Major Transaction - Part 1

Air China Ld 30 May 2006 THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ACTION 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 Air China 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. AIR CHINA LIMITED (a joint stock limited company incorporated in the People's Republic of China with limited liability) (Stock Code: 753) PURCHASE OF 15 BOEING 737 AIRCRAFT MAJOR TRANSACTION 26 May 2006 CONTENTS Page Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Letter from the Board 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . 4 2. The Boeing Aircraft Purchase Agreement . . . . . . . . . . 5 3. Effect of Transaction . . . . . . . . . . . . . . . . . . . 7 4. Financial and Operational Prospects . . . . . . . . . . . . 8 5. Working Capital . . . . . . . . . . . . . . . . . . . . . . 8 6. Additional Information . . . . . . . . . . . . . . . . . . 8 Appendix I - Financial Information of the Group . . . . . . . . . . . . 9 Appendix II - General Information . . . . . . . . . . . . . . . . . . . 90 DEFINITIONS In this circular, the following expressions have the following meanings, unless the context requires otherwise: 'AIE' Air China Group Import and Export Trading Co. ( ), a company incorporated under the laws of the People's Republic of China and a wholly-owned subsidiary of the Company as at the date of this circular 'Air China Cargo' Air China Cargo Co., Ltd. ( ), a company with limited liability incorporated under the laws of the People's Republic of China and with 51% of its registered capital owned by the Company as at the date of this circular 'Air Macau' Air Macau Company Limited, a company with limited liability incorporated under the laws of Macau and with 51.0% of its share capital owned by CNAC (Macau) as at the date of this circular 'Ameco' Aircraft Maintenance and Engineering Corporation, Beijing ( ), a company with limited liability incorporated under the laws of the People's Republic of China and with 60% of its registered capital owned by the Company as at the date of this circular 'Board' the board of directors of the Company 'Boeing Aircraft' 15 Boeing 737 aircraft to be purchased by the Company pursuant to the Boeing Aircraft Purchase Agreement 'Boeing Aircraft Purchase the aircraft acquisition agreement dated 19 April Agreement' 2006 pursuant to which the Company has agreed to acquire and Boeing Company has agreed to sell the Boeing Aircraft 'Boeing Company' Boeing Company, a company incorporated under the laws of Delaware of the United States 'Cathay Pacific' Cathay Pacific Airways Limited 'CNAC' China National Aviation Company Limited, a company with limited liability incorporated under the laws of Hong Kong and listed on The Stock Exchange of Hong Kong Limited with stock code 1110 and with approximately 68.36% of its share capital owned by the Company as at the date of this circular 'CNAC (Macau)' China National Aviation Corporation (Macau) Company Limited, a company with limited liability incorporated under laws of Macau and a wholly-owned subsidiary of CNAC as at the date of this circular 'CNACG' China National Aviation Corporation (Group) Limited, a company incorporated under the laws of Hong Kong and a wholly-owned subsidiary of CNAHC as at the date of this circular 'CNAHC' China National Aviation Holding Company, a company incorporated under the laws of the People's Republic of China which currently directly owns approximately 51.16% of the Company's share capital as at the date of this circular 'the Company' Air China Limited, a company incorporated under the laws of the People's Republic of China with primary listing on The Stock Exchange of Hong Kong Limited with stock code 753 and secondary listing on the Official List of the UK Listing Authority 'Director(s)' the director(s) of the Company 'Group' the Company and its subsidiaries and joint ventures 'Latest Practicable Date' 19 May 2006, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein 'Listing Rules' The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited 'NDRC' the National Development and Reform Commission of the People's Republic of China 'PRC' People's Republic of China excluding, for the purpose of this circular only, Hong Kong, Macau and Taiwan 'SFO' the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time 'Stock Exchange' The Stock Exchange of Hong Kong Limited 'Supervisor(s)' the supervisor(s) of the Company 'Transaction' the acquisition by the Company of the Boeing Aircraft pursuant to the Boeing Aircraft Purchase Agreement LETTER FROM THE BOARD AIR CHINA LIMITED (a joint stock limited company incorporated in the People's Republic of China with limited liability) (Stock Code: 753) Directors: Registered address: 9th Floor, Blue Sky Mansion Non-executive Directors: 28 Tianzhu Road Li Jiaxiang (Chairman) Zone A Kong Dong (Vice Chairman) Tian zhu Airport Industrial Zone Wang Shixiang (Vice Chairman) Shunyi District Yao Weiting Beijing, China Executive Directors: Principal place of business Ma Xulun in Hong Kong: Cai Jianjiang 5th Floor, CNAC House Fan Cheng 12 Tung Fai Road Hong Kong International Airport Independent Non-Executive Directors: Hong Kong Hu Hung Lick, Henry Wu Zhi Pan Zhang Ke 26 May 2006 To the Shareholders Dear Sir or Madam, MAJOR TRANSACTION 1. INTRODUCTION On 19 April 2006 the Company announced that on the same date the Company and AIE entered into the Boeing Aircraft Purchase Agreement with Boeing Company, pursuant to which the Company has agreed to purchase 15 Boeing 737 aircraft from Boeing Company. The Boeing Aircraft Purchase Agreement was entered into pursuant to a framework agreement entered into between Boeing Company and the China Aviation Supplies Import and Export Group Corporation on 11 April 2006 (the '2006 Framework Agreement'). The Transaction constitutes a major transaction of the Company under the Listing Rules. The purpose of this circular is to set out further details of the Transaction. 2. THE BOEING AIRCRAFT PURCHASE AGREEMENT (1) Date of the Transaction 19 April 2006 (2) Parties to the Transaction (i) the Company, as the purchaser, the principal business activity of which is air passenger, air cargo and airline-related services; (ii) AIE, as the import agent for the Company; and (iii) Boeing Company, as the vendor, one of whose principal business activity is aircraft manufacturing. The Company confirms that, to the best of the Directors' knowledge, information and belief having made all reasonable enquiry, Boeing Company and each of the ultimate beneficial owner of Boeing Company are independent third parties and not connected persons (as defined in the Listing Rules) of the Company. (3) Aircraft to be acquired Boeing Aircraft, i.e.15 Boeing 737 aircraft As at the Latest Practicable Date, the Company operated a fleet of 186 aircraft, including 177 passenger aircraft, 7 freighters and two corporate jets. (4) Consideration The aircraft basic price comprises the airframe price, optional features prices and engine price. The aircraft basic price of the Boeing Aircraft in aggregate is US$982.8 million (HK$7,626.5 million). The aircraft price is subject to price escalation by applying a formula. Boeing has granted to the Company significant price concessions with regard to the Boeing Aircraft. These will take the form of credit memoranda which may be used by the Company towards the purchase of the Boeing Aircraft or spare parts, goods and services or may be used towards the final delivery invoice payment of the Boeing Aircraft. Such credit memoranda were determined after arm's length negotiations between the parties and as a result, the actual consideration for the Boeing Aircraft is lower than the aircraft basic price mentioned above. The Transaction was negotiated and entered into in accordance with customary business practice. Taking into account all the factors relating to the purchase of aircraft by the Company, including the market condition, the type, number and delivery schedule of aircraft being purchased, and the terms of the 2006 Framework Agreement, the extent of the price concessions granted to the Company in the Transaction is comparable with the price concessions that the Company had obtained in the previous aircraft purchase entered into between the Company and Boeing Company on 8 August 2005 (the '2005 Aircraft Purchase'). The Company believes that there is no material difference between the effect of the price concessions obtained in the Transaction and the 2005 Aircraft Purchase on the Company's operating costs taken as a whole. The Company has applied to the Stock Exchange and the Stock Exchange has granted a waiver from strict compliance of Rule 14.58(4) of the Listing Rules in respect of disclosure of the actual consideration of the Boeing Aircraft. The Boeing Aircraft Purchase Agreement was signed pursuant to the 2006 Framework Agreement. The 2005 Aircraft Purchase was entered into pursuant to an umbrella agreement entered into between Boeing Company and airline companies including the Company in January 2005. The aircraft purchase agreement entered into between the Company, AIE and Boeing Company on 17 January 2006 (the '2006 Aircraft Purchase') was entered into pursuant to an umbrella agreement entered into between Boeing Company and the China Aviation Supplies Import and Export Group Corporation in November 2005. The purchase of the Boeing Aircraft was not in contemplation at the time of the 2005 Aircraft Purchase and 2006 Aircraft Purchase. Accordingly, the Transaction, the 2005 Aircraft Purchase and the 2006 Aircraft Purchase are not part of the same series of transactions and are not treated as if they were one transaction and these transactions are not required to be aggregated for the relevant classification of the Transaction pursuant to Rule 14.22. As the relevant percentage ratio under Rule 14.07 of the Listing Rules for the Transaction is above 25% but less than 100%, the Transaction constitutes a major transaction and is therefore subject to approval by the Company's shareholders under the Listing Rules. (5) Payment and delivery terms The aggregate consideration for the acquisition of Boeing Aircraft is payable by cash in eight instalments, with the first seven instalments to be paid prior to delivery of each Boeing Aircraft and the remaining balance, being a substantial portion of the consideration, to be paid upon delivery of each Boeing Aircraft. The Company is expecting to take delivery of the Boeing Aircraft in stages from early 2009 to 2010. (6) Source of funding The Transaction will be funded through cash generated from the Company's business operations, commercial bank loans and other debt instruments of the Company. (7) Reasons for and benefits of the Transaction The Boeing Aircraft will expand the fleet capacity of the Company and will principally reinforce Beijing's position as a transportation hub and increase frequency of flights, departing originally from Beijing, of a number of key domestic flight courses. The Company expects the Boeing Aircraft will deliver more cost-efficient performance and provide more comfortable services to passengers. Although the Boeing Aircraft was purchased with other aircraft under a package acquisition plan, which is coordinated by the NDRC, the decision to purchase the Boeing Aircraft was made independently by the Company. The negotiations under the acquisition plan were done as a package to increase bargaining power. The Directors believe that the terms of the Transaction are fair and reasonable and in the interests of the shareholders of the Company as a whole. (8) Shareholders' approval As the relevant percentage ratio for the Transaction as calculated under Rule 14.07 of the Listing Rules is above 25%, but less than 100%, the Transaction constitutes a major transaction and is therefore subject to approval by the Company's shareholders under the Listing Rules. CNAHC currently directly owns approximately 51.16% of the total issued share capital of the Company. Each of CNAHC and its associates (as defined in the Listing Rules) does not have any interest in the Transaction other than as a shareholder of the Company (where applicable). No shareholder of the Company is required to abstain from voting if the Company was to convene a general meeting for the approval of the Transaction. CNAHC has approved the Transaction by way of a written approval pursuant to Rule 14.44 of the Listing Rules and therefore the Company will not be convening a shareholders' meeting to approve the Transaction. 3. EFFECT OF TRANSACTION Based on the technical specifications of the Boeing Aircraft, the Company expects the Boeing Aircraft to operate with a higher utilization rate, more efficient jet fuel consumption and relatively low maintenance cost. This will enable the Company to operate on a cost-efficient basis and would potentially have a positive effect on the earnings of the Company. As mentioned above, the Transaction will be partly financed by commercial bank loans and other debt instruments of the Company. The Transaction will therefore increase the Group's fixed assets and liabilities. The Transaction may also result in an increase in the Group's debt-to-equity ratio. The total cash outflow of the Company in 2006 in respect of the Transaction is expected to be approximately RMB111.69 million. However, the Company does not expect the Transaction to have any material negative impact on its cash-flow position or its business operations. Save as described above, the Transaction is not expected to have any material impact on earnings, assets and liabilities of the Group. 4. FINANCIAL AND OPERATIONAL PROSPECTS As disclosed in the 2005 annual report of the Company dated 18 April 2006, for the financial year ended 31 December 2005, air traffic revenue and other operating revenue reached RMB35,301 million and RMB2,990 million respectively, representing increases of 14.48% and 11.32% over 2004. The Directors believe that rising aviation fuel prices and increasing competition in the airline business will present new challenges for the Group in 2006. However, the Directors view the future prospects during the current financial year of the Company with confidence and believe that the Group is well placed to continue to develop its business in line with its strategy. 5. WORKING CAPITAL The Directors are of the opinion that the Group will have sufficient working capital for the next 12 months following the date of this circular. 6. ADDITIONAL INFORMATION Your attention is drawn to the additional information set out in the appendices to this circular. By Order of the Board Li Jiaxiang Chairman Beijing APPENDIX I FINANCIAL INFORMATION OF THE GROUP I. SUMMARY OF CONSOLIDATED INCOME STATEMENTS AND CONSOLIDATED BALANCE SHEETS The following consolidated income statements of the Group for the three years ended 31 December 2005 and the consolidated balance sheets of the Group as at 31 December 2005, 2004 and 2003 are extracted from the Company's annual reports for the two years ended 31 December 2005 and reclassified as appropriate. Consolidated income statements For the years ended 31 December 2005 2004 2003 RMB'000 RMB'000 RMB'000 Air traffic revenue 35,300,826 30,834,822 23,422,660 Other operating revenue 2,990,140 2,685,935 1,218,745 Turnover 38,290,966 33,520,757 24,641,405 Operating expenses Jet fuel (11,777,129) (8,353,752) (5,425,059) Take-off, landing and depot charges (4,442,585) (4,230,349) (3,449,769) Depreciation (4,512,680) (3,463,252) (3,377,472) Aircraft maintenance, repair and overhaul (1,341,773) (2,835,648) (2,149,353) Employee compensation costs (3,406,825) (2,921,322) (2,379,102) Air catering charges (1,242,933) (1,171,784) (842,743) Aircraft and engine operating lease (1,530,754) (1,071,256) (910,134) expenses Other operating lease expenses (211,177) (187,471) (181,984) Other flight operation expenses (3,744,977) (2,698,234) (2,112,432) Selling and marketing expenses (1,775,026) (1,387,088) (1,057,630) General and administrative expenses (631,291) (715,350) (471,463) Total operating expenses (34,617,150) (29,035,506) (22,357,141) Profit from operations 3,673,816 4,485,251 2,284,264 Finance revenue 1,248,607 79,361 189,130 Finance costs (1,773,099) (1,879,234) (2,538,208) Dilution gains on investments - 410,137 - Share of profits less losses from 224,930 464,044 205,626 associates Profit before tax 3,374,254 3,559,559 140,812 Tax (903,874) (1,010,864) (52,314) Profit for the year 2,470,380 2,548,695 88,498 Attributable to: Equity holders of the parent 2,406,256 2,385,964 159,604 Minority interests 64,124 162,731 (71,106) 2,470,380 2,548,695 88,498 Dividend Interim - - - Proposed final 224,793 - - 224,793 - - Consolidated balance sheets As at 31 December 2005 2004 2003 RMB'000 RMB'000 RMB'000 NON-CURRENT ASSETS Property, plant and equipment 47,190,728 43,441,637 42,423,920 Lease prepayments 1,072,066 933,898 29,807 Interests in associates 3,793,957 4,001,521 3,067,846 Advance payments for aircraft and related equipment 7,329,322 2,825,612 1,957,784 Government grant receivables - - 764,422 Due from CNAHC 531,813 631,813 - Deposits for aircraft under operating 222,945 137,583 145,483 leases Available-for-sale investments 22,266 21,666 21,930 Deferred tax assets 498,371 776,084 590,153 60,661,468 52,769,814 49,001,345 CURRENT ASSETS Financial assets 127,659 - 34,000 Trade receivables 2,764,475 2,364,816 1,955,592 Inventories 851,315 743,288 712,451 Prepayments, deposits and other 762,435 915,130 763,983 receivables Pledged deposits 176,575 117,231 1,245,542 Non-pledged deposits with maturity of more than three months when acquired 97,375 320,850 30,826 Cash and cash equivalents 2,248,386 9,413,224 2,589,395 Due from CNAHC 474,216 - - Due from other CNAHC group companies 38,039 44,916 63,928 7,540,475 13,919,455 7,395,717 TOTAL ASSETS 68,201,943 66,689,269 56,397,062 CURRENT LIABILITIES Financial liabilities (1,791) - (6,000) Trade payables (4,601,364) (4,443,608) (4,214,981) Bills payable (327,937) (362,033) (1,317,220) Other payables and accruals (4,168,435) (3,920,287) (3,240,545) Provision for major overhauls (18,721) (28,130) (115,346) Air traffic liabilities (1,476,619) (1,215,770) (1,165,116) Tax payable (421,077) (186,055) (53,929) Obligations under finance leases (1,954,873) (1,705,146) (1,607,056) Bank and other loans (10,401,170) (8,806,051) (9,236,674) Due to CNAHC and CNACG (133,680) (2,256,117) (2,968) Due to other CNAHC group companies (40,471) (49,617) (33,073) (23,546,138) (22,972,814) (20,992,908) NET CURRENT LIABILITIES (16,005,663) (9,053,359) (13,597,191) TOTAL ASSETS LESS CURRENT LIABILITIES 44,655,805 43,716,455 35,404,154 As at 31 December 2005 2004 2003 RMB'000 RMB'000 RMB'000 NON-CURRENT LIABILITIES Obligations under finance leases (8,078,671) (10,576,241) (12,091,837) Bank and other loans (12,822,879) (12,896,622) (12,819,821) Long term payables (352,880) (446,311) (801,349) Deferred income (1,025,910) (1,102,853) (887,708) Provision for major overhauls (635,718) (470,698) (289,593) Provision for early retirement benefits obligations (189,141) (195,188) (198,597) (23,105,199) (25,687,913) (27,088,905) NET ASSETS 21,550,606 18,028,542 8,315,249 Represented by: EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT Owner's equity - - 6,892,869 Issued share capital 9,433,211 9,050,618 - Reserves 10,659,030 7,497,637 - 20,092,241 16,548,255 6,892,869 MINORITY INTERESTS 1,458,365 1,480,287 1,422,380 TOTAL EQUITY 21,550,606 18,028,542 8,315,249 II. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2005 The following audited financial statements of the Group are extracted from the Company's annual report for the year ended 31 December 2005. Consolidated Income Statement Year ended 31 December 2005 2005 2004 Notes RMB'000 RMB'000 Air traffic revenue 4 35,300,826 30,834,822 Other operating revenue 5 2,990,140 2,685,935 Turnover 38,290,966 33,520,757 Operating expenses Jet fuel (11,777,129) (8,353,752) Take-off, landing and depot charges (4,442,585) (4,230,349) Depreciation (4,512,680) (3,463,252) Aircraft maintenance, repair and overhaul (1,341,773) (2,835,648) Employee compensation costs 7 (3,406,825) (2,921,322) Air catering charges (1,242,933) (1,171,784) Aircraft and engine operating lease expenses (1,530,754) (1,071,256) Other operating lease expenses (211,177) (187,471) Other flight operation expenses (3,744,977) (2,698,234) Selling and marketing expenses (1,775,026) (1,387,088) General and administrative expenses (631,291) (715,350) Total operating expenses (34,617,150) (29,035,506) Profit from operations 6 3,673,816 4,485,251 Finance revenue 8 1,248,607 79,361 Finance costs 8 (1,773,099) (1,879,234) Dilution gains on investments 9 - 410,137 Share of profits less losses from associates 19 224,930 464,044 Profit before tax 3,374,254 3,559,559 Tax 12 (903,874) (1,010,864) Profit for the year 2,470,380 2,548,695 Attributable to: Equity holders of the parent 2,406,256 2,385,964 Minority interests 64,124 162,731 2,470,380 2,548,695 Dividend 13 Interim - - Proposed final 224,793 - 224,793 - Earnings per share attributable to equity holders of the parent 14 Basic 25.5 cents 36.0 cents Diluted N/A 36.0 cents Consolidated Balance Sheet 31 December 2005 2005 2004 Notes RMB'000 RMB'000 NON-CURRENT ASSETS Property, plant and equipment 15 47,190,728 43,441,637 Lease prepayments 16 1,072,066 933,898 Interests in associates 19 3,793,957 4,001,521 Advance payments for aircraft and related equipment 7,329,322 2,825,612 Due from CNAHC 20 531,813 631,813 Deposits for aircraft under operating leases 222,945 137,583 Available-for-sale investments 21 22,266 21,666 Deferred tax assets 22 498,371 776,084 60,661,468 52,769,814 CURRENT ASSETS Financial assets 44(c) 127,659 - Trade receivables 23 2,764,475 2,364,816 Inventories 24 851,315 743,288 Prepayments, deposits and other receivables 25 762,435 915,130 Pledged deposits 26 176,575 117,231 Non-pledged deposits with maturity of more than three months when acquired 26 97,375 320,850 Cash and cash equivalents 26 2,248,386 9,413,224 Due from CNAHC 34 474,216 - Due from other CNAHC group companies 27 38,039 44,916 7,540,475 13,919,455 TOTAL ASSETS 68,201,943 66,689,269 CURRENT LIABILITIES Financial liabilities 44(c) (1,791) - Trade payables 28 (4,601,364) (4,443,608) Bills payable 29 (327,937) (362,033) Other payables and accruals 30 (4,168,435) (3,920,287) Provision for major overhauls 31 (18,721) (28,130) Air traffic liabilities (1,476,619) (1,215,770) Tax payable (421,077) (186,055) Obligations under finance leases 32 (1,954,873) (1,705,146) Bank and other loans 33 (10,401,170) (8,806,051) Due to CNAHC and CNACG 34 (133,680) (2,256,117) Due to other CNAHC group companies 27 (40,471) (49,617) (23,546,138) (22,972,814) NET CURRENT LIABILITIES (16,005,663) (9,053,359) TOTAL ASSETS LESS CURRENT LIABILITIES 44,655,805 43,716,455 2005 2004 Notes RMB'000 RMB'000 NON-CURRENT LIABILITIES Obligations under finance leases 32 (8,078,671) (10,576,241) Bank and other loans 33 (12,822,879) (12,896,622) Long term payables 35 (352,880) (446,311) Deferred income 36 (1,025,910) (1,102,853) Provision for major overhauls 31 (635,718) (470,698) Provision for early retirement benefits (189,141) (195,188) obligations (23,105,199) (25,687,913) NET ASSETS 21,550,606 18,028,542 Represented by: EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT Issued share capital 37 9,433,211 9,050,618 Reserves 38 10,659,030 7,497,637 20,092,241 16,548,255 MINORITY INTERESTS 1,458,365 1,480,287 TOTAL EQUITY 21,550,606 18,028,542 Consolidated Statement of Changes in Equity Year ended 31 December 2005 Attributable to equity holders of the parent Foreign Issued exchange Proposed Owners' share Capital Reserve Retained translation final Minority Total equity capital reserve funds earnings reserve dividend Total interests equity RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 As at 1 January 2004 6,892,869 - - - - - - 6,892,869 1,422,380 8,315,249 Capital contri- bution 560,782 - - - - - - 560,782 - 560,782 of cash (note a) Capital contri- bution of land use rights (note b) 885,626 - - - - - - 885,626 - 885,626 Capita- lisation of amount payable to CNAHC (note c) 17,965 - - - - - - 17,965 - 17,965 Deferred taxation 793,755 - - - - - - 793,755 - 793,755 (note 22) Profit from 1 January 2004 to 30 Sep- tember 2004 1,758,879 - - - - - - 1,758,879 117,506 1,876,385 Divi- dend paid (29,074) - - - - - - (29,074) (24,909) (53,983) Distri- butions (note d) (2,182,921) - - - - - - (2,182,921) - (2,182,921) Capita- lisation upon reorgan- isation of the Company(8,697,881) 6,500,000 1,892,201 - 305,680 - - - - - Profit from 1 October 2004 to 31 December 2004 - - - - 627,085 - - 627,085 45,225 672,310 Distri- butions (note e) - - - - (377,550) - - (377,550) - (377,550) Dilution of interest - - - - - - - - (79,915) (79,915) (note 9(b)) Transfer to reserve - - - 93,020 (93,020) - - - - - funds (note 13) Issue of new shares - 2,550,618 5,536,678 - - - - 8,087,296 - 8,087,296 upon listing (note 37 (e)) Share issue expenses - - (486,457) - - - - (486,457) - (486,457) (note 37(e)) As at 31 December 2004 and 1 January 2005 - 9,050,618 6,942,422 93,020 462,195 - - 16,548,255 1,480,287 18,028,542 Profit for the year - - - - 2,406,256 - - 2,406,256 64,124 2,470,380 Transfer to reserve - - - 269,864 (269,864) - - - - - funds (note 13) Proposed final - - - - (224,793) - 224,793 - - - dividend (note 13 (d)) Issue of new shares - 382,593 830,414 - - - - 1,213,007 - 1,213,007 (note 37(b)) New capital contri- bution by a minority shareholder of a subsidiary - - - - - - - - 2,940 2,940 Share issue expenses - - (40,910) - - - - (40,910) - (40,910) (note 37(b)) Dividends paid to minority shareholders by - - - - - - - - (68,611) (68,611) subsidiaries Exchange realignment - - - - - (34,367) - (34,367) (20,375) (54,742) As at 31 December 2005 - 9,433,211 7,731,926 362,884 2,373,794 (34,367) 224,793 20,092,241 1,458,365 21,550,606 Notes: a. In September 2004, China National Aviation Holding Company ('CNAHC') made a cash contribution of approximately RMB561 million to the Company. b. Upon incorporation of the Company, CNAHC effected the transfer of certain land use rights in an aggregate amount of approximately RMB885,626,000 to the Company. c. This represented a payable of RMB17,965,000 of the Company assumed by CNAHC in 2004 which was accounted for as a capital contribution. d. In accordance with the ( ) 'Provisional Regulations Relating to Corporate Reorganisation of Enterprises and Related Management of State-owned Capital and Financial Treatment' notice issued by the Ministry of Finance (the English title is a direct translation of the Chinese title of the notice) and pursuant to the Restructuring as set out in note 1 to these financial statements, after the Company's incorporation, the Company is required to make a distribution to CNAHC and China National Aviation Corporation (Group) Limited ('CNACG' and which is a Hong Kong incorporated company wholly owned by CNAHC), details of which are set out in note 13(b) to these financial statements. The total amount of distributions made to CNAHC and CNACG pursuant to this notice is approximately RMB2,143,785,000. Details of the distributions are set out in note 13 (b) to these financial statements. In addition, the distributions include an amount of approximately RMB39,136,000 which represents the net assets which have been carved out and treated as deemed distribution pursuant to the Restructuring as set out in note 1 to these financial statements. e. As a result of the completion of the BACL Agreement, SWACL Agreement and HKSACL Agreement, details of which are set out in note 13(a) to these financial statements, the Group made a payment of approximately RMB377,550,000 to CNAHC. This payment has been made to CNAHC and accounted for as a special distribution to CNAHC by the Company. Consolidated Cash Flow Statement Year ended 31 December 2005 2005 2004 RMB'000 RMB'000 CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax 3,374,254 3,559,559 Adjustments for: Exchange (gains)/losses, net (1,053,839) 161,824 (Gain)/loss on disposal of property, plant and (74,474) 33,872 equipment, net Loss on derecognition of property, plant and 430,010 - equipment Gains on fuel derivatives, net (221,661) (41,036) Dilution gains on investments - (410,137) Depreciation 4,512,680 3,463,252 Amortisation of lease prepayments 19,555 4,884 Share of profits less losses from associates (224,930) (464,044) Dividend income from available-for-sale investments (168) (4,622) Interest income (108,481) (33,703) Interest expense, net of interest capitalised 1,773,099 1,824,392 Provision/(write-back of provision) for doubtful 14,723 (988) debts, net Write-back of provision against inventories, net - (11,508) Operating profit before working capital changes 8,440,768 8,081,745 Increase in inventories (108,027) (19,681) Increase in trade receivables (414,382) (425,080) Increase in amount due from CNAHC (474,216) - Increase in amount due to CNACG 15,000 - Decrease in amounts due from other CNAHC group companies 6,877 19,012 (Increase)/decrease in prepayments, deposits and other receivables 141,183 (164,606) (Increase)/decrease in deposits for aircraft under operating leases (73,850) 18,581 Increase/(decrease) in amounts due to other CNAHC group companies (9,146) 16,544 Increase in trade payables 157,756 268,645 Decrease in bills payable (34,096) (955,187) Increase in other payables and accruals 211,509 1,154,425 Increase in provision for major overhauls 155,611 93,889 Increase in air traffic liabilities 260,849 52,664 Decrease in provision for early retirement benefits obligations (6,047) (3,409) Recognition of deferred income (76,943) (70,593) Cash generated from operations 8,192,846 8,066,949 Interest paid (1,754,184) (1,872,691) Tax paid: Mainland China enterprise income tax paid (378,675) (36,953) Overseas taxes paid (12,464) (1,568) NET CASH INFLOW FROM OPERATING ACTIVITIES 6,047,523 6,155,737 2005 2004 RMB'000 RMB'000 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment (8,787,258) (5,270,777) Proceeds from disposal of property, plant and 179,493 189,840 equipment Increase in lease prepayments (157,723) (23,349) Additions of advance payments for aircraft and related equipment (4,503,710) (867,828) Net cash settlements of fuel derivatives 95,793 69,036 Decrease in amounts due from associates 27,894 4,461 Increase in amounts due to associates 14,314 58,796 (Increase)/decrease in time deposits with original maturity of more than three months 223,475 (290,024) (Increase)/decrease in pledged deposits (59,344) 1,128,311 Interest received 108,481 33,703 Capital contributions to associates - (709,253) Dividends received from available-for-sale 168 4,622 investments Dividends received from associates 358,609 176,365 Proceeds from disposal of available-for-sale - 264 investments Purchases of available-for-sale investments (600) - Net cash inflow of cash and cash equivalents in respect of the establishment of a joint venture (note 45 (a)) - 516,491 NET CASH OUTFLOW FROM INVESTING ACTIVITIES (12,500,408) (4,979,342) NET CASH INFLOW/(OUTFLOW) BEFORE FINANCING ACTIVITIES (6,452,885) 1,176,395 CASH FLOWS FROM FINANCING ACTIVITIES New bank and other loans 10,480,685 10,146,285 Repayment of bank and other loans (8,680,857) (10,500,107) Repayment of principal under finance lease (1,540,238) (1,607,056) obligations Settlement of long-term payables (95,015) (119,946) Decrease in amount due to CNAHC (2,037,437) (468,789) Contributions by CNAHC - 560,782 Dividends paid to minority shareholders (68,611) (24,909) Receipt of government grants - 32,609 Net proceeds from issuance of new shares upon 1,172,097 7,600,839 listing New capital contribution by a minority shareholder of a subsidiary 2,940 - NET CASH INFLOW/(OUTFLOW) FROM FINANCING ACTIVITIES (766,436) 5,619,708 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 54,483 27,726 NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (7,164,838) 6,823,829 Cash and cash equivalents at beginning of year 9,413,224 2,589,395 CASH AND CASH EQUIVALENTS AT END OF YEAR 2,248,386 9,413,224 Balance Sheet 31 December 2005 2005 2004 Notes RMB'000 RMB'000 NON-CURRENT ASSETS Property, plant and equipment 15 45,025,463 41,908,428 Lease prepayments 16 1,052,493 919,871 Interests in subsidiaries 17 140,075 176,929 Interests in joint ventures 18 1,398,595 1,392,388 Interests in associates 19 723,365 780,837 Advance payments for aircraft and related equipment 6,997,560 2,400,586 Due from CNAHC 20 531,813 631,813 Deposits for aircraft under operating 146,575 55,831 leases Available-for-sale investments 21 816 816 Deferred tax assets 22 391,000 658,000 56,407,755 48,925,499 CURRENT ASSETS Financial assets 44(c) 115,220 - Trade receivables 23 2,517,384 2,197,293 Inventories 24 541,453 468,930 Prepayments, deposits and other 25 651,778 889,037 receivables Pledged deposits 26 84,048 80,519 Non-pledged deposits with maturity of more than three months when acquired 26 20,875 313,768 Cash and cash equivalents 26 891,923 8,108,091 Due from CNAHC 34 474,216 - Due from other CNAHC group companies 27 12,993 8,801 5,309,890 12,066,439 TOTAL ASSETS 61,717,645 60,991,938 CURRENT LIABILITIES Financial liabilities 44(c) (1,791) - Trade payables 28 (3,666,128) (3,819,353) Bills payable 29 (327,937) (362,033) Other payables and accruals 30 (3,568,896) (3,387,870) Provision for major overhauls 31 (18,721) (28,130) Air traffic liabilities (1,337,948) (1,087,838) Tax payable (392,984) (151,533) Obligations under finance leases 32 (1,954,873) (1,705,146) Bank and other loans 33 (10,127,847) (8,255,695) Due to CNAHC and CNACG 34 (118,680) (2,240,213) Due to other CNAHC group companies 27 (22,413) (12,163) (21,538,218) (21,049,974) NET CURRENT LIABILITIES (16,228,328) (8,983,535) TOTAL ASSETS LESS CURRENT LIABILITIES 40,179,427 39,941,964 2005 2004 Notes RMB'000 RMB'000 NON-CURRENT LIABILITIES Obligations under finance leases 32 (8,078,671) (10,576,241) Bank and other loans 33 (12,448,067) (12,896,622) Long term payables 35 (317,379) (437,577) Deferred income 36 (1,025,910) (1,102,853) Provision for major overhauls 31 (474,571) (373,242) Provision for early retirement benefits (189,141) (195,188) obligations (22,533,739) (25,581,723) NET ASSETS 17,645,688 14,360,241 Represented by: Issued share capital 37 9,433,211 9,050,618 Reserves 38 8,212,477 5,309,623 TOTAL EQUITY 17,645,688 14,360,241 This information is provided by RNS The company news service from the London Stock Exchange SCPUUGWAUPQGPB

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