31 December, 2003, the fuel surcharge revenue of the Group totalled
approximately RMB740 million (2002: RMB554 million).
- 181 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
4 (LOSS)/PROFIT BEFORE TAXATION AND MINORITY INTERESTS
2003 2002
RMB'000 RMB'000
---------- ----------
(Loss)/profit before taxation and minority interests is arrived
at after charging:
Operating expenses
Jet fuel 3,866,932 3,519,005
Aircraft maintenance 2,376,635 2,134,705
Routes 4,363,277 4,297,767
Depreciation
- owned assets 1,502,013 1,301,601
- assets held under finance leases 495,869 537,692
Amortisation of deferred expenditure 40,089 578
Operating lease charges
- aircraft and other flight equipment 1,536,466 1,416,524
- buildings 135,528 129,982
Staff costs
- salaries, wages and welfare 1,496,191 1,538,617
- contributions to retirement schemes 150,447 131,622
Office and administration 470,565 452,432
Auditors' remuneration 8,200 8,200
Other 572,182 523,818
---------- ----------
17,014,394 15,992,543
---------- ----------
Interest expense
Interest on bank and other loans wholly
repayable within five years 288,293 335,953
Interest on other loans 176,026 142,679
Finance charges on obligations under finance leases 442,483 544,747
Less: borrowing costs capitalised (Note) (83,077) (64,186)
---------- ----------
Net interest expense 823,725 959,193
---------- ----------
and after crediting:
Amortisation of gains on sale and leaseback
transactions - 2,579
Dividend income from unlisted investments 17,220 7,116
========== ==========
Note: The borrowing costs have been capitalised at rates ranging 1.62% to
5.46% per annum (2002: 5.70%).
- 182 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
4 (LOSS)/PROFIT BEFORE TAXATION AND MINORITY INTERESTS (cont'd)
The (loss)/profit attributable to shareholders for the year ended 31
December, 2003 includes a loss of RMB580,959,000 (2002: profit of RMB
381,305,000) which has been dealt with in the financial statements of the
Company.
5 (LOSS)/GAIN ON SALE OF FIXED ASSETS
(Loss)/gain on sale of fixed assets represents:
2003 2002
RMB'000 RMB'000
------- -------
Aircraft (Note) (20,405) 199,394
Staff quarters (Note 28) - (17,624)
Flight equipment and other fixed assets (1,812) (11,030)
------- -------
(22,217) 170,740
======= =======
Note:
During 2003, the Group incurred a loss of RMB20,405,000 on early
retirement of two old Boeing 737-200 aircraft.
Pursuant to certain sale and leaseback arrangements, the Group sold four
Boeing 757-200 aircraft during 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. For the year ended 31 December, 2002,
the Group recognised a profit of RMB199,394,000, 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.
6 EMOLUMENTS OF DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
(a) DIRECTORS' AND SUPERVISORS' EMOLUMENTS
2003 2002
RMB'000 RMB'000
------- -------
Fees 203 103
Salaries, allowances and benefits in kind 1,244 970
Retirement benefits 98 67
Bonuses 943 264
----- -----
2,488 1,404
===== =====
Included in the above were fees of RMB203,000 (2002: RMB103,000)
paid to non-executive independent directors during the year.
- 183 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
6 EMOLUMENTS OF DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT (cont'd)
(a) DIRECTORS' AND SUPERVISORS' EMOLUMENTS (cont'd)
An analysis of directors' and supervisors' emoluments by number of
individuals and emolument ranges is as follows:
2003 2002
NUMBER Number
------ ------
Nil to HK$1,000,000 (RMB1,066,000 equivalent) 18 14
=== ===
(b) SENIOR MANAGEMENT'S EMOLUMENTS
Details of emoluments paid to the five highest paid individuals
(including directors and supervisors) of the Group during the year
are as follows:
2003 2002
RMB'000 RMB'000
------- -------
Salaries, allowances and benefits in kind 1,701 1,496
Retirement benefits 25 24
----- -----
1,726 1,520
===== =====
An analysis of emoluments paid to the five highest paid individuals
(including directors and supervisors) by number of individuals and
emolument ranges is as follows:
2003 2002
NUMBER Number
------ ------
Directors and supervisors - 1
Employees 5 4
--- ---
5 5
=== ===
Nil to HK$1,000,000 (RMB1,066,000 equivalent) 5 5
=== ===
- 184 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
7 TAXATION (CREDIT)/EXPENSE
Taxation (credit)/expense in the consolidated profit and loss account
comprises:
2003 2002
RMB'000 RMB'000
-------- -------
PRC income tax 46,938 71,651
Share of taxation of associated companies 3,342 9,424
Share of taxation of jointly controlled entities 6,372 -
-------- -------
56,652 81,075
Deferred taxation (Note 16)
- current year 11,208 317,152
- adjustment for change in income tax rate (392,137) -
-------- -------
Taxation (credit)/expense (324,277) 398,227
======== =======
On 17 October, 2003, the Company's registered address was moved to
Guangzhou Economic & Technology Development Zone. In accordance with the
Rules and Regulations for Implementation of Income Tax for Foreign
Investment Enterprises and Foreign Enterprises of the PRC and a taxation
approval document "Guangzhou Municipal State Tax Bureau Suo De Shui Zi Que
020043", the Company is entitled to enjoy the preferential tax policy
implemented in the Guangzhou Economic & Technology Development Zone
effective 1 October, 2003. As a result, the Company's income tax rate has
been changed to 15% from 33% beginning from that date.
As a result of the reduction in income tax rate, the Company's net
deferred taxation liability balance brought forward from 31 December, 2002
of RMB507,077,000 was reduced by RMB392,137,000 and a net deferred tax
credit of RMB392,137,000 was recognised for such reduction in income tax
rate in the consolidated profit and loss account for the year ended 31
December, 2003.
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
government, or has sustained tax losses in these overseas jurisdictions.
Accordingly, no provision for overseas tax has been made for the year
(2002: nil).
- 185 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
7 TAXATION (CREDIT)/EXPENSE (cont'd)
Actual taxation amount in the consolidated profit and loss account
differed from the amount computed by applying the PRC income tax rate of
15% to consolidated (loss)/profit before taxation and minority interests
as a result of the following:
2003 2002
RMB'000 RMB'000
-------- ---------
Consolidated (loss)/profit before taxation and minority interests (511,610) 1,139,099
======== =========
Expected PRC income tax (credit)/expense
at 15% (2002: 33%) (76,742) 375,903
Adjustments:
Gains on sale and leaseback transactions and their amortisation - (851)
Effect of change in income tax rate (392,137) -
Rate differential on subsidiaries - (60,530)
Non-deductible expenses 79,907 61,454
Other, net 64,695 22,251
--------- -------
(324,277) 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 Tax Bureau, lease arrangements executed
prior to 1 September, 1999 are exempted from PRC withholding tax.
For the year ended 31 December, 2003, the PRC withholding tax payable by
the Group in respect of the leases executed on or after 1 September, 1999
of RMB7,706,000 (2002: RMB14,305,000) has been included as part of the
operating lease charges for the year.
8 DIVIDENDS
No interim dividend was paid during the year ended 31 December, 2003
(2002: Nil).
The board of directors of the Company does not recommend the payment of a
final dividend in respect of the year ended 31 December, 2003.
A final dividend of RMB0.02 per share totalling RMB67,484,000 in respect
of the year ended 31 December, 2001 was approved and paid during 2002.
9 BASIC (LOSS)/EARNINGS PER SHARE
The calculation of basic (loss)/earnings per share is based on the
consolidated loss attributable to shareholders of RMB358,267,000 (2002:
profit of RMB575,761,000) and the weighted average number of shares in
issue during the year of 3,831,712,000 (2002: 3,374,178,000).
The amount of diluted (loss)/earnings per share is not presented as there
were no dilutive potential ordinary shares in existence for both years.
- 186 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
10 FIXED ASSETS
OTHER
AIRCRAFT FLIGHT
----------------------- EQUIPMENT, MACHINERY,
HELD UNDER INCLUDING EQUIPMENT
FINANCE ROTABLE AND
BUILDINGS OWNED LEASES SPARES VEHICLES TOTAL
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
------------------------------------------------------------------------------------------------------------
(a) THE GROUP
Cost or valuation:
At 1 January, 2003 3,160,073 13,510,717 11,459,978 6,283,470 1,782,400 36,196,638
Exchange adjustments 16,572 - - - 36,851 53,423
Reclassification on exercise
of purchase options - 997,403 (997,403) - - -
Additions 11,382 2,818,475 - 558,594 137,307 3,525,758
Transferred from construction
in progress 133,839 - - - 12,255 146,094
Disposals (34,273) (104,235) - - (38,540) (177,048)
--------- ---------- ---------- ---------- ---------- ----------
At 31 December, 2003 3,287,593 17,222,360 10,462,575 6,842,064 1,930,273 39,744,865
--------- ---------- ---------- ---------- ---------- ----------
Representing:
Cost 2,932,399 10,993,419 6,123,034 4,667,887 1,446,235 26,162,974
Valuation - 1996 355,194 6,228,941 4,339,541 2,174,177 484,038 13,581,891
--------- ---------- ---------- ---------- ---------- ----------
3,287,593 17,222,360 10,462,575 6,842,064 1,930,273 39,744,865
--------- ---------- ---------- ---------- ---------- ----------
Accumulated depreciation:
At 1 January, 2003 476,867 2,145,849 2,499,495 3,177,253 976,345 9,275,809
Exchange adjustments 2,892 - - - 30,129 33,021
Reclassification on exercise
of purchase options - 389,958 (389,958) - - -
Charge for the year 128,776 710,509 495,869 467,202 195,526 1,997,882
Written back on disposal (14,740) (54,555) - - (28,459) (97,754)
--------- ---------- ---------- ---------- ---------- ----------
At 31 December, 2003 593,795 3,191,761 2,605,406 3,644,455 1,173,541 11,208,958
--------- ---------- ---------- ---------- ---------- ----------
Net book value:
At 31 December, 2003 2,693,798 14,030,599 7,857,169 3,197,609 756,732 28,535,907
========= ========== ========== ========== ========== ==========
At 31 December, 2002 2,683,206 11,364,868 8,960,483 3,106,217 806,055 26,920,829
========= ========== ========== ========== ========== ==========
-187-
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
10 FIXED ASSETS (Cont'd)
OTHER
AIRCRAFT FLIGHT
----------------------- EQUIPMENT, MACHINERY,
HELD UNDER INCLUDING EQUIPMENT
FINANCE ROTABLE AND
BUILDINGS OWNED LEASES SPARES VEHICLES TOTAL
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
------------------------------------------------------------------------------------------------------------
(b) THE COMPANY
Cost or valuation:
At 1 January, 2003 1,036,612 9,053,359 11,459,978 3,941,880 895,562 26,387,391
Reclassification on exercise
of purchase options - 997,403 (997,403) - - -
Additions 2,228 2,818,475 - 455,763 87,555 3,364,021
Additions through transfer
of fixed assets upon
dissolution of subsidiary 514,197 - - 998,215 217,272 1,729,684
Transferred from construction
in progress 91,018 - - - 8,228 99,246
Disposals (347) - - - (20,178) (20,525)
--------- ---------- ---------- ---------- ---------- ----------
At 31 December, 2003 1,643,708 12,869,237 10,462,575 5,395,858 1,188,439 31,559,817
--------- ---------- ---------- ---------- ---------- ----------
Representing:
Cost 1,449,476 8,255,920 6,123,034 3,570,949 924,558 20,323,937
Valuation - 1996 194,232 4,613,317 4,339,541 1,824,909 263,881 11,235,880
--------- ---------- ---------- ---------- ---------- ----------
1,643,708 12,869,237 10,462,575 5,395,858 1,188,439 31,559,817
--------- ---------- ---------- ---------- ---------- ----------
Accumulated depreciation:
At 1 January, 2003 176,841 1,327,363 2,499,495 2,387,634 465,150 6,856,483
Reclassification on exercise
of purchase options - 389,958 (389,958) - - -
Charge for the year 72,980 514,000 495,869 373,896 116,207 1,572,952
Additions through transfer
of fixed assets upon
dissolution of subsidiary 73,772 - - 311,097 153,358 538,227
Written back on disposal (23) - - - (18,073) (18,096)
--------- ---------- ---------- ---------- ---------- ----------
At 31 December, 2003 323,570 2,231,321 2,605,406 3,072,627 716,642 8,949,566
--------- ---------- ---------- ---------- ---------- ----------
Net book value:
At 31 December, 2003 1,320,138 10,637,916 7,857,169 2,323,231 471,797 22,610,251
========= ========== ========== ========== ========== ==========
At 31 December, 2002 859,771 7,725,996 8,960,483 1,554,246 430,412 19,530,908
========= ========== ========== ========== ========== ==========
-188-
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
10 FIXED ASSETS (Cont'd)
Substantially all of the Group's buildings are located in the PRC. The
Group was formally granted the rights to use the twenty one 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 buildings 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 totalling RMB15,224,000 (2002: RMB15,224,000) were paid to CSAHC
during 2003 in respect of these leases.
During the year, the Company entered into operating lease arrangements to
lease certain flight training facilities and buildings to Zhuhai Xiang Yi
Aviation Technology Company Limited ("Zhuhai Xiang Yi"), a jointly
controlled entity of the Company. The leases with initial one-year term
are automatically renewable for another one year unless either party gives
appropriate notice of termination. In this connection, rental income
totalling RMB34,175,000 was received by the Company during 2003 in respect
of the leases. As at 31 December, 2003, the cost and accumulated
depreciation of the relevant fixed assets totalled RMB787,432,000 and
RMB462,281,000 respectively. As at 31 December, 2003, the Company's rental
receivable in respect of the leases due in 2004 amounted to RMB34,175,000.
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 at 31 December, 1996 were revalued. This revaluation was
conducted by Guangzhou Assets Appraisal Corp. ("GAAC"), 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 replacement costs, the fixed
assets of the Group are carried at revalued amount, 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 at 31 December, 2000, the carrying
amounts of fixed assets did not differ materially from their respective
fair value.
-189-
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
10 FIXED ASSETS (Cont'd)
The effect of the above revaluation was to increase future annual
depreciation charges of the Group by approximately RMB33,000,000 (2002:
RMB33,000,000). Had the fixed assets of the Group and the Company been
stated at cost, that is, the effect of the revaluation was excluded, the
net book values of fixed assets of the Group and the Company as at 31
December, 2003 would have been approximately RMB28,522,787,000 and
RMB22,793,781,000 respectively (2002: RMB26,874,709,000 and
RMB19,440,211,000 respectively), made up as follows:
THE GROUP THE COMPANY
2003 2002 2003 2002
RMB'000 RMB'000 RMB'000 RMB'000
----------------------------------------------------------------------------------------------
Buildings 3,109,988 2,982,468 1,610,075 1,002,979
Aircraft
- owned 18,344,930 14,694,256 13,657,746 9,841,868
- held under finance leases 10,942,131 11,939,534 10,942,131 11,939,534
Flight equipment and others 9,634,146 8,927,679 6,910,210 5,163,355
---------- ---------- ---------- ----------
42,031,195 38,543,937 33,120,162 27,947,736
Less: Accumulated depreciation 13,508,408 11,669,228 10,326,381 8,507,525
---------- ---------- ---------- ----------
28,522,787 26,874,709 22,793,781 19,440,211
========== ========== ========== ==========
As at 31 December, 2003, certain aircraft of the Group and the Company
with an aggregate carrying value of approximately RMB14,575,906,000 and
RMB12,795,867,000 respectively (2002: RMB14,782,559,000 and
RMB12,893,592,000, respectively) were mortgaged under certain loan and
lease agreements (see Notes 21 and 22).
The Company entered into two separate arrangements (the "Arrangements")
with certain independent third parties during each of 2002 and 2003. Under
each of the Arrangements, the Company sold an aircraft and then
immediately leased back the aircraft for an agreed period. As agreed, the
lease payment obligations, with pre-determined net present value, are to
be satisfied solely out of the sale proceeds and such amount has been
placed irrevocably by the Company in form of deposits and debt securities
in favour of the lessors. The Company has an option to purchase the
aircraft at a pre-determined date and an agreed purchase price 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 Company, the Company is liable to pay a pre-determined penalty to the
lessor. As long as the Company complies with the lease agreements, the
Company is entitled to the continued possession and operation of the
aircraft. Since the Company retains substantially all risks and rewards
incident to ownership of the aircraft and enjoys substantially the same
rights to their use as before the Arrangements, no adjustment has been
made to the fixed assets. As at 31 December, 2003, the net present value
of the lease commitments and the corresponding defeased deposits and debt
securities amounted to RMB2,409,252,000 (2002: RMB1,322,843,000). As a
result of the Arrangements, the Company received net cash benefits of
RMB51,682,000 and RMB69,121,000 in 2002 and 2003 respectively which have
been recognised as income for the respective years.
-190-
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
11 CONSTRUCTION IN PROGRESS
Construction in progress comprises expenditure incurred on the
construction of buildings and other operating facilities not yet
substantially completed at 31 December, 2003, details as follows:
2003 2002
RMB'000 RMB'000
--------- ---------
THE COMPANY
Guangzhou new airport base 1,378,063 432,580
Hubei catering building 27,911 23,407
Zhengzhou ticket selling office 22,016 21,988
Material and engineering system 21,066 21,063
Henan office building 13,986 3,717
Guangzhou ticket selling office - 45,988
Other 69,420 66,768
--------- ---------
1,532,462 615,511
--------- ---------
SUBSIDIARIES
Guangzhou new cargo centre 67,697 -
Fuzhou Chang Le airport facilities 14,244 14,839
Other 15,286 31,002
--------- ---------
97,227 45,841
--------- ---------
1,629,689 661,352
========= =========
12 INTEREST IN SUBSIDIARIES
THE COMPANY
2003 2002
RMB'000 RMB'000
--------- ---------
Unlisted shares/capital contributions, at cost 977,540 1,086,793
Amounts due from subsidiaries 468,291 319,217
--------- ---------
1,445,831 1,406,010
========= =========
-191-
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
12 INTEREST IN SUBSIDIARIES (Cont'd)
In March 2003, China Southern Airlines (Group) Shenzhen Co., a wholly
owned subsidiary of the Company was dissolved in March 2003. Its operation
and respective assets and liabilities were transferred to the Company
since then. No material gains or losses were incurred by the Group on
dissolution of the subsidiary.
Details of the Company's subsidiaries are set out in Note 36.
13 INTEREST IN ASSOCIATED COMPANIES
THE GROUP THE COMPANY
2003 2002 2003 2002
RMB'000 RMB'000 RMB'000 RMB'000
-------- -------- -------- --------
Share of attributable net assets
other than goodwill 422,201 692,026 - -
Unlisted capital contributions, at cost - - 348,502 428,840
Impairment loss for investment
in associated company - - (61,267) (61,267)
-------- -------- -------- --------
422,201 692,026 287,235 367,573
======== ======== ======== ========
Details of the Group's associated companies are set out in Note 37.
14 INTEREST IN JOINTLY CONTROLLED ENTITIES
THE GROUP THE COMPANY
2003 2002 2003 2002
RMB'000 RMB'000 RMB'000 RMB'000
-------- -------- -------- --------
Share of attributable net assets
other than goodwill 731,323 461,962 - -
Unlisted capital contributions, at cost - - 563,736 474,042
-------- -------- -------- --------
731,323 461,962 563,736 474,042
======== ======== ======== ========
Details of the Company's jointly controlled entities are set out in
Note 37.
-192-
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
14 INTEREST IN JOINTLY CONTROLLED ENTITIES (Cont'd)
An analysis of the Group's attributable share of assets, liabilities,
revenues and expenses of the jointly controlled entities is set out below:
2003 2002
RMB'000 RMB'000
-------- --------
Non-current assets 606,185 290,088
Current assets 618,799 326,712
Non-current liabilities (235,718) -
Current liabilities (257,943) (154,838)
-------- --------
Net assets 731,323 461,962
======== ========
Income 486,049 -
Expenses (525,544) (3,352)
-------- --------
Net loss (39,495) (3,352)
======== ========
15 DEFERRED EXPENDITURE
Deferred expenditure mainly comprises custom duties and other direct costs
incurred in respect of the Group's operating leased aircraft upon the
inception of the respective leases, and lump sum housing benefits provided
to eligible employees of the Group:
THE GROUP THE COMPANY
2003 2002 2003 2002
RMB'000 RMB'000 RMB'000 RMB'000
-------- -------- -------- --------
Custom duties and other direct costs 60,135 257,509 36,551 168,265
Lump sum housing benefits (Note 28) 260,000 260,000 260,000 260,000
-------- -------- -------- --------
320,135 517,509 296,551 428,265
Less: Accumulated amortisation 71,282 234,206 56,037 155,629
-------- -------- -------- --------
248,853 283,303 240,514 272,636
======== ======== ======== ========
-193-
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
16 DEFERRED TAXATION
Movements in net deferred tax liabilities are as follows:
THE GROUP THE COMPANY
--------------------- ------------------
2003 2002 2003 2002
RMB'000 RMB'000 RMB'000 RMB'000
-------- -------- ------- --------
Balance at 1 January, (779,234) (519,577) (507,077) (293,991)
Land use rights adjustment (Note 26 (f)) - 57,495 - 57,495
Transferred from profit and
loss account (Note 7)
- current year (11,208) (317,152) 25,232 (270,581)
- adjustment for change in income tax rate 392,137 - 392,137 -
-------- -------- ------- --------
Balance at 31 December, (398,305) (779,234) (89,708) (507,077)
======== ======== ======= ========
The net deferred tax liabilities at 31 December, 2003 were made up of the
following taxation effects:
THE GROUP THE COMPANY
-------------------- -----------------------
2003 2002 2003 2002
RMB'000 RMB'000 RMB'000 RMB'000
-------- --------- ------- ---------
Deferred tax assets:
Tax losses 222,936 149,338 222,936 149,338
Repairs and maintenance accruals 87,608 63,896 93,097 69,385
Repair charges capitalised 261,312 319,697 199,292 259,147
Accrued expenses 18,883 311,893 18,883 311,893
Other 8,989 129,423 10,829 144,463
-------- --------- ------- ---------
Total deferred tax assets 599,728 974,247 545,037 934,226
-------- --------- ------- ---------
Deferred tax liabilities:
Undistributed profits of subsidiaries - 254,210 - 254,210
Repairs and maintenance accruals 80,545 78,083 - -
Depreciation of fixed assets 847,781 1,403,278 590,543 1,187,093
Other 69,707 17,910 44,202 -
-------- --------- ------- ---------
Total deferred tax liabilities 998,033 1,753,481 634,745 1,441,303
-------- --------- ------- ---------
Net deferred tax liabilities (398,305) (779,234) (89,708) (507,077)
======== ========= ======= =========
- 194 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
17 INVENTORIES
THE GROUP THE COMPANY
------------------- -----------------
2003 2002 2003 2002
RMB'000 RMB'000 RMB'000 RMB'000
------- ------- ------- -------
Expendable spare parts
and maintenance materials 486,290 489,554 182,742 106,376
Other supplies 57,487 56,146 30,477 11,758
------- ------- ------- -------
543,777 545,700 213,219 118,134
======= ======= ======= =======
No significant amount of inventories was carried at net realisable value
at 31 December, 2002 and 2003.
18 TRADE RECEIVABLES
Credit terms granted by the Group to sales agents and other customers
generally range from one to three months. An ageing analysis of trade
receivables, net of impairment losses, is set out below:
THE GROUP THE COMPANY
------------------- -----------------
2003 2002 2003 2002
RMB'000 RMB'000 RMB'000 RMB'000
------- ------- ------- -------
Within 1 month 589,080 576,789 445,980 394,744
More than 1 month but less than 3 months 235,828 88,133 228,530 62,536
More than 3 months but less than 12 months 8,696 6,854 8,696 7,650
------- ------- ------- -------
833,604 671,776 683,206 464,930
======= ======= ======= =======
As at 31 December, 2003, the Group and the Company had an amount due from
a fellow subsidiary of RMB54,161,000 (2002: RMB89,550,000) which was
included in trade receivables.
All of the trade receivables are expected to be recovered within one year.
19 AMOUNTS DUE TO RELATED COMPANIES
Amounts due to related companies, which represent balances with CSAHC and
its affiliates, and the Group's associated companies and jointly
controlled entities, are unsecured, interest free and repayable within one
year. The balance at 31 December, 2002 also included balances with the
CAAC and its affiliates.
- 195 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
20 CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash at bank and in hand and deposits
with Southern Airlines Group Finance Company Limited ("SA Finance"), a PRC
authorised financial institution controlled by CSAHC and an associated
company of the Group. In accordance with the financial agreement dated 22
May, 1997 between the Company and SA Finance, all the Group's deposits
accepted by SA Finance at 31 December, 2003 were simultaneously placed
with several designated major PRC banks by SA Finance. As at 31 December,
2003, the Group's and the Company's deposits with SA Finance amounted to
RMB365,906,000 and RMB346,357,000 respectively (2002: RMB 900,979,000 and
RMB877,449,000 respectively).
21 BANK AND OTHER LOANS
THE GROUP THE COMPANY
-------------------------- ---------------------------
2003 2002 2003 2002
RMB'000 RMB'000 RMB'000 RMB'000
---------- ---------- ---------- ----------
Bank loans due:
Within one year 7,096,846 5,240,726 5,958,968 3,479,322
In the second year 646,492 839,036 401,466 522,482
In the third to fifth year, inclusive 1,223,710 3,730,849 826,417 3,143,413
After the fifth year 2,648,533 1,262,549 2,442,616 962,477
---------- ---------- ---------- ----------
11,615,581 11,073,160 9,629,467 8,107,694
Other loans due:
In the second year 3,000 3,000 - -
---------- ---------- ---------- ----------
11,618,581 11,076,160 9,629,467 8,107,694
Portion classified as current liabilities (7,096,846) (5,240,726) (5,958,968) (3,479,322)
---------- ---------- ---------- ----------
4,521,735 5,835,434 3,670,499 4,628,372
========== ========== ========== ==========
As at 31 December, 2003, bank loans of the Group and the Company totalling
RMB4,902,118,000 and RMB3,822,826,000 respectively (2002: RMB
4,117,778,000 and RMB2,783,418,000 respectively) were secured by mortgages
over certain of the Group's and the Company's aircraft.
- 196 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
21 BANK AND OTHER LOANS (cont'd)
As at 31 December, 2003, certain bank loans were guaranteed by the
following parties:
THE GROUP THE COMPANY
------------------------ -----------------------
2003 2002 2003 2002
RMB'000 RMB'000 RMB'000 RMB'000
--------- --------- --------- ---------
Export-Import Bank of the United States 2,207,393 2,680,801 1,236,160 1,536,835
Bank of China 357,193 604,010 262,231 433,706
China Construction Bank - 76,134 - 76,134
CSAHC 359,300 3,340,118 228,800 2,280,118
Guangzhou Baiyun International
Airport Company Limited 63,000 - - -
Shenzhen Yingshun Investment
Development Company Limited 21,000 - - -
SA Finance 10,052 561,531 - 550,000
--------- --------- --------- ---------
3,017,938 7,262,594 1,727,191 4,876,793
========= ========= ========= =========
- 197 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
21 BANK AND OTHER LOANS (cont'd)
Details of bank and other loans with original maturity over one year are
as follows:
THE GROUP THE COMPANY
------------------------- -------------------------
2003 2002 2003 2002
INTEREST RATE AND FINAL MATURITY RMB'000 RMB'000 RMB'000 RMB'000
----------------------------------- --------- --------- --------- ---------
RMB denominated loans:
Loans for construction Floating interest rates
projects ranging from
4.94% to 5.25% per annum
as at 31 December, 2003, with
maturities through 2009 12,357 893,838 - 850,000
Non-interest bearing loan from
a municipal government
authority, repayable in 2005 3,000 3,000 - -
Loans for purchase of
aircraft Floating interest rate of
5.49% per annum as at 31
December, 2003, with
maturities through 2004 63,500 2,310,268 - 2,231,768
U.S. dollar denominated loans:
Loans for purchase of Fixed interest rates ranging
aircraft from 5.00% to 8.33% per annum
as at 31 December, 2003, with
maturities through 2011 2,612,687 3,426,038 1,546,492 2,111,768
Floating interest rates ranging
from 1.48% to 1.50% per annum as
at 31 December, 2003, with
maturities through 2013 2,505,134 - 2,505,134 -
Loan for purchase Fixed interest rate of 8.35% per
of flight equipment annum as at 31 December, 2003,
with maturity in 2004 13,097 20,090 - -
--------- --------- --------- ---------
5,209,775 6,653,234 4,051,626 5,193,536
Less: Loans due within one year classified as current liabilities (688,040) (817,800) (381,127) (565,164)
--------- --------- --------- ---------
4,521,735 5,835,434 3,670,499 4,628,372
========= ========= ========= =========
- 198 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
21 BANK AND OTHER LOANS (cont'd)
As at 31 December, 2003, bank and other loans of the Group and the Company
included short-term bank loans totalling RMB6,408,806,000 and
RMB5,577,841,000 respectively (2002: RMB4,422,926,000 and RMB
2,914,158,000 respectively). On such date, the Group's and the Company's
weighted average interest rate on short-term borrowings were 1.76% and
1.65% respectively (2002: 3.11% and 2.66% respectively).
As at 31 December, 2003, the Group had banking facilities with several PRC
commercial banks for providing loan finance up to an approximate amount of
RMB9,860 million (2002: RMB12,360 million). As at 31 December, 2003, an
approximate amount of RMB4,412 million (2002: RMB7,258 million) was
utilised.
22 OBLIGATIONS UNDER FINANCE LEASES
The Group and the Company have commitments under finance lease agreements
in respect of aircraft and related equipment expiring during the years
2004 to 2009. As at 31 December, 2003, future payments under these finance
leases, which were 74% and 26% respectively (2002: 78% and 22%
respectively) denominated in United States dollars and Japanese yen, are
as follows:
2003 2002
----------------------------------- ------------------------------------
PAYMENTS INTEREST OBLIGATIONS Payments Interest Obligations
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
--------- --------- ----------- --------- --------- -----------
THE GROUP AND THE COMPANY
Balance due:
Within one year 1,648,141 350,286 1,297,855 2,006,392 439,694 1,566,698
In the second year 1,356,614 290,163 1,066,451 1,624,381 351,237 1,273,144
In the third to fifth
year, inclusive 4,348,235 439,418 3,908,817 4,153,235 647,988 3,505,247
After the fifth year 608,124 40,308 567,816 1,960,607 107,247 1,853,360
--------- --------- --------- --------- --------- ---------
7,961,114 1,120,175 6,840,939 9,744,615 1,546,166 8,198,449
--------- --------- --------- --------- --------- ---------
Less: Balance due within
one year classified as
current liabilities (1,297,855) (1,566,698)
--------- ---------
5,543,084 6,631,751
========= =========
Certain lease financing arrangements comprised finance leases between the
Company and certain of its subsidiaries, and corresponding borrowings
between such subsidiaries and banks. The Company has guaranteed the
subsidiaries' obligations under the bank borrowings and accordingly, the
relevant leased assets and obligations are recorded in the balance sheet
to reflect the substance of the transactions. The future payments under
these leases have therefore been presented by the Company and the Group in
amounts that reflect the payments under the bank borrowings between the
subsidiaries and banks.
- 199 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
22 OBLIGATIONS UNDER FINANCE LEASES (cont'd)
Under the terms of the leases, the Group has an 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.
As at 31 December, 2003, certain of the Group's and the Company's aircraft
with carrying amount of RMB7,857,169,000 (2002: RMB8,960,483,000) were
mortgaged to secure facilities with financial institutions granted to
lessors totalling RMB6,840,939,000 (2002: RMB8,198,449,000).
23 ACCOUNTS PAYABLE
An ageing analysis of accounts payable is set out below:
THE GROUP THE COMPANY
2003 2002 2003 2002
RMB'000 RMB'000 RMB'000 RMB'000
------- ------- ------- -------
Due within 1 month or on demand 279,165 164,442 206,620 88,645
Due after 1 month but within 3 months 278,113 157,731 231,115 89,290
Due after 3 months but within 6 months 370,815 210,307 308,153 119,054
------- ------- ------- -------
928,093 532,480 745,888 296,989
======= ======= ======= =======
As at 31 December, 2003, the Group and the Company had an amount due to a
fellow subsidiary of RMB693,345,000 (2002: RMB267,468,000) which was
included in accounts payable.
All of the accounts payable are expected to be settled within one year.
- 200 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
24 PROVISION FOR MAJOR OVERHAULS
Details of provision for major overhauls in respect of aircraft held under
operating leases are as follows:
THE GROUP THE COMPANY
-------------------- ------------------
2003 2002 2003 2002
RMB'000 RMB'000 RMB'000 RMB'000
------- ------- ------- --------
Balance at 1 January, 193,887 187,125 63,389 48,154
Additional amount provided 68,620 49,051 67,603 33,460
Amount utilised (62,326) (42,289) - (18,225)
------- ------- ------- -------
Balance at 31 December, 200,181 193,887 130,992 63,389
Less: Current portion included in
accrued expenses 10,717 52,000 -
------- ------- ------- -------
189,464 141,887 130,992 63,389
======= ======= ======= =======
25 SHARE CAPITAL
2003 2002
RMB'000 RMB'000
--------- ---------
Registered capital:
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
1,000,000,000 A shares of RMB 1.00 each 1,000,000 -
--------- ---------
4,374,178 3,374,178
========= =========
Issued and paid up capital:
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
1,000,000,000 A shares of RMB 1.00 each 1,000,000 -
--------- ---------
4,374,178 3,374,178
========= =========
In July 2003, the Company issued 1,000,000,000 A shares with a par value
of RMB1.00 each at issue price of RMB2.70 by way of a public offering to
natural persons and institutional investors in the PRC. The share premium
received by the Company, net of the issuance costs of RMB59,233,000,
amounted to RMB1,640,767,000 and was credited to share premium account.
All the domestic, H and A shares rank pari passu in all material respects.
- 201 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
26 RESERVES
Movements on reserves during the year comprise:
THE GROUP THE COMPANY
------------------------ ---------------------------
2003 2002 2003 2002
Notes RMB'000 RMB'000 RMB'000 RMB'000
----- --------- --------- --------- ---------
Share premium
Balance at 1 January, 3,683,956 3,813,659 3,683,956 3,813,659
Land use rights adjustment (f) - (129,703) - (129,703)
Share premium from issuance of shares,
net of related issuance costs 1,640,767 - 1,640,767 -
--------- --------- --------- ---------
Balance at 31 December, 5,324,723 3,683,956 5,324,723 3,683,956
--------- --------- --------- ---------
Statutory surplus reserve (a)
Balance at 1 January, 337,195 391,867 337,195 121,943
Adjustments from adoption of new PRC
accounting regulations (c) - (106,007) - 163,917
Transfer from profit and loss account 23,856 51,335 1,449 51,335
--------- --------- --------- ---------
Balance at 31 December, 361,051 337,195 338,644 337,195
--------- --------- --------- ---------
Statutory public welfare fund (b)
Balance at 1 January, 171,574 225,440 171,574 114,558
Adjustments from adoption of new PRC
accounting regulations (c) - (79,533) - 31,349
Transfer from profit and loss account 1,113 25,667 724 25,667
--------- --------- --------- ---------
Balance at 31 December, 172,687 171,574 172,298 171,574
--------- --------- --------- ---------
Discretionary surplus reserve (d)
Balance at 1 January, 76,603 69,867 76,603 -
Adjustments from adoption of new PRC
accounting regulations (c) - - - 69,867
Transfer from profit and loss account - 6,736 - 6,736
--------- --------- --------- ---------
Balance at 31 December, 76,603 76,603 76,603 76,603
--------- --------- --------- ---------
Retained earnings/(Accumulated losses)
Balance at 1 January, 1,969,701 1,346,652 445,636 467,716
Adjustments from adoption of new PRC
accounting regulations (c) - 185,540 - (265,133)
Land use rights adjustment (f) - 12,970 - 12,970
(Loss)/profit for the year (358,267) 575,761 (580,959) 381,305
Appropriations to reserves (24,969) (83,738) (2,173) (83,738)
Dividends paid - (67,484) - (67,484)
--------- --------- --------- ---------
Balance at 31 December, 1,586,465 1,969,701 (137,496) 445,636
--------- --------- --------- ---------
Total 7,521,529 6,239,029 5,774,772 4,714,964
========= ========= ========= =========
- 202 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
26 RESERVES (cont'd)
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 profits 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.
(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 profits after taxation, as determined under PRC
accounting regulations, to the statutory public welfare fund. This
fund can only be utilised 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 and the Company adopted certain new PRC
accounting regulations which resulted in adjustments to the amounts
of the Group's and Company's profits 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 usage of this reserve is similar to that of statutory surplus
reserve.
(e) Under PRC Company Law and the Company's Articles of Association, the
net profit after taxation as reported in the PRC statutory financial
statements of the Company can only be distributed as dividends after
allowances have been made for:
(i) making up cumulative prior years' losses, if any;
(ii) allocations to the statutory surplus reserve of at least 10%
of after-tax profit, until the fund aggregates to 50% of the
Company's registered capital;
(iii) allocations of 5% to 10% of after-tax profit to the Company's
statutory public welfare fund; and
(iv) allocations to the discretionary surplus reserve, if approved
by the shareholders.
Pursuant to the Articles of Association of the Company, the net
profit of the Company for the purpose of profit distribution is
deemed to be the lesser of (i) the net profit determined in
accordance with the PRC accounting principles and financial
regulations and (ii) the net profit determined in accordance with
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. As at 31 December, 2003,
the Company did not have any distributable reserves (2002:
RMB445,636,000).
- 203 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
26 RESERVES (cont'd)
Notes: (cont'd)
(f) The Group adopted IAS 40 "Investment Property" in 2002. 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 1 January,
2002. Accordingly, the unamortised 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 IAS
40 was adopted prospectively in 2002 as 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.
27 RELATED PARTY TRANSACTIONS
The Group obtained various operational and financial services provided by
CSAHC and its affiliates, and the Group's associated companies and jointly
controlled entities during the normal course of its business. In the past,
CSAHC was under the direct control of the CAAC. However, such control has
been shifted to the State Assets Administration Committee since early
2003. Consequently, transactions with the CAAC and its affiliates are no
longer presented as related party transactions of the Group.
- 204 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
27 RELATED PARTY TRANSACTIONS (cont'd)
The following is a summary of significant transactions carried out in the
normal course of business between the Group, CSAHC and its affiliates, and
the Group's associated companies and jointly controlled entities during
the year:
2003 2002
Notes RMB'000 RMB'000
----- ------- -------
EXPENSES
PAID TO CSAHC AND OTHER RELATED PARTIES
Handling charges (a) 27,051 36,306
Wet lease rentals (b) 35,751 26,164
Advertising expenses (c) - 3,275
Sundry aviation supplies (d) 42,849 101,350
Commission expense (e) 4,896 16,725
Air catering expense (f) 28,199 29,058
Repairing charges (g) 693,303 592,311
Housing benefits (h) 85,000 85,000
Lease charges for land and buildings (i) 15,224 15,224
Flight simulation service charges (j) 101,355 -
PAID TO CAAC AND ITS AFFILIATES
Jet fuel supplies - 2,373,956
Aircraft insurance - 256,238
Guarantee fees - 1,025
Ticket reservation service charges - 107,234
Passenger departure and cargo handling charges - 62,111
Aircraft and traffic servicing charges - 1,667,706
Commission expense - 464,721
INCOME
RECEIVED FROM CSAHC AND OTHER RELATED PARTIES
Rental income (j) 34,175 -
Wet lease rentals (k) - 27,599
Interest income (l) 3,100 10,530
RECEIVED FROM CAAC AND ITS AFFILIATES
Ground services income - 39,735
Commission income - 81,931
OTHERS
Short term advances from CSAHC (m) 165,995 -
Refund of medical benefit payments (n) 58,120 -
Acquisition of aircraft and related
spare parts and vehicles (o) - 946,866
Acquisition of subsidiaries (p) - 107,846
======= =========
- 205 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
27 RELATED PARTY TRANSACTIONS (cont'd)
Notes:
(a) Handling charges represent fees payable to Southern Airlines (Group)
Import and Export Trading Company, a wholly owned subsidiary of
CSAHC, in connection with the procurement of aircraft and flight
equipment on the Group's behalf. Handling charges are calculated
based on a fixed percentage of the purchase value and other charges.
(b) Wet lease rentals represented rentals payable to Xinjiang Airlines
Company, a subsidiary of CSAHC, pursuant to a wet lease agreement in
respect of a Boeing 757-200 aircraft effective October 2002. The wet
lease agreement was terminated in April 2003.
(c) Advertising expenses represent expense reimbursements to Southern
Airlines Advertising Company ("SAAC") for promotional services
rendered to the Group. SAAC was a subsidiary of CSAHC up to July
2002. In August 2002, the Company acquired 90% equity interest in
SAAC from CSAHC.
(d) Sundry aviation supplies represent purchases of aviation supplies
from Southern Airlines (Group) Economic Development Company, a
subsidiary of CSAHC. Prices charged by this supplier to the Group
are similar to those charged to other PRC airlines.
(e) Commission expense represents commissions payable to certain
subsidiaries of CSAHC in connection with services provided in
exchange for air tickets sold by them. These commissions are
calculated based on a fixed rate ranging from 1.5% to 12% on the
ticket value.
(f) Air catering expense represents purchases of 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 profits after tax.
(g) Repairing charges represent fees incurred by the Group in connection
with aircraft repair and maintenance services rendered by Guangzhou
Aircraft Maintenance Engineering Company Limited ("GAMECO") and MTU
Maintenance Zhuhai Co., Ltd. ("MTU Zhuhai"). GAMECO and MTU Zhuhai
are jointly controlled entities of the Company.
(h) Housing benefits represent a fixed annual fee payable to CSAHC in
respect of the provision of quarters to the eligible employees of
the Group. (Note 28).
(i) Charges were paid to CSAHC under certain lease agreements in respect
of certain land and buildings in the PRC (Note 10).
(j) Flight simulation service charges represent fees incurred by the
Group in connection with flight simulation services provided by
Zhuhai Xiang Yi, a jointly controlled entity of the Company.
In addition, the Company entered into operating lease agreements to
lease certain flight training facilities and buildings to Zhuhai
Xiang Yi. Rental income earned by the Company amounted to
RMB34,175,000 during 2003 (Note 10).
(k) During the period from August to October 2002, the Company received
wet lease rentals totalling RMB27,599,000 from wet leasing of an
Airbus 320-200 aircraft to Sichuan Airlines Corporation Limited, an
associated company of the Company.
(l) Interest income represents interest received from deposits placed
with SA Finance. The applicable interest rate is determined in
accordance with the deposit rate published by the People's Bank of
China (see Note 20).
- 206 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
27 RELATED PARTY TRANSACTIONS (cont'd)
Notes: (cont'd)
(m) During the year, CSAHC made short term advances to the Group. These
advances are unsecured, interest free and repayable on demand. As at
31 December, 2003, the advances amounted to RMB165,995,000.
(n) Prior to 1 January, 2002, the Group paid a fixed annual fee to CSAHC
in return for CSAHC providing medical benefit, transportation
subsidies and other welfare facilities to the retirees of the Group.
Such arrangement was terminated on 1 January, 2002. During 2003,
CSAHC refunded to the Group the difference between the aggregate
fixed annual fees received from the Group and the aggregate cost of
services incurred by CSAHC under the above arrangement.
(o) During 2002, 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
RMB1,096,866,000. The consideration was satisfied by cash of
approximately RMB132,130,000 together with an assumption by the
Group of Zhongyuan Airlines' debts of approximately RMB964,736,000.
In addition, the Group received reimbursements of wet lease rentals
totalling RMB150,000,000.
(p) In August 2002, the Company 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
RMB107,846,000. Such consideration is determined by reference to the
valuation reports prepared by Guangzhou Zhongtian Valuation Company
Limited, a firm of independent valuers registered in the PRC.
In addition to the above, certain business undertakings of CSAHC also
provided hotel and other services to the Group during the year. The total
amount involved is not material to the results of the Group for the year.
The directors of the Company are of the opinion that the above
transactions with related parties were entered into in the normal course
of business and on normal commercial terms or in accordance with the
agreements governing such transactions.
28 RETIREMENT AND HOUSING BENEFITS
Employees of the Group participate in several defined contribution
retirement schemes organised 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 14% to
19% (2002: 14% to 19%) 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 a rate of
4.5% of total salaries. The Group has no obligation for the payment of
pension benefits beyond the contributions described above. Contributions
to the retirement schemes are charged to the profit and loss account as
and when incurred.
- 207 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
28 RETIREMENT AND HOUSING BENEFITS (cont'd)
Furthermore, pursuant to the comprehensive services agreement (the
"Services Agreement") dated 22 May, 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 RMB85,000,000 to CSAHC for a ten-year period effective 1
January, 1995.
During 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 respective
employees in accordance with the relevant PRC housing reform policy. The
excess of the cost of these additional quarters over the considerations
received by the Group from the employees of RMB17,624,000 were charged to
expenses in 2002.
Pursuant to an additional staff housing benefit scheme effective September
2002, the Group 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 subsidising their purchases
of housing. Such expenditure has been deferred and amortised 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 profit and loss account. As at 31 December, 2003, the Group
already made payments totalling RMB130,479,000 (2002: RMB46,325,000) under
the scheme and recorded its remaining contractual liabilities totalling
RMB129,521,000 (2002: RMB213,675,000) as accrued liabilities on its
balance sheet.
- 208 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
29 COMMITMENTS
(a) CAPITAL COMMITMENTS
As at 31 December, 2003, the Group and the Company had capital
commitments as follows:
THE GROUP THE COMPANY
--------------------- -----------------------
2003 2002 2003 2002
RMB'000 RMB'000 RMB'000 RMB'000
---------- --------- ---------- ---------
Commitments in respect of
aircraft and related equipment
(Note)
- authorised and contracted for 10,615,079 5,875,996 7,739,290 5,875,996
---------- --------- ---------- ---------
Commitments in respect of
investments in the
Guangzhou new airport
- authorised and contracted for 617,277 525,700 617,277 525,700
- authorised but not
contracted for 1,454,661 2,601,720 1,454,661 2,601,720
---------- --------- ---------- ---------
2,071,938 3,127,420 2,071,938 3,127,420
---------- --------- ---------- ---------
Other commitments
- authorised and contracted for 232,570 43,887 29,628 42,968
- authorised but not
contracted for 708,099 500,545 229,302 245,440
---------- --------- ---------- ---------
940,669 544,432 258,930 288,408
---------- --------- ---------- ---------
13,627,686 9,547,848 10,070,158 9,291,824
========== ========= ========== =========
- 209 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
29 COMMITMENTS (cont'd)
(a) CAPITAL COMMITMENTS (cont'd)
Note: As at 31 December, 2003, the Group had on order 2 Boeing
757-200 aircraft, 13 Boeing 737-700 aircraft, 4 Airbus 330-200
aircraft, 6 Embraer ERJ-145 aircraft and certain flight
equipment, scheduled for deliveries in 2004 to 2005. Deposits
of RMB2,494,853,000 have been made towards the purchase of
these aircraft and related equipment. At 31 December, 2003,
the approximate total future payments, including estimated
amounts for price escalation through anticipated delivery
dates for these aircraft and related equipment are as follows:
THE GROUP THE COMPANY
---------------------- --------------------
2003 2002 2003 2002
RMB'000 RMB'000 RMB'000 RMB'000
---------- --------- --------- ---------
Year ending 31 December,
2003 - 2,801,451 - 2,801,451
2004 4,584,823 2,343,978 3,248,674 2,343,978
2005 6,030,256 730,567 4,490,616 730,567
---------- --------- --------- ---------
10,615,079 5,875,996 7,739,290 5,875,996
========== ========= ========= =========
The Group has taken steps towards the purchase of the airline
business of China Northern Airlines Company and Xinjiang
Airlines Company. No contractual obligations existed as at 31
December, 2003 and up to the date of approval of these
financial statements. The purchase price has not yet been
determined.
As at 31 December, 2003, the Group's and the Company's
attributable share of the capital commitments of jointly
controlled entities was as follows:
THE GROUP AND THE COMPANY
-------------------------
2003 2002
RMB'000 RMB'000
------- -------
Authorised and contracted for 24,137 63,723
Authorised but not contracted for 283,761 518,000
------- -------
307,898 581,723
======= =======
- 210 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
29 COMMITMENTS (cont'd)
(b) OPERATING LEASE COMMITMENTS
As at 31 December, 2003, commitments under non-cancellable aircraft
and flight equipment operating leases were as follows:
THE GROUP THE COMPANY
-------------------- ------------------------
2003 2002 2003 2002
RMB'000 RMB'000 RMB'000 RMB'000
--------- --------- --------- ---------
Payments due
Within one year 1,482,888 1,280,060 1,193,892 1,044,720
In the second to fifth year, inclusive 4,248,095 4,358,474 3,578,618 3,772,227
After the fifth year 2,388,874 2,898,104 2,278,463 2,893,237
--------- --------- --------- ---------
8,119,857 8,536,638 7,050,973 7,710,184
========= ========= ========= =========
(c) INVESTING COMMITMENTS
As at 31 December, 2003, the Company was committed to make a capital
contribution of approximately RMB446 million and RMB Nil
respectively (2002: RMB60 million and RMB201 million respectively)
to its jointly controlled entities and associated companies.
30 CONTINGENT LIABILITIES
(a) The Company has been advised by its PRC lawyers that, except for
liabilities constituting or arising out of or relating to the
businesses assumed by the Company in the Reorganisation, 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 Reorganisation. There are not,
however, any definitive PRC regulations or other pronouncements
confirming such conclusion.
(b) 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.
- 211 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
30 CONTINGENT LIABILITIES (cont'd)
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.
(c) The Company is currently involved in a civil litigation (Hong Kong
High Court Action No. 515 of 2001) ("Litigation"). According to the
writ of summons for the Litigation, New Link Consultants Limited,
the plaintiff, claimed against the Group (as one of the defendants
to the Litigation) on the basis of certain evidence proving that
United Aero-Supplies System of China, Limited ("UASSC") entered into
an agreement with the defendants for exclusive purchase of aviation
equipment consigned to UASSC for sale and, that as the defendants
failed to perform the agreement, UASSC has the right to
compensation. Since UASSC is in the course of its winding up
proceedings, all the rights and benefits of UASSC in connection with
the claim have been transferred to the plaintiff. The Company, as
one of the defendants to the Litigation, has been claimed for
unspecified damages for breach of the agreement. Given that the
Litigation is still at its preliminary stage, it is pre-matured to
predict the result of the court judgment. Based on the opinion given
by its instructing solicitors, the Company's directors consider that
the Company has a reasonable chance of success in its defence to the
claim. At present, the Company has filed an objection in respect of
the jurisdiction of the court, and has requested the court to
transfer the case of Mainland China for trial. Accordingly, the
Company's directors consider that a provision for such claim and/or
the associated legal costs is not required.
31 FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK
Financial assets of the Group include cash and cash equivalents,
investments, trade receivables and other receivables. Financial
liabilities of the Group include bank and other loans, amounts due to
related companies, other liabilities, accounts payable, bills payable,
sales in advance of carriage, accrual expenses and obligations under
finance leases.
LIQUIDITY RISK
As at 31 December, 2003, the Group's net current liabilities amounted to
RMB10,792 million (2002: RMB7,016 million). For the year ended 31
December, 2003, the Group recorded a net cash inflow from operating
activities of RMB2,129 million (2002: RMB3,698 million), a net cash
outflow from investing activities and financing activities of RMB3,820
million (2002: RMB2,745 million) and a decrease in cash and cash
equivalents of RMB1,691 million (2002: increase of RMB953 million).
With regard to 2004 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 bank loans outstanding
at 31 December, 2003, the Group has obtained firm commitments from its
principal bankers to renew the relevant loans as they fall due during
2004. With regard to its future capital commitments and other financing
requirements, the Group has already entered into loan financing agreements
with several PRC banks to provide loan finance up to an approximate amount
of RMB8,450 million during 2004 and thereafter. The directors of the
Company believe that such financing will be available to the Group.
- 212 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
31 FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK (cont'd)
LIQUIDITY RISK (cont'd)
The directors of the Company have carried out a detailed review of the
cash flow forecast of the Group for the twelve months ending 31 December,
2004. 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 realised.
BUSINESS RISK
The Group conducts its principal operations in the PRC 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 airlines services industry.
INTEREST RATE RISK
The interest rates and maturity information of the Group's bank and other
loans, and the maturity information of the Group's finance lease
obligations are disclosed in Notes 21 and 22 respectively.
FOREIGN CURRENCY RISK
The Group has significant exposure to foreign currency as substantially
all of the Group's lease obligations and bank loans 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, or subject to certain restrictive conditions, entering into
forward foreign exchange contracts with authorised PRC banks.
- 213 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
31 FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK (cont'd)
CREDIT RISKS
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 organised by International Air
Transportation Association. As of 31 December, 2003, the balance due from
BSP agents amounted to RMB446,399,000 (2002: RMB353,246,000).
SELF INSURANCE RISK
The Group maintains a limited amount of property insurance in respect of
certain personal and real property.
FAIR VALUE
The carrying amounts and estimated fair values of significant financial
assets and liabilities at 31 December, 2002 and 2003 are set out below:
2003 2002
CARRYING FAIR Carrying Fair
AMOUNT VALUE amount value
RMB'000 RMB'000 RMB'000 RMB'000
--------- --------- --------- ---------
THE GROUP
Cash and cash equivalents 2,080,174 2,080,174 3,771,043 3,771,043
Trade receivables 833,604 833,604 671,776 671,776
Other receivables 296,047 296,047 372,586 372,586
Bank and other loans, current portion 7,096,846 7,164,216 5,240,726 5,326,511
Amounts due to related companies 929,003 929,003 525,090 525,090
Other liabilities 1,019,811 1,019,811 646,989 646,989
Accounts payable 928,093 928,093 532,480 532,480
Bills payable 438,135 438,135 1,299,680 1,299,680
Sales in advance of carriage 466,087 466,087 390,531 390,531
Accrued expenses 2,527,794 2,527,794 2,341,454 2,341,454
Bank and other loans, non-current portion 4,521,735 4,743,128 5,835,434 6,111,052
--------- --------- --------- ---------
- 214 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
31 FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK (cont'd)
FAIR VALUE (cont'd)
2003 2002
CARRYING FAIR Carrying Fair
AMOUNT VALUE amount value
RMB'000 RMB'000 RMB'000 RMB'000
--------- --------- --------- ---------
THE COMPANY
Cash and cash equivalents 1,404,874 1,404,874 2,960,337 2,960,337
Trade receivables 683,206 683,206 464,930 464,930
Other receivables 222,438 222,438 239,601 239,601
Bank and other loans, current portion 5,958,968 6,010,222 3,479,322 3,546,409
Amounts due to related companies 870,682 870,682 358,077 358,077
Other liabilities 854,057 854,057 411,218 411,218
Accounts payable 745,888 745,888 296,989 296,989
Bills payable 438,135 438,135 1,299,680 1,299,680
Sales in advance of carriage 405,851 405,851 340,457 340,457
Accrued expenses 1,628,072 1,628,072 1,049,806 1,049,806
Bank and other loans, non-current portion 3,670,499 3,827,220 4,628,372 4,811,961
--------- --------- --------- ---------
The following methods and assumptions were used to estimate the fair value
for each class of financial instrument:
(i) Cash and cash equivalents, trade receivables, other receivables,
amounts due to related companies, other liabilities, accounts
payable, bills payable, sales in advance of carriage and accrued
expenses
The carrying values approximate fair value because of the short
maturities of these instruments.
(ii) Bank and other loans
The fair value has been estimated by applying a discounted cash flow
approach using interest rates available to the Group for similar
indebtedness.
- 215 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
31 FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK (cont'd)
The economic characteristics of the Group's 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. 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.
Fair value estimates are made at a specific point in time and are based on
relevant market information about the financial instruments. These
estimates are subjective in nature and involve uncertainties and matters
of significant judgement and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
32 SEGMENTAL INFORMATION
Geographic information about the Group's turnover and operating
profit/(loss) are as follows:
HONG KONG
DOMESTIC REGIONAL *INTERNATIONAL TOTAL
RMB'000 RMB'000 RMB'000 RMB'000
---------- --------- -------------- ----------
2003
Traffic revenue 13,086,939 807,677 3,070,184 16,964,800
Other revenue 436,122 - 69,201 505,323
---------- --------- --------- ----------
13,523,061 807,677 3,139,385 17,470,123
========== ========= ========= ==========
Operating profit/(loss) 440,158 (29,210) 44,781 455,729
========== ========= ========= ==========
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 profit 1,614,975 193,440 217,662 2,026,077
========== ========= ========= ==========
* Mainly routes between the PRC and Asian countries, the United States of
America, the Netherlands, Belgium and Australia.
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 the PRC.
- 216 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
33 RECONCILIATION AND SUPPLEMENTARY STATEMENT OF CASH FLOW INFORMATION
(a) THE RECONCILIATION OF (LOSS)/PROFIT BEFORE TAXATION AND MINORITY
INTERESTS TO CASH INFLOWS FROM OPERATIONS IS AS FOLLOWS:
2003 2002
RMB'000 RMB'000
--------- ---------
(Loss)/profit before taxation and minority interests (511,610) 1,139,099
Depreciation and amortisation of fixed assets 1,997,882 1,839,293
Other amortisation 40,089 9,816
Amortisation of deferred credits (1,541) (7,217)
Share of associated companies' results (47,798) (36,988)
Share of jointly controlled entities' results 39,495 3,352
Loss/(gain) on sale of fixed assets 22,217 (170,740)
Interest income (13,061) (52,618)
Interest expense 823,725 959,193
Unrealised exchange loss, net 177,356 174,978
Decrease/(increase) in inventories 1,923 (76,472)
Increase in trade receivables (161,828) (110,749)
Decrease/(increase) in other receivables 76,539 (166,004)
(Increase)/decrease in prepaid expenses and other assets (6,045) 123,924
Increase/(decrease) in amounts due to related companies 403,913 (193,175)
Increase/(decrease) in accounts payable 395,613 (61,843)
(Decrease)/increase in bills payable (861,545) 1,299,680
Increase in sales in advance of carriage 75,556 19,985
Increase in accrued expenses 203,439 86,215
Increase/(decrease) in other liabilities 372,822 (33,032)
Increase in provision for major overhauls 47,577 16,226
--------- ---------
Cash inflows from operations 3,074,718 4,762,923
========= =========
(b) DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During 2002, the Group assumed from Zhongyuan Airlines debts
totalling RMB964,736,000 in partial satisfaction of the
consideration payable for acquisition of five Boeing 737-300/37K
aircraft and other assets from Zhongyuan Airlines (Note 27(o)).
- 217 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
33 RECONCILIATION AND SUPPLEMENTARY STATEMENT OF CASH FLOW INFORMATION
(cont'd)
(c) EFFECT OF ACQUISITION OF SUBSIDIARIES
2003 2002
RMB'000 RMB'000
------- -------
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
------- -------
Net assets value - 119,829
======= =======
Consideration paid - 107,846
Cash and cash equivalents acquired - 17,355
------- -------
Net cash outflow from acquisition of subsidiaries - 90,491
======= =======
34 ULTIMATE HOLDING COMPANY
The directors of the Company consider the ultimate holding company to be
CSAHC, a state-owned enterprise established in the PRC.
35 SUBSEQUENT EVENTS
In April 2004, the Company entered into a purchase agreement with Airbus
SNC for the acquisition of fifteen Airbus 320-200 aircraft and six Airbus
319-100 aircraft, scheduled for deliveries in 2005 and 2006.
- 218 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
36 SUBSIDIARIES
The particulars of the Company's principal subsidiaries at 31 December,
2003 are as follows:
ATTRIBUTABLE
PLACE AND EQUITY INTEREST
DATE OF ----------------- ISSUED/
ESTABLISHMENT/ DIRECT INDIRECT REGISTERED PRINCIPAL
NAME OF COMPANY OPERATION % % CAPITAL# ACTIVITIES
China Southern Airlines PRC 100 - 100,000,000 Helicopter
(Group) Zhuhai Helicopter 31 August, 1993 transportation
Company Limited (a)
Guangxi Airlines PRC 60 - 170,900,000 Airline
Company Limited (a) 28 April, 1994
Southern Airlines Group PRC 60 - 280,000,000 Airline
Shantou Airlines 20 July, 1993
Company Limited (a)
Zhuhai Airlines PRC 60 - 250,000,000 Airline
Company Limited (a) 8 May, 1995
Xiamen Airlines PRC 60 - 588,434,000 Airline
Company Limited (a) 11 August, 1984
Guizhou Airlines PRC 60 - 80,000,000 Airline
Company Limited (a) 12 November, 1991
Guangzhou Nanland Air PRC 51 - 55,980,000 Air catering
Catering Company 21 November, 1989
Limited (b)
China Southern West Australia 65 - A$100,000 Pilot training
Australian Flying 26 January, 1971 services
College Pty Ltd
Guangzhou Baiyun International PRC 61 - 20,000,000 Logistics
Logistic Company Ltd 23 July, 2002 operations
Guangzhou Aviation Hotel PRC 90 - 63,290,000 Hotel operation
8 January, 1997
- 219 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
36 SUBSIDIARIES (cont'd)
ATTRIBUTABLE
PLACE AND EQUITY INTEREST
DATE OF ----------------- ISSUED/
ESTABLISHMENT/ DIRECT INDIRECT REGISTERED PRINCIPAL
NAME OF COMPANY OPERATION % % CAPITAL# ACTIVITIES
Southern Airlines Advertising PRC 90 - 2,000,000 Aviation
Company Ltd 3 March, 1994 advertising
South China International PRC 90 - 2,100,000 Travel services
Aviation & Travel Services 11 May, 1992
Company
CZ Flamingo Limited Cayman Islands 100 - US$1,000 Aircraft leasing
8 December, 1993
CZ Skylark Limited Cayman Islands 100 - US$1,000 Aircraft leasing
17 November, 1993
CZ Kapok Limited Cayman Islands 100 - US$1,000 Aircraft leasing
26 October, 1993
CSA-I Limited Cayman Islands 100 - US$1,000 Aircraft leasing
1 September, 1993
CZ93B Limited Cayman Islands 100 - US$1,000 Aircraft leasing
11 May, 1993
CZ97A Limited Cayman Islands 100 - US$1,000 Aircraft leasing
2 January, 1997
Zhong Yuan 99A Limited Cayman Islands 100 - US$1,000 Aircraft leasing
15 February, 1999
CXA92A Limited Cayman Islands - 60 US$1,000 Aircraft leasing
3 August, 1992
CXA93A Limited Cayman Islands - 60 US$1,000 Aircraft leasing
1 July, 1993
CXA95B Limited Cayman Islands - 60 US$1,000 Aircraft leasing
7 July, 1995
- 220 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
36 SUBSIDIARIES (cont'd)
ATTRIBUTABLE
PLACE AND EQUITY INTEREST
DATE OF ----------------- ISSUED/
ESTABLISHMENT/ DIRECT INDIRECT REGISTERED PRINCIPAL
NAME OF COMPANY OPERATION % % CAPITAL# ACTIVITIES
CXA95C Limited Cayman Islands - 60 US$1,000 Aircraft leasing
16 October, 1995
CXA98A Limited Cayman Islands - 60 US$1,000 Aircraft leasing
20 March, 1998
Xiamen Aviation PRC - 60 5,000,000 Property
Property Development 22 June, 1993 development
Company (a)
Xiamen Aviation PRC - 60 620,218 Aviation
Advertising Company 17 December, 1992 advertising
Limited (a)
Xiamen Aviation PRC - 60 8,560,000 Aviation supplies
Supplies Limited (a) 30 July, 1997
Xiamen Aviation PRC - 54 5,000,000 Hotel
Development 18 February, 1998 management
Company Limited (a)
Bai Lu Finance Limited Hong Kong - 54 HK$10,000,000 Investment
22 February, 1996 holding
Xiamen Air Holidays Hong Kong - 54 HK$3,000,000 Travel
Limited 28 April, 1994 servicing
Xiamen Macau Macau - 27.5 MOP1,000,000 Travel
Holidays Limited 11 May, 1995 servicing
Shantou Hua Kang Air PRC - 42 10,000,000 Air catering
Catering Company Ltd (a) 22 June, 1994
# Expressed in RMB, unless otherwise stated
(a) These subsidiaries are PRC limited companies.
(b) These subsidiaries are Sino-foreign equity joint venture companies
- 221 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
37 ASSOCIATED COMPANIES AND JOINTLY CONTROLLED ENTITIES
The particulars of the Group's principal associated companies and jointly
controlled entities as at 31 December, 2003 are as follows:
ATTRIBUTABLE
PLACE AND EQUITY INTEREST
DATE OF ----------------- ISSUED/
ESTABLISHMENT/ DIRECT INDIRECT REGISTERED PRINCIPAL
NAME OF COMPANY OPERATION % % CAPITAL# ACTIVITIES
Guangzhou Aircraft PRC 50 - US$27,500,000 Provision of
Maintenance 28 October, 1989 aircraft repair
Engineering and
Company Limited* (Note) maintenance
services
Southern Airlines PRC 32 15.42 424,330,000 Provision of
Group Finance 28 June, 1995 financial
Company Limited services
Hainan Phoenix PRC 45 - US$16,360,000 Provision of
Information 12 March, 1994 ticket
System Limited reservation
system
services
Hong Kong Business Hong Kong 20 - HKD1,000,000 Provision of
Aviation Centre 7 January, 1998 private
Company Limited flight logistic
services
Sichuan Airlines PRC 39 - 350,000,000 Airline
Corporation Limited 28 August, 2002
MTU Maintenance PRC 50 - US$63,100,000 Provision of
Zhuhai Co. Ltd.* 6 April, 2001 engine
repair and
maintenance
services
China Postal Airlines PRC 49 - 306,000,000 Airline
Limited* 25 November, 1996
- 222 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES TO THE FINANCIAL STATEMENTS (Cont'd)
(PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS)
(EXPRESSED IN RENMINBI)
37 ASSOCIATED COMPANIES AND JOINTLY CONTROLLED ENTITIES (cont'd)
ATTRIBUTABLE
PLACE AND EQUITY INTEREST
DATE OF ----------------- ISSUED/
ESTABLISHMENT/ DIRECT INDIRECT REGISTERED PRINCIPAL
NAME OF COMPANY OPERATION % % CAPITAL# ACTIVITIES
Zhuhai Xiang Yi PRC 51 - US$29,800,000 Provision of
Aviation Technology 10 July, 2002 flight
Company Limited* simulation
services
CSN-ETC e-commerce PRC 51 - 5,880,000 Provision of
Limited* 10 February, 2003 internet
services
# Expressed in RMB, unless otherwise stated
* These are jointly controlled entities
Note: Guangzhou Aircraft Maintenance Engineering Company Limited has been
reclassified from an associated company to a jointly controlled
entity since 2003 due to a change in the composition of its
shareholders in 2003.
- 223 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
C. UNAUDITED INTERIM FINANCIAL REPORT OF THE COMPANY FOR THE SIX-MONTH PERIOD
ENDED 30 JUNE, 2004
PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
CONSOLIDATED PROFIT AND LOSS ACCOUNT (UNAUDITED)
2004 vs
2003
FOR THE SIX MONTHS ENDED 30 JUNE, Increase/
2004 2003 2004 2004 (Decrease)
Note RMB'000 RMB'000 HK$'000 US$'000 (%)
---- ---------- --------- --------- --------- ----------
Operating revenue
Traffic revenue:
Passenger 9,776,002 5,615,796 9,214,819 1,181,162 74.1
Cargo and mail 1,058,276 921,883 997,527 127,864 14.8
---------- --------- ---------- ---------
10,834,278 6,537,679 10,212,346 1,309,026 65.7
Other revenue 259,659 195,193 244,754 31,372 33.0
---------- --------- ---------- ---------
Total operating revenue 2 11,093,937 6,732,872 10,457,100 1,340,398 64.8
---------- --------- ---------- ---------
Operating expenses:
Flight operations 4,722,442 3,516,885 4,451,355 570,578 34.3
Maintenance 1,409,841 1,218,488 1,328,910 170,341 15.7
Aircraft and traffic servicing 1,688,612 1,197,273 1,591,679 204,022 41.0
Promotion and sales 874,393 673,965 824,199 105,646 29.7
General and administrative 551,719 480,598 520,048 66,660 14.8
Depreciation and amortisation 1,083,346 1,016,530 1,021,158 130,893 6.6
Other 8,244 3,465 7,771 996 137.9
---------- --------- ---------- ---------
Total operating expenses 10,338,597 8,107,204 9,745,120 1,249,136 27.5
---------- --------- ---------- ---------
Operating profit/(loss) 755,340 (1,374,332) 711,980 91,262 155.0
---------- --------- ---------- ---------
Non-operating income/(expenses):
Share of associated companies'
results 21,156 2,825 19,942 2,556 648.9
Share of jointly controlled
entities' results 4,351 (21,654) 4,101 526 120.1
Profit/(loss) on sale of fixed
assets 2,999 (22,679) 2,827 362 113.2
Interest income 8,994 5,842 8,478 1,087 54.0
Interest expense 3 (343,620) (455,456) (323,895) (41,517) (24.6)
Exchange gain/(loss), net 15,397 (4,774) 14,513 1,860 422.5
Other, net 4,531 (287) 4,271 548 1,678.7
---------- --------- ---------- ---------
Total net non-operating expenses (286,192) (496,183) (269,763) (34,578) (42.3)
---------- --------- ---------- ---------
Profit/(loss) before taxation
and minority interests 3 469,148 (1,870,515) 442,217 56,684 125.1
Taxation (expense)/credit 4 (94,790) 544,992 (89,349) (11,453) (117.4)
---------- --------- ---------- ---------
Profit/(loss) before minority
interests 374,358 (1,325,523) 352,868 45,231 128.2
Minority interests (108,174) 93,910 (101,964) (13,070) 215.2
---------- --------- ---------- ---------
Profit/(loss) attributable to
shareholders 266,184 (1,231,613) 250,904 32,161 121.6
========== ========= ========== =========
Basic earnings/(loss) per share 5 RMB0.06 RMB(0.37) HK$0.06 US$0.007 116.7
========== ========= ========== =========
The notes on pages 229 to 235 form part of this interim financial report.
-224-
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
CONSOLIDATED BALANCE SHEET (UNAUDITED)
As at 30 June, 2004
(Expressed in Renminbi)
AS AT As at
30 JUNE, 31 December,
2004 2003
Note RMB'000 RMB'000
---- ---------- ------------
NON-CURRENT ASSETS
Fixed assets 29,128,791 28,535,907
Construction in progress 2,189,052 1,629,689
Lease prepayments 344,755 348,652
Interest in associated companies 443,780 422,201
Interest in jointly controlled entities 787,874 731,323
Other investments 199,007 204,971
Lease and equipment deposits 4,717,553 2,932,591
Deferred expenditure 233,726 248,853
Long-term receivables 6,648 6,380
---------- ----------
38,051,186 35,060,567
---------- -----------
CURRENT ASSETS
Inventories 572,457 543,777
Trade receivables 7 1,210,680 833,604
Other receivables 310,365 296,047
Prepaid expenses and other assets 323,947 247,926
Cash and cash equivalents 2,931,786 2,080,174
---------- -----------
5,349,235 4,001,528
---------- -----------
CURRENT LIABILITIES
Bank and other loans 9,931,236 7,096,846
Obligations under finance leases 1,138,495 1,297,855
Amounts due to related companies 906,353 929,003
Other liabilities 1,176,852 1,019,811
Accounts payable 8 841,409 928,093
Bills payable - 438,135
Sales in advance of carriage 386,255 466,087
Accrued expenses 3,217,955 2,527,794
Taxes payable 72,954 89,954
---------- -----------
17,671,509 14,793,578
---------- -----------
NET CURRENT LIABILITIES (12,322,274) (10,792,050)
---------- -----------
TOTAL ASSETS LESS CURRENT LIABILITIES 25,728,912 24,268,517
---------- -----------
LONG-TERM LIABILITIES AND DEFERRED ITEMS
Bank and other loans 6,062,819 4,521,735
Obligations under finance leases 5,006,135 5,543,084
Provision for major overhauls 230,525 189,464
Deferred credits 44,983 46,554
Deferred taxation 456,354 398,305
---------- -----------
11,800,816 10,699,142
---------- -----------
13,928,096 13,569,375
========== ===========
The notes on pages 229 to 235 form part of this interim financial report.
-225-
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
CONSOLIDATED BALANCE SHEET (UNAUDITED)(Continued)
As at 30 June, 2004
(Expressed in Renminbi)
AS AT As at
30 JUNE, 31 December,
2004 2003
Note RMB'000 RMB'000
---- ---------- ------------
REPRESENTING:
SHARE CAPITAL 4,374,178 4,374,178
RESERVES 9 7,787,713 7,521,529
---------- -----------
SHAREHOLDERS' EQUITY 12,161,891 11,895,707
MINORITY INTERESTS 1,766,205 1,673,668
---------- -----------
13,928,096 13,569,375
========== ===========
Approved and authorised for issue by the board of directors on 26 August, 2004.
YAN ZHI QING WANG CHANG SHUN XU JIE BO
Director Director Director
The notes on pages 229 to 235 form part of this interim financial report.
-226-
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
For the six months ended 30 June, 2004
(Expressed in Renminbi)
SHARE SHARE OTHER RETAINED
CAPITAL PREMIUM RESERVES EARNINGS TOTAL
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
--------- --------- -------- --------- ----------
At 1 January, 2003 3,374,178 3,683,956 585,372 1,969,701 9,613,207
Loss for the period - - - (1,231,613) (1,231,613)
--------- --------- ------- --------- ----------
At 30 June, 2003 3,374,178 3,683,956 585,372 738,088 8,381,594
========= ========= ======= ========= ==========
At 1 January, 2004 4,374,178 5,324,723 610,341 1,586,465 11,895,707
Profit for the period - - - 266,184 266,184
--------- --------- ------- --------- ----------
AT 30 JUNE, 2004 4,374,178 5,324,723 610,341 1,852,649 12,161,891
========= ========= ======= ========= ==========
The notes on pages 229 to 235 form part of this interim financial report.
-227-
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)
For the six months ended 30 June, 2004
(Expressed in Renminbi)
FOR THE SIX MONTHS
ENDED 30 JUNE,
2004 2003
RMB'000 RMB'000
---------- ----------
Net cash inflows from operating activities 1,217,840 1,199,731
Net cash used in investing activities (4,050,525) (1,886,023)
---------- ----------
Net cash outflows before financing activities (2,832,685) (686,292)
Net cash inflows/(outflows) from financing activities 3,684,297 (803,404)
---------- ----------
Increase/(decrease) in cash and cash equivalents 851,612 (1,489,696)
Cash and cash equivalents as at 1 January, 2,080,174 3,771,043
---------- ----------
Cash and cash equivalents as at 30 June, 2,931,786 2,281,347
========== ==========
The notes on pages 229 to 235 form part of this interim financial report.
-228-
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
NOTES:
1 BASIS OF PREPARATION
This interim financial report of China Southern Airlines Company Limited
(the "Company") and its subsidiaries (the "Group") is unaudited, but has
been reviewed by KPMG in accordance with Statement of Auditing Standards
700 "Engagements to review interim financial reports", issued by the Hong
Kong Society of Accountants. KPMG's independent review report to the Board
of Directors is included on page 25.
The interim financial report has been prepared in accordance with the
requirements of the Main Board Listing Rules of The Stock Exchange of Hong
Kong Limited, including compliance with International Accounting Standard
34 "Interim Financial Reporting" adopted by the International Accounting
Standards Board.
The financial information relating to the financial year ended 31
December, 2003 included in the interim financial report does not
constitute the Group's annual financial statements prepared under
International Financial Reporting Standards for that financial year but is
derived from those financial statements. The Group's annual financial
statements for the year ended 31 December, 2003 are available at the
Company's registered office. The auditors have expressed an unqualified
opinion on those financial statements in their report dated 23 April,
2004.
The accounting policies have been consistently applied by the Group and
are consistent with those adopted in the 2003 annual financial statements.
The notes on the unaudited interim financial report include an explanation
of events and transactions that are significant to an understanding of the
changes in financial position and performance of the Group since the 2003
annual financial statements.
2 TURNOVER
The Group is principally engaged in the provision of domestic, Hong Kong
regional and international passenger, cargo and mail airline services,
with flights operating primarily from the Guangzhou Baiyun International
Airport in the People's Republic of China ("PRC"), which is both the main
hub of the Group's route network and the location of its corporate
headquarters.
Turnover comprises revenues from airline and airline-related businesses
and is stated net of sales tax. The turnover for the six months ended 30
June, 2003, was stated net of sales tax and contributions to the CAAC
Infrastructure Development Fund.
Sales tax is payable at 3% (2003: 3%) of the Group's traffic revenue in
respect of domestic flights and international/Hong Kong regional outbound
flights. During the six months ended 30 June, 2003, the Group's passenger
revenue for May and June 2003 was exempted from sales tax.
Prior to 1 April, 2004, contributions to the CAAC Infrastructure
Development Fund were payable at 5% and 2%, respectively of the Group's
domestic and international/Hong Kong regional traffic revenue, except for
the period from 1 May, 2003 to 31 March, 2004 during which the Group was
exempted from contributions to the CAAC Infrastructure Development Fund.
Effective from 1 April, 2004, contributions to the CAAC Infrastructure
Development Fund are payable based on the Group's traffic capacity
deployed on its routes. The contributions now form part of the flight
operations expenses.
- 229 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
2 TURNOVER (Continued)
The Group's turnover and operating profit/(loss) by geographic region are
as follows:
FOR THE SIX MONTHS ENDED 30 JUNE,
HONG KONG
DOMESTIC REGIONAL INTERNATIONAL TOTAL
RMB'000 RMB'000 RMB'000 RMB'000
------- ------- ------- -------
2004
Traffic revenue 8,341,352 568,609 1,924,317 10,834,278
Other revenue 259,659 - - 259,659
--------- ------- --------- ----------
Turnover 8,601,011 568,609 1,924,317 11,093,937
========= ======= ========= ==========
Operating profit 604,728 38,852 111,760 755,340
========= ======= ========= ==========
2003
Traffic revenue 4,896,421 321,912 1,319,346 6,537,679
Other revenue 195,193 - - 195,193
--------- ------- --------- ----------
Turnover 5,091,614 321,912 1,319,346 6,732,872
========= ======= ========= ==========
Operating (loss) (1,198,810) (80,384) (95,138) (1,374,332)
========= ======= ========= ==========
3 PROFIT/(LOSS) BEFORE TAXATION AND MINORITY INTERESTS
FOR THE SIX MONTHS
ENDED 30 JUNE,
2004 2003
RMB'000 RMB'000
------- -------
Profit/(loss) before taxation and minority interests
is arrived at after charging:
Depreciation
- owned assets 815,604 768,595
- assets held under finance leases 254,742 247,935
Staff costs 1,061,144 847,623
Operating lease charges in respect of aircraft 827,665 820,491
Amortisation of deferred expenditure 13,000 13,348
--------- -------
Interest on bank and other loans 174,232 273,841
Finance charges on obligations under finance leases 186,147 231,371
Less: borrowing costs capitalised (16,759) (49,756)
--------- -------
Net interest expense 343,620 455,456
========= =======
- 230 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
4 TAXATION EXPENSE/(CREDIT)
FOR THE SIX MONTHS
ENDED 30 JUNE,
2004 2003
RMB'000 RMB'000
------- -------
PRC income tax 27,953 2,859
Share of taxation of associated companies 3,738 3,791
Share of taxation of jointly controlled entities 5,050 -
------ --------
36,741 6,650
Deferred taxation 58,049 (551,642)
------ --------
94,790 (544,992)
====== ========
On 17 October, 2003, the Company's registered address was moved to
Guangzhou Economic & Technology Development Zone. In accordance with the
Rules and Regulations for Implementation of Income Tax for Foreign
Investment Enterprises and Foreign Enterprises of the PRC and a taxation
approval document from Guangzhou Municipal State Tax Bureau, the Company
is entitled to enjoy the preferential tax policy implemented in the
Guangzhou Economic & Technology Development Zone effective 1 October,
2003. As a result, the Company's income tax rate has been changed to 15%
from 33% beginning from that date.
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 and PRC governments, or
has sustained tax losses in these overseas jurisdictions. Accordingly, no
provision for overseas tax has been made for the periods presented.
5 BASIC EARNINGS/(LOSS) PER SHARE
The calculation of basic earnings/(loss) per share is based on the
consolidated profit attributable to shareholders of RMB266,184,000 (2003:
loss of RMB1,231,613,000) and the weighted average number of shares in
issue during the period of 4,374,178,000 (2003: 3,374,178,000).
There were no dilutive potential shares in existence during the six months
ended 30 June, 2003 and 2004.
6 DIVIDENDS
The Board of Directors of the Company does not recommend the payment of an
interim dividend for the six months ended 30 June, 2004 (2003: Nil).
- 231 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
7 TRADE RECEIVABLES
Credit terms granted by the Group to sales agents and other customers
generally range from one to three months. An ageing analysis of trade
receivables, net of impairment losses, is set out below:
AS AT As at
30 JUNE, 31 December,
2004 2003
RMB'000 RMB'000
------- -------
Within 1 month 919,687 589,080
More than 1 month but less than 3 months 288,093 235,828
More than 3 months but less than 12 months 2,900 8,696
--------- -------
1,210,680 833,604
========= =======
8 ACCOUNTS PAYABLE
An ageing analysis of accounts payable is as follows:
AS AT As at
30 JUNE, 31 December,
2004 2003
RMB'000 RMB'000
------- -------
Due within 1 month or on demand 275,060 279,165
Due after 1 month but within 3 months 242,721 278,113
Due after 3 months but within 6 months 323,628 370,815
------- -------
841,409 928,093
======= =======
9 RESERVES
No transfer to statutory surplus reserve, statutory public welfare fund
and discretionary surplus reserve has been made during the period and the
corresponding period of 2003. According to the Articles of Association of
the Company and certain of its subsidiaries and the PRC Company Law, any
such transfer shall be proposed by the respective board of directors and
approved by shareholders in the annual general meeting.
- 232 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
10 COMMITMENTS
(a) CAPITAL COMMITMENTS
As at 30 June, 2004, the Group had capital commitments as follows:
AS AT As at
30 JUNE, 31 December,
2004 2003
RMB'000 RMB'000
------- -------
Commitments in respect of aircraft and related equipment
- authorised and contracted for 14,155,601 10,615,079
---------- ----------
Commitments in respect of investments in the Guangzhou new airport
- authorised and contracted for 387,185 617,277
- authorised but not contracted for 1,252,906 1,454,661
---------- ----------
1,640,091 2,071,938
---------- ----------
Other commitments
- authorised and contracted for 134,201 232,570
- authorised but not contracted for 656,971 708,099
---------- ----------
791,172 940,669
---------- ----------
16,586,864 13,627,686
========== ==========
The Group has taken steps towards the purchase of the airline business of
China Northern Airlines Company and Xinjiang Airlines Company. No
contractual obligations existed as at 30 June, 2004 and up to the date of
approval of this interim financial report. The purchase price has not yet
been determined.
(b) INVESTING COMMITMENTS
As at 30 June, 2004, the Company was committed to make a capital
contribution of approximately RMB382 million (as at 31 December, 2003:
approximately RMB446 million) to its jointly controlled entities.
- 233 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
11 RELATED PARTY TRANSACTIONS
The Group obtained various operating and financial services provided by
China Southern Air Holding Company ("CSAHC"), the ultimate holding company
and its affiliates, and the Group's associated companies and jointly
controlled entities during the normal course of its business.
The following is a summary of significant transactions carried out in the
normal course of business between the Group, CSAHC and its affiliates, and
the Group's associated companies and jointly controlled entities during
the period:
FOR THE SIX MONTHS
ENDED 30 JUNE,
2004 2003
RMB'000 RMB'000
------- -------
EXPENSES
Paid to CSAHC and its affiliates
Handling charges 18,552 14,277
Wet lease rentals - 27,800
Sundry aviation supplies 25,596 25,982
Air catering expenses 18,865 11,986
Housing benefits 42,500 42,500
Lease charges for land and buildings 7,612 7,612
Paid to associated companies and jointly controlled
entities
Repairing charges 431,340 277,579
Flight simulation service charges 46,426 50,151
INCOME
Received from associated companies and jointly
controlled entities
Rental income 15,288 15,288
Interest income 1,025 1,178
In addition to the above, certain business undertakings of CSAHC also
provided hotel and other services to the Group during the period. The
total amount involved is not material to the results of the Group for the
period.
As at 30 June, 2004, the Group had cash and cash equivalents placed with
Southern Airlines Group Finance Company Limited, a PRC authorised
financial institution controlled by CSAHC and an associated company of the
Group amounting to RMB677,835,000 (as at 31 December, 2003:
RMB365,906,000). The applicable interest rates are determined in
accordance with the rates published by the People's Bank of China.
- 234 -
APPENDIX IV FINANCIAL INFORMATION OF THE LISTED GROUP
11 RELATED PARTY TRANSACTIONS (Continued)
As at 31 December, 2003, the Group had advances from CSAHC amounting to
RMB165,995,000, which was interest free and repayable on demand. The
advances were repaid by the Group during the period.
The Directors of the Company are of the opinion that the above
transactions were conducted in the normal course of business and on normal
commercial terms or in accordance with the agreements governing such
transactions.
12 CONTINGENT LIABILITIES
There have been no material adverse changes in contingent liabilities of
the Group subsequent to 31 December, 2003, details of which are disclosed
in its 2003 annual financial statements.
13 CONVENIENCE TRANSLATION
The unaudited consolidated profit and loss account has been prepared in
Renminbi ("RMB"), the national currency of the PRC. Translations of
amounts from RMB into Hong Kong dollars ("HK$") and United States dollars
("US$") solely for the convenience of readers have been made at the rates
of HK$1.00 to RMB1.0609 and US$1.00 to RMB8.2766, being the average of the
buying and selling rates as quoted by the People's Bank of China at the
close of business on 30 June, 2004. No representation is made that the RMB
amounts could have been or could be converted into HK$ or US$ at these
rates or at any other certain rates on 30 June, 2004 or on any other date.
- 235 -
APPENDIX V FINANCIAL INFORMATION OF THE COMBINED GROUP
(A) UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE COMBINED GROUP
The following is the text of a report, prepared for the sole purpose of
inclusion in this circular, received from the independent reporting accountants,
KPMG, Certified Public Accountants, Hong Kong. As described in the section
headed "Documents available for inspection" in Appendix IX, a copy of the
following report is available for inspection.
[KPMG LOGO] 8th Floor
Prince's Building
10 Chater Road
Hong Kong
12 November, 2004
The Directors
China Southern Airlines Company Limited
Baiyun International Airport
Guangzhou
People's Republic of China
Dear Sirs,
We report on the unaudited pro forma financial information of the Combined
Group (the Listed Group (as defined herein) together with the Airline Operations
(as defined herein) of Northern Airlines Group (as defined herein) and the
Airline Operations of Xinjiang Airlines Group (as defined herein)) (the "Pro
Forma Financial Information") set out on pages 239 to 243 in Section A of
Appendix V to the shareholders' circular of China Southern Airlines Company
Limited (the "Company", and together with its subsidiaries are referred to as
the "Listed Group") dated 12 November, 2004, which has been prepared by the
Company solely for illustrative purposes to provide information about how the
proposed acquisition of the airline and airline related operations (the "Airline
Operations") of each of China Northern Airlines Company and its subsidiaries
("Northern Airlines Group") and Xinjiang Airlines Company and its subsidiaries
("Xinjiang Airlines Group") by the Company (the "Acquisition") as described in
the accompanying introduction to the unaudited pro forma financial information
of the Combined Group might have affected the historical amounts in the
accompanying unaudited pro forma balance sheet of the Combined Group as at 30
June, 2004, and the unaudited pro forma statement of income and unaudited pro
forma condensed statement of cash flows of the Combined Group for the six-month
period ended 30 June, 2004. The historical financial information is derived from
the unaudited historical financial information of the Listed Group as set out in
Appendix IV and the audited historical financial information of the Airline
Operations of Northern Airlines Group and the Airline Operations of Xinjiang
Airlines Group appearing as set out in Appendices II and III respectively. The
basis of preparation of the Pro Forma Financial Information is set out in the
accompanying introduction and notes to the unaudited pro forma financial
information of the Combined Group.
- 236 -
APPENDIX V FINANCIAL INFORMATION OF THE COMBINED GROUP
RESPONSIBILITIES
It is the responsibility solely of the directors of the Company to prepare
the Pro Forma Financial Information in accordance with Paragraph 29 of Chapter 4
of the Rules Governing the Listing of Securities on the Stock Exchange of Hong
Kong Limited (the "Listing Rules").
It is our responsibility to form an opinion, as required by the Listing
Rules, on the Pro Forma Financial Information and to report our opinion to you.
We do not accept any responsibility for any reports previously given by us on
any financial information used in the compilation of the Pro Forma Financial
Information beyond that owed to those to whom those reports were addressed by us
at the dates of their issue.
BASIS OF OPINION
We conducted our work in accordance with the Statements of Investment
Circular Reporting Standards and Bulletin 1998/8 "Reporting on pro forma
financial information pursuant to the Listing Rules" issued by the Auditing
Practices Board in the United Kingdom, where applicable. Our work consisted
primarily of comparing the unadjusted financial information with the source
documents, considering the evidence supporting the adjustments and discussing
the Pro Forma Financial Information with the directors of the Company.
Our work did not constitute an audit or review made in accordance with the
Statements of Auditing Standards issued by the Hong Kong Institute of Certified
Public Accountants, and accordingly, we do not express any such audit or review
assurance on the Pro Forma Financial Information.
The Pro Forma Financial Information is for illustrative purposes only,
based on the directors' judgements and assumptions, and because of its nature,
it does not provide any assurance or indication that any event will take place
in the future and may not be indicative of the financial position or result of:
- the Combined Group had the Acquisition actually completed as at the
dates indicated therein; or
- the Combined Group at any future date or for any future periods.
- 237 -
APPENDIX V FINANCIAL INFORMATION OF THE COMBINED GROUP
OPINION
In our opinion:
(a) the accompanying unaudited Pro Forma Financial Information has been
properly compiled on the basis stated;
(b) such basis is consistent with the accounting policies of the
Company; and
(c) the adjustments are appropriate for the purposes of the Pro Forma
Financial Information as disclosed pursuant to Paragraph 29(1) of
Chapter 4 of the Listing Rules.
Yours faithfully,
KPMG
Certified Public Accountants
Hong Kong
- 238 -
APPENDIX V FINANCIAL INFORMATION OF THE COMBINED GROUP
INTRODUCTION TO THE UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE COMBINED
GROUP
The accompanying unaudited pro forma financial information of the Combined
Group (the Listed Group (as defined herein) together with the Airline Operations
(as defined herein) of Northern Airlines Group (as defined herein) and the
Airline Operations of Xinjiang Airlines Group (as defined herein)) has been
prepared to illustrate the effect of the proposed acquisition of the airline and
airline related operations (the "Airline Operations") of each of China Northern
Airlines Company and its subsidiaries ("Northern Airlines Group") and Xinjiang
Airlines Company and its subsidiaries ("Xinjiang Airlines Group") by China
Southern Airlines Company Limited (the "Company", and together with its
subsidiaries are referred to as the "Listed Group") (the "Acquisition"). The
consideration is assumed to be approximately RMB1,897 million, which represents
the aggregate amount of the net assets value of the Airline Operations of
Northern Airlines Group and the Airline Operations of Xinjiang Airlines Group as
at 30 June, 2004 prepared under PRC Accounting Rules and Regulations. The
consideration will be satisfied by short term U.S. dollar bank loans amounting
to RMB1,000 million and cash of RMB897 million.
The accompanying unaudited pro forma statement of income and unaudited pro
forma condensed statement of cash flows of the Combined Group for the six-month
period ended 30 June, 2004 gives effect to the Acquisition as if the Acquisition
had been completed on 1 January, 2004. The accompanying unaudited pro forma
balance sheet of the Combined Group as at 30 June, 2004 gives effect to the
Acquisition as if the Acquisition had been completed on 30 June, 2004.
The accompanying unaudited pro forma financial information of the Combined
Group is prepared based upon the audited historical financial information of the
Airline Operations of Northern Airlines Group and Xinjiang Airlines Group as set
out in Appendices II and III respectively and the unaudited historical financial
information of the Listed Group as set out in Appendix IV after giving effect to
the pro forma adjustments described in the accompanying notes. A narrative
description of the pro forma adjustments of the Acquisition that are (i)
directly attributable to the transactions; (ii) expected to have a continuing
impact on the Combined Group; and (iii) factually supportable, are summarised in
the accompanying notes.
The unaudited pro forma financial information of the Combined Group should
be read in conjunction with the financial information of the Airline Operations
of Northern Airlines Group and Xinjiang Airlines Group as set out in Appendices
II and III respectively, the financial information of the Listed Group as set
out in Appendix IV and other financial information included elsewhere in this
circular.
- 239 -
APPENDIX V FINANCIAL INFORMATION OF THE COMBINED GROUP
UNAUDITED PRO FORMA STATEMENT OF INCOME OF THE COMBINED GROUP
For the six-month period ended 30 June, 2004
NORTHERN XINJIANG
THE LISTED AIRLINES AIRLINES PRO FORMA
GROUP GROUP GROUP PRO FORMA COMBINED
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS Note GROUP
------------- ---------- ---------- ----------- ---- -------------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
OPERATING REVENUE
Traffic revenue 10,834,278 3,391,448 1,176,300 15,402,026
Other operating revenue 259,659 73,232 38,776 371,667
------------- ---------- ---------- ---------- -------------
TOTAL OPERATING REVENUE 11,093,937 3,464,680 1,215,076 - 15,773,693
------------- ---------- ---------- ---------- -------------
OPERATING EXPENSES
Flight operations 4,722,442 1,480,465 639,339 6,842,246
Maintenance 1,409,841 412,118 126,536 8,881 3 1,957,376
Aircraft and traffic servicing 1,688,612 464,035 134,088 2,286,735
Promotion and sales 874,393 219,471 80,877 1,174,741
General and administrative 551,719 114,849 61,279 727,847
Depreciation and 1,083,346 404,419 173,177 1,660,942
amortisation Others 8,244 - - 8,244
------------- ---------- ---------- ---------- -------------
TOTAL OPERATING EXPENSES 10,338,597 3,095,357 1,215,296 8,881 14,658,131
------------- ---------- ---------- ---------- -------------
OPERATING PROFIT/(LOSS) 755,340 369,323 (220) (8,881) 1,115,562
------------- ---------- ---------- ---------- -------------
NON-OPERATING INCOME/(EXPENSES)
Interest income 8,994 4,257 746 (3,228) 2 10,769
Interest expense (343,620) (195,027) (69,417) (10,850) 1 (618,914)
Exchange gain/(loss), net 15,397 23,567 (64) 38,900
Share of associated companies'
results 21,156 - - 21,156
Share of jointly controlled
entities' results 4,351 - - 4,351
Gain/(loss) on disposal of property,
plant and equipment 2,999 (439) (800) 1,760
Others, net 4,531 - - 4,531
------------- ---------- ---------- ---------- -------------
TOTAL NON-OPERATING EXPENSES, NET (286,192) (167,642) (69,535) (14,078) (537,447)
------------- ---------- ---------- ---------- -------------
PROFIT/(LOSS) BEFORE INCOME TAX AND
MINORITY INTERESTS 469,148 201,681 (69,755) (22,959) 578,115
INCOME TAX (94,790) (67,300) 24,048 3,444 4 (111,006)
23,592 5
------------- ---------- ---------- ---------- -------------
PROFIT/(LOSS) BEFORE MINORITY INTERESTS 374,358 134,381 (45,707) 4,077 467,109
MINORITY INTERESTS (108,174) 661 1,396 (106,117)
------------- ---------- ---------- ---------- -------------
NET PROFIT/(LOSS) 266,184 135,042 (44,311) 4,077 360,992
============= ========== ========== ========== =============
BASIC EARNINGS PER SHARE (IN RMB) 0.06 0.08
WEIGHTED AVERAGE NUMBER OF SHARES 4,374,178,000 4,374,178,000
============= =============
- 240 -
APPENDIX V FINANCIAL INFORMATION OF THE COMBINED GROUP
UNAUDITED PRO FORMA BALANCE SHEET OF THE COMBINED GROUP
As at 30 June, 2004
NORTHERN XINJIANG
THE LISTED AIRLINES AIRLINES PRO FORMA
GROUP GROUP GROUP PRO FORMA COMBINED
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS Note GROUP
----------- ---------- ---------- ----------- ---- -----------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
NON-CURRENT ASSETS
Property, plant and equipment, net 29,128,791 9,141,267 4,043,708 42,313,766
Construction in progress 2,189,052 38,930 13,404 2,241,386
Lease prepayments 344,755 - - 55,683 8 400,438
Interest in associated companies 443,780 - - 443,780
Interest in jointly controlled entities 787,874 - - 787,874
Other investments 199,007 68,209 - 267,216
Lease and equipment deposits 4,717,553 437,117 53,620 5,208,290
Deferred expenditure 233,726 122,093 - 355,819
Long term receivables 6,648 - - 6,648
----------- ---------- ---------- ---------- -----------
TOTAL NON-CURRENT ASSETS 38,051,186 9,807,616 4,110,732 55,683 52,025,217
----------- ---------- ---------- ---------- -----------
CURRENT ASSETS
Inventories 572,457 544,093 71,311 51,395 7 1,239,256
Trade receivables 1,210,680 398,158 125,212 (345,442) 9 1,388,608
Other receivables and prepaid expenses 634,312 566,110 169,295 1,369,717
Cash and cash equivalents 2,931,786 234,733 286,998 (896,642) 6 2,556,875
----------- ---------- ---------- ---------- -----------
TOTAL CURRENT ASSETS 5,349,235 1,743,094 652,816 (1,190,689) 6,554,456
----------- ---------- ---------- ---------- -----------
CURRENT LIABILITIES
Bank and other loans 9,931,236 767,257 1,056,639 1,000,000 6 12,755,132
Obligations under finance leases 1,138,495 1,063,047 - 2,201,542
Amounts due to related companies 906,353 - - (675,300) 9 231,053
Other liabilities and accrued expenses 4,394,807 1,403,363 718,783 6,516,953
Accounts payable 841,409 140,026 128,638 (9,012) 9 1,101,061
Sales in advance of carriage 386,255 - - 338,870 9 725,125
Tax payable 72,954 - - 72,954
----------- ---------- ---------- ---------- -----------
TOTAL CURRENT LIABILITIES 17,671,509 3,373,693 1,904,060 654,558 23,603,820
----------- ---------- ---------- ---------- -----------
NET CURRENT LIABILITIES (12,322,274) (1,630,599) (1,251,244) (1,845,247) (17,049,364)
----------- ---------- ---------- ---------- -----------
TOTAL ASSETS LESS CURRENT LIABILITIES 25,728,912 8,177,017 2,859,488 (1,789,564) 34,975,853
----------- ---------- ---------- ---------- -----------
NON-CURRENT LIABILITIES AND DEFERRED ITEMS
Bank and other loans 6,062,819 1,811,371 1,735,037 9,609,227
Obligations under finance leases 5,006,135 5,402,143 - 10,408,278
Provision for major overhauls 230,525 - 182,319 412,844
Deferred credits 44,983 25,750 - 70,733
Deferred taxation 456,354 (20,313) (19,195) 16,961 7 450,643
16,836 8
----------- ---------- ---------- ---------- -----------
NON-CURRENT LIABILITIES AND DEFERRED ITEMS 11,800,816 7,218,951 1,898,161 33,797 20,951,725
----------- ---------- ---------- ---------- -----------
MINORITY INTERESTS 1,766,205 2,372 76,777 16,883 8 1,862,237
----------- ---------- ---------- ---------- -----------
12,161,891 955,694 884,550 (1,840,244) 12,161,891
=========== ========== ========== ========== ===========
CAPITAL AND RESERVES 12,161,891 955,694 884,550 (1,840,244) 12,161,891
=========== ========== ========== ========== ===========
- 241 -
APPENDIX V FINANCIAL INFORMATION OF THE COMBINED GROUP
UNAUDITED PRO FORMA CONDENSED STATEMENT OF CASH FLOWS OF THE COMBINED GROUP
For the six-month period ended 30 June, 2004
NORTHERN XINJIANG
THE LISTED AIRLINES AIRLINES PRO FORMA
GROUP GROUP GROUP PRO FORMA COMBINED
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS Note GROUP
---------- ---------- ---------- ----------- ---- ---------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Net cash from operating
activities 1,217,840 221,973 69,672 (10,850) 1 1,495,407
(3,228) 2
Net cash (used in)/generated from
investing activities (4,050,525) 92,732 (57,890) (977,815) 10 (4,993,498)
---------- -------- -------- --- ---------
Net cash (outflows)/inflows before
financing activities (2,832,685) 314,705 11,782 (3,498,091)
Net cash inflows/(outflows) from
financing activities 3,684,297 (622,018) (101,565) 1,000,000 6 3,960,714
---------- -------- -------- --- ---------
Increase/(decrease) in cash and
cash equivalents 851,612 (307,313) (89,783) 462,623
Cash and cash equivalents at
1 January, 2004 2,080,174 542,046 376,781 (918,827) 10 2,080,174
---------- -------- -------- --- ---------
Cash and cash equivalents at
30 June, 2004 2,931,786 234,733 286,998 2,542,797
========== ======== ======== =========
- 242 -
APPENDIX V FINANCIAL INFORMATION OF THE COMBINED GROUP
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE COMBINED GROUP
(1) To record the additional interest expense arising from short term U.S.
dollar bank loans bearing interest at 2.17% per annum amounting to
RMB1,000 million borrowed to partially satisfy the consideration as if the
Acquisition had taken place on 1 January, 2004.
(2) To adjust for reduction in the interest income for the cash consideration
of RMB897 million to be taken from the internal resources depositing in
certain PRC banks enjoying saving rate of 0.72% per annum of the Listed
Group as if the Acquisition had taken place on 1 January, 2004.
(3) To record the additional costs of inventories charged to the combined
statement of income as a result of adjusting the carrying value of
inventories to fair value under purchase method as if the Acquisition had
taken place on 1 January, 2004.
(4) To record the tax effect of the pro forma statement of income adjustments
described in notes 1 to 3 above using the Company's applicable income tax
rate of 15%.
(5) To adjust for the reduction in taxation because of different applicable
income tax rates on the Company and the Airline Operations of Northern
Airlines Group and the Airline Operations of Xinjiang Airlines Group as if
the Acquisition had taken place on 1 January, 2004. The Company's
applicable income tax rate is 15% while the applicable income tax rate of
the Airline Operations of Northern Airlines Group and the Airline
Operations of Xinjiang Airlines Group is 33%. The Airline Operations of
Northern Airlines Group and the Airline Operations of Xinjiang Airlines
Group will become branches of the Company subsequent to the Acquisition
and will be subject to the Company's income tax rate of 15% according to
the current relevant PRC tax regulations.
(6) To record the payment of consideration of RMB1,897 million satisfied by
short term U.S. dollar bank loans amounting to RMB1,000 million and cash
of RMB897 million as if the Acquisition had taken place on 30 June, 2004.
(7) To adjust the carrying value of inventories to fair value under purchase
method and to reverse the corresponding deferred tax asset recognised as
if the Acquisition had taken place on 30 June, 2004.
(8) To adjust the carrying value of land use rights to fair value under
purchase method, the related deferred tax liability and the corresponding
minority shareholders' share as if the Acquisition had taken place on 30
June, 2004.
(9) Elimination of the inter-company balances among the Airline Operations of
Northern Airlines Group, the Airline Operations of Xinjiang Airlines Group
and the Listed Group on combined basis.
(10) To record the pro forma cash flow effect of the Acquisition, being the
payment of consideration of RMB1,897 million, net of the cash and cash
equivalents acquired amounting to RMB919 million as if the Acquisition had
taken place on 1 January, 2004
(B) INDEBTEDNESS
As at the close of business on 30 September, 2004, being the latest
practicable date for the purpose of this indebtedness statement prior to the
printing of this circular, the Combined Group had bank and other loans of
approximately RMB22,031,716,000 and finance lease obligations of approximately
RMB11,966,164,000. As at 30 September, 2004, certain bank loans of the Combined
Group were secured by certain aircraft with an aggregate carrying amount of
RMB10,529,085,000. Finance lease obligations were secured by the related
aircraft under finance lease with an aggregate carrying amount of
RMB11,886,637,000. In addition, bank loans of RMB3,071,227,000 were also
guaranteed by certain banks.
- 243 -
APPENDIX V FINANCIAL INFORMATION OF THE COMBINED GROUP
Save as aforesaid or as otherwise disclosed herein, the Combined Group did
not have, at the close of business on 30 September, 2004, outstanding
liabilities or any mortgages, charges, debentures, loan capital, bank
overdrafts, loans, liabilities under acceptance or other similar indebtedness,
hire purchase or finance lease obligations or any guarantees or other material
contingent liabilities.
(C) WORKING CAPITAL
The Directors of the Company are of the opinion that the Combined Group
will, following the completion of the Acquisition, have sufficient working
capital for its present requirements.
- 244 -
APPENDIX VI PROFIT FORECAST
The forecast combined profit after taxation and minority interests but
before extraordinary items of the Airline Operations of Northern Airlines Group
and the Airline Operations of Xinjiang Airlines Group for the year ending 31
December, 2004 is set out in the section headed "Prospective Financial
Information" in the Letter from the Board.
(A) BASES AND ASSUMPTIONS
The management of the Company, the Airline Operations of Northern Airlines
Group and the Airline Operations of Xinjiang Airlines Group have prepared the
forecast combined profit after taxation and minority interests but before
extraordinary items of the Airline Operations of Northern Airlines Group and the
Airline Operations of Xinjiang Airlines Group for the year ending 31 December,
2004. The management of the Company, Airline Operations of Northern Airlines
Group and the Airline Operations of Xinjiang Airlines Group are not currently
aware of any extraordinary items which have arisen or are likely to arise in
respect of the year ending 31 December, 2004. The forecast has been prepared on
a basis consistent in all material respects with the accounting policies
currently adopted by the Airline Operations of Northern Airlines Group and the
Airline Operations of Xinjiang Airlines Group as summarised in Appendices II and
III respectively and on the following principal assumptions:
(1) there will be no material changes in existing government policies or
political, legal, including changes in legislations or rules,
regulatory, fiscal, economic or market conditions in the PRC or any
of the countries in which the Airline Operations of Northern
Airlines Group and the Airline Operations of Xinjiang Airlines Group
carry out business;
(2) the Airline Operations of Northern Airlines Group and the Airline
Operations of Xinjiang Airlines Group will continue to be authorised
to operate services to other countries and cities of which their
current scheduled services are covered pursuant to the bilateral
aviation agreements between the PRC and overseas governments;
(3) the Airline Operations of Northern Airlines Group and the Airline
Operations of Xinjiang Airlines Group will be able to maintain all
of their certificates and licenses required from the CAAC to enable
them to operate their forecast services;
(4) there will be no material changes in the bases or rates of taxation
or duties in the PRC or any of the countries in which the Airline
Operations of Northern Airlines Group and the Airline Operations of
Xinjiang Airlines Group operate;
(5) there will be no material changes in inflation, interest rates or
foreign currency exchange rates from those currently prevailing; and
(6) the Airline Operations of Northern Airlines Group and the Airline
Operations of Xinjiang Airlines Group will not be severely
interrupted by any force majeure events or unforeseeable factors of
any unforeseeable reasons that are beyond the control of the
Company, the Airline Operations of Northern Airlines Group and the
Airline Operations of Xinjiang Airlines Group, including but not
limited to, the occurrence of natural disasters or catastrophes,
epidemics or serious accidents.
- 245 -
APPENDIX VI PROFIT FORECAST
(B) LETTERS
Set out below are the text of the letters received from KPMG, and from the
Company's Financial Advisers in connection with the profit forecast and prepared
for the sole purpose of inclusion in this circular.
[KPMG LOGO] 8th Floor
Prince's Building
10 Chater Road
Hong Kong
12 November, 2004
The Directors
China Southern Airlines Company Limited
J.P. Morgan Securities (Asia Pacific) Limited
ICEA Capital Limited
Dear Sirs,
We have reviewed the accounting policies and calculations adopted in
arriving at the forecast (the "Forecast") of the combined profit after taxation
and minority interests but before extraordinary items of the airline and airline
related operations (the "Airline Operations") of China Northern Airlines Company
and its subsidiaries (collectively referred to as "Northern Airlines Group") for
the year ending 31 December, 2004, for which the directors (the "Directors") of
China Southern Airlines Company Limited (the "Company") and management of the
Airline Operations of Northern Airlines Group ("Management") are solely
responsible, as set out in the circular dated 12 November, 2004 issued by the
Company (the "Circular").
In our opinion, so far as the accounting policies and calculations are
concerned, the Forecast has been properly compiled on the bases and assumptions
made by the Directors and Management as set out in Part A of Appendix VI to the
Circular and is presented on a basis consistent in all material respects with
the accounting policies adopted by the Airline Operations of Northern Airlines
Group as set out in our Accountants' Report on Financial Information of the
Airline Operations of Northern Airlines Group dated 12 November, 2004, the text
of which is set out in Appendix II to the circular.
Yours faithfully,
KPMG
Certified Public Accountants
Hong Kong
- 246 -
APPENDIX VI PROFIT FORECAST
[KPMG LOGO] 8th Floor
Prince's Building
10 Chater Road
Hong Kong
12 November, 2004
The Directors
China Southern Airlines Company Limited
J.P. Morgan Securities (Asia Pacific) Limited
ICEA Capital Limited
Dear Sirs,
We have reviewed the accounting policies and calculations adopted in
arriving at the forecast (the "Forecast") of the combined profit after taxation
and minority interests but before extraordinary items of the airline and airline
related operations (the "Airline Operations") of Xinjiang Airlines Company and
its subsidiaries (collectively referred to as "Xinjiang Airlines Group") for the
year ending 31 December, 2004, for which the directors (the "Directors") of
China Southern Airlines Company Limited (the "'Company") and management of the
Airline Operation of Xinjiang Airlines Group ("Management") are solely
responsible, as set out in the circular dated 12 November, 2004 issued by the
Company (the "Circular").
In our opinion, so far as the accounting policies and calculations are
concerned, the Forecast has been properly compiled on the bases and assumptions
made by the Directors and Management as set out in Part A of Appendix VI to the
Circular and is presented on a basis consistent in all material respects with
the accounting policies adopted by the Airline Operations of Xinjiang Airlines
Group as set out in our Accountants' Report on Financial Information of the
Airline Operations of Xinjiang Airlines Group dated 12 November, 2004, the text
of which is set out in Appendix III to the circular.
Yours faithfully,
KPMG
Certified Public Accountants
Hong Kong
- 247 -
APPENDIX VI PROFIT FORECAST
[JPMORGAN LOGO]
J.P. MORGAN SECURITIES (ASIA PACIFIC) LIMITED
28th Floor
Chater House
8 Connaught Road Central
Hong Kong
12 November, 2004
The Directors
China Southern Airlines Company Limited
Baiyun International Airport
Guangzhou 510405
PRC
Dear Sirs,
We refer to the forecast of the combined profit after taxation and
minority interests but before extraordinary items of the Airline Operations of
Northern Airlines Group and the Airline Operations of Xinjiang Airlines Group as
defined in this circular, for the year ending 31 December, 2004, as set out in
the section headed "Letter from the Board - Prospective Financial Information"
of the circular dated 12 November, 2004 issued by the Company.
We have discussed with you the assumptions upon which the profit forecast
has been made. We have also considered the letter dated 12 November, 2004
addressed to you and us from KPMG regarding the accounting policies and
calculations upon which the forecast has been made.
On the basis of the assumptions solely made by the management of the
Company, the Airline Operations of Northern Airlines Group and the Airline
Operations of Xinjiang Airlines Group, respectively, and on the basis of the
accounting policies and calculations reviewed by KPMG, we are of the opinion
that the profit forecast, for which the management of the Company, the Airline
Operations of Northern Airlines Group and the Airline Operations of Xinjiang
Airlines Group are solely responsible, has been made after due and careful
enquiry.
Yours faithfully,
For and on behalf of
J.P. MORGAN SECURITIES (ASIA PACIFIC) LIMITED
TODD R. MARIN
Managing Director
- 248 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
The following information should be read in conjunction with the financial
information as set out in Appendix I headed "Information regarding the Airline
Operations of Northern Airlines Group and Xinjiang Airlines Group" and the
Accountants' Reports on Financial Information of the Airline Operations of
Northern Airlines Group and the Airline Operations of Xinjiang Airlines Group as
set out in Appendices II and III respectively.
OVERVIEW
The Listed Group provides commercial airlines services throughout China,
Southeast Asia and other parts of the world. The Listed Group conducts a portion
of its airline operations through its 60% owned subsidiaries, namely Xiamen
Airlines Company Limited, Southern Airlines Group Shantou Airlines Company
Limited, Guangxi Airlines Company Limited, Zhuhai Airlines Company Limited and
Guizhou Airlines Company Limited. The Listed Group also provides air cargo and
mail services. Currently, the Listed Group has two Boeing 747-400 freighters
servicing three international cargo routes. The Listed Group's airline
operations are fully integrated with its airline-related businesses, including
flight training, aircraft maintenance and air catering operations. Please refer
to the annual reports of the Company for each of the years in the three-year
period ended 31 December, 2003 and the interim report of the Company for the
six-month period ended 30 June, 2004 for a detailed management discussion and
analysis of the financial performance of the Listed Group during the respective
periods.
Northern Airlines Group is principally engaged in the provision of
domestic and international passenger, cargo and mail airline services, with
flights operating primarily from Shenyang Tao Xian International Airport which
is the main base of Northern Airlines Group in the PRC. Northern Airlines Group
has three branches in Dalian (Liaoning Province), Changchun (Jilin Province) and
Harbin (Heilongjiang Province). Xinjiang Airlines Group is also principally
engaged in the provision of domestic and international passenger, cargo and mail
airline services, with flights operating primarily from Urumqi International
Airport which is the main base of Xinjiang Airlines Group in the PRC.
- 249 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
CERTAIN FINANCIAL INFORMATION AND OPERATING DATA BY GEOGRAPHIC REGION
The following table sets forth certain financial information and operating
data of the Airline Operations of Northern Airlines Group by geographic region
for each of the years in the three-year period ended 31 December, 2003 and the
six-month periods ended 30 June, 2003 and 2004:
SIX-MONTH PERIODS
ENDED 30 JUNE, YEARS ENDED 31 DECEMBER,
----------------- ------------------------------
2004 2003 2003 2002 2001
Traffic
Revenue passenger
kilometres (RPK)
(million)
- Domestic 4,652 2,846 8,234 7,800 6,914
- International 538 396 913 986 1,334
----- ----- ------ ------ ------
Total 5,190 3,242 9,147 8,786 8,248
===== ===== ====== ====== ======
Passengers carried
(thousand)
- Domestic 3,258 1,943 5,831 5,501 4,849
- International 363 262 643 652 864
----- ----- ------ ------ ------
Total 3,621 2,205 6,474 6,153 5,713
===== ===== ====== ====== ======
Cargo tonne kilometres
(RFTK) (million)
- Domestic 87 73 168 166 162
- International 9 8 19 15 13
----- ----- ------ ------ ------
Total 96 81 187 181 175
===== ===== ====== ====== ======
Capacity
Available seat kilometres
(ASK) (million)
- Domestic 6,722 4,697 12,226 12,232 11,412
- International 971 814 1,714 1,800 2,334
----- ----- ------ ------ ------
Total 7,693 5,511 13,940 14,032 13,746
===== ===== ====== ====== ======
- 250 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
SIX-MONTH PERIODS
ENDED 30 JUNE, YEARS ENDED 31 DECEMBER,
----------------- -------------------------
2004 2003 2003 2002 2001
Load Factors
Passenger load factor
(RPK/ASK)
- Domestic 69% 61% 67% 64% 61%
- International 55% 49% 53% 55% 57%
Overall 67% 59% 66% 63% 60%
==== ==== ==== ==== ====
Yield
Yield per RPK (RMB)
- Domestic 0.57 0.57 0.55 0.50 0.55
- International 0.98 0.87 0.97 0.87 0.71
Overall 0.61 0.61 0.60 0.54 0.58
==== ==== ==== ==== ====
Fleet
Total number of aircraft in
service at year end/
period end
- McDonald Douglas 35 35 35 36 37
- Airbus 17 12 12 10 8
- Others 3 6 3 19 27
---- ---- ---- ---- ----
Total 55 53 50 65 72
==== ==== ==== ==== ====
Overall utilisation rate
(hours per day)
- Airbus 8.8 7.0 7.8 8.3 7.5
- McDonald Douglas 9.1 7.0 7.8 8.2 8.4
Overall 9.0 7.0 7.8 8.3 7.8
==== ==== ==== ==== ====
- 251 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
The following table sets forth certain financial information and operating
data of the Airline Operations of Xinjiang Airlines Group by geographic region
for each of the years in the three-year period ended 31 December, 2003 and the
six-month periods ended 30 June, 2003 and 2004:
SIX-MONTH PERIODS
ENDED 30 JUNE, YEARS ENDED 31 DECEMBER,
----------------- --------------------------
2004 2003 2003 2002 2001
Traffic
Revenue passenger
kilometres (RPK)
(million)
- Domestic 2,324 1,435 3,941 3,768 3,400
- International 92 54 151 148 148
----- ----- ----- ----- -----
Total 2,416 1,489 4,092 3,916 3,548
===== ===== ===== ===== =====
Passengers carried
(thousand)
- Domestic 1,209 721 2,062 1,753 1,510
- International 55 31 86 75 61
----- ----- ----- ----- -----
Total 1,264 752 2,148 1,828 1,571
===== ===== ===== ===== =====
Cargo tonne kilometres
(RFTK) (million)
- Domestic 33 28 62 81 62
- International 1 - 1 1 1
----- ----- ----- ----- -----
Total 34 28 63 82 63
===== ===== ===== ===== =====
Capacity
Available seat kilometres
(ASK) (million)
- Domestic 3,527 2,480 5,995 6,105 5,771
- International 195 121 302 331 326
----- ----- ----- ----- -----
Total 3,722 2,601 6,297 6,436 6,097
===== ===== ===== ===== =====
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APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
SIX-MONTH PERIODS
ENDED 30 JUNE, YEARS ENDED 31 DECEMBER,
----------------- ------------------------
2004 2003 2003 2002 2001
Load Factors
Passenger load factor
(RPK/ASK)
- Domestic 66% 58% 66% 62% 59%
- International 47% 45% 50% 45% 45%
Overall 65% 57% 65% 61% 58%
==== ==== ==== ==== ====
Yield
Yield per RPK (RMB)
- Domestic 0.46 0.45 0.48 0.53 0.55
- International 0.72 0.65 0.69 0.69 0.60
Overall 0.47 0.95 0.48 0.54 0.55
==== ==== ==== ==== ====
Fleet
Total number of aircraft in
service at year end/
period end
- Boeing 15 15 15 15 14
- ATR 72 and IL 86 5 5 5 8 8
---- ---- ---- ---- ----
Total 20 20 20 23 22
==== ==== ==== ==== ====
Overall utilisation rate
(hours per day)
- Boeing 10.0 7.9 8.8 8.9 10.1
- ATR 72 and IL86 7.8 6.3 7.4 7.1 8.2
Overall 8.9 7.4 8.3 7.7 8.4
==== ==== ==== ==== ====
OPERATING RESULTS
INTERIM PERIOD FOR THE SIX-MONTH PERIOD ENDED 30 JUNE, 2004 COMPARED TO INTERIM
PERIOD FOR THE SIX-MONTH PERIOD ENDED 30 JUNE, 2003
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
Operating revenue
For the first half of 2004, the total traffic revenue was RMB3,391
million, an increase of RMB1,262 million or 59.3% from the same period last
year. The increase was primarily due to a 62.4% increase in passenger revenue.
The number of passengers carried increased by 64.2% to 3.6 million. Passenger
traffic in terms of RPKs increased by 60.1% to 5,190 million.
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APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
Passenger revenue was RMB3,187 million, up 62.4% from the same period last
year, representing 94.0% of total traffic revenue. The increase was mainly due
to increases in traffic volume of 60.1%.
Domestic passenger revenue was RMB2,659 million, up 63.5% from the same
period last year. Domestic passenger revenue accounted for 83.4% of overall
passenger revenue. The increase in domestic passenger revenue was mainly due to
the increases in traffic volume of 63.5% to 4,652 million. The increase in
traffic volume was mainly due to the combined effect of the absence of Severe
Acute Respiratory Syndrome impact during the first half of 2004 and the PRC
government's policies and efforts to attract more investment in the Northeastern
part of the PRC, including Shenyang.
International passenger revenue was RMB528 million, an increase of 47.5%
from the same period last year. International passenger revenue accounted for
16.6% of overall passenger revenue. The increase in international passenger was
mainly due to the increases in traffic volume of 35.9% to 538 million and
passenger yield of 12.6% to RMB0.98. The increase in traffic volume was mainly
because of the absence of Severe Acute Respiratory Syndrome impact during the
first half of 2004. The increase in passenger yield was mainly the result of the
recording of the contributions to the CAAC infrastructure fund as an operating
expense instead of being netted off with traffic revenue and an upward
adjustment of fare resulting from increased traffic demand with effect from 1
April, 2004.
Cargo and mail revenue was RMB204 million in the first half of 2004, an
increase of 22.7% from the same period last year. Cargo and mail revenue
accounted for 6.0% of total traffic revenue in the first half of 2004. The
increase in cargo and mail revenue was mainly due to increases in traffic volume
of 18.5% to 96 million RFTKs and overall yield per RFTK of 7.0% to RMB2.13. The
increase in traffic volume was mainly due to the absence of Severe Acute
Respiratory Syndrome impact during the first half of 2004. The increase in
overall yield per RFTK was mainly due to an increase in fares resulting from
increased traffic demand.
Other operating revenue increased by 94.3% to RMB73 million in the first
half of 2004. The increase was mainly due to a rise in the aircraft lease income
of RMB49 million from leasing certain aircraft to a related party.
Operating expenses
Total operating expenses increased by 20.6% to RMB3,095 million from the
same period last year, representing an increase of RMB529 million. The increase
was mainly due to increases in fuel costs, landing and navigation fees and
commission expenses resulting from increased traffic volume during the first
half of 2004.
Flight operations expenses, which accounted for 47.8% of total operating
expenses in the first half of 2004, increased by 32.2% to RMB1,481 million. Of
these expenses, fuel cost was RMB816 million, up 40.9%, mainly as a result of
increases in fuel consumption and fuel prices. Air catering expenses increased
by 57.6% to RMB104 million, primarily as a result of an increase in number of
passengers carried during the first half of 2004. Labour costs increased by
54.2% to RMB222 million, largely due to an increase in flying hours.
- 254 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
Maintenance expenses which accounted for 13.3% of total operating expenses
in the first half of 2004, decreased by 23.9% to RMB412 million. The decrease
was mainly due to year 2003 being a peak time for aircraft engine major repairs.
Aircraft and traffic servicing expenses, which accounted for 15.0% of the
total operating expenses in the first half of 2004, increased by 45.0% to RMB464
million, reflecting primarily the rise in the number of landing and takeoffs
resulting from increased traffic volume during the first half of 2004.
Promotional and sales expenses, which accounted for 7.1% of total
operating expenses in the first half of 2004, increased by 32.0% to RMB219
million. The increase was the result of an increase in traffic revenue.
General and administrative expenses, which accounted for 3.7% of the total
operating expenses in the first half of 2004, increased by 15.7% to RMB115
million. The increase was mainly due to an increase in the scale of operations
during the first half of 2004.
Depreciation and amortization expenses, which accounted for 13.1% of the
total operating expenses in the first half of 2004, increased by 26.8% to RMB404
million. The increase was mainly due to the additional depreciation arising from
the net revaluation surplus as a result of the revaluation of property, plant
and equipment as at 31 December, 2003.
Non-operating income/(expenses)
Interest expense decreased by 37.5% to RMB195 million during the first
half of 2004, primarily reflecting the interest saving resulting from the
assumption of RMB5,083 million bank loans by CSAHC as at 31 December, 2003.
A net exchange gain of RMB24 million was recorded in the first half of
2004 as compared to a net exchange loss of RMB2 million in the same period last
year, mainly due to its Japanese yen denominated borrowings as a result of the
depreciation of Japanese yen during the first half of 2004.
Taxation
The taxation amount for the first half of 2003 was nil because the Airline
Operations of Northern Airlines Group did not recognise any deferred tax assets
in respect of its taxable losses as the Airline Operations of Northern Airlines
Group did not forecast any future taxable income to utilise the taxable losses.
As a result of the aforementioned reasons, the Airline Operations of
Northern Airlines Group earned a net profit of RMB135 million for the first half
of 2004 as compared to a net loss of RMB685 million for the same period last
year.
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APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
THE AIRLINE OPERATIONS OF XINJIANG AIRLINES GROUP
Operating revenue
For the first half of 2004, the total traffic revenue was RMB1,176
million, an increase of RMB459 million or 64.0% from the same period last year.
The increase was primarily due to a 66.7% increase in passenger revenue. The
number of passengers carried increased by 68.1% to 1.3 million. Passenger
traffic in terms of RPKs increased by 62.3% to 2,416 million.
Passenger revenue was RMB1,126 million, up 66.7% from the same period last
year, representing 95.8% of total traffic revenue. The increase was mainly due
to an increase in traffic volume of 62.3%.
Domestic passenger revenue was RMB1,059 million, up 65.2% from the same
period last year. Domestic passenger revenue accounted for 94.0% of overall
passenger revenue. The increase in domestic passenger was mainly due to the
increases in traffic volume of 62.0% to 2,324 million and passenger yield of
2.2% to RMB0.46. The increase in traffic volume was mainly due to the combined
effect of the absence of Severe Acute Respiratory Syndrome impact during the
first half of 2004. The increase in passenger yield was mainly as a result of
recording the contributions to the CAAC infrastructure fund as an operating
expense instead of being netted off with traffic revenue with effect from 1
April, 2004.
International passenger revenue was RMB67 million, an increase of 91.4%
from the same period last year. International passenger revenue accounted for
6.0% of overall passenger revenue. The increase in international passenger was
mainly due to the increases in traffic volume of 70.4% to 92 million and
passenger yield of 10.8% to RMB0.72. The increase in traffic volume was mainly
because of the absence of Severe Acute Respiratory Syndrome impact during the
first half of 2004. The increase in passenger yield was mainly the result of the
recording of the contributions to the CAAC infrastructure fund as an operating
expense instead of being netted off with traffic revenue and an upward
adjustment of fare resulting from increased traffic demand with effect from 1
April, 2004.
Cargo and mail revenue was RMB50 million in the first half of 2004, an
increase of 19.7% from the same period last year. Cargo and mail revenue
accounted for 4.2% of total traffic revenue in the first half of 2004. The
increase in cargo and mail revenue was mainly due to the net effect of an
increase in traffic volume of 21.4% to 34 million RFTKs and a decrease in
overall yield per RFTK of 4.0% to RMB1.45. The increase in traffic volume was
mainly due to the absence of Severe Acute Respiratory Syndrome impact during the
first half of 2004. The decrease in overall yield per RFTK was mainly due to the
decrease in fares resulting from intensified competition from other airlines and
other modes of transportation.
Other operating revenue decreased by 30.6% to RMB39 million in the first
half of 2004. The decrease was primarily due to the decrease in aircraft lease
income.
- 256 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
Operating expenses
Total operating expenses increased by 24.1% to RMB1,215 million from the
same period last year, representing an increase of RMB236 million. The increase
was mainly due to increases in fuel costs, maintenance, landing and navigation
fees and commission expenses resulting from increased traffic volume during the
first half of 2004.
Flight operations expenses, which accounted for 52.6% of total operating
expenses in the first half of 2004, increased by 31.3% to RMB639 million. Of
these expenses, fuel cost was RMB314 million, up 48.7%, mainly as a result of
increases in fuel consumption and fuel prices. Air catering expenses increased
by 21.5% to RMB36 million, primarily as a result of an increase in number of
passengers carried during the first half of 2004. Labour costs increased by
22.6% to RMB79 million, largely due to an increase in flying hours.
Maintenance expenses which accounted for 10.5% of total operating expenses
in the first half of 2004, increased by 16.3% to RMB127 million. The increase
was primarily attributable to increases in aircraft overhaul charges and routine
maintenance costs resulting from increased flying hours.
Aircraft and traffic servicing expenses, which accounted for 11.0% of the
total operating expenses in the first half of 2004, increased by 20.6% to RMB134
million, reflecting primarily the rise in the number of landing and takeoffs
resulting from increased traffic volume during the first half of 2004.
Promotional and sales expenses, which accounted for 6.7% of total
operating expenses in the first half of 2004, increased by 48.2% to RMB81
million. The increase was the result of an increase in traffic revenue.
General and administrative expenses, which accounted for 5.0% of the total
operating expenses in the first half of 2004, increased by 19.1% to RMB61
million. The increase was mainly due to an increase in the scale of operations
during the first half of 2004.
Depreciation and amortization expenses, which accounted for 14.2% of the
total operating expenses in the first half of 2004, increased by 4.2% to RMB173
million. The increase was mainly due to the additional depreciation arising from
the net revaluation surplus as a result of the revaluation of property, plant
and equipment as at 31 December, 2003 and new purchases during the first half of
2004.
Non-operating income/(expenses)
Interest expense decreased by 14.7% to RMB69 million during the first half
of 2004, primarily reflecting the interest saving resulting from the replacement
of higher interest bearing foreign U.S. dollar bank loans with lower interest
bearing domestic U.S. dollar bank loans during 2003.
- 257 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
Taxation
The income tax credit for the first half of 2004 was RMB24 million as
compared to RMB95 million for the same period of last year. The decrease was
mainly due to better performance during the first half of 2004. The Airline
Operations of Xinjiang Airlines Group incurred a loss before income tax of RMB70
million for the first half of 2004 as compared to a loss before income tax of
RMB290 million for the same period last year.
As a result of the aforementioned reasons, the Airline Operations of
Xinjiang Airlines Group incurred a net loss of RMB44 million for the first half
of 2004 as compared to a net loss of RMB194 million for the same period last
year.
YEAR ENDED 31 DECEMBER, 2003 COMPARED TO YEAR ENDED 31 DECEMBER, 2002
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
Operating revenue
The total traffic revenue was RMB5,857 million in 2003, an increase of
RMB700 million or 13.6% from 2002. The increase was primarily due to a 14.3%
increase in passenger revenue. The number of passengers carried increased by
5.2% to 6.5 million. Passenger traffic in terms of RPKs increased by 4.1% to
9,147 million.
Passenger revenue was RMB5,446 million, up 14.3% from 2002, representing
93.0% of total traffic revenue. The increase was mainly due to increases in
traffic volume of 4.1% and passenger yield of 10.0%.
Domestic passenger revenue was RMB4,559 million, up 16.7% from 2002.
Domestic passenger revenue accounted for 83.7% of overall passenger revenue. The
increase in domestic passenger revenue was mainly due to increases in traffic
volume of 5.6% to 8,234 million and passenger yield of 10.0% to RMB0.55. The
increase in traffic volume was the result of rescheduling of certain major
routes in October 2002. Some low yield and load factor routes were suspended and
the traffic capacity were allocated to those routes with high yield and load
factor. The increase in passenger yield was due mainly to the exemption of the
CAAC infrastructure fund and sales tax during the period from 1 May, 2003 to 31
December, 2003.
International passenger revenue was RMB887 million, an increase of 3.5%
from 2002. International passenger revenue accounted for 16.3% of overall
passenger revenue. The increase in international passenger revenue was mainly
due to the net effect of a decrease in traffic volume of 7.4% to 913 million and
an increase in passenger yield of 11.5% to RMB0.97. The decrease in traffic
volume was the result of suspension of routes to Hong Kong during the period of
1 April, 2003 to 31 December, 2003 because of the outbreak of Severe Acute
Respiratory Syndrome and persistently low load factor and yield. The increase in
passenger yield per RPK was due mainly to the exemption of the CAAC
infrastructure fund and sales tax during the period from 1 May, 2003 to 31
December, 2003.
- 258 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
Cargo and mail revenue was RMB411 million, an increase of 4.9% from 2002.
Cargo and mail revenue accounted for 7.0% of total traffic revenue in 2003. The
increase in cargo and mail revenue was mainly due to an increase in traffic
volume resulting from the introduction of new routes to Japan in October 2002.
Other operating revenue decreased by 17.8% to RMB72 million in 2003. The
decrease was primarily due to a drop in the commission income of RMB15 million
resulting from the use of the Company's tickets for the flights of the Airline
Operations of Northern Airlines Group since 1 January, 2003 under a ticket sale
agreement.
Operating expenses
Total operating expenses increased by 7.9% to RMB5,989 million from 2002,
representing an increase of RMB438 million. The increase was mainly due to
increases in fuel costs, landing and navigation fees, repair and maintenance
resulting from increased traffic volume during 2003.
Flight operations expenses, which accounted for 39.0% of total operating
expenses in 2003, increased by 6.6% to RMB2,338 million. Of these expenses, fuel
cost was RMB1,314 million, up 6.4%, mainly as a result of an increase in fuel
prices caused by the outbreak of Iraq war. Air catering expenses decreased by
15.1% to RMB174 million during 2003 primarily as a result of stricter cost
control. Labour costs increased by 16.8% to RMB376 million largely due to an
increase of headcount and the introduction of double pay during 2003.
Maintenance expenses which accounted for 17.4% of total operating expenses
in 2003, increased by 4.6% to RMB1,039 million. The increase was mainly due to
year 2003 being a peak time for aircraft engine major repairs.
Aircraft and traffic servicing expenses, which accounted for 12.7% of the
total operating expenses in 2003, increased by 5.9% to RMB760 million,
reflecting primarily an increase in the charge rate for domestic landing and
navigation fees effective September 2002.
Promotional and sales expenses, which accounted for 7.1% of total
operating expenses in 2003, increased by 2.3% to RMB425 million. The increase
was the result of an increase in traffic revenue.
General and administrative expenses, which accounted for 3.8% of the total
operating expenses in 2003, increased by 3.1% to RMB226 million. The increase
was mainly due to an increase in labour costs resulting from the introduction of
double pay during 2003.
Depreciation and amortization expenses, which accounted for 10.8% of the
total operating expenses in 2003, decreased by 2.5% to RMB646 million. The
decrease was mainly due to the reduction associated with fully depreciated
property, plant and equipment which outweighed the additional depreciation on
those property, plant and equipment purchased during 2003.
- 259 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
Others which represented impairment losses on aircraft and accounted for
9.2% of the total operating expenses, increased by 58.7% to RMB555 million in
2003. During 2003, the Airline Operations of Northern Airlines entered into
agreements with an independent third party to dispose of its twenty-three
McDonald Douglas 82 aircraft during the years 2003 to 2007 and then immediately
lease back the aircraft under operating leases for a period of one to two years.
Accordingly, the Airline Operations of Northern Airlines Group recorded an
impairment loss for the year ended 31 December 2003 of approximately RMB555
million, being the excess of the carrying amount of the aircraft over their
recoverable amount as determined based on the agreed selling prices of the
aircraft and estimated future cash flows from operating the aircraft prior to
their disposals.
Non-operating income/(expenses)
Interest income decreased by 54.7% to RMB13 million in 2003. This is
mainly due to the combined effect of decreases in average cash balances and bank
deposit interest rates.
Interest expense decreased by 10.5% to RMB627 million in 2003, primarily
reflecting the combined effect of scheduled debt repayments and the replacement
of certain Renminbi denominated bank loans with US$ denominated bank loans with
lower interest rates.
During 2003, the Airline Operations of Northern Airlines Group recorded a
net exchange loss of RMB218 million predominantly due to its Japanese Yen
denominated borrowings as a result of the Japanese Yen appreciation. Such amount
comprised mostly unrealized translation gain.
In connection with the Acquisition, the property, plant and equipment of
the Airline Operations of Northern Airlines Group as at 31 December, 2003 were
revalued on a replacement cost basis as required by the relevant PRC rules and
regulations. As a result of the revaluation, a deficit on revaluation of RMB492
million was resulted during 2003.
Taxation
The income tax for 2003 was RMB117 million as compared to nil for 2002.
This was because the Airline Operations of Northern Airlines Group did not
recognise any deferred tax assets in respect of its taxable losses in 2002 as
the Airline Operations of Northern Airlines Group did not forecast any future
taxable income to utilise the taxable losses.
As a result of the aforementioned reasons, the Airline Operations of
Northern Airlines Group incurred a net loss of RMB1,234 million for 2003 as
compared to a net loss of RMB1,141 million for 2002.
- 260 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
THE AIRLINE OPERATIONS OF XINJIANG AIRLINES GROUP
The total traffic revenue was RMB2,075 million in 2003, a decrease of
RMB140 million or 6.3% from 2002. This decrease was primarily due to a 5.8%
decrease in passenger revenue.
Passenger revenue was RMB1,982 million, down 5.8% from 2002, representing
95.5% of total traffic revenue. The decrease was mainly due to the net effect of
an increase in traffic volume of 4.5% and a decrease in passenger yield of
11.1%.
Domestic passenger revenue was RMB1,878 million, down 6.2% from 2002.
Domestic passenger revenue accounted for 94.8% of overall passenger revenue. The
decrease in domestic passenger revenue was mainly due to the net effect of an
increase in traffic volume of 4.6% to 3,941 million and a decrease in passenger
yield of 9.4% to RMB0.48. The increase in traffic volume was the result of a
quick and strong recovery of aviation market during the second half year of 2003
subsequent to the recovery from Severe Acute Respiratory Syndrome. The decrease
in passenger yield was due mainly to the entry of other airlines which induced
the price competition.
International passenger revenue was RMB104 million, an increase of 2.0%
from 2002. International passenger revenue accounted for 5.2% of overall
passenger revenue. The increase in international passenger revenue was mainly
due to the net effect of an increase in traffic volume of 2.0% to 151 million.
The passenger yield remained at RMB0.69.
Cargo and mail revenue was RMB93 million, a decrease of 16.6% from 2002.
Cargo and mail revenue accounted for 4.5% of total traffic revenue in 2003. The
decrease in cargo and mail revenue was mainly due to a decrease in traffic
volume resulting from the disposal of three IL86 aircraft during 2003. The
overall yield per RFTK increased by 8.8% to RMB1.48 because of an upward
adjustment of fare on certain routes to Russia as a result of increased demand.
Other operating revenue decreased by 44.4% to RMB77 million in 2003. The
decrease was due to decrease in the aircraft lease income resulting from the
disposal of three IL86 aircraft.
Operating expenses
Total operating expenses increased by 1.6% to RMB2,191 million from 2002,
representing an increase of RMB35 million. The increase was mainly due to
increases in fuel costs, landing and navigation fees, repair and maintenance
resulting from increased traffic volume during 2003.
Flight operations expenses, which accounted for 48.5% of total operating
expenses in 2003, increased by 2.5% to RMB1,062 million. Of these expenses, fuel
cost was RMB481 million, up 1.8%, mainly as a result of an increase in fuel
prices caused by the outbreak of Iraq war. Air catering expenses decreased by
7.9% to RMB70 million during 2003 primarily as a result of stricter cost
control. Labour costs increased by 45.0% to RMB134 million largely due to
increases in headcount and salary level by 20% in late 2002.
- 261 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
Maintenance expenses which accounted for 11.4% of total operating expenses
in 2003, increased by 23.2% to RMB250 million. The increase was primarily
attributable to an increase in utilization rates of the aircraft.
Aircraft and traffic servicing expenses, which accounted for 12.6% of the
total operating expenses in 2003, increased by 34.3% to RMB276 million,
reflecting primarily an increase in the charge rate for domestic landing and
navigation fees effective September 2002.
Promotional and sales expenses, which accounted for 6.3% of total
operating expenses in 2003, increased by 17.2% to RMB138 million. The increase
was mainly the result of an increase in commission and bonus paid to sales
agents due to intensified competition.
General and administrative expenses, which accounted for 5.4% of the total
operating expenses in 2003, increased by 21.2% to RMB119 million. The increase
was mainly due to an increase in staff cost resulting from increases in
headcount and salary level by 20% in late 2002.
Depreciation and amortization expenses, which accounted for 15.8% of the
total operating expenses in 2003, decreased by 1.7% to RMB346 million. The
decrease was mainly due to the reduction associated with fully depreciated
property, plant and equipment which outweighed the additional depreciation on
those property, plant and equipment purchased during 2003.
Non-operating income/(expenses)
Interest expense increased by 9.5% to RMB201 million in 2003, primarily
reflecting a termination charge paid for early repayment of certain overseas
U.S. dollar loans amounting to RMB43 million, the effect of which was partly
offset by interest saving from scheduled debt repayments.
In connection with the Acquisition, the property, plant and equipment of
the Airline Operations of Xinjiang Airlines Group as at 31 December, 2003 were
revalued on a replacement cost basis as required by the relevant PRC rules and
regulations. As a result of the revaluation, a deficit on revaluation of RMB235
million was resulted during 2003.
Taxation
The income tax credit for 2003 was RMB156 million as compared to a
taxation expense of RMB9 million for 2002. This was mainly because the Airline
Operations of Xinjiang Airlines Group incurred a loss before income tax of
RMB481 million for 2003 as compared to a profit before income tax of RMB12
million for 2002.
As a result of the aforementioned reasons, the Airline Operations of
Xinjiang Airlines Group incurred a net loss of RMB299 million for 2003 as
compared to a net profit of RMB3 million for 2002.
- 262 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
YEAR ENDED 31 DECEMBER 2002 COMPARED TO YEAR ENDED 31 DECEMBER 2001
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
Operating revenue
The total traffic revenue was RMB5,157 million in 2002, an increase of
RMB51 million or 1.0% from 2001. This increase was primarily due to 18.0% or
RMB60 million increase in cargo and mail revenue.
Passenger revenue was RMB4,765 million, down slightly by 0.2% from 2001,
representing 92.4% of total traffic revenue. The decrease was mainly due to the
decrease in passenger yield of 6.9% to RMB0.54.
Domestic passenger revenue was RMB3,908 million, up slightly by 2.2% from
2001. Domestic passenger revenue accounted for 82.0% of total passenger revenue.
The increase in domestic passenger revenue was mainly due to the net effect of
an increase in traffic volume of 12.8% to 7,800 million and a decrease in
passenger yield of 9.1% to RMB0.50. The increase in traffic volume was the
result of the continued PRC government's effort in stimulating domestic
consumption which increased traffic demand. The decrease in passenger yield was
mainly as a result of increased competition among the PRC airlines.
International passenger revenue was RMB857 million, down 9.9% from 2001.
International passenger revenue accounted for 18.0% of overall passenger
revenue. The decrease in international passenger revenue was mainly due to the
net effect of a decrease in traffic volume of 26.1% to 986 million and an
increase in passenger yield of 22.5% to RMB0.87. In January 2002, the Airline
Operations of Northern Airlines Group suspended certain low yield and load
factor international routes. This accounted for a decrease in traffic volume but
an increase in passenger yield.
Cargo and mail revenue was RMB392 million, an increase of 18.0% from 2001.
Cargo and mail revenue accounted for 7.6% of total traffic revenue in 2002. The
increase in cargo and mail revenue was mainly to an increase in overall yield
per RFTK of 14.3% to RMB2.16 resulting from the suspension of certain routes
with low yield as mentioned above.
Other operating revenue decreased by 11.0% to RMB87 million in 2002. The
decrease was primarily due to the net effect of a drop in aircraft wet lease
income of RMB34 million and an increase in maintenance service income of RMB17
million.
Operating expenses
Total operating expenses increased by 4.2% to RMB5,552 million from 2002,
representing an increase of RMB223 million. The increase was mainly due to the
net effect of increases in landing and navigation fees and repair and
maintenance, and a decrease in impairment loss on aircraft.
- 263 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
Flight operations expenses, which accounted for 39.6% of total operating
expenses in 2002, increased by 3.3% to RMB2,194 million. Of these expenses, fuel
cost was RMB1,236 million, down 3.8%, mainly as a result of a decrease in fuel
prices. Air catering expenses increased by 9.6% to RMB205 million during 2002
primarily as a result of an increase in passenger carried. Labour costs
increased by 15.8% to RMB322 million largely due to an increase of flying hours.
Maintenance expenses which accounted for 17.9% of total operating expenses
in 2002, increased by 32.2% to RMB994 million. The increase was mainly due to
year 2002 being a peak time for aircraft engine major repairs.
Aircraft and traffic servicing expenses, which accounted for 12.9% of the
total operating expenses in 2002, increased by 7.4% to RMB717 million,
reflecting primarily an increase in the charge rate for domestic landing and
navigation fees effective September 2002.
Promotional and sales expenses, which accounted for 7.5% of total
operating expenses in 2002, increased by 1.7% to RMB416 million. The increase
was the result of an increase in operation scale.
General and administrative expenses, which accounted for 3.9% of the total
operating expenses in 2002, increased by 34.3% to RMB219 million. The increase
was mainly due to an increase in labour costs resulting from salary increment.
Depreciation and amortization expenses, which accounted for 11.9% of the
total operating expenses in 2002, decreased by 2.4% to RMB662 million. The
decrease was mainly due to the reduction associated with fully depreciated
property, plant and equipment which outweighed the additional depreciation on
those property, plant and equipment purchased during 2002.
Others which mainly represented impairment losses on aircraft and
accounted for 6.3% of the total operating expenses, decreased by 34.7% to RMB350
million. The decrease was mainly due the absence of lump sum housing subsidy to
eligible employees during 2002. Pursuant to the housing policy executed by the
Airline Operations of Northern Airlines Group, the Airline Operations of
Northern Airlines Group made payments totalling approximately RMB102 million to
eligible employees in 2001 for the purpose of subsidising the employees in
purchasing their houses.
Non-operating income/(expenses)
Interest income decreased by 52.3% to RMB29 million in 2002. This was
mainly due to the combined effect of decreases in average cash balances and bank
deposit interest rates.
Interest expense decreased by 3.3% to RMB701 million in 2002, primarily
reflecting the combined effect of scheduled debt repayments and the decrease in
interest rates on certain floating rates obligation as market interest rates
dropped.
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APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
During 2002, the Airline Operations of Northern Airlines Group recorded a
net exchange loss of RMB151 million as compared to a net exchange gain of RMB232
million in 2001. The net exchange loss in 2002 was predominantly due to its
Japanese Yen denominated borrowings as a result of the Japanese Yen
appreciation. Such amount comprised mostly unrealized translation gain.
Taxation
The taxation amount was small for both 2002 and 2001. This was because the
Airline Operations of Northern Airlines Group did not recognise any deferred tax
assets in respect of its taxable losses in both years as the Airline Operations
of Northern Airlines Group did not forecast any future taxable income to utilise
the taxable losses.
As a result of the aforementioned reasons, the Airline Operations of
Northern Airlines Group incurred a net loss of RMB1,141 million for 2002 as
compared to a net loss of RMB502 million for 2001.
THE AIRLINE OPERATIONS OF XINJIANG AIRLINES GROUP
Operating revenue
The total traffic revenue was RMB2,215 million in 2002, an increase of
RMB167 million or 8.2% from 2001. This increase was primarily due to the 7.9% or
RMB154 million increase in passenger revenue.
Passenger revenue was RMB2,104 million, up by 7.9% from 2001, representing
95.0% of total traffic revenue. The increase was mainly due to an increase in
traffic volume of 10.4%.
Domestic passenger revenue was RMB2,002 million, increased by 7.6% from
2001. Domestic passenger revenue accounted for 95.2% of overall passenger
revenue. The increase in domestic passenger revenue was mainly due to the net
effect of an increase of traffic volume of 10.8% to 3,768 million and a decrease
in passenger yield of 3.6% to RMB0.53. The increase in traffic volume was the
result of the continued PRC government's effort in stimulating domestic
consumption which increased traffic demand. The decrease in passenger yield was
mainly as a result of increased competition among the PRC airlines.
International passenger revenue was RMB102 million, up 14.6% from 2001.
International passenger revenue accounted for 4.8% of overall passenger revenue.
The increase in international passenger revenue was mainly due to an increase in
passenger yield of 15.0% to RMB0.69 because of increased traffic demand.
Cargo and mail revenue was RMB111 million, an increase of 14.0% from 2001.
Cargo and mail revenue accounted for 5.0% of total traffic revenue in 2002. The
increase in cargo and mail revenue was mainly due to the net effect of an
increase in traffic volume of 30.2% to 82 million and a decrease in overall
yield per RFTK of 11.7% to RMB1.36 resulting from the intensified competition
from other airlines.
- 265 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
Other operating revenue increased by 9.1% to RMB138 million in 2002. The
increase was primarily due to an increase in ground services income subsequent
to the introduction of ground services in 2002.
Operating expenses
Total operating expenses increased by 13.2% to RMB2,156 million from 2001,
representing an increase of RMB251 million. The increase was mainly due to the
impairment loss recognised on aircraft and other flight equipment of RMB132
million.
Flight operations expenses, which accounted for 48.1% of total operating
expenses in 2002, increased by 3.4% to RMB1,036 million. Of these expenses, fuel
cost was RMB473 million, down 11.9%, mainly as a result of a decrease in fuel
prices. Air catering expenses increased by 10.1% to RMB76 million during 2002
primarily as a result of an increase in passenger carried. Labour costs
increased by 8.2% to RMB92 million largely due to an increase of flying hours.
Maintenance expenses which accounted for 9.4% of total operating expenses
in 2002, increased by 1.4% to RMB203 million. The increase was primarily
attributable to an increase in flight hours.
Aircraft and traffic servicing expenses, which accounted for 9.5% of the
total operating expenses in 2002, increased by 1.6% to RMB205 million,
reflecting primarily an increase in the charge rate for domestic landing and
navigation fees effective September 2002.
Promotional and sales expenses, which accounted for 5.4% of total
operating expenses in 2002, increased by 17.4% to RMB117 million. The increase
was the result of an increase in revenue.
General and administrative expenses, which accounted for 4.6% of the total
operating expenses in 2002, increased by 13.7% to RMB98 million. The increase
was mainly due to an increase in labour costs resulting from salary increment.
Depreciation and amortization expenses, which accounted for 16.3% of the
total operating expenses in 2002, increased by 11.8% to RMB352 million. This
increase was primarily as a result of addition of one Boeing 757-200 aircraft
and two 757-200 jet engines during 2002.
Others which mainly represented the impairment loss on aircraft accounted
for 6.7% of the total operating expenses in 2002. In accordance with certain
regulations announced by the CAAC in 2002, IL86 aircraft were not allowed to fly
unless they were installed with additional security modules starting from 1
January, 2003. After having evaluated the costs and benefits, management decided
to ground the aircraft. Management assessed the recoverable amount of the three
IL86 aircraft and their related flight equipment and spare parts. Impairment
loss of approximately RMB132 million was provided for to write down the carrying
value of the aircraft to their estimated net realisable value during 2002.
- 266 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
Non-operating income/(expenses)
Interest expense decreased by 2.7% to RMB184 million in 2002, primarily
reflecting the effect of scheduled debt repayments.
Taxation
The income tax for 2002 was RMB9 million as compared to RMB36 million for
2001. The decrease was mainly due to a decrease in profit before income tax.
As a result of the aforementioned reasons, the Airline Operations of
Xinjiang Airlines Group had a net profit of RMB3 million for 2002 as compared to
a net profit of RMB41 million for 2001.
LIQUIDITY
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
As of 30 June 2004, the Airline Operations of Northern Airlines Group's
borrowings totalled RMB9,044 million. The majority of such borrowings were
denominated in United States dollars and, to a smaller extent, in Japanese yen
and Renminbi, with a significant portion being fixed interest rate borrowings
ranging from 5.94% to 8.18%. Of such borrowings, RMB1,830 million, RMB1,294
million, RMB2,310 million, RMB1,279 million and RMB2,331 million will be
repayable in 2005, 2006, 2007, 2008, 2009 and thereafter respectively.
THE AIRLINE OPERATIONS OF XINJIANG AIRLINES GROUP
As of 30 June 2004, the Airline Operations of Xinjiang Airlines Group's
borrowings totalled RMB2,792 million. The majority of such borrowings were
denominated in United States dollars and Renminbi, with a significant portion
being fixed interest rate borrowings ranging from 5.77% to 7.63%. Of such
borrowings, RMB1,057 million, RMB320 million, RMB314 million, RMB222 million and
RMB879 million will be repayable in 2005, 2006, 2007, 2008, 2009 and thereafter
respectively.
FINANCIAL RISK MANAGEMENT POLICY
In the normal course of business, each of the Airline Operations of
Northern Airlines Group and the Airline Operations of Xinjiang Airlines Group is
exposed to fluctuations in foreign currencies and jet fuel prices. Their
exposure to foreign currencies is mainly attributable to their debts denominated
in foreign currencies. Depreciation or appreciation of the Renminbi against
foreign currencies could affect results and financial position of the Airline
Operations of Northern Airlines Group and the Airline Operations of Xinjiang
Airlines Group significantly, as their foreign currency payments generally
exceed its foreign currency receipts. Both the Airline Operations of Northern
Airlines Group and the Airline Operations of Xinjiang Airlines Group are not
able to hedge their foreign currency exposure effectively other
- 267 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
than by retaining their foreign currency denominated earnings and receipts to
the extent permitted by the State Administration of Foreign Exchange, or subject
to certain restrictive conditions, by entering into forward foreign exchange
contracts with authorized PRC banks.
Both the Airline Operations of Northern Airlines Group and the Airline
Operations of Xinjiang Airlines Group are required to procure a majority of its
jet fuel domestically at PRC spot market prices. There are currently no
effective means available to either the Airline Operations of Northern Airlines
Group or the Airline Operations of Xinjiang Airlines Group for managing their
exposure associated with the fluctuations in domestic jet fuel prices.
CHARGES ON ASSETS
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
As of 30 June 2004, certain aircraft of the Airline Operations of Northern
Airlines Group with an aggregate carrying value of approximately RMB6,941
million were mortgaged under certain loan and finance leases.
THE AIRLINE OPERATIONS OF XINJIANG AIRLINES GROUP
As of 30 June 2004, certain aircraft of the Airline Operations of Xinjiang
Airlines Group with an aggregate carrying value of approximately RMB1,689
million were mortgaged under certain loan agreements.
COMMITMENTS AND CONTINGENCIES
THE AIRLINE OPERATIONS OF NORTHERN AIRLINES GROUP
As of 30 June 2004, the Airline Operations of Northern Airlines Group had
capital commitments of approximately RMB909 million. Of such amounts, RMB860
million was related to the acquisition of aircraft and related flight equipment.
The remaining amount of RMB49 million was related to the Airline Operations of
Northern Airlines Group's office facilities and equipment, overhaul and
maintenance bases and training facilities.
The details of the contingencies of the Airline Operations of Northern
Airlines Group was set out on page 105 of the Circular.
THE AIRLINE OPERATIONS OF XINJIANG AIRLINES GROUP
As of 30 June 2004, the Airline Operations of Xinjiang Airlines Group had
capital commitments of approximately RMB12 million. They were related to the
Airline Operations of Xinjiang Airlines Group's office facilities and equipment,
overhaul and maintenance bases and training facilities.
As at 30 June, 2004, the Airline Operations of Xinjiang Airlines Group was
not subject to any major contingent liabilities.
- 268 -
APPENDIX VII ADDITIONAL INFORMATION TO SHAREHOLDERS
OPERATING RESULTS OUTLOOK
The Directors view the Acquisition as a significant driver to improving
its operating efficiency and competitiveness.
Via a successful integration, the Directors aim to achieve the following
improvement in the Company's operating results:
2005 2004 2003
BENCHMARK (PRO FORMA)(1) (PRO FORMA)(1) (ACTUAL)(2)
--------------------------------- -------------- -------------- -----------
Total RTK (million) 7,300 6,550 3,561
Total passenger carried (million) 45 40 26
Total RFTK (million) 0.76 0.69 0.59
Average daily utilization (hours) 9.3 9.2 8.45
Overall load factor (%) 63.2 62.8 60.1
Passenger load factor (%) 70 69.3 64.6
(1) Refers to pro forma combination of the Listed Group, the Airline
Operations of Northern Airlines Group and the Airline Operations of
Xinjiang Airlines Group.
(2) Refers to the Listed Group's actual 2003 result.
- 269 -
APPENDIX VIII PROPERTY VALUATION
The following is the text of the letter, summary of values and valuation
certificate received from Chesterton, an independent property valuer, prepared
for the purpose of incorporation in this Circular, in connection with their
valuation of the property interests held and to be acquired by the Group as at
31 August, 2004.
[CHESTERTON PETTY LOGO]
International Property Consultants
Chesterton Petty Limited
16/F CITIC Tower
1 Tim Mel Avenue
Central
Hong Kong
Tel 2840 1177
Fax 2840 0600
12 November, 2004
The Directors
China Southern Airlines Company Limited
Baiyun International Airport
Guangzhou City
Guangdong Province
The People's Republic of China
Dear Sirs,
In accordance with your instructions to us to value the property interests
to be acquired by China Southern Airlines Company Limited (hereinafter referred
to as the "Company") from China Southern Air Holding Company ("CSAHC") which are
originally held by China Northern Airlines Company and Xinjiang Airlines Company
and those property interests held by the Company and its principal subsidiaries
and associated company (hereinafter together referred to as the "Group"), we
confirm that we have carried out inspections, made relevant enquiries and
obtained such further information as we consider necessary for the purpose of
providing you with our opinion of the open market values of the property
interests as at 31 August, 2004.
Our valuation is our opinion of the open market value which we would
define as intended to mean "the best price at which the sale of an interest in a
property would have been completed unconditionally for cash consideration on the
date of valuation assuming:
(a) a willing seller;
(b) that, prior to the date of valuation, there had been a reasonable
period (having regard to the nature of the property and the state of
the market) for the proper marketing of the interest, for the
agreement of price and terms and for the completion of the sale;
(c) that the state of the market, level of values and other
circumstances were, on any earlier assumed date of exchange of
contracts, the same as on the date of valuation;
- 270 -
APPENDIX VIII PROPERTY VALUATION
(d) that no account is taken of any additional bid by a prospective
purchaser with a special interest; and
(e) that both parties to the transaction had acted knowledgeably,
prudently and without compulsion".
Our valuation has been made on the assumption that the owner sells the
property interest in the open market without the benefit of a deferred term
contract, leaseback, joint venture, management agreement or any similar
arrangement which would serve to increase the values of the property interests.
In addition, no account has been taken of any option or right of pre-emption
concerning or affecting the sale of the property interest and no forced sale
situation in any manner is assumed in our valuation.
In valuing the property interests, we have assumed that, unless otherwise
stated, CSAHC and its subsidiaries and the Company have an enforceable title to
each of the property interests to be acquired and those held by the Group,
respectively, and have free and uninterrupted rights to use, occupy or assign
the property interests for the whole of the respective unexpired terms as
granted. In the course of our valuation to the properties held by the Group in
the PRC, we have also assumed that, unless otherwise stated, transferable land
use rights in respect of the properties for their respective specific terms at
nominal annual land use fees have been granted and that any premium payable has
already been fully paid. We have relied on the advice given by the Group and its
PRC legal advisers, Z & T Law Firm, on the PRC laws regarding the title to the
properties.
Due to the specific purposes for which most of the buildings and
structures to be acquired in Group I and those held by the Group in Groups IV
and V have been constructed, there are no readily identifiable market
comparables available, thus the buildings and structures cannot be valued on the
basis of direct comparison. They have therefore been valued on the basis of
their depreciated replacement cost. We would define depreciated replacement cost
to be our opinion of the land value in its existing use together with an
estimate of the new replacement costs of the buildings and structures, including
fees and finance charges, from which deductions are then made to allow for age,
condition and functional obsolescence. The depreciated replacement cost approach
generally provides the most reliable indication of value for property in the
absence of a known market based on comparable sales.
We have valued the property interest in Group VI by using "Direct
Comparison Approach" with the benefit of vacant possession and by reference to
comparable sales evidence as available in the market.
Property interests under construction in Groups II and VII have been
valued on the basis of their prevailing costs level and status of construction
as at the date of valuation. We have assumed that all consents, approvals and
licences from the relevant government authorities for such constructions and
related development proposals have been granted without any onerous conditions
or undue delay which might affect their values.
The properties in Group III which are to be rented by the Company and
those in Groups VIII which are rented by the Group in the PRC and overseas have
been assigned no commercial value due to the short term nature or the
prohibition against assignment or sub-letting, or lack of substantial profit
rent.
- 271 -
APPENDIX VIII PROPERTY VALUATION
In valuing the property interests, we have complied with the requirements
contained within the relevant provisions as stipulated in Chapter 5 and Practice
Note 12 to the Rules Governing the Listing of Securities on The Stock Exchange
of Hong Kong Limited, except to those in respect of which waiver in respect of
Rule 5.06 of the Listing Rules has been applied for due to the large number of
land and buildings involved in the Acquisition.
We have been provided with copies of extracts of title documents relating
to the property interests. However, we have not inspected the original documents
to verify the ownership or to verify any amendments which may not appear on the
copies handed to us. We have relied to a considerable extent on information
given by the Group and the legal opinion of the Group's PRC legal advisers and
have accepted advice given to us on such matters as planning approvals or
statutory notices, easements, tenure, particulars of occupancy, identification
of the property, development proposals, completion dates of buildings, floor and
site areas, construction costs incurred, attributable interests and all other
relevant information. Dimensions, measurements and areas included in the
valuation certificate are based on information contained in the documents
provided to us and are therefore only approximations. We have not been able to
carry out on-site measurements to verify the correctness of the site and floor
areas of the properties and we have assumed that the site and floor areas shown
on the documents handed to us are correct.
We have inspected the exteriors and, where possible, the interiors of the
properties. However, we have not carried out any site investigations to
determine the suitability of the ground conditions and the services etc, for any
future development. Our valuation is prepared on the assumption that these
aspects are satisfactory and that no extraordinary expenses or delays will be
incurred during the construction period. Moreover, no structural survey has been
made, but in the course of our inspection, we did not note any serious defects.
We are not, however, able to report that the properties are free of rot,
infestation, or any other structural defects. No test has been carried out to
any of the services.
No allowance has been made in our valuation for any charges, mortgages or
amounts owing on any property or for any expenses or taxation which may be
incurred in effecting a sale. Unless otherwise stated, it is assumed that the
properties are free from encumbrances, restrictions and outgoings of an onerous
nature which could affect their values.
Unless otherwise stated, all money amounts are stated in Renminbi. The
exchange rates used in calculating the values of the property interests in
Groups IV and V into Renminbi, being AUD1=RMB5.849 and Euro1=RMB10.086 and they
have no significant fluctuation between the date of valuation and the date of
this letter.
We enclose herewith a summary of values and valuation certificate.
Yours faithfully
For and on behalf of
CHESTERTON PETTY LIMITED
CHARLES C K CHAN
Chartered Estate Surveyor
MSc FRICS FHKIS MCIArb RPS(GP)
Executive Director
Note: Charles C K Chan, MSc, FRICS, FHKIS, MCIArb, RPS (GP), has been a
qualified valuer with Chesterton since June 1987 and has about 19 years'
experience in the valuation of properties in Hong Kong and extensive
experience in the valuation of properties in the People's Republic of
China and the Asia Pacific regions.
- 272 -
APPENDIX VIII PROPERTY VALUATION
SUMMARY OF VALUES
OPEN MARKET CAPITAL VALUE
VALUE IN EXISTING ATTRIBUTABLE TO
STATE AS AT INTEREST THE GROUP AS AT
31 AUGUST, 2004 ATTRIBUTABLE 31 AUGUST, 2004
PROPERTY RMB TO THE GROUP RMB
GROUP I - PROPERTIES TO BE ACQUIRED BY THE COMPANY FROM CSAHC
1. Various properties to be 132,250,000 100% 132,250,000
acquired by the Company
from China Northern
Airlines Company
in Shenyang
2. Various properties to be 138,270,000 100% 138,270,000
acquired by the Company
from China Northern
Airlines Company
in Harbin
3. Various properties to be 39,850,000 100% 39,850,000
acquired by the Company
from China Northern
Airlines Company in Dalian
4. Various properties to be 47,440,000 100% 47,440,000
acquired by the Company
from China Northern
Airlines Company
in Changchun
5. Various properties to be 5,120,000 100% 5,120,000
acquired by the Company
from China Northern
Airlines Company
in Chaoyang
6. Various properties to be No commercial 51.8% No commercial
acquired by the Company value value
from Xinjiang Civil
Aviation Property
Management Ltd in Urumqi
7. Various properties to be 406,370,000 100% 406,370,000
acquired by the Company
from Xinjiang Airlines
Company in Urumqi
------------- -------------
SUB-TOTAL: 769,300,000 769,300,000
------------- -------------
- 273 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET CAPITAL VALUE
VALUE IN EXISTING ATTRIBUTABLE TO
STATE AS AT INTEREST THE GROUP AS AT
31 AUGUST, 2004 ATTRIBUTABLE 31 AUGUST, 2004
PROPERTY RMB TO THE GROUP RMB
GROUP II - PROPERTIES UNDER CONSTRUCTION TO BE ACQUIRED BY THE COMPANY FROM CSAHC
8. Various properties to be No commercial 51.8% No commercial
acquired by the Company value value
from Xinjiang Civil Aviation
Property Management Ltd
in Urumqi
9. Various properties to be 263,000 100% 263,000
acquired by the Company
from Xinjiang Airlines
Company in Urumqi
------------- -------------
SUB-TOTAL: 263,000 263,000
------------- -------------
GROUP III - PROPERTIES TO BE RENTED BY THE COMPANY FROM CSAHC
10. Various properties to be No commercial 100% No commercial
rented by the Company value value
from CSAHC
------------- -------------
SUB-TOTAL: NIL NIL
------------- -------------
GROUP IV - PROPERTIES HELD BY THE GROUP IN THE PRC
11. Various properties held by 383,290,000 100% 383,290,000
China Southern Airlines
Company Limited
Guangzhou Headquarters
12. Various properties held by 110,210,000 100% 110,210,000
China Southern Airlines
Company Limited
in Henan
13. Various properties held by 54,060,000 100% 54,060,000
China Southern Airlines
Company Limited
in Hubei
- 274 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET CAPITAL VALUE
VALUE IN EXISTING ATTRIBUTABLE TO
STATE AS AT INTEREST THE GROUP AS AT
31 AUGUST, 2004 ATTRIBUTABLE 31 AUGUST, 2004
PROPERTY RMB TO THE GROUP RMB
14. Various properties held by 169,480,000 100% 169,480,000
China Southern Airlines
Company Limited
in Hunan
15. Various properties held by 74,640,000 100% 74,640,000
China Southern Airlines
Company Limited
in Shenzhen
16. Various properties held by 48,211,000 100% 48,211,000
China Southern Airlines
Company Limited
in Hainan
17. Various properties held by 2,110,000 100% 2,110,000
China Southern Airlines
(Group) Zhuhai Helicopter
Company Limited
18. Various properties held by 126,880,000 60% 76,128,000
Xiamen Airlines Company
Limited (Xiamen Airlines)
19. Various properties held by 115,870,000 60% 69,520,000
Southern Airlines (Group)
Shantou Airlines Company
Limited
20. Various properties held by 24,140,000 60% 14,484,000
Guangxi Airlines Company
Limited
21. Various properties held by 67,530,000 60% 40,520,000
Zhuhai Airlines Company
Limited
22. Various properties held by No commercial 60% No commercial
Guizhou Airlines Company value value
Limited
23. Various properties held by No commercial 51% No commercial
Guangzhou Nanland Air value value
Catering Company Limited
- 275 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET CAPITAL VALUE
VALUE IN EXISTING ATTRIBUTABLE TO
STATE AS AT INTEREST THE GROUP AS AT
31 AUGUST, 2004 ATTRIBUTABLE 31 AUGUST, 2004
PROPERTY RMB TO THE GROUP RMB
24. A property held by 57,670,000 90% 51,900,000
Guangzhou Aviation Hotel
25. Various properties held by 16,030,000 100% 16,030,000
China Southern Airlines
Company Limited
Operation Department
26. Various properties held by 156,070,000 100% 156,070,000
China Southern Airlines
Company Limited Zhuhai
Flight Simulator Training
Centre
------------- -------------
SUB-TOTAL: 1,406,191,000 1,266,653,000
------------- -------------
GROUP V - PROPERTIES HELD BY THE GROUP IN WESTERN AUSTRALIA
27. Various properties held by 12,120,000 65% 7,878,000
China Southern West
Australian Flying College
Pty Ltd.
------------- -------------
SUB-TOTAL: 12,120,000 7,878,000
------------- -------------
GROUP VI - PROPERTIES HELD BY THE GROUP IN THE NETHERLANDS
28. Five residential units held 13,210,000 100% 13,210,000
by the Company in
Amestelveen, Noord-Holland,
The Netherlands
------------- -------------
SUB-TOTAL: 13,210,000 13,210,000
------------- -------------
- 276 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET CAPITAL VALUE
VALUE IN EXISTING INTEREST ATTRIBUTABLE TO
STATE AS AT ATTRIBUTABLE THE GROUP AS AT
PROPERTY 31 AUGUST, 2004 TO THE GROUP 31 AUGUST, 2004
RMB RMB
GROUP VII - PROPERTIES HELD UNDER CONSTRUCTION BY THE GROUP IN THE PRC
29. Various properties held 1,559,830,000 100% 1,559,830,000
under construction by
China Southern Airlines
Company Limited
Guangzhou Headquarters
30. Various properties held No commercial 60% No commercial
under construction by value value
Xiamen Airlines
31. A property held under 4,810,000 60% 2,890,000
construction by Southern
Airlines (Group) Shantou
Airlines Company Limited
32. A parcel of land held under 7,200,000 60% 4,320,000
construction by Zhuhai
Airlines Company Limited
33. Various properties held No commercial 60% No commercial
under construction by value value
Guizhou Airlines Company
Limited
34. Various properties held No commercial 61% No commercial
under construction by value value
Guangzhou Baiyun
International Logistic
Company Ltd.
---------------- --------------
SUB-TOTAL: 1,571,840,000 1,567,040,000
---------------- --------------
-277-
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET CAPITAL VALUE
VALUE IN EXISTING INTEREST ATTRIBUTABLE TO
STATE AS AT ATTRIBUTABLE THE GROUP AS AT
PROPERTY 31 AUGUST, 2004 TO THE GROUP 31 AUGUST, 2004
RMB RMB
GROUP VIII - PROPERTIES RENTED BY THE GROUP
35. Various properties rented by No commercial 100% No commercial
China Southern Airlines value value
Company Limited
Guangzhou Headquarters
36. Various properties rented by No commercial 100% No commercial
China Southern Airlines value value
Company Limited
in Henan
37. Various properties rented by No commercial 100% No commercial
China Southern Airlines value value
Company Limited
in Hubei
38. Various properties rented by No commercial 100% No commercial
China Southern Airlines value value
Company Limited
in Shenzhen
39. Various properties rented by No commercial 100% No commercial
China Southern Airlines value value
(Group) Zhuhai Helicopter
Company Limited
40. Various properties rented by No commercial 60% No commercial
Xiamen Airlines value value
41. Various properties rented by No commercial 60% No commercial
Southern Airlines (Group) value value
Shantou Airlines Company
Limited
42. Various properties rented by No commercial 60% No commercial
Guangxi Airlines Company value value
Limited
43. Various properties rented by No commercial 60% No commercial
Zhuhai Airlines Company value value
Limited
44. Various properties rented by No commercial 60% No commercial
Guizhou Airlines Company value value
Limited
-278-
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET CAPITAL VALUE
VALUE IN EXISTING INTEREST ATTRIBUTABLE TO
STATE AS AT ATTRIBUTABLE THE GROUP AS AT
PROPERTY 31 AUGUST, 2004 TO THE GROUP 31 AUGUST, 2004
RMB RMB
45. A property rented by No commercial 90% No commercial
Southern Chinab value value
International Aviation &
Travel Services Company
46. Various properties rented by No commercial 100% No commercial
China Southern Airlines value value
Company Limited Overseas
Offices
47. Various properties rented by No commercial 100% No commercial
China Southern Airlines value value
Operation Department
------------- -------------
SUB-TOTAL: NIL NIL
------------- -------------
TOTAL: 3,772,924,000 3,624,344,000
============= =============
-279-
APPENDIX VIII PROPERTY VALUATION
VALUATION CERTIFICATE
GROUP I - PROPERTIES TO BE ACQUIRED BY THE COMPANY FROM CSAHC
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OF OCCUPANCY RMB
1. Various properties The property comprises 27 The properties are 132,250,000
to be acquired by various operational and ancillary occupied by China
the Company from buildings and various structures Northern Airlines
China Northern completed in various stages Company as
Airlines Company between 1989 and 2000 with a headquarters purposes.
in Shenyang total gross floor area of
approximately 80,778.39 sq.m.
(869,499 sq.ft.).
Details of gross floor areas of
the properties are listed as
follows:
APPROXIMATE
USE GROSS FLOOR AREA
sq.m. sq.ft.
Office 19,757.70 212,672
Warehouses 25,556.30 275,088
Ancillary
buildings
and
structures 35,464.39 381,739
--------- -------
Total: 80,778.39 869,499
========= =======
The land upon which the
properties currently erected
comprises 9 parcels of land with
a total area of 134,356.36 sq.m.
(1,446,212 sq.ft.).
The land use rights of the
properties are held for a term of
49 years from 26 August, 2004 to 1
January, 2053.
Notes:
(1) Pursuant to the land use rights leasing agreement entered into between the
Company and CSAHC on 12 November, 2004 (the "Lease Agreement") CSAHC
agreed to lease 22 parcels of land with a total area of approximately
633,740.93 sq.m. to the Company at an annual rental of RMB10,340,449 for a
term of three years with an option to renew for further terms (subsequent
annual rents will remain unchanged) where the entire lease term is either
not less than the term specified in the corresponding Building Ownership
Certificates of the buildings erected on the lands or the corresponding
residual useful life of buildings determined in valuations when the
Company purchases the buildings, whichever is longer.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) CSAHC has obtained the authorized land use rights of 9 parcels of
land with a total area of approximately 134,356.36 sq.m.
(ii) China Northern Airlines has obtained the Building Ownership
Certificates for 27 buildings.
-280-
APPENDIX VIII PROPERTY VALUATION
(iii) The Lease Agreement is legally valid. During the lease term, the
Company has the right to occupy and use the leased lands;
(iv) CSAHC has agreed to bear all liabilities, losses and costs arising
from disputes on the land use rights of the leased lands and to
indemnify the Company in respect of losses to the buildings and
structures erected on the leased lands;
(v) CSAHC and China Northern Airlines Company have agreed to indemnify
the Company in respect of disputes on the title and the
incorrectness to the buildings and structures of the properties; and
(vi) The transfer of buildings and structures of the properties to the
Company has no legal impediment. After the acquisition, the Company
will have the ownership to the buildings and structures of the
properties and can use, mortgage, lease and sell the buildings and
structures of the properties. However, if the Company sells the
buildings and structures of the properties to third parties (other
than CSAHC, its subholdings, subsidiaries and associates), the
Company shall obtain an approval from relevant State-owned Land
Resources Administration Bureaus and pay relevant land grant fees.
While the sale, CSAHC has agreed to assist the Company in proceeding
the relevant procedures for conversion the lands to granted lands
but not to bear any procedural costs.
(3) We have assigned no commercial value to the land portions of the
properties due to its non-transferability in the open market. According to
the Group's PRC legal adviser opinion, the Company will obtain the
ownership of the buildings and structures of the property without any
legal obstacles. Also, CSAHC has agreed to assist the Company to transfer
the properties and process the land grant process. We have, relied on the
aforesaid, assigned open market values to the buildings and structures of
the properties but excluding the land portion.
-281-
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OF OCCUPANCY RMB
2. Various properties The property comprises 6 various The properties are 138,270,000
to be acquired by operational and ancillary occupied by China
the Company from buildings and various structures Northern Airlines
China Northern completed in various stages Company for airport
Airlines Company between 1989 and 1999 with a services, aircraft
in Harbin total gross floor area of maintenance works
approximately 36,925.40 sq.m. and offices purposes.
(397,465 sq.ft.).
Details of gross floor areas of
the properties are listed as
follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Office 27,132.35 292,053
Ancillary
buildings
and
structures 9,793.05 105,412
--------- -------
Total: 36,925.40 397,465
========= =======
The land upon which the
properties currently erected
comprises 8 parcels of land with
a total area of 289,647.90 sq.m.
(3,117,770 sq.ft.).
The land use rights of the
properties are held for terms of
49 years from 26 August, 2004 to
1 January, 2053 and 39 years
expiring on 1 January, 2043.
Notes:
(1) Pursuant to the land use rights leasing agreement entered into between the
Company and CSAHC on 12 November, 2004 (the "Lease Agreement") CSAHC
agreed to lease 22 parcels of land with a total area of approximately
633,740.93 sq.m. to the Company at an annual rental of RMB10,340,449 for a
term of three years with an option to renew for further terms (subsequent
annual rents will remain unchanged) where the entire lease term is either
not less than the term specified in the corresponding Building Ownership
Certificates of the buildings erected on the lands or the corresponding
residual useful life of buildings determined in valuations when the
Company purchases the buildings, whichever is longer.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) CSAHC has obtained the authorized land use rights of 8 parcels of
land with a total area of approximately 289,647.90 sq.m.
(ii) China Northern Airlines has obtained the Building Ownership
Certificates for 6 buildings.
(iii) The Lease Agreement is legally valid. During the lease term, the
Company has the right to occupy and use the leased lands;
-282-
APPENDIX VIII PROPERTY VALUATION
(iv) CSAHC has agreed to bear all liabilities, losses and costs arising
from disputes on the land use rights of the leased lands and to
indemnify the Company in respect of losses to the buildings and
structures erected on the leased lands;
(v) CSAHC and China Northern Airlines Company have agreed to indemnify
the Company in respect of disputes on the title and the
incorrectness to the buildings and structures of the properties; and
(vi) The transfer of buildings and structures of the properties to the
Company has no legal impediment. After the acquisition, the Company
will have the ownership to the buildings and structures of the
properties and can use, mortgage, lease and sell the buildings and
structures of the properties. However, if the Company sells the
buildings and structures of the properties to third parties (other
than CSAHC, its subholdings, subsidiaries and associates), the
Company shall obtain an approval from relevant State-owned Land
Resources Administration Bureaus and pay relevant land grant fees.
While the sale, CSAHC has agreed to assist the Company in proceeding
the relevant procedures for conversion the lands to granted lands
but not to bear any procedural costs.
(3) We have assigned no commercial value to the land portions of the
properties due to its non-transferability in the open market. According to
the Group's PRC legal adviser opinion, the Company will obtain the
ownership of the buildings and structures of the property without any
legal obstacles. Also, CSAHC has agreed to assist the Company to transfer
the properties and process the land grant process. We have, relied on the
aforesaid, assigned open market values to the buildings and structures of
the properties but excluding the land portion.
-283-
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OF OCCUPANCY RMB
3. Various properties The property comprises 2 various The properties are 39,850,000
to be acquired by operational and ancillary occupied by China
the Company from buildings and various structures Northern Airlines
China Northern completed in various stages Company for office
Airlines Company between 1995 and 1997 with a and guest house
in Dalian total gross floor area of purposes.
approximately 16,488.34 sq.m.
(177,480 sq.ft.).
Details of gross floor areas of
the properties are listed as
follows:
APPROXIMATE
USE GROSS FLOOR AREA
sq.m. sq.ft.
Office 16,488.34 177,480
--------- -------
Total: 16,488.34 177,480
========= =======
The land upon which the
properties currently erected
comprises 1 parcels of land with
a total area of 14403.40 sq.m.
(155,038 sq.ft.).
The land use rights of the
properties are held for a term
of 39 years commencing 26 August,
2004.
Notes:
(1) Pursuant to the land use rights leasing agreement entered into between the
Company and CSAHC on 12 November, 2004 (the "Lease Agreement") CSAHC
agreed to lease 22 parcels of land with a total area of approximately
633,740.93 sq.m. to the Company at an annual rental of RMB10,340,449 for a
term of three years with an option to renew for further terms (subsequent
annual rents will remain unchanged) where the entire lease term is either
not less than the term specified in the corresponding Building Ownership
Certificates of the buildings erected on the lands or the corresponding
residual useful life of buildings determined in valuations when the
Company purchases the buildings, whichever is longer.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) CSAHC has obtained the authorized land use rights of 1 parcel of
land with a total area of approximately 14,403.40 sq.m.
(ii) China Northern Airlines has obtained the Building Ownership
Certificates for 2 buildings.
(iii) The Lease Agreement is legally valid. During the lease term, the
Company has the right to occupy and use the leased lands;
(iv) CSAHC has agreed to bear all liabilities, losses and costs arising
from disputes on the land use rights of the leased lands and to
indemnify the Company in respect of losses to the buildings and
structures erected on the leased lands;
-284-
APPENDIX VIII PROPERTY VALUATION
(v) CSAHC and China Northern Airlines Company have agreed to indemnify
the Company in respect of disputes on the title and the
incorrectness to the buildings and structures of the properties; and
(vi) The transfer of buildings and structures of the properties to the
Company has no legal impediment. After the acquisition, the Company
will have the ownership to the buildings and structures of the
properties and can use, mortgage, lease and sell the buildings and
structures of the properties. However, if the Company sells the
buildings and structures of the properties to third parties (other
than CSAHC, its subholdings, subsidiaries and associates), the
Company shall obtain an approval from relevant State-owned Land
Resources Administration Bureaus and pay relevant land grant fees.
While the sale, CSAHC has agreed to assist the Company in proceeding
the relevant procedures for conversion the lands to granted lands
but not to bear any procedural costs.
(3) We have assigned no commercial value to the land portions of the
properties due to its non-transferability in the open market. According to
the Group's PRC legal adviser opinion, the Company will obtain the
ownership of the buildings and structures of the property without any
legal obstacles. Also, CSAHC has agreed to assist the Company to transfer
the properties and process the land grant process. We have, relied on the
aforesaid, assigned open market values to the buildings and structures of
the properties but excluding the land portion.
-285-
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
PARTICULARS IN EXISTING STATE AS
PROPERTIES DESCRIPTION AND TENURE OF OCCUPANCY AT 31 AUGUST, 2004
RMB
4. Various properties to be The property comprises 16 various The properties are occupied by 47,440,000
acquired by the Company from operational and ancillary buildings and China Northern Airlines Company
China Northern Airlines various structures completed in various for offices, and warehouses
Company in Changchun stages between 1975 and 2002 with a purposes.
total gross floor area of approximately
33,656.96 sq.m. (362,284 sq.ft.).
Details of gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Office 21,145.94 227,615
Warehouses 7,359.41 79,217
Ancillary buildings
and structures 5,151.61 55,452
--------- -------
Total: 33,656.96 362,284
========= =======
The land upon which the properties
currently erected comprises 3 parcels
of land with a total area of 160,106.30
sq.m. (1,723,384 sq.ft.).
The land use rights of the properties
are held for terms of 49 years from 26
August, 2004 to 1 January, 2053 and 37
years expiring on 1 January, 2053.
Notes:
(1) Pursuant to the land use rights leasing agreement entered into the Company
and CSAHC on 12 November, 2004 (the "Lease Agreement") CSAHC agreed to
lease 22 parcels of land with a total area of approximately 633,740.93
sq.m. to the Company at an annual rental of RMB10,340,449 for a term of
three years with an option to renew for further terms (subsequent annual
rents will remain unchanged) where the entire lease term is either not
less than the term specified in the corresponding Building Ownership
Certificates of the buildings erected on the lands or the corresponding
residual useful life of buildings determined in valuations when the
Company purchases the buildings, whichever is longer.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) CSAHC has obtained the granted or authorized land use rights of 3
parcels of land with a total area of approximately 160,160.30 sq.m.
(ii) China Northern Airlines has obtained the Building Ownership
Certificates for 16 buildings.
(iii) The Lease Agreement is legally valid. During the lease term, the
Company has the right to occupy and use the leased lands;
- 286 -
APPENDIX VIII PROPERTY VALUATION
(iv) CSAHC has agreed to bear all liabilities, losses and costs arising
from disputes on the land use rights of the leased lands and to
indemnify the Company in respect of losses to the buildings and
structures erected on the leased lands;
(v) CSAHC and China Northern Airlines Company have agreed to indemnify
the Company in respect of disputes on the title and the
incorrectness to the buildings and structures of the properties; and
(vi) The transfer of buildings and structures of the properties to the
Company has no legal impediment. After the acquisition, the Company
will have the ownership to the buildings and structures of the
properties and can use, mortgage, lease and sell the buildings and
structures of the properties. However, if the Company sells the
buildings and structures of the properties to third parties (other
than CSAHC, its subholdings, subsidiaries and associates), the
Company shall obtain an approval from relevant State-owned Land
Resources Administration Bureaus and pay relevant land grant fees.
While the sale, CSAHC has agreed to assist the Company in proceeding
the relevant procedures for conversion the lands to granted lands
but not to bear any procedural costs.
(3) We have assigned no commercial value to the land portions of the
properties due to its non-transferability in the open market. According to
the Group's PRC legal adviser opinion, the Company will obtain the
ownership of the buildings and structures of the property without any
legal obstacles. Also, CSAHC has agreed to assist the Company to transfer
the properties and process the land grant process. We have, relied on the
aforesaid, assigned open market values to the buildings and structures of
the properties but excluding the land portion.
- 287 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
PARTICULARS IN EXISTING STATE AS
PROPERTIES DESCRIPTION AND TENURE OF OCCUPANCY AT 31 AUGUST, 2004
RMB
5. Various properties to be The property comprises 9 various The properties are occupied by 5,120,000
acquired by the Company from operational and ancillary buildings China Northern Airlines Company
China Northern Airlines and various structures completed in for office and training
Company in Chaoyang various stages between 1966 and purposes.
1992 with a total gross floor area
of approximately 7,831.45 sq.m.
(84,298 sq.ft.).
Details of gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Office 4,046.99 43,562
Ancillary buildings
and structures 3,784.46 40,736
-------- ------
Total: 7,831.45 84,298
======== ======
The land upon which the properties
currently erected comprises 1
parcel of land with a total area of
31,226.67 sq.m. (336,123.88
sq.ft.).
The land use rights of the
properties are held for a term of
49 years from 26 August, 2004 to 1
January, 2053.
Notes:
(1) Pursuant to the land use rights leasing agreement entered into the Company
and CSAHC on 12 November, 2004 (the "Lease Agreement") CSAHC agreed to
lease 22 parcels of land with a total area of approximately 633,740.93
sq.m. to the Company at an annual rental of RMB10,340,449 for a term of
three years with an option to renew for further terms (subsequent annual
rents will remain unchanged) where the entire lease term is either not
less than the term specified in the corresponding Building Ownership
Certificates of the buildings erected on the lands or the corresponding
residual useful life of buildings determined in valuations when the
Company purchases the buildings, whichever is longer.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) CSAHC has obtained the authorized land use rights of 1 parcel of
land with a total area of approximately 31,226.67 sq.m.
(ii) China Northern Airlines has obtained the Building Ownership
Certificates for 9 buildings.
(iii) The Lease Agreement is legally valid. During the lease term, the
Company has the right to occupy and use the leased lands;
(iv) CSAHC has agreed to bear all liabilities, losses and costs arising
from disputes on the land use rights of the leased lands and to
indemnify the Company in respect of losses to the buildings and
structures erected on the leased lands;
- 288 -
APPENDIX VIII PROPERTY VALUATION
(v) CSAHC and China Northern Airlines Company have agreed to indemnify
the Company in respect of disputes on the title and the
incorrectness to the buildings and structures of the properties; and
(vi) The transfer of buildings and structures of the properties to the
Company has no legal impediment. After the acquisition, the Company
will have the ownership to the buildings and structures of the
properties and can use, mortgage, lease and sell the buildings and
structures of the properties. However, if the Company sells the
buildings and structures of the properties to third parties (other
than CSAHC, its subholdings, subsidiaries and associates), the
Company shall obtain an approval from relevant State-owned Land
Resources Administration Bureaus and pay relevant land grant fees.
While the sale, CSAHC has agreed to assist the Company in proceeding
the relevant procedures for conversion the lands to granted lands
but not to bear any procedural costs.
(3) We have assigned no commercial value to the land portions of the
properties due to its non-transferability in the open market. According to
the Group's PRC legal adviser opinion, the Company will obtain the
ownership of the buildings and structures of the property without any
legal obstacles. Also, CSAHC has agreed to assist the Company to transfer
the properties and process the land grant process. We have, relied on the
aforesaid, assigned open market values to the buildings and structures of
the properties but excluding the land portion.
- 289 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
PARTICULARS IN EXISTING STATE AS
PROPERTIES DESCRIPTION AND TENURE OF OCCUPANCY AT 31 AUGUST, 2004
RMB
6. Various properties to be The property comprises 59 various The properties are occupied by No commercial value
acquired by the Company from operational and ancillary buildings Xinjiang Civil Aviation Property (please see note 1)
Xinjiang Civil Aviation and various structures completed in Management Ltd for offices,
Property Management Ltd in various stages between 1975 and carparks and warehouses purposes.
Urumqi 2004 with a total gross floor area
of approximately 65,424.44 sq.m.
(704,229 sq.ft.).
Details of gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Office 4,289.67 46,174
Warehouses 10,387.28 111,809
Ancillary buildings
and structures 50,747.49 546,246
--------- -------
Total: 65,424.44 704,229
========= =======
The land upon which the properties
currently erected comprises 18
parcels of land with a total area
of 310,059.85 sq.m. (3,337,484
sq.ft.).
The land use rights of the
properties are allocated to
Xinjiang Civil Aviation Property
Management Ltd.
Notes:
(1) According to the information provided, the land portions of the properties
are allocated which are non-transferable in the open market. We have thus
attributed no commercial value to the properties due to its
non-transferability in the open market. However, further to your specific
term of instructions, we have calculated the depreciated replacement cost
of the properties for indication purposes. The depreciated replacement
costs of the buildings and structures with a total gross floor area of
approximately 65,424.44 sq.m. is RMB150,960,000 as at the date of
valuation.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The land use rights of the 18 parcels of land with a total area of
310,059.85 sq.m. is allocated to Xinjiang Civil Aviation Property
Management Ltd; and
(ii) Xinjiang Civil Aviation Property Management Ltd obtained the
ownership of the 59 buildings and structures of the properties.
(3) In the course of our valuation, we have assigned no commercial value to
the properties due to its non-transferability in the market.
- 290 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
PARTICULARS IN EXISTING STATE AS
PROPERTIES DESCRIPTION AND TENURE OF OCCUPANCY AT 31 AUGUST, 2004
RMB
7. Various properties to be The property comprises 60 various The properties are occupied by 406,370,000
acquired by the Company from operational and ancillary buildings Xinjiang Airlines Company for
Xinjiang Airlines Company in and various structures completed in offices, training centre,
Urumqi various stages between 1975 and carparks and warehouses
2004 with a total gross floor area purposes.
of approximately 116,292.37 sq.m.
(1,251,771 sq.ft.).
Details of gross floor areas of
the properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Office 100,167.71 1,078,205
Warehouses 6,577.96 70,805
Ancillary buildings
and structures 9,546.70 102,761
---------- ---------
Total: 116,292.37 1,251,771
========== =========
The land upon which the properties
currently erected comprises 13
parcels of land with a total area
of 548,556.07 sq.m. (5,904,658
sq.ft.).
The land use rights of the
properties is held for a term of 49
years from 26 August, 2004 to 1
January, 2053.
Notes:
(1) Pursuant to the land use rights leasing agreement entered into the Company
and CSAHC on 12 November, 2004 (the "Lease Agreement") CSAHC agreed to
lease 22 parcels of land with a total area of approximately 633,740.93
sq.m. to the Company at an annual rental of RMB10,340,449 for a term of
three years with an option to renew for further terms (subsequent annual
rents will remain unchanged) where the entire lease term is either not
less than the term specified in the corresponding Building Ownership
Certificates of the buildings erected on the lands or the corresponding
residual useful life of buildings determined in valuations when the
Company purchases the buildings, whichever is longer.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The Lease Agreement is legally valid. During the lease term, the
Company has the right to occupy and use the leased lands;
(ii) CSAHC has agreed to bear all liabilities, losses and costs arising
from disputes on the land use rights of the leased lands and to
indemnify the Company in respect of losses to the buildings and
structures erected on the leased lands;
(iii) CSAHC and Xinjiang Airlines Company have agreed to indemnify the
Company in respect of disputes on the title and the incorrectness to
the buildings and structures of the properties; and
- 291 -
APPENDIX VIII PROPERTY VALUATION
(iv) The transfer of buildings and structures of the properties to the
Company has no legal impediment. After the acquisition, the Company
will have the ownership to the buildings and structures of the
properties and can use, mortgage, lease and sell the buildings and
structures of the properties. However, if the Company sells the
buildings and structures of the properties to third parties (other
than CSAHC, its subholdings, subsidiaries and associates), the
Company shall obtain an approval from relevant State-owned Land
Resources Administration Bureaus and pay relevant land grant fees.
While the sale, CSAHC has agreed to assist the Company in proceeding
the relevant procedures for conversion the lands to granted lands
but not to bear any procedural costs.
(3) We have assigned no commercial value to the land portions of the
properties due to its non-transferability in the open market. According to
the Group's PRC legal adviser opinion, the Company will obtain the
ownership of the buildings and structures of the property without any
legal obstacles. Also, CSAHC has agreed to assist the Company to transfer
the properties and process the land grant process. We have, relied on the
aforesaid, assigned open market values to the buildings and structures of
the properties but excluding the land portion.
- 292 -
APPENDIX VIII PROPERTY VALUATION
GROUP II - PROPERTIES UNDER CONSTRUCTION TO BE ACQUIRED BY THE COMPANY FROM
CSAHC
OPEN MARKET VALUE
PARTICULARS IN EXISTING STATE AS
PROPERTIES DESCRIPTION AND TENURE OF OCCUPANCY AT 31 AUGUST, 2004
RMB
8. Various properties to be The property comprises 3 ancillary The properties are under No commercial value
acquired by the Company from buildings and various structures construction. (please see note 1)
Xinjiang Civil Aviation scheduled to be completed in late 2004.
Property Management Ltd in Upon completion, the total gross floor
Urumqi area of the properties will be
approximately 193,809.28 sq.m.
(2,086,163 sq.ft.).
Details of gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Office 7,652.90 82,375
Warehouses 186,156.38 2,003,787
---------- ---------
Total: 193,809.28 2,086,163
========== =========
The land upon which the properties
currently erected comprises 2 parcels
of land with a total area of
approximately 134,163.90 sq.m.
(1,444,140 sq.ft.).
The land use rights of the properties
are allocated to Xinjiang Airlines
Property.
Notes:
(1) According to the information provided, the land portions of the properties
are allocated which are non-transferable in the open market. We have thus
attributed no commercial value to the properties due to its
non-transferability in the open market. However, further to your specific
term of instructions, we have calculated the depreciated replacement cost
of the properties for indication purposes. The depreciated replacement
costs of the buildings and structures with a total gross floor area of
approximately 65,424.44 sq.m. is RMB40,850,000 as at the date of
valuation.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The land use rights of the 2 parcels of land with a total area of
134,163.90 sq.m. is allocated to Xinjiang Civil Aviation Property
Management Ltd; and
(ii) The buildings with a total gross floor area of 193,909.28 sq.m. is
under construction. Application for Building Ownership Certificates
is incapable to conduct at this moment.
(3) In the course of our valuation, we have assigned no commercial value to
the properties due to its non-transferability in the market.
- 293 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
PARTICULARS IN EXISTING STATE AS
PROPERTIES DESCRIPTION AND TENURE OF OCCUPANCY AT 31 AUGUST, 2004
RMB
9. Various properties to be The property comprises an ancillary The property is under 263,000
acquired by the Company from structure scheduled to be completed in construction.
Xinjiang Airlines Company in late 2004 with a total gross floor area
Urumqi of approximately 780 sq.m. (8,396
sq.ft.).
The land upon which the properties
currently erected on comprises a parcel
of land with a total area of 72,534.82
sq.m. (780,765 sq.ft.).
The land use rights of the property is
held for a term of 49 years from 26
August, 2004 to 1 January, 2053.
Notes:
(1) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The Lease Agreement is legally valid. During the lease term, the
Company has the right to occupy and use the leased lands;
(ii) CSAHC has agreed to bear all liabilities, losses and costs arising
from disputes on the land use rights of the leased lands and to
indemnify the Company in respect of losses to the buildings and
structures erected on the leased lands;
(iii) CSAHC and Xinjiang Airlines Company have agreed to indemnify the
Company in respect of disputes on the title and the incorrectness to
the buildings and structures of the properties; and
(iv) The transfer of buildings and structures of the properties to the
Company has no legal impediment. After the acquisition, the Company
will have the ownership to the buildings and structures of the
properties and can use, mortgage, lease and sell the buildings and
structures of the properties. However, if the Company sells the
buildings and structures of the properties to third parties (other
than CSAHC, its subholdings, subsidiaries and associates), the
Company shall obtain an approval from relevant State-owned Land
Resources Administration Bureaus and pay relevant land grant fees.
While the sale, CSAHC has agreed to assist the Company in proceeding
the relevant procedures for conversion the lands to granted lands
but not to bear any procedural costs.
(2) We have assigned no commercial value to the land portions of the
properties due to its non-transferability in the open market. According to
the Group's PRC legal adviser opinion, the Company will obtain the
ownership of the buildings and structures of the property without any
legal obstacles. Also, CSAHC has agreed to assist the Company to transfer
the properties and process the land grant process. We have, relied on the
aforesaid, assigned open market values to the buildings and structures of
the properties but excluding the land portion.
- 294 -
APPENDIX VIII PROPERTY VALUATION
GROUP III - PROPERTY INTERESTS TO BE RENTED BY THE COMPANY FROM CSAHC
OPEN MARKET VALUE
PARTICULARS IN EXISTING STATE AS
PROPERTIES DESCRIPTION AND TENURE OF OCCUPANCY AT 31 AUGUST, 2004
RMB
10. Various properties to be The properties comprise 35 parcels of The properties are currently No commercial value
rented by the Company from land with a total area of approximately occupied by China Northern
CSAHC 1,182,297.00 sq.m. (12,726,245 sq.ft.), Airlines Company for office,
together with 186 various operational warehouse, carparks, ancillary
and ancillary buildings and various buildings and staff quarters for
structures completed in various stages operating and ancillary purposes.
between 1964 and 2000 with a total gross
floor area of approximately 220,152.51
sq.m. (2,369,722 sq.ft.).
Details of the gross floor areas of
the properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 103,850.04 1,117,842
Warehouses 37,195.81 400,376
Ancillary
buildings 79,106.66 851,504
---------- ---------
Total: 220,152.51 2,369,722
========== =========
The buildings and structures will be
leased by the Company from CSAHC, China
Northern Airlines Company Limited and
Xinjiang Airlines Company under 2 lease
agreements for a term of 3 years at an
aggregate annual rental of
RMB47,791,227.05.
The land use rights of the properties
will be leased to the Company from CSAHC
at an aggregate annual rental of
approximately RMB1,850,000 (please see
note (3) for details).
Notes:
(1) Pursuant to the premises leasing agreement entered into between CSAHC and
China Northern Airlines Company and the Company on 12 November, 2004
("Lease Agreement 1"), 156 buildings and various structures will be rented
by Company for a term of 3 years commencing from the effective date of
this agreement at an annual rental of RMB41,993,318.44.
(2) Pursuant to the premises leasing agreement entered into between CSAHC and
Xinjiang Airlines Company and the Company on 12 November, 2004 ("Lease
Agreement 2"), 30 buildings and various structures will be rented by
Company for a term of 3 years commencing from the effective date of this
agreement at an annual rental of RMB5,797,908.61.
- 295 -
APPENDIX VIII PROPERTY VALUATION
(3) Pursuant to a land lease agreement entered into between CSAHC and the
Company dated ("Lease Agreement 3"), 35 parcels of land with a total area
of approximately 1,182,297.00 sq.m. will be rented to the Company at an
aggregate annual rental of RMB1,850,000 for a term of three years with an
option to renew for further terms (subsequent annual rents will remain
unchanged) where the entire lease term is either not less than the term
specified in the corresponding Building Ownership Certificates of the
buildings erected on the lands or the corresponding residual useful life
of buildings determined in valuations when the Company purchases the
buildings, whichever is longer.
(4) We have been provided with a legal opinion on the legality of the lease
agreements prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The Lease Agreement is legally valid. During the lease term, the
Company has the right to occupy and use the leased lands;
(ii) CSAHC has agreed to bear all liabilities, losses and costs arising
from disputes on the land use rights of the leased lands to
indemnify the Company in respect of losses to the buildings and
structures erected on the leased lands;
(iii) CSAHC and China Northern Airlines Company have agreed to indemnify
the Company in respect of disputes on the title and the
incorrectness to the buildings and structures of the properties; and
(iv) The transfer of buildings and structures of the properties to the
Company has no legal impediment. After the acquisition, the Company
will have the ownership to the buildings and structures of the
properties and can use, mortgage, lease and sell the buildings and
structures of the properties. However, if the Company sells the
buildings and structures of the properties to third parties (other
than CSAHC, its subholdings, subsidiaries and associates), the
Company shall obtain an approval from relevant State-owned Land
Resources Administration Bureaus and pay relevant land grant fees.
With the sale, CSAHC has agreed to assist the Company in proceeding
the relevant procedures for conversion of the lands to granted lands
but not to bear any procedural costs.
- 296 -
APPENDIX VIII PROPERTY VALUATION
GROUP IV - PROPERTY INTERESTS HELD BY THE GROUP IN THE PRC
OPEN MARKET VALUE
PARTICULARS OF IN EXISTING STATE AS
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY AT 31 AUGUST, 2004
RMB
11. Various properties held by The properties comprise 50 various The property is occupied by the 383,290,000
China Southern Airlines operational and ancillary buildings and Group as offices, warehouses and (100% interest
Company Limited Guangzhou various structures completed in various staff quarters for operating and attributable to the
Headquarters stages between 1957 and 2003 with a ancillary purposes. Group: 383,290,000)
total gross floor area of approximately
158,202.26 sq.m. (1,702,889 sq.ft.).
Details of the gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 97,476.24 1,049,234
Warehouses 15,303.09 164,722
Ancillary
buildings 45,422.93 488,932
---------- ---------
Total: 158,202.26 1,702,889
========== =========
The lands upon which the properties
currently erected comprise 3 parcels of
land with a total area of approximately
1,659,136.21 sq.m. (17,858,942 sq.ft.).
Notes:
(1) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) Pursuant to an approval for construction land, the land of
approximately 676 sq.m. is vested in CSAHC. However, there is a
dispute on the land use right of the land so that the Group cannot
obtain the relevant land use right certificate and transfer the
land. Nevertheless, the Group can use the land in its existing
state. In addition, the building with gross floor area of
approximately 7,606 sq.m. erected on the aforesaid land also cannot
be transferred due to the land dispute, but the Group can use the
building;
(ii) In respect of a parcel of granted land of approximately 248,461.62
sq.m., the Group has signed the relevant land use right grant
contract but has not yet fully paid the land grant fee and thus has
not obtained the land use right certificate;
- 297 -
APPENDIX VIII PROPERTY VALUATION
(iii) The Group has legal rights to the buildings of the properties and
has no legal impediment in obtaining the relevant title documents.
The Group has the ownership to the buildings and can use, mortgage,
lease and sell the buildings. However, if the Group sells the
buildings of the properties to third parties (other than CSAHC and
its subsidiaries, associated companies and shareholding companies),
the Group shall obtain an approval from relevant State-owned Land
Administration Bureaus and pay relevant land grant fees.
(iv) The total land area of Bai Yun Airport is approximately
14,394,652.27 sq.m., which is an allocated land, and a portion which
is occupied by the Group. When the Group transfers the portion of
the land, the Group needs to obtain an approval from State-owned
Land Administration Bureau and to pay a land grant fee.
(2) In the course of our valuation, we have assumed that the granted land can
be transferable in the market. In respect of the land of approximately 676
sq.m. and the corresponding building erected thereon with gross floor area
of approximately 7,606 sq.m. where there is land dispute, and a portion of
the allocated land with site area of approximately 1,409,988.59 sq.m., as
advised by the Group, we have assigned no commercial value to the lands
and the building.
- 298 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
PARTICULARS OF IN EXISTING STATE AS
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY AT 31 AUGUST, 2004
RMB
12. Various properties held The properties comprise 20 various The properties are occupied by 110,210,000 (100%
by China Southern operational and ancillary buildings and the Group as offices and staff interest
Airlines Company various structures completed in various quarters for operating and attributable to the
Limited in Henan stages between 1997 and 2002 with a ancillary purposes. Group: 110,210,000)
total gross floor area of approximately
36,805 sq.m. (396,166 sq.ft.).
Details of the gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 19,783.35 212,948
Ancillary buildings 17,021.35 183,218
--------- -------
Total: 36,804.70 396,166
========= =======
The lands upon which the properties
currently erected comprise 4 parcels of
land with a total area of approximately
295,661.32 sq.m. (3,182,498 sq.ft.).
The land use rights of the properties
have been granted for 50 years (except
the allocated land).
Notes:
(1) According to 4 Land Use Rights Certificates and 20 Building Ownership
Certificates, the land use rights of 4 parcels of land with a total area
of approximately 295,661.32 sq.m. and the building ownership rights of 20
buildings with a total gross floor area of approximately 36,804.70 sq.m.
are held by China Southern Airlines Company Limited Henan Branch, which is
100% owned by the Group.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The Group has obtained three Land Use Right Certificates for the
three granted lands with a total area of approximately 289,909.65
sq.m. and the Group has owned the land use rights and has the rights
to use, lease, mortgage and transfer the lands;
(ii) The Group has obtained a Land Use Right Certificate for the
allocated land with an area of approximately 5,751.67 sq.m.. The
Group has owned the land use rights and has the rights to use,
mortgage and sell the land. While the land is transferred, the Group
shall obtain an approval from the relevant State-owned Land
Administration Bureaus and pay relevant land grant fees; and
-299-
APPENDIX VIII PROPERTY VALUATION
(iii) The Group has obtained 16 Building Ownership Certificates for 16
buildings of the properties and has legally acquired 4 buildings of
the properties where the Group needs to apply for change of
ownership of the buildings. The Group has the ownership to all the
buildings and can use, mortgage, lease and sell the buildings.
(3) In the course of our valuation, since the allocated land cannot be freely
transferable in the market, we have assigned no commercial value to the
land.
-300-
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
PARTICULARS OF IN EXISTING STATE AS
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY AT 31 AUGUST, 2004
RMB
13. Various properties held The properties comprise 6 various The properties are occupied by 54,060,0000 (100%
by China Southern operational and ancillary buildings and the Group as offices and staff interest
Airlines Company various structures completed in various quarters for operating and attributable to the
Limited in Hubei stages between 1994 and 1999 with a ancillary purposes. Group: 54,060,000)
total gross floor area of approximately
55,065.33 sq.m. (592,723 sq.ft.).
Details of the gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 44,178.39 475,536
Ancillary buildings 10,886.94 117,187
--------- -------
Total: 55,065.33 592,723
========= =======
The lands upon which the properties
currently erected comprise 7 parcels of
land with a total area of approximately
119,320.47 sq.m. (1,284,366 sq.ft.)
(excluding the site with uncertain
area).
The land use rights of the properties
have been granted for various terms
ranging from 42 to 50 years.
Notes:
(1) According to 3 Land Use Rights Certificates and 3 Building Ownership
Certificates, the land use rights of 3 parcels of land with a total area
of approximately 14,884.97 sq.m. and the building ownership rights of 2
buildings with a total gross floor area of approximately 28,693.09 sq.m.
are held by China Southern Airlines Company Limited Hubei Branch, which is
100% owned by the Group.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The Group has obtained three Land Use Right Certificates for the
three granted lands with a total area of approximately 14,884.97
sq.m. and the Group has owned the land use rights and has the rights
to use, lease, mortgage and transfer the lands;
(ii) The Group has obtained three Land Use Right Certificates for the
three allocated lands with a total area of approximately 104,435.50
sq.m.. The Group has owned the land use rights and has the rights to
use, mortgage and sell the lands. While the lands are transferred,
the Group shall obtain an approval from the relevant State-owned
Land Administration Bureaus and pay relevant land grant fees;
(iii) A parcel of land with undetermined site area has not been obtained
the relevant Land Use Right Certificate;
-301-
APPENDIX VIII PROPERTY VALUATION
(iv) The Group has obtained 3 title documents for 3 buildings of the
properties with a total gross floor area of approximately 44,178.39
sq.m.. Since one of the buildings of approximately 15,485.30 sq.m.
is erected on the allocated land, a land grant fee shall be paid
while transfer. The remaining two buildings can be leased, mortgaged
and transferred; and
(v) There are two buildings with a total gross floor area of
approximately 5,486.94 sq.m. not yet obtained the relevant title
documents.
(3) In the course of our valuation, since the allocated lands and the
corresponding buildings erected thereon as well as the buildings and the
parcel of land having no title documents cannot be freely transferable in
the market, we have assigned no commercial value to them.
-302-
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
PARTICULARS OF IN EXISTING STATE AS
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY AT 31 AUGUST, 2004
RMB
14. Various properties held The properties comprise 35 various The property is occupied by the 169,480,000 (100%
by China Southern operational and ancillary buildings and Group as office and warehouse interest
Airlines Company various structures completed in various for operating purposes. attributable to the
Limited Hunan Branch stages between 1989 and 2002 with a Group: 169,480,000)
total gross floor area of approximately
69,057.36 sq.m. (743,333 sq.ft.).
Details of the gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
sq.m. sq.ft.
Offices 26,861.53 289,138
Warehouses 9,444.89 101,665
Ancillary buildings 32,750.94 352,531
--------- -------
Total: 69,057.36 743,333
========= =======
The land upon which the properties
currently erected comprise 8 parcels of
land with a total area of approximately
174,138.34 sq.m. (1,874,425 sq.ft.)
(excluding the site with uncertain
area).
The land use rights of the properties
have been granted for various terms
ranging from 38 to 61 years.
Notes:
(1) According to 7 Land Use Rights Certificates and 36 Building Ownership
Certificates, the land use rights of 7 parcels of land with a total area
of approximately 174,138.34 sq.m. and the building ownership rights of 35
buildings with a total gross floor area of approximately 51,391.62 sq.m.
are held by China Southern Airlines Company Limited Hunan Branch, which is
100% owned by the Group.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The Group has obtained 7 Land Use Right Certificates for the 7
granted lands with a total area of approximately 174,138.34 sq.m.
and the Group has owned the land use rights and has the rights to
use, lease, mortgage and transfer the lands;
(ii) A parcel of land with undetermined site area has not been obtained
the relevant Land Use Right Certificate for which the Group is
applying;
-303-
APPENDIX VIII PROPERTY VALUATION
(iii) The Group has possessed proper title to the buildings of the
properties with a total gross floor area of approximately 51,391.62
sq.m., which can be used, leased, mortgaged and transferred by the
Group.
(3) In the course of our valuation, since the parcel of land with undetermined
site area and the buildings with total gross floor area of approximately
18,116.48 sq.m. have no proper title, we have assigned no commercial value
to them.
-304-
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
PARTICULARS OF IN EXISTING STATE AS
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY AT 31 AUGUST, 2004
RMB
15. Various properties held The properties comprise 269 various The properties are currently 74,640,000 (100%
by China Southern operational and ancillary buildings and occupied by the Group for interest
Airlines Company Limited commodity properties completed in office, warehouse and staff attributable to the
in Shenzhen various stages between 1991 and 1994 quarters for operating and Group: 74,640,000)
with a total gross floor area of ancillary purposes.
approximately 31,937.22 sq.m. (343,772
sq.ft.).
Details of gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 7,931.92 85,379
Warehouses 1,665.60 17,929
Ancillary buildings 22,339.70 240,465
--------- -------
Total: 31,937.22 343,772
========= =======
The lands upon which the properties
(excluding stratified properties)
currently erected comprise 3 parcels of
land with a total area of approximately
205,045.40 sq.m. (2,207,109 sq.ft.).
The land use rights of portions of the
properties have been granted for various
terms ranging from 30 years to 70 years,
and the remaining lands are allocated
lands.
Notes:
(1) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The Company has the land use right of the site with an area of
approximately 199,285.60 sq.m. and is entitled to occupy, use and
dispose the land within the land use right term. There is no legal
impediment for the Company to obtain Real Estate Title Certificate
and settlement of land premium is not necessary.
(ii) The Company is entitled to use, rent, mortgage and transfer the land
use right of the land which 248 buildings with a gross floor area of
approximately 20,852.01 sq.m. erecting upon.
(iii) According to 253 Real Estate Title Certificates registered under the
name of China Southern Airlines Company Limited in Shenzhen, 248
buildings and commodity properties with a total gross floor area of
approximately 20,852.01 sq.m. are held by China Southern Airlines
Company Limited in Shenzhen, which is 100% owned by the Group.
-305-
APPENDIX VIII PROPERTY VALUATION
(iv) According to 5 Real Estate Title Certificates registered under the
name of Shenzhen City Southern Aviation Instrument Company Limited,
5 commodity properties with a total gross floor area of
approximately 465.50 sq.m. are not owned by the Group.
(v) Since 14 buildings with total gross floor area of 10,623.69 sq.m.
and 2 buildings with undetermined floor area do not have any land
use right title certificate, the Group cannot obtain the real estate
with certificates.
(2) In the course of our valuation, we have assigned no commercial value to
the 21 properties to which the Group has no title. However, for indication
purpose, the total value of the 21 properties is RMB99,120,000 as at the
date of valuation.
-306-
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
PARTICULARS OF IN EXISTING STATE AS
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY AT 31 AUGUST, 2004
RMB
16. Various properties held by The properties comprise 29 various The properties are currently 48,211,000 (100%
China Southern Airlines operational and ancillary buildings and occupied by the Group for interest
Company Limited in Hainan various structures completed in various office, warehouse and staff attributable to the
stages between 1997 and 2002 with a quarters for operating and Group: 48,211,000 )
total gross floor area of approximately ancillary purposes.
54,567.19 sq.m. (587,361 sq.ft.).
Details of the gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 23,310.75 250,917
Warehouses 2,051 22,077
Ancillary buildings 29,205.44 314,367
--------- -------
Total: 54,567.19 587,361
========= =======
The lands upon which the properties
currently erected comprise 5 parcels of
land with a total area of approximately
330,532.71 sq.m. (3,557,854 sq.ft.).
The land use rights of the properties
with an area of 4,739.21 sq.m. and
19,329.9 sq.m. have been granted for
terms expiring on 17 February, 2070 and
July 2063 respectively. The remaining
lands are allocated lands.
Notes:
(1) Since the land of 23 buildings is allocated land and/or the buildings have
not obtained the Real Estate Title Certificates, we have attributed no
commercial value to the properties. However, for indication purposes, the
depreciated replacement costs of the 23 buildings with a total gross floor
areas of approximately 41,515.30 sq.m. is RMB107,209,307 as at the date of
valuation.
(2) According to 2 Land Use Rights Certificates and 6 Building Ownership
Certificates given to us, the land use rights of 2 parcels of land with a
total area of approximately 24,069.11 sq.m. and the building ownership
rights of 6 buildings with a total gross floor area of approximately
13,051.89 sq.m. are held by China Southern Airlines Company Limited Hainan
Branch, which is 100% owned by the Group.
-307-
APPENDIX VIII PROPERTY VALUATION
(3) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(1) The Company has the land use right of the lands with an area of
approximately 4,739.21 sq.m. and 19,329.9 sq.m. and is entitled to
occupy, use and dispose the land within their respective land use
right term.
(ii) The Company has legally obtained the Building Ownership Certificates
with an area of approximately 269.45 sq.m. and the land of Room
1308, Block E of World Trade Building and Room 1005 of Jiang Nan Hua
Yuan (Unit Yi) and there is no legal impediment in applying for
relevant title certificate. However, as the policy of the different
government departments varies, the time for successful application
cannot be confirmed.
(iii) The Real Estate Title Certificate of 6 buildings has been obtained
and the titles to the properties are legally vested in the Company.
The Company is entitled to use, rent, mortgage and transfer the
properties.
-308-
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
PARTICULARS OF IN EXISTING STATE AS
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY AT 31 AUGUST, 2004
RMB
17. Various properties held The properties comprise 46 various The properties are currently 2,110,000 (100%
by China Southern operational and ancillary buildings and occupied by the Group for interest
Airlines (Group) Zhuhai various structures completed in various office and staff quarters for attributable to the
Helicopter Company Limited stages between 1989 and 2004 with a operating and ancillary Group: 2,110,000)
total gross floor area of approximately purposes.
16,350.29 sq.m. (175,995 sq.ft.).
Details of the gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 2,977.56 32,050.46
Ancillary
buildings 13,372.73 143,944.07
--------- ----------
Total: 16,350.29 175,994.52
========= ==========
The lands upon which the properties
currently erected comprise 6 parcels of
land with a total area of approximately
150,524.18 sq.m. (1,620,242.27 sq.ft.).
The land use rights of the properties
have been granted for various terms
ranging from 50 to 50 years.
Notes:
(1) Since the land of 28 buildings is allocated land and/or the buildings have
not obtained the Real Estate Title Certificates, we have attributed no
commercial value to the properties. However, for indication purposes, the
depreciated replacement costs of the 28 buildings with a total gross floor
areas of approximately 16,350.29 sq.m. is RMB25,610,000 as at the date of
valuation.
(2) According to a Land Use Rights Certificate and 14 Real Estate Title
Certificates given to us, the land use rights of 1 parcel of granted land
with a total area of approximately 10,046.60 sq.m. and the building
ownership rights of 14 buildings with a total gross floor area of
approximately 8,249.90 sq.m. are held by China Southern Airlines (Group)
Zhuhai Helicopter Company Limited, which is 100% owned by the Group.
(3) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The Company has legally obtained the land use right of the land with
an area of approximately 140,120.3 sq.m.. There is no legal
impediment for change of "land origin" registration and settlement
of land premium for the registration is not necessary. However, as
the policy of the different government departments varies, the time
for successful change of registration cannot be confirmed.
-309-
APPENDIX VIII PROPERTY VALUATION
(ii) The land with an area of approximately 257.28 sq.m. is allocated
land. The Company held the land use right and is entitled to occupy,
use and dispose the land. Since the land is allocated, the Company
has to settle the land premium and get prior approval from relevant
government authorities when disposing the land.
(iii) The Company has the land use right of the land with an area of
approximately 10,046.6 sq.m. and is entitled to use, rent, mortgage
and transfer the land use right.
(iv) The Real Estate Certificate of 14 buildings with a total gross floor
area of approximately 8,249.9 sq.m. has been obtained. However, the
property rights owner of the aforesaid certificate is in the old
name of China Southern Airlines Company Limited Zhuhai Branch. There
is no legal impediment in applying for change of name.
(v) The 5 buildings with a total gross floor area of approximately
2,521.44 sq.m. is erected upon allocated land. The Company has to
settle the land premium whenever it transfers the property right.
(vi) The Company can use the 5 buildings with a total gross floor area of
approximately 4,460 sq.m. but it has to settle the land premium
whenever it transfers the property right.
(vii) The Company has the right to use, rent, mortgage and transfer the
building with a gross floor area of approximately 165.27 sq.m..
Since the building is erected upon allocated land, the Company has
to settle the land premium whenever it transfers the property right.
-310-
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
PARTICULARS OF IN EXISTING STATE AS
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY AT 31 AUGUST, 2004
RMB
18. Various properties held The properties comprise 114 various The property is occupied by the 126,880,000 (60%
by Xiamen Airlines Company operational and ancillary buildings and Group as office and warehouse interest
Limited (Xiamen Airlines) various structures completed in various for operating purposes. attributable to the
stages between 1979 and 2003 with a Group: 76,128,000)
total gross floor area of approximately
267,287.34 sq.m. (2,877,081 sq.ft.).
Details of the gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 217,198.34 2,337,923
Warehouses 8,554 92,075
Ancillary
buildings 41,535.02 447,083
---------- ---------
Total: 267,287.36 2,877,081
========== =========
The lands upon which the properties
(excluding stratified properties)
currently erected comprise 22 parcels of
land with a total area of approximately
400,753.28 sq.m. (4,313,708 sq.ft.).
The land use rights of the properties
have been granted for various terms
ranging from 40 to 70 years.
Notes:
(1) According to 52 Land Use Rights Certificates and 83 Building Ownership
Certificates, the land use rights of land with a total area of
approximately 400,925.83 sq.m. and the building ownership rights of
buildings with a total gross floor area of approximately 183,966.37 sq.m.
are held by Xiamen Airlines Company Limited, which is 60% owned by the
Group.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The Group has obtained 16 Land Use Right Certificates for a granted
land with total area of approximately 31,298.42 sq.m. and 34
allocated lands with a total area of approximately 369,627.41 sq.m.,
respectively. The Group owned the land use rights of the two lands
and has the rights to use, lease, mortgage and transfer the lands
where the allocated land is subject to obtaining an approval from
the relevant State-owned Land Administration Bureaus and pay
relevant land grant fees;
(ii) The Group has the land use rights of 39 buildings, which have not
yet obtained the relevant Land Use Right Certificates. The lands
cannot be transferred separately but shall be transferred with the
buildings erected on. In addition, the use of a land for "Zhai Ji
Di" with an area of approximately 152.90 sq.m. which the Group has
the land use right is inconsistent with the laws;
-311-
APPENDIX VIII PROPERTY VALUATION
(iii) The Group has obtained Building Ownership Certificates for 83
buildings of which approximately 25,359.02 sq.m. of buildings the
Group has the right to use, lease, mortgage and transfer,
approximately 144,892.04 sq.m. of buildings the Group has the
building ownership but land grant fee shall be payable upon
transfer, approximately 13,715.31 sq.m. of buildings the Group has
the right to use, lease, mortgage and transfer but the corresponding
land use right certificates have not yet obtained where while the
buildings are transferred, the corresponding land use right shall be
transferred altogether;
(3) In the course of our valuation, we have assigned no commercial value to
the allocated land, the lands without Land Use Right Certificates and the
"Zhai Ji Di" with a total land area of approximately 229,863.85 sq.m. and
the buildings with a total gross floor area of approximately 241,928.32
sq.m. because they cannot be freely transferred in the market.
-312-
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
19. Various properties The properties comprise 88 The properties are 115,870,000
held by various operational and currently occupied by (60% interest
Southern Airlines ancillary buildings and various the Group for office, attributable to
(Group) Shantou structures completed in various operating and the Group:
Airlines Company stages between 1993 and 2002 ancillary purposes. 69,520,000)
Limited with a total gross floor area of
approximately 40,624.35 sq.m.
(437,281 sq.ft.).
Details of the gross floor areas of
the properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 31,333.59 337,275
Ancillary buildings 9,290.76 100,006
--------- -------
Total: 40,624.35 437,281
========= =======
The lands upon which the properties
currently erected comprise 5 parcels
of land with a total area of
approximately 32,094.13 sq.m. (345,461
sq.ft.).
The land use rights of the properties
have been granted for various terms
ranging from 50 to 70 years.
Notes:
(1) Since the land of 11 buildings is allocated land and/or the buildings have
not obtained the Building Ownership Certificates/Reality Title
Certificates, we have attributed no commercial value to the properties.
However, for indication purposes, the depreciated replacement costs of the
11 buildings with a total gross floor areas of approximately 9,185.85
sq.m. is RMB29,540,000 as at the date of valuation.
(2) According to 4 Land Use Rights Certificates and 77 Reality Title
Certificates given to us, the land use rights of 4 parcels of land with a
total area of approximately 32,094.13 sq.m. and the building ownership
rights of 77 buildings with a total gross floor area of approximately
31,438.50 sq.m. are held by Southern Airlines (Group) Shantou Airlines
Company Limited, which is 60% owned by the Group.
(3) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) Southern Airlines (Group) Shantou Airlines Company Limited has
obtained the granted land use rights of the 4 parcels of land with a
total area of approximately 32,094.00 sq.m. and can use, lease,
mortgage and transfer the land.
- 313 -
APPENDIX VIII PROPERTY VALUATION
(ii) Southern Airlines (Group) Shantou Airlines Company Limited has
obtained the reality title certificates for 77 buildings and can
use, mortgage, lease and sell the buildings. However, as 20 of the
buildings has been mortgaged, consent has been obtained for the
transfer of the aforesaid 20 buildings according to the law in the
PRC.
(iii) For the 11 buildings which have not obtained the reality title
certificates, 9 buildings with a total floor area of approximately
7,830.85 sq.m. are erected on leased land and the ownership will be
given to the lessor of the land. Southern Airlines (Group) Shantou
Airlines Company Limited has the right to use the 9 buildings during
the lease period. The remaining 2 buildings with a total gross floor
area of approximately 1,355 sq.m. are erected on granted land and
there is no impediment for obtaining the reality title certificate.
(4) We have assigned no commercial value to the land in which the reality
title certificate has not been obtained.
- 314 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
20. Various properties The properties comprise 29 The property is 24,140,000
held by various operational and occupied by the (60% interest
Guangxi Airlines ancillary buildings and various Group as office, attributable to
Company Limited structures completed in various warehouse and staff the Group:
stages between 1996 and 2002 quarters for operating 14,484,000)
with a total gross floor area of and ancillary
approximately 55,765.21 sq.m. purposes.
(600,257 sq.ft.).
Details of the gross floor areas of
the properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 38,615.41 415,656
Warehouses 2,256 24,284
Ancillary buildings 14,893.81 160,317
--------- -------
Total: 55,765.22 600,257
========= =======
The lands upon which the properties
currently erected comprise 5 parcels
of land with a total area of
approximately 54,837.55 sq.m. (590,271
sq.ft.).
The land use rights of the properties
have been granted for various terms of
70 years.
Notes:
(1) Since 25 buildings are erected on allocated land and/or have not obtained
the Building Ownership Certificates, we have attributed no commercial
value to the properties. However, for indication purposes, the depreciated
replacement costs of the 25 buildings with a total gross floor areas of
approximately 50,097.28 sq.m. is RMB101,450,000 as at the date of
valuation.
(2) According to 2 Land Use Rights Certificates and 12 Building Ownership
Certificates given to us, the land use rights of 1 parcel of granted land
with an area of approximately 8,490.85 sq.m. and 1 parcel of allocated
land with an area of approximately 46,346.7 sq.m. and the building
ownership rights of 4 buildings erected on granted land with a total gross
floor area of approximately 5,667.93 sq.m. and 8 buildings erected on
allocated land with total gross floor area of approximately 27,481.53
sq.m. are held by Guangxi Airlines Company Limited, which is 60% owned by
the Group.
(3) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) Guangxi Airlines Company Limited has obtained the granted land use
right of a parcel of land with an area of approximately 8,590.85
sq.m. and can use, lease, mortgage and transfer the land and has
obtained the allocated land use right of a parcel of land with an
area approximately 46,346.70 sq.m. and can use, lease, mortgage and
transfer the land with approval of the State Land Bureau and payment
of the land premium.
- 315 -
APPENDIX VIII PROPERTY VALUATION
(ii) Guangxi Airlines Company Limited has obtained the building ownership
certificates for 10 buildings. 4 buildings with a total area of
approximately 5,576.93 sq.m., which are erected on granted land, are
legally owned and can be used; leased, mortgaged and transferred by
Guangxi Airlines Company Limited. As the other 6 buildings with a
total area of approximately 27,481.53 sq.m. are erected on allocated
land or land with unclear title, there is legal impediment for the
transfer of the buildings and or land premium has to be paid.
(iii) Guangxi Airlines Company Limited has the land use right for the
remaining 19 buildings with a total gross floor area of
approximately 22,615.75 sq.m. Since they are erected on granted
land, there is no legal impediment for Guangxi Airlines Company
Limited to obtain the building ownership certificates.
(4) For the remaining 3 parcels of land in which the reality title
certificates have not been obtained, the areas of the land cannot be
determined.
- 316 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
21. Various properties The properties comprise 52 The property is 67,530,000
held by various operational and occupied by the (60% interest
Zhuhai Airlines ancillary buildings and various Group as office, attributable to
Company Limited structures completed in various warehouse and staff the Group:
stages between 1993 and 2002 quarters for operating 40,520,000)
with a total gross floor area of and ancillary
approximately 54,471.53 sq.m. purposes.
(586,331 sq.ft.).
Details of the gross floor areas of
the properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 8,735.22 94,026
Ancillary buildings 45,736.31 492,306
--------- -------
Total: 54,471.53 586,332
========= =======
The lands upon which the properties
(excluding stratified properties)
currently erected comprise 5 parcels
of land with a total area of
approximately 65,255.50 sq.m. (702,410
sq.ft.) (See Notes (2)(ii)).
The land use rights of the properties
have been granted for various terms
ranging from 48 to 65 years.
Notes:
(1) According to 48 Land Use Rights Certificates and 46 Building Ownership
Certificates, the land use rights and the building ownership rights of 46
buildings with a total gross floor area of approximately 44,432.19 sq.m.
are held by Zhuhai Airlines Company Limited, which is 60% owned by the
Group.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The Group has obtained two Land Use Right Certificates for a granted
land with area of approximately 59,999.90 sq.m. and an allocated
land with area of approximately 5,255.60 sq.m., respectively. The
Group has owned the land use rights of the two lands and has the
rights to use, lease, mortgage and transfer the lands where the
allocated land is subject to obtaining an approval from the relevant
State-owned Land Administration Bureaus and pay relevant land grant
fees;
(ii) The Group has three lands together with buildings (6,706 sq.m.)
without having any title documents where the land areas cannot be
determined. Thus, the ownership of the Group in the three lands and
buildings cannot be confirmed;
- 317 -
APPENDIX VIII PROPERTY VALUATION
(iii) The Group has obtained 46 Building Ownership Certificates for 46
buildings with total gross floor area of approximately 44,432.19
sq.m. of which 43 buildings with total gross floor area of
approximately 43,922.79 sq.m. can be used, leased, mortgaged and
transferred by the Group whilst 3 buildings with total gross floor
area of approximately 509.40 sq.m. are erected on allocated lands
that need to pay land grant fee before a transfer; and
(iv) The Group has the right to use two buildings with total gross floor
area of approximately 3,033.34 sq.m. There is no legal impediment in
applying for relevant Building Ownership Certificates.
(3) In the course of our valuation, we have assigned no commercial value to
the allocated land (5,255.60 sq.m.) and the three lands together with
buildings (6,706 sq.m.) because they cannot be freely transferred in the
market.
- 318 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
22. Various properties The properties comprise 11 The properties are No commercial value
held by Guizhou various operational and ancillary currently occupied by
Airlines Company buildings and various structures the Group for office
Limited completed in various stages and staff quarters for
between 1991 and 2000 with a operating and
total gross floor area of ancillary purposes.
approximately 4,087.81 sq.m.
(44,001 sq.ft.).
Details of the gross floor areas of
the properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 1,667 17,944
Ancillary
buildings 2,420.81 26,058
-------- ------
Total: 4,087.81 44,001
======== ======
The lands upon which the properties
currently erected comprise 2 parcels
of land with area unknown.
The lands are allocated lands.
Notes:
(1) Since the land is allocated land and/or the buildings have not obtained
the Real Estate Title Certificates, we have attributed no commercial value
to the properties. However, for indication purposes, the depreciated
replacement costs of the 11 buildings with a total gross floor areas of
approximately 4,087.81 sq.m. is RMB30,000,000 as at the date of valuation.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The Company can legally use the land in Guiyang Leizhuang Airport
for aviation transport purpose but it has to get approval from
relevant government authorities and settle land premium prior to
transfer of land use right.
(ii) There is no legal impediment in obtaining relevant title certificate
for the land in Changli Commercial/Residential Building since it is
commodity housing.
(iii) The Company has the right to use the property in Changli
Commercial/Residential Building and there is no legal impediment in
obtaining relevant title certificate for the land since it is
commodity housing.
(iv) The Company has the right to use the property in Guiyang Leizhuang
Airport and there is no legal impediment in obtaining relevant title
certificate.
- 319 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
23. Various properties The properties comprise 3 The property is No commercial value
held by various operational and ancillary occupied by the
Guangzhou buildings and various structures Group as office,
Nanland Air completed in various stages warehouse and staff
Catering Company between 1985 and 1991 with a quarters for operating
Limited total gross floor area of and ancillary
approximately 12,464 sq.m. purposes.
(134,163 sq.ft.).
Details of the gross floor areas of
the properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Food processing
building 11,300 121,633
Warehouses 664 7,147
Ancillary buildings 500 5,382
------ -------
Total: 12,464 134,162
====== =======
The land upon which the properties
currently erected comprises a parcel
of land with an area of approximately
15,333.41 sq.m. (165,049 sq.ft.).
The land use rights of the properties
have been authorized for operation to
CSAHC.
Notes:
(1) Since the land is authorized for operation to CSAHC and the buildings have
not obtained Reality Title Certificates, we have attributed no commercial
value to the properties. However, for indication purposes, the depreciated
replacement costs of the 3 buildings with a total gross floor areas of
approximately 12,464.00 sq.m. is RMB24,850,000 as at the date of
valuation.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The land use rights of the property is authorized to CSAHC which is
currently used by Nanland Air Catering Company Limited.
(ii) The buildings erected on the land are owned by Guangzhou Nanland Air
Catering Company Limited, however, as the State-owned land use right
certificate and building ownership certificate are combined as the
reality title certificate in Guangzhou, it is impossible for Nanland
Air Catering Company Limited to obtain the reality title certificate
for the buildings.
- 320 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
24. A property held by The property comprises a hotel The property is 57,670,000
Guangzhou building completed in 1998 with currently occupied by (90% interest
Aviation Hotel a total gross floor area of the Group as an attributable to
approximately 11,485.40 sq.m. operating hotel. the Group:
(123,629 sq.ft.). 51,900,000)
The land upon which the property
currently erected comprises 1 parcel
of land with a total area of
approximately 1,250.46 sq.m. (13,460
sq.ft.).
Notes :
(1) According to 1 Land Use Rights Certificate and 1 Building Ownership
Certificate given to us, the land use rights of 1 parcel of land with a
total area of approximately 1,250.46 sq.m. and the building ownership
rights of 1 building with a total gross floor area of approximately
11,485.40 sq.m. are held by Guangzhou Aviation Hotel, which is 90% owned
by the Group.
(2) We have been provided with a copy of the legal opinion on the title to the
property prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) Pursuant to the Real Estate Title Certificate Hui Fang Di Zheng Zi
No. 0423921, the land portion of the property of granted land nature
with an area of approximately 1,250.46 sq.m. is held by CSAHC.
(ii) The Guangzhou Aviation Hotel has obtained the land use rights of the
property and can occupy, use, handle the land use rights within the
land use right terms. The Group should change the land use rights of
the property under its name and there is no legal obstacle to
process such changes of ownership.
(iii) Pursuant to the Real Estate Title Certificate Hui Fang Di Zheng Zi
No. 0423921, the building portion of the property with a gross floor
area of approximately 11,485.40 sq.m. is held by CSAHC.
(iv) Guangzhou Aviation Hotel has obtained the building ownership of the
property and can use, let, mortgage and transfer the property. The
Group should change the land use rights of the property under its
name and there is no legal obstacle to process such changes of
ownership.
- 321 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
25. Various properties The properties comprise 14 The properties are 16,030,000
held by China various operational and ancillary currently occupied by (100% interest
Southern Airlines buildings and various structures the Group for office attributable to
Company Limited completed in various stages and staff quarters for the Group:
Operation between 1985 and 2002 with a operating and 16,030,000)
Department total gross floor area of ancillary purposes.
approximately 19,375.49 sq.m.
(280,558 sq.ft.).
Details of the gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 16,901.44 181,927
Ancillary buildings 2,474.05 26,631
--------- -------
Total: 19,375.49 280,558
========= =======
The lands upon which the properties
currently erected comprise 13 parcels
of land with a total area of
approximately 31,505.99 sq.m. (339,130
sq.ft.).
The land use rights of the properties
have been granted for various terms
ranging from 40 to 70 years.
Notes:
(1) Since the 5 buildings with a total gross floor area of approximately
1,881.99 sq.m. are erected on allocated land and/or the buildings have not
obtained the Real Estate Title Certificates, we have attributed no
commercial value to the properties. However, for indication purposes, the
depreciated replacement costs of the 5 buildings with a total gross floor
areas of 1,881.99 sq.m. is RMB158,880,000 as at the date of valuation.
(2) According to 7 Land Use Rights Certificates and 10 Real Estate Title
Certificates given to us, the land use rights of 6 parcels of land with a
total area of approximately 5,834.66 sq.m. and the building ownership
rights of 6 buildings with a total gross floor area of approximately
2,518.44 sq.m. are held by China Southern Airlines Company Limited
Operation Department, which is 100% owned by the Group.
(3) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The land used by the operation departments in Beijing, Shanghai,
Kunming, Chengdu (Friendship Building), Jinan and Xian cannot obtain
relevant land use right certificate as the application for
construction inspection by developer has not been carried out.
(ii) The Land Use Right Certificate of the land used by the operation
departments in Chengdu (Ao Shen Hua Yuan), Xiamen and Nanjing has
been obtained and the Company has the land use right of the land.
Whenever the Company transfers the land use right, it has to
transfer together with the buildings erected upon.
- 322 -
APPENDIX VIII PROPERTY VALUATION
(iii) The Beijing Nan Hang Hotel and property used by Shanghai operation
department has no real estate certificate and the Company has the
right to use it.
(iv) The Real Estate Title Certificates of the buildings used by the
operation departments of Kunming and Chengdu (Ao Shen Hua Yuan) has
been obtained and the Company can use, rent, mortgage and transfer
the property right.
(v) The Company has the right to use the buildings of the operation
departments of Jinan and Chengdu (Friendship Building) and there is
no legal impediment for the Company to obtain Real Estate Title
Certificates upon settlement of the property price.
(vi) The Company has the right to use, rent, mortgage and transfer the
property right of the National Development Bank Building and
property used by Xiamen operation department.
- 323 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
26. Various properties The properties comprise 4 The properties are 156,070,000
held by China various operational and ancillary currently occupied by (100% interest
Southern Airlines buildings completed in various the Group for and attributable to
Company Limited stages between 1992 and 2001 Zhuhai Xiang Yi the Group:
Zhuhai Flight with a total gross floor area of Aviation Technology 156,070,000)
Simulator Training approximately 38,720.00 sq.m. Company Limited for
Centre (416,782 sq.ft.). office, training centre,
student quarters and
Details of the gross floor areas canteen purposes.
of the properties are listed as
follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 21,095.00 227,066
Ancillary buildings 17,625.00 189,716
--------- -------
Total: 38,720.00 416,782
========= =======
The lands upon which the properties
currently erected comprise 2 parcels
of land with a total area of
approximately 29,941.60 sq.m.
(322,291.38 sq.ft.).
The land use rights of the properties
have been granted for 50 years
commencing from 7 February, 1991 and 1
August, 1994 respectively.
Notes:
(1) According to 2 Land Use Rights Certificates given to us, the land use
rights of 2 parcels of land with a total area of approximately 29,416.60
sq.m. are held by China Southern Airlines Company Limited Zhuhai Flight
Simulator Training Centre, which is 100% owned by the Group.
(2) We have been provided with a copy of the legal opinion on the title to the
properties prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
(i) The Company is entitled to use, rent, mortgage and transfer the land
use right with an area of approximately 16,954 sq.m. There is no
legal impediment for change of "land origin" registration and
settlement of land premium for the registration is not necessary.
(ii) The Land Use Right Certificate of the land use right with an area of
approximately 12,987.6 sq.m. has been obtained. The Company is
entitled to use, rent, mortgage and transfer the land use right for
a term of 50 years commencing from August 1994 and expiring on
August 2004. However, the land use rights owner of the aforesaid
certificate is in the old name of Zhuhai Flight Simulator Training
Centre. There is no legal impediment in applying for change of name.
(iii) The Company held the ownership rights of the 4 buildings with a
total gross floor area of approximately 38,720 sq.m. and there is no
legal impediment for the Company to obtain relevant title
certificates.
- 324 -
APPENDIX VIII PROPERTY VALUATION
GROUP V - PROPERTIES HELD BY THE GROUP IN WESTERN AUSTRALIA
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
27. Various properties The properties comprise 38 The properties are 12,120,000
held by various operational and ancillary currently occupied by (65% interest
China Southern buildings and various structures the Group for staff, attributable to
West Australian completed in various stages student accommodation, the Group:
Flying College Pty between 1960 and 2000 with a administration and 7,878,000)
Ltd. in Australia total gross floor area of flying school purposes.
approximately 11,580 sq.m.
(124,647 sq.ft.).
Details of the gross floor areas
of the properties held under
freehold land are listed as
follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
13 Residences 2,250 23,940
5 Transportables 300 3,229
Dining/Ancillary 250 2,691
Operations 390 4,197
Briefing 390 4,197
Tower/Facilities 150 1,614
Hangar Workshop 1,000 10,764
Residences 1,040 11,194
Other 150 1,614
--------- -------
Total 5,920 63,723
========= =======
Details of the gross flow areas of the
properties held under leasehold land
are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Hangar/Workshop 1,485 15,984
Ground School 377 4,058
Ancillary Storage 98 1,054
Engine Workshop 700 7,534
Dormitory Accom. 3,000 32,393
--------- -------
Total: 5,660 60,924
========= =======
The lands upon which the properties
currently erected comprise 31 parcels
of freehold lands with a total area of
approximately 1,121,639 sq.m.
(12,073,322 sq.ft.) and 3 parcels of
leasehold lands with a total area of
approximately 16,122sq.m.
(173,537sq.ft.).
Note :
(1) The registered owner of the property is China Southern West Australian
Flying College Pty Ltd..
The lands of the property with an area of approximately 16,122 sq.m. are
leasehold lands, and we thus have attributed no commercial value to those
leasehold lands and the buildings erecting thereon. However, for
indication purposes, the depreciated replacement costs of the buildings
with a total gross floor area of approximately 5,660 sq.m. is
RMB19,773,000 as at the date of valuation.
- 325 -
APPENDIX VIII PROPERTY VALUATION
GROUP VI - PROPERTIES HELD BY THE GROUP IN THE NETHERLANDS
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
28. Five residential The property comprises five The property is 13,210,000
units held by the residential units completed in currently occupied by (100% interest
Company in various stages between late the Group for staff attributable to
Amstelveen 1980s and mid 1990s with a total quarters purposes. the Group:
Noord-Holland gross floor area of approximately 13,210,000)
The Netherlands 432.00 sq.m. (4,650 sq.ft.).
Note:
The registered owner of the property is China Southern Airlines Company
Limited.
- 326 -
APPENDIX VIII PROPERTY VALUATION
GROUP VII - PROPERTIES HELD UNDER CONSTRUCTION BY THE GROUP IN THE PRC
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
29. Various properties The properties under The properties are 1,559,830,000
held under development are planned to currently under (100% interest
construction by comprise 16 buildings and 3 construction. attributable to
China Southern structures. Upon completion, the the Group:
Airlines Company proposed development will have 1,559,830,000)
Limited a total gross floor area of
Guangzhou approximately 346,235.89 sq.m.
Headquarters (3,726,883 sq.ft.).
The lands upon which the properties
currently erected comprise a parcel of
land with a total area of
approximately 80,909 sq.m. (870,904
sq.ft.).
Notes :
(1) We have been provided with a copy of the legal opinion on the title
to the properties prepared by Z & T Law Firm, the Company's PRC
legal adviser, which contains, inter alia, the following
information:
(i) The application for properties under construction has been
legally obtained and the properties under construction are
vested in the Group. After the constructions have been
completed and have obtained the completion certificates, the
Group may apply for the relevant title documents;
(ii) The properties under construction are erected on a leased with
a site area of 80,909 sq.m. land where the Group has the right
to use but cannot sub-lease the land.
(2) We have assigned no commercial value to the land portions of the
properties due to its non-transferability and non-subletting nature
in the open market. According to the Group's PRC legal adviser
opinion, the Company could apply the ownership of the buildings and
structures of the property upon completion. Also, CSAHC has agreed
to assist the Company to transfer the properties and process the
land grant process whenever the Company dispose of the properties.
We have, relied on the aforesaid, assigned open market values to the
un-completed buildings and structures of the properties but
excluding the land portion.
- 327 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
30. Various properties The properties under The properties are No commercial value
held under development are planned to currently under
construction by comprise 4 buildings and construction.
Xiamen Airlines structures. Upon completion, the
proposed development will have
a total gross floor area of
approximately 2,122 sq.m.
(22,841 sq.ft.).
The lands upon which the properties
currently erected comprise 2 parcels
of land with a total area of
approximately 151,347.20 sq.m.
(1,629,101 sq.ft.).
Notes :
(1) We have been provided with a copy of the legal opinion on the title
to the properties prepared by Z & T Law Firm, the Company's PRC
legal adviser, which contains, inter alia, the following
information:
4 buildings are held under construction by Xiamen Airlines. One of
the buildings is an aircraft repairing warehouse with a gross floor
area of approximately 2,122 sq.m. For the remaining 3 buildings,
there is no information regarding their gross floor area.
(2) Since no land use rights certificates have been obtained for the 2
subject lands of the property and the buildings of the property
which are under construction have not obtained any construction
approval documents from relevant governmental departments, we have
attributed no commercial value to the properties. However, for
indication purposes, the depreciated replacement costs of the 4
buildings with a total gross floor areas of approximately 2,122
sq.m. is RMB1,250,000 as at the date of valuation.
- 328 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
31. A property held The property under development The property is 4,810,000
under construction is planned to comprise a currently under (60% interest
by Southern warehouse. Upon completion, the construction. attributable to
Airlines (Group) proposed development will have the Group:
Shantou Airlines a total gross floor area of 2,890,000)
Company Limited approximately 2,058.00 sq.m.
(22,152 sq.ft.).
The land upon which the property
currently erected comprises 1 parcel
of land with an area of approximately
3,563.50 sq.m. (38,357.51 sq.ft.).
The land use right of the property has
been granted for a term of 50 years
commencing from 25 May, 1994.
Note:
We have been provided with a copy of the legal opinion on the title to the
property prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
Southern Airlines (Group) Shantou Airlines Company Limited has obtained
the granted land use rights of a parcel of land with an area of
approximately 3,563.50 sq.m. and can use, lease, mortgage and transfer the
land.
- 329 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
32. A parcel of land The property comprise 1 parcel The property is 7,200,000
held under of land with an area of currently under (60% interest
construction by approximately 60,006.35 sq.m. construction. attributable to
Zhuhai Airlines (645,908.35 sq.ft.). the Group:
Company Limited 4,320,000)
The land use right of the property has
been granted for a term of 50 years.
Note :
We have been provided with a copy of the legal opinion on the title to the
property prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
The Company has obtained the Land Use Right Certificate and it has the
right to occupy, use and dispose of the land use right within the land use
term.
- 330 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
33. Various properties The properties under The properties are No commercial value
held under development are planned to currently under
construction by comprise 20 buildings and construction.
Guizhou Airlines structures. Upon completion, the
Company Limited proposed development will have
a total gross floor area of
approximately 26,434.82 sq.m.
(284,544 sq.ft.).
The lands upon which the properties
currently erected comprise 2 parcels
of land with a total area of
approximately 259,878.60 sq.m.
(2,797,333.25 sq.ft.).
The lands are allocated lands.
Notes :
(1) Since the land of 20 buildings is allocated land and/or the
buildings have not obtained the Real Estate Title Certificates, we
have attributed no commercial value to the properties. However, for
indication purposes, the depreciated replacement costs of the 20
buildings with a total gross floor areas of approximately 26,434.82
sq.m. is RMB22,600,000 as at the date of valuation.
(2) We have been provided with a copy of the legal opinion on the title
to the properties prepared by Z & T Law Firm, the Company's PRC
legal adviser, which contains, inter alia, the following
information:
(i) The 2 parcels of lands with a total area of 259,878.6 sq.m.
are allocated lands and the land use right certificates have
been obtained.
(ii) The properties with a gross floor area of approximately
26,434.82 sq.m. have legally obtained the approval of
construction and no third parties is involved in the dispute
of the title. The Group will have the ownership right of the
properties and there is no legal impediment in obtaining real
estate title certificates after the construction has obtained
a completion certificate.
- 331 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
34. Various properties The properties under The properties are No commercial value
held under development are planned to currently under
construction by comprise 10 buildings and construction.
Guangzhou Baiyun structures. Upon completion, the
International proposed development will have
Logistic Company a total gross floor area of
Ltd. approximately 123,928 sq.m. (1,333,961
sq.ft.).
The land upon which the properties
currently erected comprises 1 parcel
of land with an area of approximately
653,333.3 sq.m. (7,032,480 sq.ft.).
Notes:
(1) We have been provided with a copy of the legal opinion on the title
to the properties prepared by Z & T Law Firm, the Company's PRC
legal adviser, which contains, inter alia, the following
information:
(i) Ten buildings under construction with a total gross floor area
of approximately 123,928 sq.m. have obtained approvals of
construction and there is no third parties dispute on the
title. The Group may apply for Building Ownership Certificates
after the construction has obtained a completion certificate.
(ii) The Group has possessed a parcel of land with an area of
approximately 653,333 sq.m., which has no Land Use Right
Certificate.
(2) Since the land has no title document, we have attributed no
commercial value to the properties. However, for indication
purposes, the depreciated replacement costs of the 10 buildings with
a total gross floor area of approximately 123,928 sq.m. is
RMB213,617,983 as at the date of valuation.
- 332 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
35. Various properties The properties comprise 12 The property is No commercial value
rented by various operational and ancillary occupied by the
China Southern buildings and various structures Group as office,
Airlines Company completed in various stages warehouse and staff
Limited between 1986 and 1996 with a quarters for operating
Guangzhou total gross floor area of and ancillary
Headquarters approximately 93,854.35 sq.m. purposes.
(1,010,248 sq.ft.) and a parcel of
land with an area of
approximately 80,909 sq.m.
(870,904 sq.ft.).
Details of the gross floor areas of
the properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 33,827.88 364,123
Warehouses 41,405 445,683
Ancillary buildings 18,621.47 200,442
--------- ---------
Total: 93,854.35 1,010,248
========= =========
7 buildings of the property are rented
from independent third parties under
tenancy agreements for various terms
with the latest expiry date in 2002 at
a total annual rental of
RMB15,997,315.56.
The remaining 5 buildings and the
parcel of land together with other
structures having an aggregate gross
floor area of 52,449.62 sq.m. and site
area of approximately 80,909 sq.m. are
rented from 1995 at an aggregate
annual rental of RMB20,027,523.83.
- 333 -
APPENDIX VIII PROPERTY VALUATION
Note:
We have been provided with a copy of the legal opinion on the legality of
the use to the properties prepared by Z & T Law Firm, the Company's PRC
legal adviser, which contains, inter alia, the following information:
(i) CSAHC has obtained the rights to use the above-mentioned parcel of
land with an area of approximately 80,909 sq.m. and under the
condition of not changing the use of the land, CSAHC can continue to
use the land. According to the Permit No. 460 dated 17 November,
2003, CSAHC has obtained the authorization to conduct its trade of
business upon the said land and is being entitled to lease the land
to its subsidiaries. The Group has obtained the rights to use the
land according to the lease agreement and has not acquired the right
of handling the property. The property cannot be sub-let, mortgaged
or transferred by the Group.
(ii) For the remaining portion of property, according to the lease
agreement entered into between the Group and the lessor or CSAHC,
the Group has obtained the rights to use the property and has not
acquired the ownership of the property.
- 334 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
36. Various properties The properties comprise 7 The properties are No commercial value
rented by various operational and ancillary occupied by the
China Southern buildings and various structures Group as offices for
Airlines Company completed in various stages operating purposes.
Limited Henan between 1989 and 1993 with a
Branch total gross floor area of
approximately 917.26 sq.m.
(9,873 sq.ft.).
Details of the gross floor areas of
the properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 917.26 9,873
------ -----
Total: 917.26 9,873
====== =====
The properties are subject to tenancy
agreements for various terms with the
latest expiry date in 2010 at a total
annual rental of RMB978,416.
Note:
We have been provided with a copy of the legal opinion on the legality of
the use to the properties prepared by Z & T Law Firm, the Company's PRC
legal adviser, which contains, inter alia, the following information:
According to the lease agreements entered into between the Group and the
lessors, the Group has obtained the rights to use the properties and has
not acquired the ownership of the properties.
- 335 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
37. Various properties The properties comprise 4 The properties are No commercial value
rented by various operational and ancillary occupied by the
China Southern buildings and various structures Group as offices for
Airlines Company completed in various stages operating purposes.
Limited Hubei between 1990 and 1995 with a
Branch total gross floor area of
approximately 1,112.70 sq.m.
(11,977 sq.ft.).
Details of the gross floor areas of
the properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 1,112.70 11,977
-------- ------
Total: 1,112.70 11,977
======== ======
The properties are subject to tenancy
agreements for various terms with the
latest expiry date in 2005 at a total
annual rental of RMB1,328,840.
Note :
We have been provided with a copy of the legal opinion on the legality of
the use to the properties prepared by Z & T Law Firm, the Company's PRC
legal adviser, which contains, inter alia, the following information:
According to the lease agreements entered into between the Group and the
lessors, the Group has obtained the rights to use the properties and has
not acquired the ownership of the properties.
- 336 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
38. Various properties The properties comprise 17 The properties are No commercial value
rented by various operational and ancillary occupied by the
China Southern buildings and various structures Group as offices and
Airlines Company completed in various stages warehouses for
Limited Shenzhen between 1991 and 1997 with a operating purposes.
Branch total gross floor area of
approximately 2,231.5 sq.m.
(24,020 sq.ft.).
Details of the gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 2,131.5 2,943
Warehouses 100 1,076
------- ------
Total: 2,231.5 24,019
======= ======
The properties are subject to tenancy
agreements for various terms with the
latest expiry date in 2012 at a total
annual rental of RMB261,771.78.
Note :
We have been provided with a copy of the legal opinion on the legality of
the use to the properties prepared by Z & T Law Firm, the Company's PRC
legal adviser, which contains, inter alia, the following information:
According to the lease agreements entered into between the Group and the
lessors, the Group has obtained the rights to use the properties and has
not acquired the ownership of the properties.
- 337 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
39. A parcel of land The property comprises a parcel The property is No commercial value
rented by of land with an area of currently occupied by
China Southern approximately 33,333.50 sq.m. the Group for aircraft
Airlines Company (358,802 sq.ft.). runway purposes.
Limited Zhuhai
Branch
The property is rented from an
independent third party under a
tenancy agreement for a term expiring
in 2019 at a total yearly rental of
RMB27,500.
Note :
We have been provided with a copy of the legal opinion on the legality of
the use to the property prepared by Z & T Law Firm, the Company's PRC
legal adviser, which contains, inter alia, the following information:
According to the lease agreement entered into between the Group and the
lessor, the Group has obtained the rights to use the property and has not
acquired the ownership of the property.
- 338 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
40. Various properties The properties comprise 102 The properties are No commercial value
rented by Xiamen various operational and ancillary occupied by the
Airlines buildings and various structures Group as offices and
with a total gross floor area of staff quarters for
approximately 37,543.03 sq.m. operating and
(404,113 sq.ft.). ancillary purposes.
Details of the gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 36,730.34 395,365
Ancillary buildings 812.7 8,748
--------- -------
Total: 37,543.04 404,113
========= =======
The properties are rented from
independent third parties under
tenancy agreements for various terms
with the latest expiry date in 2013 at
a total annual rental of RMB13,485,851.48.
Note:
We have been provided with a copy of the legal opinion on the legality of the
use to the property prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
According to the lease agreements entered into between the Group and the
lessors, the Group has obtained the rights to use the properties and has not
acquired the ownership of the properties.
- 339 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
41. Various properties The properties comprise 4 The properties are No commercial value
rented by Southern various operational and ancillary occupied by the
Airlines (Group) buildings and various structures Group as offices and
Shantou Airlines completed in various stages with warehouses for
Company Limited a total gross floor area of operating and
approximately 55,773 sq.m. ancillary purposes.
(600,341 sq.ft.) and a parcel of
land with a site area of
approximately 53,000.00 sq.m.
Details of the gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 366 3,940
Warehouses 2,407 25,909
----- ------
Total: 2,773 29,849
===== ======
The properties are rented from
independent third parties under
tenancy agreements for various terms
with the latest expiry date in 2043 at
a total annual rental of RMB13,628,783.5.
Note:
We have been provided with a copy of the legal opinion on the legality of the
use to the properties prepared by Z & T Law Firm, the Company's PRC legal
adviser, which contains, inter alia, the following information:
(i) According to the lease agreements entered into between the Group and the
lessors, the Group has obtained the rights to use the properties and has
not acquired the ownership of the properties.
(ii) Pursuant to the lease agreement of the aforesaid parcel of land with an
area of approximately 53,000 sq.m., the buildings erected thereon will be
surrendered to the lessor upon expiry of the lease term of 12 years from 1
January, 1997.
- 340 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
42. Various properties The properties comprise 3 The properties are No commercial value
rented by Guangxi various operational and ancillary occupied by the
Airlines Company buildings and various structures Group as offices for
Limited operating purposes.
completed in various stages
between 1998 and 1999 with a
total gross floor area of
approximately 250.84 sq.m.
(2,700 sq.ft.).
Details of the gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 250.84 2,700
------ ------
Total: 250.84 2,700
====== ======
The properties are rented from
independent third parties under
tenancy agreements for various terms
with the latest expiry date in 2006 at
a total annual rental of RMB373,508.
Note :
We have been provided with a copy of the legal opinion on the legality of the
use to the properties prepared by Z & T Law Firm, the Company's PRC legal
adviser, which contains, inter alia, the following information:
According to the lease agreements entered into between the Group and the
lessors, the Group has obtained the rights to use the properties and has not
acquired the ownership of the properties.
- 341 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
43. Various properties The properties comprise 6 The properties are No commercial value
rented by Zhuhai various operational and ancillary occupied by the
Airlines Company buildings and various structures Group as offices
Limited completed in various stages with for operating
a total gross floor area of purposes.
approximately 2,135.20 sq.m.
(22,983 sq.ft.).
Details of the gross floor areas
of the properties are listed as
follows:
APPROXIMATE
USE GROSS FLOOR AREA
------ -----------------
sq.m. sq.ft.
Offices 2,135.20 22,983
-------- ------
Total: 2,135.20 22,983
======== ======
The properties are rented from
independent third parties under
tenancy agreements for various
terms with the latest expiry date
in 2008 at a total annual rental
of RMB604,584.
Note:
We have been provided with a copy of the legal opinion on the legality of the
use to the properties prepared by Z & T Law Firm, the Company's PRC legal
adviser, which contains, inter alia, the following information:
According to the lease agreements entered into between the Group and the
lessors, the Group has obtained the rights to use the properties and has not
acquired the ownership of the properties.
- 342 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
44. Various properties The properties comprise 14 various The properties are No commercial value
rented by Guizhou operational and ancillary buildings and occupied by the
Airlines Company various structures completed in various Group as offices
Limited stages between 1988 and 1996 with a and staff quarters
total gross floor area of approximately for operating and
2,090.06 sq.m. (22,497 sq.ft.). ancillary purposes.
Details of the gross floor areas
of the properties are listed as
follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 1,892.06 20,366
Ancillary buildings 198 2,131
-------- ------
Total: 2,090.06 22,497
======== ======
The properties are rented from
independent third parties under tenancy
agreements for various terms with the
latest expiry date in 2018 at a total
annual rental of RMB3,535,832.15.
Note :
We have been provided with a copy of the legal opinion on the legality of the
use to the properties prepared by Z & T Law Firm, the Company's PRC legal
adviser, which contains, inter alia, the following information:
According to the lease agreements entered into between the Group and the
lessors, the Group has obtained the rights to use the properties and has not
acquired the ownership of the properties.
- 343 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
45. A property rented by The property comprise 1 operational and The property is No commercial value
Southern China ancillary building with a gross floor occupied by the
International area of approximately 90 sq.m. (969 Group as office for
Aviation & Travel sq.ft.). operating purposes.
Services Company
Details of the gross floor area of the
property is listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Office 90 969
-- ---
Total: 90 969
== ===
The property is rented from an
independent third party under a tenancy
agreement for a term expiring in 2010 at
an annual rental of RMB189,504.
Note:
We have been provided with a copy of the legal opinion on the legality of the
use to the property prepared by Z & T Law Firm, the Company's PRC legal adviser,
which contains, inter alia, the following information:
According to the lease agreement entered into between the Group and the lessors,
the Group has obtained the rights to use the property and has not acquired the
ownership of the property.
- 344 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
46. Various properties The properties comprise 99 various The properties are No commercial value
rented by China operational and ancillary buildings and occupied by the
Southern Airlines various structures completed in various Group for sales
Company Limited stages between 1950's and 2000's with office, dormitory
Overseas Offices a total gross floor area of and carport purposes.
approximately 10,333.19 sq.m. (111,226
sq.ft.) in Japan, Malaysia, Korea,
Sharjah U.A.E., Singapore, Australia,
Vietnam, The Netherlands, Indonesia,
France and USA.
According to the information provided by
the Group, the properties are rented
under tenancy agreements for various
terms with the latest expiry date in
March 2013 at a total annual rental of
RMB21,030,673.18.
Note:
We have been provided with a copy of the legal opinion on the legality of the
use to the properties prepared by Z & T Law Firm, the Company's PRC legal
adviser, which contains, inter alia, the following information:
According to the lease agreements entered into between the Group and the
lessors, the Group has obtained the rights to use the properties and has not
acquired the ownership of the properties.
- 345 -
APPENDIX VIII PROPERTY VALUATION
OPEN MARKET VALUE
IN EXISTING STATE AS AT
PARTICULARS OF 31 AUGUST, 2004
PROPERTIES DESCRIPTION AND TENURE OCCUPANCY RMB
47. Various properties The properties comprise 67 various The properties are No commercial value
rented by China operational and ancillary buildings and occupied by the
Southern Airlines various structures completed in various Group as offices,
Operation Department stages between 1982 and 2003 with a warehouses and
total gross floor area of approximately staff quarters for
6,804.85 sq.m. (73,247 sq.ft.). operating and
ancillary purposes.
Details of the gross floor areas of the
properties are listed as follows:
APPROXIMATE
USE GROSS FLOOR AREA
--- ----------------
sq.m. sq.ft.
Offices 5,864.85 63,129
Warehouses 580 6,243
Ancillary buildings 360 3,875
-------- ------
Total: 6,804.85 73,247
======== ======
The properties are rented from
independent third parties under tenancy
agreements for various terms with the
latest expiry date in 2009 at a total
annual rental of RMB8,185,479.12.
Note:
We have been provided with a copy of the legal opinion on the legality of the
use to the properties prepared by Z & T Law Firm, the Company's PRC legal
adviser, which contains, inter alia, the following information:
According to the lease agreements entered into between the Group and the
lessors, the Group has obtained the rights to use the properties and has not
acquired the ownership of the properties.
- 346 -
APPENDIX IX GENERAL INFORMATION
1. RESPONSIBILITY STATEMENT
This circular includes particulars given in compliance with the Listing
Rules for the purpose of giving information with regard to the Listed Group. The
Directors collectively and individually accept full responsibility for the
accuracy of the information contained in this circular and confirm, having made
all reasonable inquiries, that to the best of their knowledge and belief there
are no other facts the omission of which would make any statement herein
misleading.
2. DISCLOSURE OF INTERESTS OF DIRECTORS AND SUPERVISORS
As at the Latest Practicable Date, the interests and short positions of
the Directors, chief executive and supervisors of the Company in the shares,
underlying shares and debentures (as the case may be) of the Company or its
associated corporations (within the meaning of Part XV of the SFO) which were
notified to the Company and the Stock Exchange pursuant to SFO (including
interests or short positions which are taken or deemed to have under such
provisions of the SFO), or recorded in the register maintained by the Company
pursuant to Section 352 of the SFO or which were notified to the Company and the
Stock Exchange pursuant to the Model Code for Securities Transactions by
Directors of the Listed Companies in Schedule 10 of the Listing Rules are as
follows:
% TO THE % TO THE
TOTAL TOTAL % TO THE
ISSUED ISSUED TOTAL
THE SHARE DOMESTIC ISSUED H
COMPANY/ NUMBER OF CAPITAL SHARES SHARES
ASSOCIATED TYPE OF TYPE OF SHARES OF THE OF THE OF THE SHORT
NAME CORPORATION INTEREST SHARES HELD COMPANY COMPANY COMPANY POSITION
-------- ------------ ----------- -------- --------- -------- -------- -------- --------
Simon To the Company Interest of H shares 100,000 0.002% - 0.009% -
spouse
(Note 1)
Note 1. The spouse of Mr. Simon To is the owner of these 100,000 H Shares of
the Company and accordingly, Mr. Simon To, is taken to be interested in
these 100,000 H Shares by virtue of the SFO.
Save as disclosed above, as at the Latest Practicable Date, none of the
Directors, chief executive or supervisors of the Company has interests or short
positions in the shares, underlying shares and/or debentures (as the case may
be) of the Company or its associated corporations (within the meaning of Part XV
of the SFO) which were notified to the Company and the Stock Exchange pursuant
to SFO (including interests or short positions which he is taken or deemed to
have under such provisions of the SFO), or recorded in the register maintained
by the Company pursuant to Section 352 of the SFO or which were notified to the
Company and the Stock Exchange pursuant to the Model Code for Securities
Transactions by Directors of the Listed Companies.
None of the Directors, chief executive or supervisors of the Company and
their respective associates (as defined in the Listing Rules) has any competing
interests which would be required to be disclosed under Rule 8.10 of the Listing
Rules if each of them were a controlling shareholder.
- 347 -
APPENDIX IX GENERAL INFORMATION
3. SUBSTANTIAL SHAREHOLDERS
As at the Latest Practicable Date, to the knowledge of the Directors,
chief executive and supervisors of the Company, the interests and short
positions of the following persons other than the Directors, chief executives or
supervisors in the shares and underlying shares of the Company as recorded in
the register of the Company required to be kept under Section 336 of the SFO or
otherwise persons who are, directly or indirectly, interested in 10% or more of
the nominal value of any class of share capital carrying rights to vote in all
circumstances at general meetings of any members of the Listed Group are as
follows:
THE COMPANY
% OF THE % OF THE
% OF THE TOTAL ISSUED TOTAL ISSUED
TOTAL ISSUED SHARES DOMESTIC
H SHARES CAPITAL SHARES
NAME OF TYPE OF TYPE OF NUMBER OF OF THE OF THE OF THE SHORT
SHAREHOLDER SHAREHOLDING SHARES SHARES HELD COMPANY COMPANY COMPANY POSITION
----------- -------------- ----------- ------------ ------------ ------------ ------------ --------
CSAHC Direct holding State-owned 2,200,000,000 - 50.30% 68.75% -
shares
HKSCC Nominees Direct holding H shares 1,151,389,998 98.6% 26.32% - -
Limited
Note: Based on the information available to the Directors, chief executive and
supervisors of the Company (including such information as was available on
the website of the Stock Exchange) and so far as the Directors, chief
executive and supervisors are aware, as at the Latest Practicable Date:
Among the 1,151,389,998 H Shares held by HKSCC Nominees Limited, JPMorgan
Chase & Co. had an interest in an aggregate of 154,610,800 H Shares of the
Company (representing approximately 13.17% of its then total issued H
Shares). Out of the 154,610,800 H Shares, JPMorgan Chase & Co. had an
interest in a lending pool comprising 69,960,000 H Shares of the Company
(representing approximately 5.96% of its then total issued H Shares).
According to the information as disclosed in the website of the Stock
Exchange and so far as the Directors, chief executive and supervisors are
aware, JPMorgan Chase & Co. held its interest in the Company in the
following manners:
(a) 69,960,000 H Shares in a lending pool, representing approximately
5.96% of the Company's then total issued H Shares, were held by
JPMorgan Chase Bank, which was 100% held by JPMorgan Chase & Co.;
(b) 1,030,800 H Shares, representing approximately 0.09% of the
Company's then total issued H Shares, were held in the capacity as
beneficial owner by JPMorgan Whitefriars Inc., which was ultimately
100% held by JPMorgan Chase & Co.;
(c) 81,978,000 H Shares, representing approximately 6.98% of the
Company's then total issued H Shares, were held in the capacity as
investment manager by JF Asset Management Limited, which was
approximately 99.99% held by JPMorgan Fleming Asset Management
(Asia) Inc., which was ultimately 100% held by JPMorgan Chase & Co.;
and
(d) 1,642,000 H Shares, representing approximately 0.14% of the
Company's then total issued H Shares, were held in the capacity as
investment manager by JF International Management Inc., which was
100% held by JPMorgan Fleming Asset Management (Asia) Inc., which
was ultimately 100% held by JPMorgan Chase & Co.
- 348 -
APPENDIX IX GENERAL INFORMATION
Save as disclosed above, as at the Latest Practicable Date, to the
knowledge of the Directors, chief executive and supervisors of the Company, no
other person (other than the Directors, chief executives or supervisors) had an
interest or short positions in the shares or underlying shares of the Company as
recorded in the register of the Company required to be kept under section 336 of
the SFO or otherwise had an interest of 10% or more of the nominal value of any
class of share capital carrying rights to vote in all circumstances at general
meetings of any members of the Group.
4. MATERIAL CONTRACTS
No material contract has been entered into by the Listed Group within the
two years immediately preceding the date of this circular.
5. LITIGATION
As at the Latest Practicable Date, there was no litigation or claims of
material importance pending or threatened against any member of the Listed
Group.
6. PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS
Pursuant to Article 77 of the Articles of Association of the Company, at
any general meeting of shareholders of the Company, a resolution shall be
decided on a show of hands unless a poll is (before or after any vote by show of
hands) demanded:
i. by the chairman of the meeting;
ii. by at least two shareholders entitled to vote present in person or
by proxy; or
iii. by one or more shareholders present in person or by proxy and
representing 10 per cent or more of all shares carrying the right to
vote at the meeting.
The demand for a poll may be withdrawn by the person who makes such
demand.
7. DIRECTORS' AND SUPERVISORS' INTERESTS
(a) None of the Directors or supervisors of the Company, or any
professional advisers named in paragraph 11 of this Appendix has any
direct or indirect interest in any assets which have been, since 31
December, 2003, the date to which the latest published audited
accounts of the Listed Group were made up, acquired or disposed of
by or leased to, or which are proposed to be acquired or disposed of
by, or leased to, to any member of the Listed Group.
(b) None of the Directors or supervisors of the Company is materially
interested in any contract or arrangement subsisting at the date of
this circular and which is significant in relation to the business
of the Listed Group.
- 349 -
APPENDIX IX GENERAL INFORMATION
8. SERVICE CONTRACTS
None of the Directors has any existing or proposed service contract with
any member of the Listed Group which is not expiring or terminable by the Listed
Group within one year without payment of compensation (other than statutory
compensation).
9. MATERIAL ADVERSE CHANGE
The Directors are not aware of any material adverse change in the financial
or trading position of the Listed Group since 31 December, 2003, being the date
of the latest published audited financial statements of the Company.
10. CONSENTS
JPMorgan, ICEA, KPMG and Chesterton have given and have not withdrawn their
respective written consents to the issue of this circular with the inclusion of
their reports and letters (if any), as the case may be, and references to their
names in the form and context in which they respectively appear.
11. QUALIFICATIONS OF EXPERTS
The following are the qualifications of the professional advisers who have
given opinions or advice contained in this circular.
NAMES QUALIFICATIONS
----- --------------
JPMorgan Licensed by the Securities and Futures Commission for Types 1, 4, 6 and 7
regulated activities under SFO
ICEA Deemed licensed by the Securities and Futures Commission for Types 1, 4, 6 and 9
regulated activities under SFO
KPMG Certified Public Accountants registered in Hong Kong
Chesterton Chartered Surveyor
- 350 -
APPENDIX IX GENERAL INFORMATION
12. EXPERTS' INTERESTS IN ASSETS
As at the Latest Practicable Date, each of JPMorgan, ICEA, KPMG and
Chesterton:
(a) was not interested, directly or indirectly in any assets which have
been acquired or disposed of by or leased to the Company since 31
December, 2003, being the date to which the latest published audited
financial statements of the Company were made up; and
(b) did not have any shareholding interest in any member of the Listed
Group or any right (whether legally enforceable or not) to subscribe
for or to nominate persons to subscribe for securities in any member
of the Listed Group.
13. MISCELLANEOUS
(a) The secretary of the Company is Su Liang.
(b) The Company has not currently appointed an individual who will satisfy
all the requirements of a qualified accountant for the purposes of
Rule 3.24 of the Listing Rules, pursuant to which the Company has
published an announcement on 5 November, 2004.
(c) The registered address of the Company is at Guangzhou Economic and
Technology Development Zone, Guangdong Province, PRC and the principal
place of business of the Company in Hong Kong is at Unit B1, 9th
Floor, United Centre, 95 Queensway, Hong Kong.
(d) The Hong Kong branch share registrar and transfer office of the
Company is Hong Kong Registrars Limited, 46th Floor, Hopewell Centre,
183 Queen's Road East, Hong Kong.
(e) The English text of this circular and the form of proxy shall prevail
over the Chinese text in the case of inconsistency.
14. DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents are available for inspection during
normal business hours at the principal place of business of the Company in Hong
Kong at Unit B1, 9th Floor, United Centre, 95 Queensway, Hong Kong up to and
including 3 December, 2004:
(a) Sale and Purchase Agreement;
(b) Lease Agreement 1, Lease Agreement 2 and Lease Agreement 3;
- 351 -
APPENDIX IX GENERAL INFORMATION
(c) Catering Agreement;
(d) Financial Services Agreement;
(e) the accountants' reports of the Airline Operations of Northern
Airlines Group and the Airline Operations of Xinjiang Airlines Group
for each of the years in the three-year period ended 31 December, 2003
and the six-month period ended 30 June, 2004, the text of which is set
out in Appendices II and III to this circular respectively;
(f) the audited financial statements of the Company for each of the three
financial years immediately preceding the issue of this circular;
(g) the interim financial reports of the Company for the six-month periods
ended 30 June, 2003 and 2004;
(h) the letters of consent referred to in paragraph 10 of this Appendix;
(i) the report from KPMG on the unaudited pro forma financial information
of the Combined Group dated 12 November, 2004 the text of which is set
out in Appendix V to this circular;
(j) the letter from ICEA dated 12 November, 2004 the text of which is set
out on pages 29 to 48 of this circular;
(k) the letter from the Independent Board Committee to the Independent
Shareholders dated 12 November, 2004, the text of which is set out on
pages 27 to 28 of this circular;
(l) the letters relating to the profit forecast, the text of which is set
out in Appendix VI of this circular;
(m) the letter dated 12 November, 2004, summary of values and valuation
certificate prepared by Chesterton, the texts of which are set out in
Appendix VIII to this circular, and the full valuation report (in the
Chinese language only) prepared by Chesterton referred to in Appendix
VIII;
(n) the Zhong Qi Hua Valuation Reports;
(o) articles of association of the Company; and
(p) the major transaction circular of the Company dated 21 May, 2004 in
relation to the acquisition of certain aircraft from Airbus SNC.
- 352 -
NOTICE OF THE EGM
[CHINESE CHARACTER]
[LOGO] CHINA SOUTHERN AIRLINES COMPANY LIMITED
(A JOINT STOCK LIMITED COMPANY INCORPORATED IN THE PEOPLE'S REPUBLIC OF CHINA
WITH LIMITED LIABILITY)
(STOCK CODE: 1055)
NOTICE OF THE SECOND EXTRAORDINARY GENERAL MEETING IN 2004
NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the "EGM") of
China Southern Airlines Company Limited (the "Company") will be held at No. 278,
Ji Chang Road, Guangzhou, Guangdong Province, the PRC on 31 December, 2004 at
9:00 a.m. for the purpose of considering and passing the following resolutions
as ordinary resolutions:
ORDINARY RESOLUTIONS
(1) "THAT the entering into of the sale and purchase agreement dated 12
November, 2004, copy of which has been produced to this meeting marked "A"
and initialed by the Chairman of this meeting for the purpose of
identification, between China Southern Air Holding Company ("CSAHC"), China
Northern Airlines Company ("Northern Airlines") and Xinjiang Airlines
Company ("Xinjiang Airlines") as vendors and the Company as purchaser and
the transactions contemplated thereunder, upon the terms and subject to the
conditions therein contained, be and are hereby unconditionally approved."
(2) "THAT the entering into of the lease agreement dated 12 November, 2004,
copy of which has been produced to this meeting marked "B" and initialed by
the Chairman of this meeting for the purpose of identification, between the
Company, CSAHC and Northern Airlines, and the transactions contemplated
thereunder, upon the terms and subject to the conditions therein contained,
be and are hereby unconditionally approved."
(3) "THAT the entering into of the lease agreement dated 12 November, 2004,
copy of which has been produced to this meeting marked "C" and initialed by
the Chairman of this meeting for the purpose of identification, between the
Company, CSAHC and Xinjiang Airlines, and the transactions contemplated
thereunder, upon the terms and subject to the conditions therein contained,
be and are hereby unconditionally approved."
(4) "THAT the entering into of the lease agreement dated 12 November, 2004,
copy of which has been produced to this meeting marked "D" and initialed by
the Chairman of this meeting for the purpose of identification, between the
Company and CSAHC, and the transactions contemplated thereunder, upon the
terms and subject to the conditions therein contained, be and are hereby
unconditionally approved."
(5) "THAT the entering into of the catering agreement dated 12 November, 2004,
copy of which has been produced to this meeting marked "E" and initialed by
the Chairman of this meeting for the purpose of identification, between the
Company and China Southern Airlines Group Air Catering Company Limited, and
the transactions contemplated thereunder, upon the terms and subject to the
conditions therein contained, be and are hereby unconditionally approved."
- 353 -
NOTICE OF THE EGM
(6) "THAT the entering into of the financial services agreement dated 12
November, 2004, copy of which has been produced to this meeting marked "F"
and initialed by the Chairman of this meeting for the purpose of
identification, between the Company and Southern Airlines Group Finance
Company Limited, and the transactions contemplated thereunder, upon the
terms and subject to the conditions therein contained, be and are hereby
unconditionally approved."
(7) "THAT the proposed resignation of Mr. Wang Chang Shun as a director of the
Company be and is hereby approved."
(8) "THAT the proposed election of Mr. Si Xian Min, as nominated by China
Southern Air Holding Company in accordance with the Articles of Association
of the Company, as a director of the fourth session of the Board of the
Company (the biography of Mr. Si Xian Min is set out below) be and is
hereby approved."
By Order of the Board
SU LIANG
Company Secretary
Guangzhou, the People's Republic of China
12 November, 2004
As at the date of this notice, the Directors of the Company include Yan Zhi
Qing, Liu Ming Qi, Wang Chang Shun, Peng An Fa, Wang Quan Hua, Zhao Liu An, Zhou
Yong Qian, Zhou Yong Jin, Xu Jie Bo and Wu Rong Nan as executive Directors; and
Simon To, Peter Lok, Wei Ming Hai, Wang Zhi and Sui Guang Jun as independent
non-executive Directors.
Notes:
1. PERSONS WHO ARE ENTITLED TO ATTEND THE EGM
a. Holders of H shares of the Company who are registered with Hong Kong
Registrars Limited, the registrar of H shares of the Company, at the
close of trading in the afternoon of Tuesday, 30 November, 2004
("Eligible Shareholders") or their representatives are entitled to
attend the EGM after completion of the required registration
procedures in accordance with Note 2 "Registration procedures for
attending the EGM". Holders of A shares of the Company shall receive a
notice separately.
b. The directors, supervisors and senior management of the Company.
c. Representatives of the professional advisers hired by the Company and
special guests invited by the board of directors of the Company.
2. REGISTRATION PROCEDURES FOR ATTENDING THE EGM
a. Eligible Shareholders who intend to attend the EGM either in person or
by proxy must deliver to the Company on or before Friday, 10 December,
2004, in person or by post at the registration address of the Company,
or by fax at (+86) 20-8665 9040, the reply slip, which is attached to
the notice of the EGM as Attachment A.
b. When attending the EGM, individual Eligible Shareholder or his/her
proxy shall bring along his/her identity card. The legal
representative of a corporate Eligible Shareholder attending the EGM
shall bring along his/her identity card, together with a notarized
copy of the resolution or power of attorney issued by the board of
directors or other governing body of the corporate Eligible
Shareholder to appoint such legal representative to attend the
meeting.
c. Holders of H shares of the Company who intend to attend the EGM must
deliver their instruments of transfer together with the relevant share
certificates to Hong Kong Registrars Limited, the registrar of H
Shares of the Company, at Shops 1712-1716, 17th Floor, Hopewell
Centre, 183 Queen's Road East, Hong Kong, at or before 4:00 p.m. on
Tuesday, 30 November, 2004.
- 354 -
NOTICE OF THE EGM
d. The register of H shares of the Company will be closed from Wednesday,
1 December, 2004 to Thursday, 30 December, 2004 (both days inclusive),
during which period no transfer of H shares will be registered.
3. PROXIES
a. An Eligible Shareholder has the right to appoint one or more proxies
to attend the EGM and vote on his/her behalf. A proxy does not need to
be a shareholder of the Company.
b. A proxy must be appointed by an Eligible Shareholder or his/her
attorney by way of a form of proxy for extraordinary general meeting,
which is attached to the notice of EGM as Attachment B. If the proxy
is appointed by the attorney of an Eligible Shareholder, the power of
attorney or other authorization document(s) authorizing such attorney
to appoint the proxy must be notarized.
c. To be valid, the notarized power of attorney or other authorization
document(s), together with the completed form of proxy for the EGM,
must be lodged with Hong Kong Registrars Limited at 46th Floor,
Hopewell Centre, 183 Queen's Road East, Hong Kong, not less than 24
hours before the time designated for the holding of the EGM.
4. MISCELLANEOUS
a. The EGM is expected to last for approximately one day. Eligible
Shareholders who attend shall bear their own traveling and
accommodation expenses.
b. The address of the headquarters of the Company is:
1st Floor, No. 278 Ji Chang Road
Guangzhou 510405, Guangdong Province
People's Republic of China
Telephone No.: (+86) 20-8612 4737
Facsimile No.: (+86) 20-8665 9040
Website: www.cs-air.com
Contact persons: Su Liang and Lei Bin
c. Pursuant to the Article 77 of the Articles of Association of the
Company, at any general meeting of shareholders of the Company, a
resolution shall be decided on a show of hands unless a poll is
(before or after any vote by show of hands) demanded:
i. by the chairman of the meeting;
ii. by at least two shareholders entitled to vote present in person
or by proxy; or
iii. by one or more shareholders present in person or by proxy and
representing 10 per cent or more of all shares carrying the right
to vote at the meeting.
The demand for a poll may be withdrawn by the person who makes such
demand.
5. BRIEF BIOGRAPHY OF MR. SI XIAN MIN
Mr. Si Xian Min, born in November 1957, graduated from No. 14 Aviation
College as an aircraft piloting major with an associate's degree. A professional
political tutor, he began his career in civil aviation in 1975. He has held
positions as Deputy Director and Director of the political division of China
Southern Airlines Henan Branch in 1992-1998 and Party Secretary and Vice
president of Guizhou Airlines in 1998-2000. From 2000 to July 2003, Mr. Si
served as Deputy Party Secretary of China Southern Airlines Company Limited.
From 2002 to July 2003, he served concurrently as Secretary of the Disciplinary
Department of China Southern Airlines Company Limited. He has been Party
Secretary of China Northern Airlines since 2003.
Mr. Si Xian Min has no interests or short positions in the shares,
underlying shares or debentures of the Company or its associated corporations
(within the meaning of Part XV of the Securities and Futures Ordinance) which is
notifiable to the Company and The Stock Exchange of Hong Kong Limited pursuant
to the Securities and Futures Ordinance (including interests or short positions
which are taken or deemed to have under such provisions of the Securities and
Futures Ordinance) or required to be recorded in the register maintained by the
Company pursuant to Section 352 of the Securities and Futures Ordinance or which
is notifiable to the Company and The Stock Exchange of Hong Kong Limited
pursuant to the "Model Code for Securities Transactions by Directors of the
Listed Companies" in Schedule 10 of the Rules Governing the Listing of
Securities on The Stock Exchange of Hong Kong Limited. Further, save as
disclosed, Mr. Si Xian Min is not connected with any directors, senior
management, substantial shareholders or controlling shareholders of the Company.
- 355 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By /s/ Su Liang
-------------------------------------
Name: Su Liang
Title: Company Secretary
Date: November 29, 2004