Annual Results Announcement

Air China Ld 17 March 2008 (a joint stock limited company incorporated in the People's Republic of China with limited liability) (Stock Code: 753) 2007 ANNUAL RESULTS ANNOUNCEMENT GROUP RESULTS The board of directors (the 'Board') of Air China Limited (the 'Company') is pleased to announce the audited consolidated financial results of the Company, its subsidiaries and joint ventures (collectively, the 'Group') for the year ended 31 December 2007 with comparative figures for the corresponding year of 2006 as follows: A. Prepared under International Financial Reporting Standards CONSOLIDATED INCOME STATEMENT 2007 2006 Notes RMB'000 RMB'000 TURNOVER Air traffic revenue 3 47,717,546 41,606,130 Other operating revenue 4 3,612,995 3,330,476 51,330,541 44,936,606 OPERATING EXPENSES Jet fuel costs (17,201,143) (15,716,174) Take-off, landing and depot charges (5,537,907) (5,136,388) Depreciation (5,554,443) ( 5,274,033) Aircraft maintenance, repair and overhaul costs (2,076,119) (1,812,647) Employee compensation costs 5 (5,209,766) (4,313,883) Air catering charges (1,473,543) (1,320,123) Aircraft and engine operating lease expenses (2,239,359) (2,069,639) Other operating lease expenses (311,262) (323,752) Other flight operation expenses (4,232,726) (3,658,986) Selling and marketing expenses (2,708,770) (2,026,728) General and administrative expenses (951,376) (766,549) (47,496,414) (42,418,902) PROFIT FROM OPERATIONS 6 3,834,127 2,517,704 Finance revenue 7 2,376,572 1,177,871 Finance costs 7 (1,969,326) (1,876,487) Gain on disposal of an associate 8 - 1,592,633 Share of profits and losses of associates 1,364,740 517,500 PROFIT BEFORE TAX 5,606,113 3,929,221 Tax (1,484,613) (624,124) PROFIT FOR THE YEAR 4,121,500 3,305,097 2007 2006 Notes RMB'000 RMB'000 Attributable to: Equity holders of the Company 4,228,997 2,687,841 Minority interests (107,497) 617,256 4,121,500 3,305,097 Dividend: Interim - - Proposed final 837,987 602,767 837,987 602,767 Earnings per share attributable to equity holders of the Company: 12 Basic 35.6 cents 26.2 cents Diluted NA NA CONSOLIDATED BALANCE SHEET 2007 2006 RMB'000 RMB'000 NON-CURRENT ASSETS Property, plant and equipment 61,691,673 54,767,664 Lease prepayments 1,046,042 1,013,529 Intangible asset 75,194 - Interests in associates 9,542,677 9,255,474 Advance payments for aircraft and related equipment 7,652,365 6,976,054 Deposits for aircraft under operating leases 257,505 259,681 Long term receivable from ultimate holding company 331,813 431,813 Available-for-sale investments 1,997 6,704 Deferred tax assets 626,645 1,064,157 81,225,911 73,775,076 CURRENT ASSETS Aircraft held for sale 184,728 - Inventories 1,142,050 1,015,266 Accounts receivable 2,794,280 2,835,227 Bills receivable 1,599 - Prepayments, deposits and other receivables 1,318,062 1,077,036 Derivative financial instruments 6,493 99,935 Pledged deposits 118,624 211,504 Cash and cash equivalents 3,906,520 5,159,181 Due from ultimate holding company 335,129 289,933 Due from related companies 22,881 14,378 9,830,366 10,702,460 TOTAL ASSETS 91,056,277 84,477,536 CURRENT LIABILITIES Air traffic liabilities (2,156,104) (1,530,484) Accounts payable (5,930,800) (5,221,061) Bills payable - (651,345) Other payables and accruals (4,350,281) (4,192,887) Derivative financial instruments (14,826) (242,108) Tax payable (1,111,404) (534,273) Obligations under finance leases (2,216,680) (2,354,905) Bank and other loans (10,978,835) (11,139,021) Provision for major overhauls (83,907) (47,318) Due to related companies (45,142) (39,989) (26,887,979) (25,953,391) NET CURRENT LIABILITIES (17,057,613) (15,250,931) TOTAL ASSETS LESS CURRENT LIABILITIES 64,168,298 58,524,145 NON-CURRENT LIABILITIES Obligations under finance leases (13,328,193) (11,247,855) Bank loans, other loans and corporate bonds (16,615,291) (12,701,977) Provision for major overhauls (1,190,415) (921,929) Provision for early retirement benefits obligations (164,837) (201,199) Long term payables (190,005) (252,591) Deferred income (872,023) ( 948,966) Deferred tax liabilities (300,181) (513,935) (32,660,945) (26,788,452) NET ASSETS 31,507,353 31,735,693 2007 2006 RMB'000 RMB'000 EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Issued share capital 12,251,362 12,251,362 Treasury shares (1,283,492) (1,246,955) Reserves 19,551,280 18,117,084 Proposed final dividend 837,987 602,767 31,357,137 29,724,258 MINORITY INTERESTS 150,216 2,011,435 TOTAL EQUITY 31,507,353 31,735,693 Notes: 1 Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRSs', which comprise standards and interpretations approved by the International Accounting Standards Board, and International Accounting Standards ('IAS') and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee that remain in effect) and the disclosure requirements of the Hong Kong Companies Ordinance. These financial statements are presented in Renminbi ('RMB') and all values are rounded to the nearest thousand (RMB'000) except when otherwise indicated. These financial statements have been prepared on a historical cost basis, except for derivative financial instruments which have been measured at fair value and aircraft held for sale which have been stated at the lower of their carrying amounts and fair values less costs to sell. Impact of New and Revised IFRSs The Group has adopted the following new and revised IFRSs for the first time for the current year's financial statements. Except for in certain cases, giving rise to new and revised accounting policies and additional disclosures, the adoption of these new and revised standards and interpretations has had no material effect on these financial statements. IFRS 7 Financial Instruments: Disclosures IAS 1 Amendment Capital Disclosures IFRIC-Int 8 Scope of IFRS 2 IFRIC-Int 9 Reassessment of Embedded Derivatives IFRIC-Int 10 Interim Financial Reporting and Impairment (a) IFRS 7 Financial Instruments: Disclosures This standard requires disclosures that enable users of the financial statements to evaluate the significance of the Group's financial instruments and the nature and extent of risks arising from those financial instruments. The new disclosures are included throughout the financial statements. While there has been no effect on the financial position or results of operations of the Group, comparative information has been included where appropriate. (b) Amendment to IAS 1 Presentation of Financial Statements - Capital Disclosures This amendment requires the Group to make disclosures that enable users of the financial statements to evaluate the Group's objectives, policies and procedures for managing capital. (c) IAS 27 Consolidated and Separate Financial Statements This interpretation requires IFRS2 to be applied to any arrangement in which the Group cannot identify specifically some or all of the goods or services received, for which equity instruments are granted or liabilities (based on a value of the Company's equity instruments) are incurred by the Group for a consideration, and which appears to be less than the fair value of the equity instruments granted or liabilities incurred. As the Company has not issued any equity instruments to its employees and only incurred liabilities to its employees for identified services provided in accordance with its share appreciation right arrangement, the interpretation has had no effect on these financial statements. (d) IFRIC-Int 9 Reassessment of Embedded Derivatives This interpretation requires that the date to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative is the date that the Group first becomes a party to the contract, with reassessment only if there is a change to the contract that significantly modifies the cash flows. As the Group has no embedded derivative requiring separation from the host contract, the interpretation has had no impact on the financial position or results of operations of the Group. (e) IFRIC-Int 10 Interim Financial Reporting and Impairment The Group has adopted IFRIC Interpretation 10 as at 1 January 2007, which requires that an impairment loss recognised in a previous interim period in respect of goodwill or an investment in either an equity instrument classified as available-for-sale or a financial asset carried at cost is not subsequently reversed. As the Group had no impairment losses previously reversed in respect of such assets, the interpretation has had no impact on the financial position or results of operations of the Group Impact of Issued but not yet Effective IFRSs The Group has not applied the following new and revised IFRSs, which have been issued but are not yet effective, in these financial statements: IFRS 8 Operating Segments IFRS 2 Share-based Payments - Vesting Conditions and Cancellations IFRS 3 (Revised) Business Combinations IAS 23 (Revised) Borrowing Costs IAS 27 (Revised) Consolidated and Separate Financial Statements IAS 1 (Revised) Presentation of Financial Statements IAS 32 (Amendment) Puttable Financial Instruments IAS 1 (Amendment) Puttable Financial Instruments IFRIC-Int 11 IFRS 2: Group and Treasury Share Transactions IFRIC-Int 12 Service Concession Arrangements IFRIC-Int 13 Customer Loyalty Programmes IFRIC-Int 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (a) IFRS 8 Operating Segments This standard will become effective for annual periods beginning on or after 1 January 2009. The standard specifies how an entity should report information about its operating segments, based on information about the components of the entity that is available to the chief operating decision maker for the purpose of allocating resources to the segments and assessing their performance. The standard also requires the disclosure of information about the products and services provided by the segments, the geographical areas in which the Group operates, and revenue from the Group's major customers. The Group expects to adopt IFRS 8 from 1 January 2009. (b) IFRS 2 Share-based Payments - Vesting Conditions and Cancellations This amendment to IFRS 2 Share-based payments was published in January 2008 and becomes effective for financial years beginning on or after 1 January 2009. The standard restricts the definition of 'vesting condition' to a condition that includes an explicit or implicit requirement to provide services. Any other conditions are non-vesting conditions, which have to be taken into account to determine the fair value of the equity instruments granted. In the case that such award does not vest as the result of a failure to meet a non-vesting condition that is within the control of either the entity or the counterparty, this must be accounted for as a cancellation. The Group has not entered into shared-based payment schemes with non-vesting conditions attached and, therefore, does not expect significant implications on its accounting for share-based payments. (c) IFRS 3 Business Combinations The revised standards were issued in January 2008 and become effective for financial years beginning on or after 1 July 2009. IFRS 3 introduces a number of changes in the accounting for business combinations that will impact the amount of goodwill recognised., the reported results in the period that an acquisition occurs, and future reported results. The changes introduced by IFRS 3 must be applied prospectively and will affect future acquisitions and transactions with minority interest. (d) IAS 23 Borrowing Costs The revised standard will become effective for annual periods beginning on or after 1 January 2009 and requires capitalisation of borrowing costs when such costs are directly attributable to the acquisition, construction or production of a qualifying asset. As the Group's current policy for borrowing cost aligns with the requirement of the revised standard, the revised standard is unlikely to have any financial impact on the Group. (e) IAS 27 Consolidated and Separate Financial Statements IAS 27 requires that a change in the ownership interest of a subsidiary is accounted for as an equity transaction. Therefore, such a change will have no impact on goodwill, nor will it give raise to a gain or loss. Further more, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes introduced by IAS 27 must be applied prospectively and will affect future acquisitions and transactions with minority interest. (f) IAS 1 Presentation of Financial Statements The revised IFAS 1 Presentation of Financial Statements was issued in September 2007 and becomes effective for financial years beginning or after 1 January 2009. The Standard separates owners and non-owner changes in equity. The statement of changes in equity will include only details of transactions with owners, with all non-owner changes in equity presented as a single line. In addition, the Standard introduces the statement of comprehensive income: it presents all items of income and expense recognized in profit or loss, together with all other items of recognized income and expenses, either in one single statement, or in two linked statements. The Group is still evaluating whether it will have one or two statements. (g) IAS 32 Puttable Financial Instruments Amendment to IAS 32 were issued in February 2008 and become effective for annual periods beginning or after 1 January 2009. The amendment to IAS 32 requires certain puttable financial instruments and obligations arising on liquidation to be classified as equity if certain criteria are met. The Group does not expect these amendments to impact the financial statements of the Group. (h) IAS 1 Puttable Financial Instruments Amendment to IAS 1 were issued in February 2008 and become effective for annual periods beginning or after 1 January 2009. The amendment to IAS 1 requires disclosure of certain information relating to puttable instruments classified as equity. The Group does not expect these amendments to impact the financial statements of the Group. (i) IFRIC-Int 11: IFRS 2 Group and Treasury Share Transactions This interpretation will become effective for annual periods beginning on or after 1 March 2007. This interpretation requires arrangements whereby an employee is granted rights to the Group's equity instruments, to be accounted for as an equity-settled scheme, even if the Group acquires the instruments from another party, or the shareholders provide the equity instruments needed. The interpretation also addresses the accounting for share-based payment transactions involving two or more entities within the Group. As the Group currently has no such transactions, the interpretation is unlikely to have any financial impact on the Group. (j) IFRIC-Int 12 Service Concession Arrangements This interpretation will become effective for annual periods beginning on or after 1 January 2008. The interpretation requires an operator under public-to-private service concession arrangements to recognise the consideration received or receivables in exchange for the construction services as a financial asset and/or an intangible asset, based on the terms of the contractual arrangements. The interpretation also address how an operator shall apply existing IFRSs to account for the obligations and the rights arising from service concession arrangements by which a government or a public sector entity grants a contract for the construction of infrastructure used to provide public services and/or for the supply of public service. As the Group currently has no such arrangements, the interpretation is unlikely to have any financial impact on the Group. (k) IFRIC-Int 13 Customer Loyalty Programmes This interpretation will become effective for annual periods beginning on or after 1 July 2008. This interpretation requires that the loyalty award credits granted to customers as part of a sales transaction are accounted for as a separate component of the sales transaction. The consideration received in the sales transaction is allocated between the loyalty award credits and the other components of the sale. The amount allocated to the loyalty award credits is determined by reference to their fair value and is deferred until the awards are redeemed or the liability is otherwise extinguished. (l) IFRIC-Int 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction This interpretation will become effective for annual periods beginning on or after 1 January 2008. This Interpretation provides guidance on how to assess the limit under IAS 19 Employee Benefits, on the amount of a refund or a reduction in future contributions in relation to a defined benefit scheme that can be recognised as an asset, in particular, when a minimum funding requirement exists. The Group is in the process of making an assessment of the impact if applicable, of these new and revised IFRSs upon initial application. So far, it has concluded that while the adoption of IFRS8 may result in new or amended disclosure and the adoption of IFRIC-Int 13 may result in a change in amounting policy,these new and revised IFRSs are unlikely to have a significant impact on the Group's results of operations and financial position. 2 Business segments The following tables present revenue, profit and certain asset, liability and expenditure information for the Group's business segments for the years ended 31 December 2007 and 2006: Year ended 31 December 2007 Airport Airline Engineering terminal operations services services Others Eliminations Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 REVENUE Sales to external 50,028,849 487,710 509,450 304,532 - 51,330,541 customers Intersegment sales - 674,123 - 190,758 (864,881) - Total revenue 50,028,849 1,161,833 509,450 495,290 (864,881) 51,330,541 PROFIT FROM OPERATIONS Segment results 3,695,437 686,601 111,793 205,177 (864,881) 3,834,127 Finance revenue 2,328,035 21,791 - 26,746 - 2,376,572 Finance costs (1,954,476) (13,400) - (1,450) - (1,969,326) Share of profits and 1,214,190 5,189 117,808 27,553 1,364,740 losses of associates Profit before tax 5,283,186 700,181 229,601 258,026 (864,881) 5,606,113 Tax (1,484,613) Minority interests 107,497 Profit attributable to equity holders of the Company 4,228,997 ASSETS Segment assets 79,308,581 1,441,639 371,119 1,096,601 (1,330,985) 80,886,955 Interests in associates 9,013,689 153,911 119,317 255,760 - 9,542,677 Unallocated assets 626,645 Total assets 91,056,277 LIABILITIES Segment liabilities (57,441,708) (827,806) (608,978) (890,013) 1,330,985 (58,437,520) Unallocated liabilities (1,111,404) Total liabilities (59,548,924) OTHER SEGMENT INFORMATION Capital expenditure (including additions to property, plant and equipment and advance payments for aircraft, and 20,591,633 215,990 134,954 3,852 - 20,946,429 related equipment) Depreciation of property, plant and equipment 5,447,151 38,594 66,324 2,374 - 5,554,443 Amortisation of lease 22,478 - - - - 22,478 prepayments Impairment loss on 142,800 - - - - 142,800 aircraft held for sale Impairment loss on available-for-sale investments - - - 4,481 - 4,481 Decrease in fair value of derivative financial instruments 133,840 - - - - 133,840 Reversal of impairment (435) (884) - (92) - (1,411) for doubtful debts Recognition of deferred 76,943 - - - - 76,943 income Year ended 31 December 2006 Airport Airline Engineering terminal operations services services Others Eliminations Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 REVENUE Sales to external 43,708,683 481,021 496,741 250,161 - 44,936,606 customers Intersegment sales - 620,302 - 186,000 (806,302) - Total revenue 43,708,683 1,101,323 496,741 436,161 (806,302) 44,936,606 PROFIT FROM OPERATIONS Segment results 2,281,754 655,137 175,445 211,670 (806,302) 2,517,704 Finance revenue 1,161,287 9,456 - 7,128 - 1,177,871 Finance costs (1,863,002) (11,606) - (1,879) - (1,876,487) Gain on disposal of an 1,592,633 - - - - 1,592,633 associate Share of profits and 365,639 4,797 135,169 11,895 - 517,500 losses of associates Profit before tax 3,538,311 657,784 310,614 228,814 (806,302) 3,929,221 Tax (624,124) Minority interests (617,256) Profit attributable to equity holders of the Company 2,687,841 ASSETS Segment assets 72,975,757 1,239,259 306,758 1,182,531 (1,546,400) 74,157,905 Interests in associates 8,663,367 112,336 170,115 309,656 - 9,255,474 Unallocated assets 1,064,157 Total assets 84,477,536 LIABILITIES Segment liabilities (51,130,149) (639,936) (475,015) (994,935) 1,546,400 (51,693,635) Unallocated liabilities (1,048,208) Total liabilities (52,741,843) OTHER SEGMENT INFORMATION Capital expenditure (including additions to property, plant and equipment and advance payments for aircraft, and 16,440,786 89,754 27,521 28,191 - 16,586,252 related equipment) Depreciation of property, plant and equipment 5,168,367 41,834 56,088 7,744 - 5,274,033 Amortisation of lease 21,495 - - - - 21,495 prepayments Impairment loss on available-for-sale investments - - - 15,562 - 15,562 Decrease in fair value of derivative financial instruments 268,041 - - - - 268,041 Impairment/(reversal of impairment) for doubtful debts 3,536 (3,579) - (1,859) - (1,902) Recognition of deferred 76,943 - - - - 76,943 income Geographical segments The following tables present the Group's consolidated revenue by geographical segment for the years ended 31 December 2007 and 2006: Year ended 31 December 2007 Asia Mainland Hong Kong North Japan and Pacific China and Macau Europe America Korea and Total others RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Sales to external customers and total revenue 27,702,479 2,848,675 7,616,370 4,678,276 4,475,578 4,009,163 51,330,541 Year ended 31 December 2006 Mainland Hong Kong North Japan and Pacific China and Macau Europe America Korea and Total others RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Sales to external customers and total revenue 23,868,328 2,770,579 6,203,536 3,806,678 4,256,753 4,030,732 44,936,606 3 AIR TRAFFIC REVENUE Air traffic revenue comprises revenue from the airline operations business and is stated net of business tax. An analysis of the Group's air traffic revenue during the year is as follows: Group 2007 2006 RMB'000 RMB'000 Passenger 43,632,090 37,564,903 Cargo and mail 4,085,456 4,041,227 47,717,546 41,606,130 Pursuant to the relevant PRC business tax rules and regulations, air traffic revenue for all domestic and outbound international flights is subject to business tax at a rate of 3%. All inbound international, Hong Kong and Macau regional flights are exempted from business tax. Business tax incurred and set off against air traffic revenue for the years ended 31 December 2007 amounted to approximately RMB1,224 million (2006: RMB1,039 million). 4 OTHER OPERATING REVENUE Group 2007 2006 RMB'000 RMB'000 Bellyhold income from a joint venture 1,579,185 1,518,925 Aircraft engineering income 487,710 481,021 Ground service income 509,450 496,741 Air catering income 162,886 136,581 Government grants: Recognition of deferred income 76,943 76,943 Others 131,136 124,420 Service charges on return of unused flight tickets 152,107 110,825 Cargo handling service income 62,466 63,938 Sale of materials 12,648 15,055 Import and export service income 7,850 10,676 Training service income 20,837 17,839 Aircraft and related equipment lease income 12,688 1,323 Gain on disposal of property, plant and equipment, 165,311 17,353 net Others 231,778 258,836 3,612,995 3,330,476 5 EMPLOYEE COMPENSATION COSTS An analysis of the Group's employee compensation costs, including the emoluments of Directors and Supervisors, is as follows: Group 2007 2006 RMB'000 RMB'000 Wages, salaries and social security costs 4,817,539 4,037,553 Retirement benefit costs 368,241 276,330 Share-based benefits 23,986 - 5,209,766 4,313,883 6 PROFIT FROM OPERATIONS The Group's profit from operations is arrived at after charging/(crediting): Group 2007 2006 RMB'000 RMB'000 Auditors' remuneration 14,261 10,658 Depreciation 5,554,443 5,274,033 Gain on disposal of property, plant and (165,311) (17,353) equipment, net Loss on derecognition of property, plant and 37,138 70,206 equipment Amortisation of lease prepayments 22,478 21,495 Minimum lease payments under operating leases: Aircraft and engines 2,239,359 2,069,639 Land, buildings and others 311,262 323,752 Impairment loss on available-for-sale investments 4,481 15,562 Impairment loss on aircraft held for sale 142,800 - Reversal of impairment for doubtful debts (1,411) (1,902) 7 FINANCE REVENUE AND FINANCE COSTS An analysis of the Group's finance revenue and finance costs during the year is as follows: Finance revenue Group 2007 2006 RMB'000 RMB'000 Exchange gains, net 2,030,391 983,692 Interest income 110,013 80,689 Gains on fuel derivatives, net 235,944 113,225 Dividend income from available-for-sale 224 265 investments 2,376,572 1,177,871 Finance costs Group 2007 2006 RMB'000 RMB'000 Interest on bank loans, other loans and corporate 1,572,793 1,380,781 bonds Interest on finance leases 650,613 601,153 Total interest 2,223,406 1,981,934 Less: Interest capitalised (254,080) (105,447) 1,969,326 1,876,487 The interest capitalisation rates ranging from 4.5% to 5.9% (2006: 4.5% to 6.0%) per annum represent the cost of related borrowings during the year. 8 GAIN ON DISPOSAL OF AN ASSOCIATE The gain on disposal of an associate in 2006 relates to the sale of the Group's equity interest in Dragonair to Cathay. 9 TAX According to the PRC Enterprise Income Tax Law ('Old CIT Law'), the Company, its subsidiaries, joint ventures and associates established in the PRC are subject to enterprise income tax at rates ranging from 12% to 33% (2006: 12% to 33%) on their taxable income. Hong Kong profits tax has been provided at a rate of 17.5% (2006: 17.5%) on the estimated assessable profits arising in Hong Kong during the year. In accordance with the Old CIT Law and an approval document issued by the relevant tax bureau on 28 November 2005 (the 'Approval Document'), Air China Cargo Co., Ltd ('Air China Cargo') was subject to a state enterprise income tax rate of 24% and was fully exempted from state enterprise income tax for the year ended 31 December 2005, followed by a 3-year 50% reduction in state enterprise income tax during the period between 1 January 2006 and 31 December 2008. In addition, pursuant to the Approval Document, Air China Cargo has been granted a 4-year local enterprise income tax exemption during the period between 1 January 2005 and 31 December 2008, followed by a 5-year 50% reduction in local enterprise income tax during the period between 1 January 2009 and 31 December 2013. During the 5th Session of the 10th National People's Congress, which was concluded on 16 March 2007, the People's Republic of China Corporate Income Tax Law (the 'New CIT Law') was approved and became effective on 1 January 2008. The New CIT Law introduces a wide range of changes which include, but are not limited to, the unification of the corporate income tax rate for both domestic enterprises and foreign-invested enterprises as 25%. The New CIT Law also lays down principles for transitional arrangements relating to tax incentive (reduced tax and tax holidays) enjoyed by enterprises under the Old CIT Law. Therefore, deferred income tax assets and liabilities of the Group are measured at the 25% tax rate or other applicable tax rates that are expected to apply to the annual periods beginning on or after 1 January 2008 when the deferred tax asset is realised or the deferred tax liability is settled. The determination of current and deferred income tax was based on enacted tax rates. Major components of income tax charge are as follows: Group 2007 2006 RMB'000 RMB'000 Current income tax - Mainland China 1,260,855 675,975 Deferred income tax - origination and reversal of temporary differences 223,758 (51,851) Income tax charge for the year 1,484,613 624,124 The share of tax attributable to associates amounting to RMB193,915,329 (2006: RMB113,577,000) is included in the 'Share of profit and losses of associates' on the face of the consolidated income statement. A reconciliation of income tax expense applicable to profit before tax at the statutory income tax rates in Mainland China to income tax expense at the Group's effective income tax rate, and a reconciliation of the applicable rate (i.e., the statutory tax rate) to the effective tax rate are as follows: Group 2007 2006 RMB'000 % RMB'000 % Profit before tax 5,606,113 3,929,221 At statutory income tax rate of 33% 1,850,017 33.0 1,296,643 33.0 Tax effect of share of profits and losses of associates, net (450,364) (8.0) (170,775) (4.3) Lower income tax rates of other territories 54,074 0.9 (20,718) (0.5) Income not subject to tax (27,716) (0.5) (614,323) (15.6) Expenses not deductible for tax purposes (27,247) (0.5) 125,004 3.2 Tax losses not recognised 8,844 0.2 8,293 0.2 Effect on opening deferred income tax due to a decrease in income tax rates 77,005 1.4 - - At the Group's effective income tax rate 1,484,613 26.5 624,124 16.0 As at 31 December 2007, there was no significant unrecognised deferred tax liability (2006: Nil) for taxes that would be payable on the unremitted earnings of certain of the Group's subsidiaries and joint ventures as the Directors of the Company have no intention to request remittance of any significant amount of earnings to the Company in the foreseeable future. There are no income tax consequences attaching to the payment of dividends by the Company to its shareholders. 10 PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY The consolidated profit attributable to the equity holders of the Company for the year ended 31 December 2007 includes a profit of approximately RMB3,097 million (2006: RMB1,226 million), which was arrived at after deducting dividend income received from subsidiaries, joint ventures and associates aggregating approximately RMB91 million (2006: RMB39 million) from the Company's profit of approximately RMB3,188 million (2006: RMB1,265 million) that has been dealt with in the financial statements of the Company. 11 APPROPRIATIONS Group 2007 2006 RMB'000 RMB'000 Proposed final dividend - RMB0.684 (2006: RMB0.492) per 10 shares 837,987 602,767 (a) The proposed final dividend of RMB0.684 (2006: RMB0.492) per 10 shares for the year is subject to the approval of the Company's shareholders at the forthcoming annual general meeting. Cash dividends to shareholders in Hong Kong will be paid in Hong Kong dollars. (b) Under the PRC Company Law and the Company's articles of association, profit after tax as reported in the PRC statutory financial statements can only be distributed as dividends after allowance has been made for the following: (i) Making up prior years' cumulative losses, if any; (ii) Allocations to the statutory common reserve fund of at least 10% of after-tax profit, until the fund aggregates 50% of the Company's registered capital. For the purpose of calculating the transfer to reserves, the profit after tax shall be the amount determined under China Accounting Standards ('CAS'). The transfer to this reserve must be made before any distribution of dividends to shareholders. The statutory common reserve fund can be used to offset previous years' losses, if any, and part of the statutory common reserve fund can be capitalised as the Company's share capital provided that the amount of such reserve remaining after the capitalisation shall not be less than 25% of the share capital of the Company; (iii) Allocations to the discretionary common reserve if approved by the shareholders. The above reserves cannot be used for purposes other than those for which they are created and are not distributable as cash dividends. In accordance with the articles of association of the Company, the profit after tax of the Company for the purpose of dividends payment is based on the lesser of (i) the profit determined in accordance with CAS; and (ii) the profit determined in accordance with IFRSs. 12 EARNINGS PER SHARE ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY The calculation of basic earnings per share for the year ended 31 December 2007 is based on the profit attributable to equity holders of the Company for the year ended 31 December 2007 of approximately RMB4,229 million, and the weighted average number of 11,878,992,909 ordinary shares in issue during the year, as adjusted to reffect the weighted average number of treasure shares held by Cathay Pacific Airways Limited ('Cathay') through reciprocal shareholding. The calculation of basic earnings per share for the year ended 31 December 2006 was based on the profit attributable to equity holders of the Company for the year ended 31 December 2006 of approximately RMB2,688 million, and the weighted average number of 10,256,259,792 ordinary shares in issue during the year, as adjusted to reflect the weighted average number of treasury shares held by Cathay through reciprocal shareholding. Diluted earnings per share for the years ended 31 December 2007 and 2006 have not been disclosed because no diluting events existed during these years. B. Prepared in accordance with China Accounting Standards ('CAS') 2007 As 2006 (Restated) Revenue from operations 49,738,921 43,410,605 Less: Costs of operations 40,307,624 36,727,352 Business taxes and surcharges 1,205,082 1,005,817 Selling expenses 3,290,959 2,540,147 General and administrative expenses 1,311,598 1,254,505 Finance costs (52,619) 876,888 Impairment losses in assets 52,821 19,457 Add: Gains/(loss)from changes in fair value 133,840 (268,041) Investment income 1,235,655 3,525,557 Including: Share of profits and losses of associates and joint ventures 1,131,024 590,908 Profit from operations 4,992,951 4,243,955 Add: Non-operating income 333,608 161,840 Less: Non-operating expenses 123,424 87,192 Including: Loss on disposal of non-current 45,212 29,129 assets Profit before tax 5,203,135 4,318,603 Less: Tax 1,429,284 364,253 Net profit 3,773,851 3,954,350 Attributable to: Equity holders of the Company 3,881,348 2,977,195 Minority interests (107,497) 977,155 Earnings per share (RMB): (I) Basic 0.3267 0.2903 (II) Diluted N/A N/A 31 December, 31 December, ASSETS 2007 2006 (Restated) CURRENT ASSETS: Cash and bank balances 3,787,152 4,982,844 Financial assets held for trading 6,493 99,935 Bills receivable 1,599 - Accounts receivable 2,812,327 2,662,281 Other receivables 997,205 847,272 Prepayments 311,784 298,704 Inventories 755,340 704,367 Total current assets 8,671,900 9,595,403 NON-CURRENT ASSETS: Long term receivables 255,340 293,160 Long term equity investments 11,404,643 11,387,551 Fixed assets 55,000,376 49,243,169 Construction-in-progress 10,967,888 9,309,266 Intangible assets 1,396,620 1,291,905 Goodwill 131,945 131,945 Deferred tax assets 385,843 578,625 Long-term deferred expenses 80,684 67,931 Total non-current assets 79,623,339 72,303,552 Total assets 88,295,239 81,898,955 31 December, 31 December, 2007 2006 (As restated) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term loans 6,546,088 8,016,656 Financial liabilities held for trading 14,826 242,108 Bills payable - 610,545 Accounts payable 6,338,341 5,869,229 Domestic air traffic liabilities 437,473 383,851 International air traffic liabilities 1,702,490 1,147,204 Receipts in advance 53,778 14,770 Employee compensations 254,073 193,641 Taxes payable 1,906,067 1,700,858 Interest payable 273,824 177,946 Other payables 2,221,096 1,648,457 Non-current liabilities repayable within one year 6,344,212 5,205,258 Total current liabilities 26,092,268 25,210,523 NON-CURRENT LIABILITIES: Long-term loans 12,938,092 9,130,330 Corporate bonds 3,000,000 3,000,000 Long-term payables 1,301,844 1,140,234 Obligations under finance leases 13,328,193 11,247,855 Provisions 191,533 149,021 Deferred tax liabilities 5,000 7,000 Total non-current liabilities 30,764,662 24,674,440 Total liabilities 56,856,930 49,884,963 SHAREHOLDERS' EQUITY Share capital 12,251,362 12,251,362 Capital reserve 11,852,408 13,044,987 Reserve fund 1,299,214 716,612 Retained earnings 6,888,843 4,192,864 Including: Discretionary reserve fund proposed by Board of Directors 264,700 317,902 Dividend proposed by Board of Directors 837,987 602,767 Foreign exchange translation reserve (1,003,732) (203,151) Equity attributable to equity holders of the Company 31,288,095 30,002,674 Minority interests 150,214 2,011,318 Total shareholders' equity 31,438,309 32,013,992 Total liabilities and shareholders' equity 88,295,239 81,898,955 C. Effects of significant differences between IFRS and CAS The consolidated income statement and consolidated balance sheet set out in Section A were prepared in accordance with IFRS. The significant differences between the consolidated financial statement prepared under CAS and the consolidated financial statement prepared under IFRS of the Group are as follows: 2007 2006 RMB'000 RMB'000 (Restated) Net profit under CAS 3,881,348 2,977,195 Deferred taxes (40,916) (232,066) Additional depreciation from restatement of costs of fixed assets (149,060) (159,746) Reversal of depreciation and amortisation arising on revaluation 446,936 490,369 Government grant 16,900 (10,987) Effect of component accounting 57,635 234,344 Gain on disposal of an associate - (627,761) Others 16,154 16,493 Profit attributable to equity holders of the Company under IFRS 4,228,997 2,687,841 2007 2006 RMB'000 RMB'000 Shareholders' equity under CAS 31,288,095 30,002,674 Deferred taxes (62,319) (21,403) Restatement of costs of fixed assets 743,768 892,828 Reversal of revaluation surplus (972,848) (1,419,784) Government grant (410,242) (427,142) Effect of component accounting 603,038 545,403 Gain on disposal of an associate 139,919 139,919 Others 27,726 11,763 Equity interest attributable to equtiy holders of the Company under IFRS 31,357,137 29,724,258 2007 REVIEW In 2007, China's economy continued to maintain the trend of a rapid but steady growth and the market demand for air transportation remained robust. The Company has, while ensuring its flight safety, improved the service quality and realized the steady growth through economies of scale and a stable increase of the relevant profits as well. In December 2007, the Company was formally admitted to the Star Alliance, the largest alliance in the world, and thereafter the route network coverage of the Star Alliance extended to 155 countries and regions and 895 destinations. By taking the advantages of its admission to the alliance, the Company is able to fully explore its geographical market. In 2007, the Company was enlisted in the 'World's Top Five Hundred Brands' and the '2007 Top 20 Most Competitive Chinese Companies in the World', and was ranked No.27 in the 'Top 500 Most Valuable Chinese Brands'. The Company's brand value was further enhanced. 1. Business review of passenger service operation In 2007, the Company's passenger traffic reached 67,000 million RPKs, representing an increase of 11.10% from 2006. Passenger traffic from international routes, Mainland China routes and Hong Kong and Macau routes increased by 12.10%, 10.80% and 2.70% respectively. The higher growth in international routes compared with Mainland China and Hong Kong and Macau routes reflected the robust growth potential of the international aviation markets. The number of passengers carried was increased by 10.60% from 2006 to 34.841 million with an average passenger load factor of 78.60%, representing an increase of 2.6 percentage points from 2006. The available seat kilometres of the Company was increased by 7.30% from 2006 to 85,270 million kilometers. The revenue per RPK was increased by 5.08% from 2006 to RMB0.62. Air Macau Company Limited ('Air Macau'): For 2007, while the available seat kilometres reached 3,964 million representing a decrease of 2.14% from 2006, passenger traffic decreased by 0.43% from 2006 to 3,026 million RPKs, and the number of passengers carried decreased by 2.10% from 2006 to 2.415 million. Passenger load factor for 2007 was 76.35%, representing an increase of 1.3 percentage points from 2006. 2. Business review of cargo service operation In 2007, the cargo and mail traffic of the Company's joint venture Air China Cargo Co., Ltd ('Air China Cargo') and the bellyhold space of the Company's passenger aircraft increased by 12.30% from 2006 to 3,690 million RFTKs. Cargo and mail carried increased by 10.60% from 2006 to 934,000 tonnes while cargo and mail load factor increased by 2.1 percentage points from 2006 to 55.80%. The available freight tonne kilometres increased by 8.20% from 2006 to 6,620 million, and cargo yield per tonne kilometer decreased by 7.20% from 2006 to RMB1.80. Air Macau: For 2007, while the available fright tonne kilometres reached 249 million representing a decrease of 13.30% from 2006, turnover volume of cargo and mail decreased by 3.75% from 2006 to 185 million RFTKs, and cargo and mail carried decreased by 2.81% from 2006 to 169,800. Fright and mail load factor for 2007 was 74.31%, representing an increase of 7.4 percentage points from 2006. 3. Business review of the Company's investment in airlines (1) Shandong Airlines Company Limited ('Shandong Airlines') The Company holds 22.8% of the share capital of Shandong Airlines, and 49.4% of the share capital of Shandong Aviation Group Corporation, which in turn holds 42% of the share capital of Shandong Airlines. During 2007, the total traffic turnover of Shandong Airlines increased by 9.10% from 2006 to 600 million tonne kilometres, while passengers carried increased by 6.40% from 2006 to 5.36 million. (2) Shenzhen Airlines Company Limited ('Shenzhen Airlines') The Company holds 25% of the share capital of Shenzhen Airlines. During 2007, the total traffic turnover of Shenzhen Airlines increased by 34% from 2006 to 1.42 billion tonne kilometers, while passengers carried increased by 33.70% from 2006 to 9.52 million. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS The following discussion and analysis are based on the Group's consolidated financial statements prepared in accordance with International Financial Reporting Standards ('IFRS'), and are designed to assist the readers in understanding the information provided in this report further so as to fully comprehend the financial performance of the Group as a whole. ANALYSIS OF THE PROFITABILITY In 2007, the profit before tax realized by the Group was RMB5.606 billion, representing an increase of RMB1.677 billion or 42.68%, in which the Group's profit from operations was RMB3.834 billion, representing an increase of RMB1.316 billion or 52.29% compared with 2006, and the net exchange gains was RMB2.030 billion, representing an increase of RMB1.046 billion or 106.41%, and the share of profits of associates was RMB 1.365 billion, representing an increase of RMB847 million or 163.72% as compared with 2006. The profit structure of the Group was further improved. The pie chart below shows the profit before tax of the Group: The bar charts below show the change in profit from operations, profit attributable to equity holders of the parent company and earnings per share: TURNOVER In 2007, the Group's total turnover was RMB51.330 billion, representing a 14.23% growth over 2006. REVENUE CONTRIBUTION BY GEOGRAPHICAL SEGMENT (in RMB'000) 2007 2006 Change Amount percentage Amount percentage Mainland China 27,702,479 53.97% 23,868,328 53.12% 16.06% Hong Kong and Macau 2,848,675 5.55% 2,770,579 6.17% 2.82% Europe 7,616,370 14.84% 6,203,536 13.81% 22.77% North America 4,678,276 9.11% 3,806,678 8.47% 22.90% Japan and Korea 4,475,578 8.72% 4,256,753 9.47% 5.14% Other Asia Pacific 4,009,163 7.81% 4,030,732 8.97% -0.54% regions Total 51,330,541 100% 44,936,606 100% 14.23% REVENUE CONTRIBUTION BY BUSINESS SEGMENT (in RMB'000) 2007 2006 Change Amount percentage Amount percentage Air passenger 43,632,090 85.00% 37,564,903 83.60% 16.15% Air cargo 4,085,456 7.96% 4,041,227 8.99% 1.09% Engineering services 487,710 0.95% 481,021 1.07% 1.39% Airport terminal services 509,450 0.99% 496,741 1.11% 2.56% Others 2,615,835 5.10% 2,352,714 5.24% 11.18% Total 51,330,541 100% 44,936,606 100% 14.23% AIR PASSENGER REVENUE In 2007, the Group's air passenger revenue was RMB43.632 billion, representing an increase of RMB6.067 billion or 16.15% as compared with 2006, which was mainly affected by factors in respect of the increase in traffic capacity, passenger load factor and revenue per seat kilometer as follows: 2007 2006 Change Available seat kilometres (million) 89,233.74 83,492.25 6.88% Passenger load factor (%) 78.47 75.89 2.59% Passenger yield per kilometre (RMB) 0.62 0.59 5.08% As compared with those factors attributable to the revenue growth in 2006, the increase in traffic capacity, passenger load factor and revenue level contributed to an increase of revenue of RMB2.583 billion, RMB1.368 billion and RMB2.116 billion in 2007 respectively. Air Passenger revenue contributed by geographical segment (in RMB'000) 2007 2006 Change Amount percentage Amount percentage Mainland China 23,486,436 53.83% 20,051,081 53.38% 17.13% Hong Kong and Macau 2,288,552 5.25% 2,239,280 5.96% 2.20% Europe 6,437,813 14.75% 5,145,804 13.70% 25.11% North America 3,680,386 8.44% 2,785,877 7.42% 32.11% Japan and Korea 4,173,935 9.57% 3,890,891 10.36% 7.27% Other Asia Pacific 3,564,968 8.16% 3,451,970 9.18% 3.27% regions Total 43,632,090 100% 37,564,903 100% 16.15% SIGNIFICANT REVENUE GROWTH CONTRIBUTED BY EUROPE AND US ROUTES The Company increased its efforts in developing the air passenger markets in Europe and the US in 2007. By targeting at the right markets and initiating the appropriate marketing strategies together with deploying the proper aircraft models, business from the overall Europe and US regions became profitable during the year. At the same time, there was also an improvement in the operating performance of the large-capacity aircraft serving long-haul routes. AIR CARGO REVENUE In 2007, the Group's air cargo and mail revenue was RMB4.085 billion, representing an increase of RMB44 million or 1.09% compared with 2006. 2007 2006 Change Available freight tonne kilometres (million) 6,868.1 6,404.4 7.24% Load factor (%) 56.43 54.30 2.13% Cargo yield per tonne kilometre (RMB) 1.98 2.16 -8.33% Air cargo revenue contributed by geographical segment (in RMB'000) 2007 2006 Change Amount percentage Amount percentage Mainland China 603,048 14.76% 486,771 12.05% 23.89% Hong Kong and Macau 560,123 13.71% 531,299 13.15% 5.43% Europe 1,178,557 28.85% 1,057,732 26.17% 11.42% North America 997,890 24.43% 1,020,801 25.26% -2.24% Japan and Korea 301,643 7.38% 365,862 9.05% -17.55% Other Asia Pacific 444,195 10.87% 578,762 14.32% -23.25% regions Total 4,085,456 100% 4,041,227 100% 1.09% OPERATING EXPENSES In 2007, the Group recorded an aggregate operating expenses of RMB47.496 billion, representing an increase of 11.97% compared with RMB42.419 billion in 2006. The elements comprising the operating expenses as well as the ratio and change of each of those elements are set out below: Jet fuel costs Jet fuel costs increased by 9.45% to RMB17.201 billion in 2007 from RMB15.716 billion in 2006 and accounted for 36.22% of operating expenses compared with 37.05% in 2006. Factors affecting the jet fuel costs include the jet fuel price and the consumption level of jet fuel, and in which the rise in jet fuel price and increase in the consumption of jet fuel caused an increase in operating cost of RMB0.383 billion and RMB1.102 billion respectively. • Take-off, landing and depot charges increased by 7.82% to RMB5.538 billion in 2007 from RMB5.136 billion in 2006, primarily due to the increase in the number of flights operated. The percentage of the take-off, landing and depot charges to the operating expenses decreased from 12.11% to 11.66%. • Due to the business needs during the year, there was an increase in the number of aircraft ranging from the self-owned aircraft to those under finance leases and operation leases, which resulted in an increase in the aircraft maintenance, repair and overhaul costs accordingly. • Employee compensation costs were increased due to the increase in the number of flight hours, number of employees and employees' basic income. • The increase in the air catering charges was primarily due to an increase in the number of passengers carried. • The increase in the sale commission and the royalty from the sales of the relevant IT systems was brought by the increase in business revenue. The marketing expenses were increased to RMB2.709 billion in 2007 from RMB2.027 billion in 2006, representing an increase of 33.65%, and their percentage to the profit from operations was up from 4.78% to 5.70%. • General and administrative expenses were increased primarily due to business growth and more frequently incurred donation expenses for Olympic Games in 2007. • Other operating expenses mainly include the aircraft and engines operating lease expenses, civil aviation infrastructure construction fund and the daily expenses arising from core air traffic business not included in the aforesaid items. The growth of business inevitably drove such expenses upwards. PROFIT CONTRIBUTION BY BUSINESS SEGMENT (RMB'000) 2007 2006 Change Air businesses 3,695,437 2,281,754 61.96% Engineering services 12,478 34,835 -64.18% Airport terminal services 111,793 175,445 -36.28% Others 14,419 25,670 -43.83% Total 3,834,127 2,517,704 52.29% ANALYSIS OF ASSETS STRUCTURE As at 31 December 2007, the total assets of the Group amounted to RMB91.056 billion, representing an increase of 7.79% from 31 December 2006, of which the current assets accounted for RMB9.830 billion, representing 10.80% of the total assets, while non-current assets accounted for RMB81.226 billion, representing 89.20% of the total assets. Among the current assets, cash and cash equivalents were RMB3.907 billion, decreased by 24.28% compared with those recorded as at 31 December 2006, while accounts receivable decreased by 1.44% to RMB2.794 billion compared with those recorded as at 31 December 2006. Among the non-current assets, the net book value of property, plant and equipment as at 31 December 2007 was RMB61.692 billion, representing an increase of 12.64% compared with those recorded as at 31 December 2006. DEBT STRUCTURE ANALYSIS (RMB'000) Bank loans, other loans and Obligation corporate bonds under finance lease 31 December 31 December 31 December 31 December 2007 2006 2007 2006 Within one year 10,978,835 11,139,021 2,216,680 2,354,905 In the second year 4,039,529 2,649,697 2,821,518 1,996,954 In the third to fifth years (inclusive) 8,181,988 5,581,186 5,484,352 6,061,709 After five years 4,393,774 4,471,094 5,022,323 3,189,192 Total 27,594,126 23,840,998 15,544,873 13,602,760 ASSETS MORTGAGE As at 31 December 2007, the Group mortgaged certain aircraft and premises with an aggregate net book value of approximately RMB34.240 billion (compared with RMB34.251 billion as at 31 December 2006) pursuant to certain bank loans and finance lease agreements. In addition, certain bank deposits of the Group in the sum of approximately RMB119 million (compared with approximately RMB212 million as at 31 December 2006 ) were pledged against the obligations in respect of certain bank loans, operating leases and financial derivatives of the Group. The Group also pledged certain number of shares in an associated company with an aggregate market value of approximately RMB7.609 billion as at 31 December 2007 (compared with approximately RMB7.695 billion as at 31 December 2006). COMMITMENTS AND CONTINGENT LIABILITIES As at 31 December 2007, capital commitments of the Group increased substantially from RMB42.944 billion in 2006 to approximately RMB58.878 billion, primarily used for the purchase of certain aircraft and relevant flight equipment to be delivered in the coming years and the construction of certain properties. As at 31 December 2007, the Group had contingent liabilities in respect of bank loans and other guarantees and other matters arising in the ordinary course of business. Details of contingent liabilities of the Group are set out in note 46 to the Group's 2007 annual consolidated financial statements. CAPITAL EXPENDITURE In 2007, the capital expenditure of the Company amounted to RMB15.293 billion in total. Among the capital expenditure of the Company, the total investment in aircraft and engines was RMB10.026 billion, including prepayments of RMB3.824 billion for the purchases of aircraft for 2007 and onwards. Other capital expenditure amounted to RMB5.267 billion, which mainly involved the improvement of first class and business class cabins of certain aircraft, investment in the ancillary project in the Third Terminal of Beijing Capital International Airport, preparation for the 11th Five Years Plan as well as investment in certain long-term external investment projects. CASH FLOW ANALYSIS In 2007, the Group's net cash inflow from operating activities increased by 17.55% to RMB7.302 billion from RMB6.212 billion in 2006, primarily due to the increase in business revenue. Net cash outflow from investment activities during the year decreased by 15.94% to RMB10.212 billion from RMB12.148 billion in 2006, primarily due to the relatively substantial cash outflow arising out of the acquisition of the Cathay Pacific's equity interests in 2006. The Group recorded a net cash inflow from financing activities of RMB1.839 billion, representing a decrease of RMB5.470 billion from RMB7.309 billion in 2006, primarily due to the proceeds of approximately RMB8.570 billion raised by way of the A shares initial public offering and the additional issue of H shares in 2006. The Group experienced a higher increase in the net operating cash flow of the Group for the current period, which secured the Group to enhance its cash structure. RISKS ANALYSIS • Analysis of the long-term solvency As at 31 December 2007, the Group's gearing ratio, which represents total liabilities divided by total assets, was 65.40%, representing an increase of 2.97 percentage points from 62.43% as at 31 December 2006, primarily due to the introduction of additional aircraft and the increase of debt financing activities. Although the gearing ratio of the Group for the current period slightly moved upwards, its solvency position in the long term was relatively strong insofar as it continued to dominate a leading position in the industry while the prevailing gearing ratios of other air carriers stood at a relatively high level. • Analysis of the short-term solvency and the long- and short-term debt structure As at 31 December 2007, the Group's current ratio, which represents current assets divided by current liabilities, was 0.36, representing a decrease of 0.05 percentage point from 0.41 as at 31 December 2006, while its EBITDA interest cover was 4.78 times, representing an increase of 18.12% from 4.16 times as at 31 December 2006, resulting that the Group maintained a relatively sufficient operating cash flow position. The Company is in the process of optimizing both its long-term and short-term debt structures step by step to align with the changes in the financial market. The Group had already obtained bank facilities with an aggregate amount of up to RMB80.172 billion from a number of banks in the PRC and was therefore in a position to fully meet its own demand on current capital. • Foreign exchange and interest rate exposure As at 31 December 2007, foreign currency denominated loans, mainly those denominated in US dollars, Hong Kong dollars and Japanese Yen, constitute a large proportion of the Group's loans. The Group basically maintained a balance of its foreign currency denominated incomes and expenditures. The Group will continue to effectively eliminate any foreign exchange risk by means of financial derivative products based on the major trend of foreign exchange and in accordance with its forecast on its overall incomes and expenditures. For managing risks associated with interest rates, the Company will attempt to make use of the swap transactions and other derivative products and to rationalize the ratios between the fixed and floating interest rates relating to the interest-bearing debts so as to eliminate any risks arising from interest rate. • Investment risk As at 31 December 2007, regarding the air carriers that the Group had invested in, except for Shandong Airlines and Shenzhen Airlines, neither Air Macau nor Air China Cargo generated any profit from operations. Further efforts are needed to promote the consolidation and optimization of the businesses of the companies that the Group had made its investment in. There is also room for a substantial improvement in their financial position and operating results. • Risk associated with the fluctuation in the jet fuel price The Group is exposed to the fluctuations in jet fuel price in its daily operation. International jet fuel prices have been historically, and will in the future continue to be, subject to price volatility and fluctuation in supply and demand. The Group's strategy for managing its jet fuel price risk aims to protect itself against sudden and significant price increases. To the extent as permitted by the relevant laws in the PRC, the Group has been engaging in fuel hedging transactions since March 2001. The hedging instruments used were mainly derivatives of Singapore Kerosene together with Brent crude oil and New York crude oil, which are closely linked to the price of jet fuel. In 2007, the net gain on fuel derivatives achieved by the Group was RMB236 million, representing an increase of 108.85% compared with RMB113 million in 2006. Information on financial risk management objectives and polices in other aspects of the Group's operations are set out in note 47 to the Group's 2007 annual consolidated financial statements. OUTLOOK FOR 2008 Looking ahead in 2008, the Company believes that China's economy and the air transport market will continue to grow. However, competition in the air transportation market has become increasingly fierce, especially with the implementation of the liberalization policy, the Chinese aviation industry will face more severe challenges. In response to the changing market situation, the Company has to adjust its corporate strategies from time to time. Therefore, the Company has re-adjusted its future strategic objectives to 'build up a world-class competitive strength, continuously improve its expansion capability, offer unique experience for its customers by delivering the most excellent services and realize a steady increase in the relevant revenues'. SHARE CAPITAL As at 31 December 2007, the total share capital of the Company was RMB12,251,362,273, divided into 12,251,362,273 shares with a par value of RMB1.00 each. The following table sets out the share capital structure of the Company as at 31 December 2007: Category of Shares Number of shares Percentage of the total share capital A Shares 7,845,678,909 64.04% H shares 4,405,683,364 35.96% Total 12,251,362,273 100% PURCHASE, SALE OR REDEMPTION OF SHARES During the year ended 31 December 2007, neither the Company nor any of its subsidiaries had purchased, sold or redeemed any of the Company's listed securities. CORPORATE GOVERNANCE 1. Compliance with the Code on Corporate Governance Practices The Company has complied with the code provisions set out in the Code on Corporate Governance Practices contained in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited ('Listing Rules') throughout the year of 2007. 2. Compliance with the Model Code for Securities Transactions by Directors of Listed Issuers The Company has adopted and established a code of conduct on no less exacting terms than the Model Code for Securities Transactions by Directors of Listed Issuers (the 'Model Code') as set out in Appendix 10 of the Listing Rules. Having made specific enquiry by the Company, all Directors and Supervisors have confirmed their compliance with the required standards of the Model Code throughout the period of the first half of 2007. The code of the Company is also applicable to Supervisors and relevant employees. DIVIDENDS The Board recommends the payment of a final dividend of RMB0.684 per 10 shares for the year ended 31 December 2007, totalling approximately RMB837.987 million. A resolution for the dividend payment will be submitted for consideration at the annual general meeting. The dividend will be denominated and declared in Renminbi. Dividends on domestic shares will be paid in Renminbi, whereas foreign shares will be paid in Hong Kong dollars. The relevant exchange rate will be the mean of the average rate of Renminbi to Hong Kong dollars as announced by the People's Bank of China for the week prior to the date of declaration of dividends. PRE-EMPTIVE RIGHTS Neither the Articles of Association of the Company nor the laws of the PRC provide for any preemptive rights requiring the Company to offer new shares to existing shareholders in proportion to their existing shareholdings. SERVICE CONTRACTS OF THE DIRECTORS Each of the Directors was appointed by the Company on 30 October 2007 for a term of three years. None of the Directors has any existing or proposed service contract with any member of the Group which is not expiring or terminable by the Group within one year without payment of compensation (other than statutory compensation). ANNUAL REPORT The Annual Report for the year ended 31 December 2007 containing all information required by Appendix 16 of the Listing Rules will be despatched to shareholders and will be published on the website of The Stock Exchange of Hong Kong Limited (www.hkex.com.hk) as well as the website of the Company (www.airchina.com.cn) in due course. FORWARD-LOOKING STATEMENT We would like to caution readers of this announcement that the airline operations are substantially influenced by global political and economical developments. Accidental and unexpected incidents may have a material impact on our operations or the industry as a whole. This 2007 Annual Results Announcement of the Group contains, inter alia, certain forward-looking statements, such as forward-looking statements on the global and Chinese economies and aviation markets. Such forward-looking statements are subject to some uncertainties and risks. AUDIT COMMITTEE The annual results of the Company have been reviewed by the audit committee of the Board of Directors of the Company. By order of the Board Air China Limited Kong Dong Acting Chairman of the Board Beijing, PRC, 17 March 2008 As at the date of this announcement, the Directors of the Company are Kong Dong, Wang Shixiang, Yao Weiting, Christopher Dale Pratt, Chen Nan Lok Philip, Ma Xulun, Cai Jianjiang, Fan Cheng, Hu Hung Lick, Henry*, Wu Zhipan*, Zhang Ke* and Jia Kang*. * Independent non-executive Director of the Company END This information is provided by RNS The company news service from the London Stock Exchange

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