Announcements - Continuing Connected Transaction
Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss whatsoever arising from or in reliance upon the whole or any part of the contents of this announcement.
AIR CHINA LIMITED
(a joint stock limited company incorporated in the People's Republic of China with limited liability)
(Stock Code: 00753)
CONTINUING CONNECTED TRANSACTIONS
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SUMMARY
On 26 September 2013, the Board approved, among others, (i) the renewal of the ACC Framework Agreement in respect of the continuing connected transactions between the Group and Air China Cargo and the proposed annual caps for the three years ending 31 December 2014, 2015 and 2016, and (ii) the renewal of the CNACG Framework Agreement in respect of the continuing connected transactions between the Group and CNACG Group and the proposed annual caps for the three years ending 31 December 2014, 2015 and 2016.
As the highest of the applicable Percentage Ratios in respect of the proposed annual caps applicable to the ACC Transactions is, on an annual basis, higher than 5.0%, the ACC Transactions fall under Rule 14A.35 of the Hong Kong Listing Rules. Therefore, the ACC Transactions and the proposed annual caps are subject to the reporting, annual review and announcement requirements under Rules 14A.45 to 14A.47 of the Hong Kong Listing Rules and are required to be approved by Independent Shareholders in accordance with the requirements under Rules 14A.48 at the EGM.
As each of the relevant Percentage Ratios (other than the profits ratio) in respect of the annual caps applicable to the CNACG Transactions is, on an annual basis, higher than 0.1% and less than 5.0%, the CNACG Transactions fall under Rule 14A.34 of the Hong Kong Listing Rules and are accordingly subject to the reporting, annual review and announcement requirements, but are exempt from the requirements of independent shareholders' approval under Chapter 14A of the Hong Kong Listing Rules.
The Company has appointed Asian Capital as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the ACC Transactions and the proposed annual caps under the ACC Framework Agreement.
A circular containing, among other things, (i) details of the ACC Transactions and the proposed annual caps; (ii) a letter from Asian Capital to the Independent Board Committee and the Independent Shareholders containing its advice on the ACC Transactions and the proposed annual caps; and (iii) the recommendation of the Independent Board Committee in respect of the ACC Transactions and the proposed annual caps, will be despatched to Shareholders on or about 15 October 2013 in accordance with the Hong Kong Listing Rules. |
1. CONTINUING CONNECTED TRANSACTIONS WITH AIR CHINA CARGO
1.1 Introduction
Reference is made to the announcement of the Company dated 27 October 2011 and the circular of the Company dated 10 November 2011 in relation to the ACC Framework Agreement entered into between the Company and Air China Cargo on 27 October 2011 and the ACC Transactions. At the extraordinary general meeting of the Company dated 25 November 2011, the Independent Shareholders approved the ACC Transactions and the annual caps for the three years ending 31 December 2013. The current term of the ACC Framework Agreement will expire on 31 December 2013. Upon the expiry of such term, the ACC Framework Agreement shall automatically renew for successive terms of three years unless either party gives to the other party a notice of termination of not less than three months expiring on any 31 December. As the Company expected the ACC Transactions will continue to be conducted after 31 December 2013, the Company has decided to extend the term of the ACC Framework Agreement for a further term of three years commencing on 1 January 2014 and ending on 31 December 2016. Accordingly, the Company is required to re-comply with Chapter 14A of the Hong Kong Listing Rules in respect of the renewal of the ACC Framework Agreement and the ACC Transactions contemplated thereunder.
1.2 The ACC Transactions
Parties and Connection of the Parties
The Company's principal business activity is air passenger, air cargo and airline-related services. The principal activity of Air China Cargo is the operation of cargo airline services.
Air China Cargo is a 51% held subsidiary of the Company. Cathay Pacific, a substantial shareholder of the Company, holds more than 10% of the equity interest in Air China Cargo. Therefore, Air China Cargo is a connected person of the Company as defined under the Hong Kong Listing Rules. Mr. Fan Cheng, a Director of the Company, is a director of Cathay Pacific as well as a director of Air China Cargo.
Description of the ACC Transactions
Pursuant to the ACC Framework Agreement, the Group (other than Air China Cargo) will provide the following services to Air China Cargo:
• the provision of bellyhold space of the passenger aircraft operated by the Company;
• ground support and aircraft maintenance engineering including, among others, the repair and maintenance of aircrafts and engines; and
• other services to Air China Cargo including, among others, labour management and import and export agency services.
Air China Cargo will provide the following services to the Group (other than Air China Cargo):
• ground support including, among others, cargo and mail ground loading and unloading and security inspection services; and
• other services provided to the Group (other than Air China Cargo).
The consideration of specific continuing connected transactions under the ACC Framework Agreement shall be agreed between the Company and Air China Cargo on a case-by-case basis.
The initial term of the ACC Framework Agreement is three years, ending on 31 December 2013, which is automatically renewable for successive terms of three years after its initial expiry date unless being terminated by either party to the ACC Framework Agreement by serving the other party notice of termination of not less than three months expiring on any 31 December.
Reasons for and Benefits of the ACC Transactions
The Directors believe that it is in the best interest of the Company to continue the ACC Transactions with Air China Cargo having taken into account the following factors:
• Air China Cargo, being a company having engaged in air cargo business for a long time, has a profound understanding of, and extensive experience in, the air cargo business and the air cargo industry, and therefore possesses certain advantages in promoting the Company's air cargo business with access to the Company's bellyhold space;
• as the Company and Air China Cargo both have significant presence in Beijing, the PRC, the aircraft related services such as ground support and aircraft maintenance engineering services could be easily accessible and therefore generate revenue and benefit for the Company with low additional cost; and
• the long established successful cooperative relationship between the Company and Air China Cargo is able to provide streamlined and efficient cooperation and transaction between the Company and Air China Cargo.
Historical Amounts and Proposed Caps:
The annual cap for the aggregate amount paid by Air China Cargo to the Group for each of the three years ending 31 December 2013 was RMB5,600 million, RMB6,300 million and RMB7,700 million, respectively. The annual cap for the aggregate amount paid by the Group to Air China Cargo for each of the three years ending 31 December 2013 was RMB46 million, RMB46 million and RMB46 million, respectively.
The actual aggregate amount paid by Air China Cargo to the Group for the two years ended 31 December 2011 and 2012 was approximately RMB3,769 million and RMB4,076 million, respectively. The estimated aggregate amount paid by Air China Cargo to the Group for the year ending 31 December 2013 is approximately RMB4,870 million. The actual aggregate amount paid by the Group to Air China Cargo for the two years ended 31 December 2011 and 2012 was RMB2 million and RMB1 million, respectively. The estimated aggregate amount paid by the Group to Air China Cargo for the year ending 31 December 2013 is approximately RMB3 million.
It is proposed that the annual caps for the aggregate amount payable by Air China Cargo to the Group for the years ending 31 December 2014, 2015 and 2016 shall be RMB6,120 million, RMB7,110 million and RMB8,250 million, respectively. The annual caps for the aggregate amount payable by the Group to Air China Cargo for the years ending 31 December 2014, 2015 and 2016 are proposed to be RMB1,060 million, RMB1,250 million and RMB1,480 million, respectively.
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Historical Caps |
Historical Figures |
Future Caps |
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Transactions |
Annual cap for the year ended 31 December 2011 |
Annual cap for the year ended 31 December 2012 |
Annual cap for the year ending 31 December 2013 |
Actual annual amount for the year ended 31 December 2011 |
Actual annual amount for the year ended 31 December 2012 |
Estimated annual amount for the year ending 31 December 2013 |
Annual cap for the year ending 31 December 2014 |
Annual cap for the year ending 31 December 2015 |
Annual cap for the year ending 31 December 2016 |
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(in millions of RMB) |
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Amount paid/payable by Air China Cargo to the Group |
5,600 |
6,300 |
7,700 |
3,769 |
4,076 |
4,870 |
6,120 |
7,110 |
8,250 |
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Amount paid/payable by the Group to Air China Cargo |
46 |
46 |
46 |
2 |
1 |
3 |
1,060 |
1,250 |
1,480 |
Basis for Such Caps:
In arriving at the above annual caps, the Directors have considered the historical transaction amount and the expected growth of the ACC Transactions, as well as the change in accounting policy.
Prior to 1 September 2012, the revenue from the provision of bellyhold services (the "Bellyhold Revenue") was subject to business tax and was recognised as an amount paid by Air China Cargo to the Group on a net basis by setting off against the commission paid by the Group to Air China Cargo. Therefore, the previous annual caps for the aggregate amount payable by Air China Cargo to the Group as well as the aggregate amount payable by the Group to Air China Cargo for the three years ending 31 December 2013 do not take into account the commission paid by the Group to Air China Cargo in respect of the provision of bellyhold services. Pursuant to the relevant new tax rules and regulations of the PRC, Bellyhold Revenue has become revenue subject to value-added tax with effect from 1 September 2012. Under the new tax rules and regulations, the gross amount of Bellyhold Revenue will be recognised as an amount paid by Air China Cargo to the Group while commission, which will be negotiated between the Group and Air China Cargo on the basis of market condition, will be recognised as an amount paid by the Group to Air China Cargo. The aggregate amount of commission is expected to increase at the same rate as that of the gross Bellyhold Revenue. In order to be in line with the accounting treatment for the Bellyhold Revenue and the commission paid by the Group to Air China Cargo in this regard, the Company considered that, for the purpose of setting the proposed annual caps, it is desirable to treat the gross Bellyhold Revenue to be paid by Air China Cargo to the Group and the commission to be paid by the Group to Air China Cargo separately rather than on a net basis from 2014. Accordingly, it is expected that both the aggregate amount payable by Air China Cargo to the Group and the aggregate amount payable by the Group to Air China Cargo will increase significantly from the year ending 31 December 2014 compared with previous years.
In addition to the impact from the change in accounting policy, more than 90% of the amount payable by Air China Cargo to the Group has been derived from the provision of bellyhold services by the Company to Air China Cargo, and the Bellyhold Revenue is subject to the change of fleet capacity and the unit price:
• The bellyhold cargo space for Air China Cargo will increase along with the expansion of the fleet of passenger aircraft of the Company. The fleet of passenger aircraft of the Company is expected to expand at an annual rate of approximately 7.5% from 2014 to 2016; and
• As a result of the combined effects of the increasing of bellyhold utilization and general product quality, the unit air transportation price is expected to rise at an annual rate of approximately 8.0% from 2014 to 2016.
As such, based on the historical figures set out above, it is expected that the aggregate amount payable by Air China Cargo to the Group for the three years ending 31 December 2016 will increase at an annual rate of approximately 16%.
In arriving at the estimated aggregate amount payable by the Group to Air China Cargo for the years ending 31 December 2014, 2015 and 2016, in addition to the impact from the change in accounting policy as illustrated above, the Company also considered, among other things, the expected increase of other services to be provided by Air China Cargo to the Group.
2. CONTINUING CONNECTED TRANSACTIONS WITH CNACG
2.1 Introduction
Reference is made to the announcement of the Company dated 10 September 2010 in relation to the CNACG Framework Agreement entered into between the Company and CNACG on 26 August 2008 and the CNACG Transactions. The current term of the CNACG Framework Agreement will expire on 31 December 2013. Upon the expiry of such term, the CNACG Framework Agreement shall automatically renew for successive terms of three years unless either party gives to the other party a notice of termination of not less than three months expiring on any 31 December. As the Company expected the CNACG Transactions will continue to be conducted after 31 December 2013, the Company has decided to extend the term of the CNACG Framework Agreement for a further term of three years commencing on 1 January 2014 and ending on 31 December 2016. Accordingly, the Company is required to re-comply with Chapter 14A of the Hong Kong Listing Rules in respect of the renewal of the CNACG Framework Agreement and the CNACG Transactions contemplated thereunder.
2.2 The CNACG Transactions
Parties and Connection of the Parties
CNACG is a substantial shareholder of the Company and is therefore a connected person of the Company as defined under the Hong Kong Listing Rules. CNACG is an investment holding company whose principal businesses include passenger terminal operation, cargo terminal operation, airport ground handling services, airline catering services, property investment, ticket and tourism services, logistics and other businesses conducted through its subsidiaries.
Description of the CNACG Transactions
The CNACG Framework Agreement provides a framework for the Relevant Agreements between members of the Group on the one hand and members of CNACG Group on the other hand. The CNACG Transactions are transactions between members of the Group on the one hand and members of CNACG Group on the other hand, comprising ground handling and engineering services, management services and other services and transactions as may be agreed by parties to be undertaken under the CNACG Framework Agreement excluding those which have been contemplated by the related CNAHC Framework Agreements.
Reasons for and Benefits of the CNACG Transactions
The Group has entered into a series of continuing connected transactions with CNACG Group in its ordinary and usual course of business. CNACG Group possesses ample management expertise and financial resources on airport ground handling and logistics and is able to provide quality services to the Group.
Historical Amounts and Proposed Caps:
The annual caps for the aggregate amount paid by the Group to CNACG Group for each of the three years ending 31 December 2013 was RMB350 million, RMB350 million and RMB350 million, respectively. The actual aggregate amount paid by the Group to CNACG Group for the two years ended 31 December 2011 and 2012 was approximately RMB123 million and RMB233 million, respectively. The estimated aggregate amount paid by the Group to CNACG Group for the year ending 31 December 2013 is approximately RMB255 million.
It is proposed that the annual caps for the aggregate amount payable by the Group to CNACG Group for the years ending 31 December 2014, 2015 and 2016 shall be RMB350 million, RMB350 million and RMB350 million, respectively.
The annual amount payable by CNACG Group to the Group under the CNACG Framework Agreement for each of the three years ending 31 December 2014, 2015 and 2016 is expected to fall below the de minimis threshold as stipulated under Rule 14A.33(3) of the Hong Kong Listing Rules, therefore such transactions will be exempt from the reporting, annual review, announcement and independent shareholders' approval requirements for continuing connected transactions.
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Historical Caps |
Historical Figures |
Future Caps |
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Transactions |
Annual cap for the year ended 31 December 2011 |
Annual cap for the year ended 31 December 2012 |
Annual cap for the year ending 31 December 2013 |
Actual annual amount for the year ended 31 December 2011 |
Actual annual amount for the year ended 31 December 2012 |
Estimated annual amount for the year ending 31 December 2013 |
Annual cap for the year ending 31 December 2014 |
Annual cap for the year ending 31 December 2015 |
Annual cap for the year ending 31 December 2016 |
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(in millions of RMB) |
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Amount paid/payable by the Group to CNACG Group |
350 |
350 |
350 |
123 |
233 |
255 |
350 |
350 |
350 |
Basis for Such Caps:
In arriving at the above annual caps, the Directors have considered the historical transaction amount of the CNACG Transactions and the Group's projections for its fleet sizes, daily utilisation of aircraft and other operating parameters, and have taken into account the growth of the Company's fleet. As the amount payable by the Group to CNACG Group in respect of the CNACG Transactions is not expected to grow significantly, maintaining the cap at RMB350 million for the three years ending 31 December 2016 shall meet the requirements of the Group.
3. HONG KONG LISTING RULES IMPLICATIONS
3.1 As the highest of the applicable Percentage Ratios in respect of the proposed annual caps applicable to the ACC Transactions is, on an annual basis, higher than 5.0%, the ACC Transactions fall under Rule 14A.35 of the Hong Kong Listing Rules. Therefore, the ACC Transactions and the proposed annual caps are subject to the reporting, annual review and announcement requirements under Rules 14A.45 to 14A.47 of the Hong Kong Listing Rules and are required to be approved by Independent Shareholders in accordance with the requirements under Rules 14A.48 at the EGM.
3.2 As each of the relevant Percentage Ratios (other than the profits ratio) in respect of the annual caps applicable to the CNACG Transactions is, on an annual basis, higher than 0.1% and less than 5.0%, the CNACG Transactions fall under Rule 14A.34 of the Hong Kong Listing Rules and are accordingly subject to the reporting, annual review and announcement requirements, but are exempt from the requirements of independent shareholders' approval under Chapter 14A of the Hong Kong Listing Rules.
3.3 The Company will comply with the continuing obligations under Rules 14A.37 to 14A.41 of the Hong Kong Listing Rules and will re-comply with the relevant Hong Kong Listing Rules if the annual caps are exceeded, when the ACC Framework Agreement or CNACG Framework is renewed or when there is a material change to their respective terms.
4. PRC LAW IMPLICATIONS
4.1 Pursuant to the Shanghai Listing Rules, the ACC Transactions and the CNACG Transactions shall be disclosed in a timely fashion.
5. OPINION OF THE DIRECTORS
The Board (including the independent non-executive Directors) considers that the ACC Transactions and CNACG Transactions have been conducted on normal commercial terms or on terms no less favourable than those available to independent third parties and were entered into in the ordinary and usual course of business of the Group, are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and that the relevant annual caps for the ACC Transactions and the CNACG Transactions for each of the three years ending 31 December 2014, 2015 and 2016 are fair and reasonable.
Mr. Wang Changchun, Mr. Christopher Dale Pratt, Mr. Ian Sai Cheung Shiu, Mr. Cai Jianjiang and Mr. Fan Cheng are considered to have a material interest in the ACC Transactions and therefore have abstained from voting on the relevant board resolution of the Company in respect of the ACC Transactions.
Mr. Wang Changshun, Ms. Wang Yinxiang, Mr. Cao Jianxiong and Mr. Sun Yude are considered to have a material interest in the CNACG Transactions and therefore have abstained from voting on the relevant board resolution of the Company in respect of the CNACG Transactions.
The Company has appointed Asian Capital as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the ACC Transactions and the proposed annual caps under the ACC Framework Agreement.
A circular containing, among other things, (i) details of the ACC Transactions and the proposed annual caps; (ii) a letter from Asian Capital to the Independent Board Committee and the Independent Shareholders containing its advice on the ACC Transactions and the proposed annual caps; and (iii) the recommendation of the Independent Board Committee in respect of the ACC Transactions and the proposed annual caps, will be despatched to Shareholders on or about 15 October 2013 in accordance with the Hong Kong Listing Rules.
DEFINITIONS
In this announcement, unless the context otherwise requires, the following terms shall have the following meanings:
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"ACC Framework Agreement" |
the framework agreement, dated 27 October 2011, entered into between the Company and Air China Cargo in respect of the ACC Transactions |
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"ACC Transactions" |
the continuing connected transactions contemplated under the Framework Agreement between the Company and Air China Cargo in relation to the provision of bellyhold space, ground support and aircraft maintenance engineering, as well as other services between Air China Cargo and the Group |
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"Air China Cargo" |
Air China Cargo Co., Ltd, a company with limited liability incorporated under the laws of the PRC, 51% of whose registered capital is owned by the Company as at the date of this announcement |
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"Asian Capital" |
Asian Capital (Corporate Finance) Limited, a corporation licensed to conduct Type 1 (dealing in securities), Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) of the regulated activities under the Securities and Futures Ordinance, the independent financial adviser to the Independent Board Committee and the Independent Shareholders in connection with the ACC Transactions and the proposed annual caps under the ACC Framework Agreement |
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"Board" |
the board of directors of the Company |
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"Cathay Pacific" |
Cathay Pacific Airways Limited, a company incorporated in Hong Kong and listed on the Hong Kong Stock Exchange, the principal activity of which is the operation of scheduled airline services |
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"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 announcement |
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"CNACG Framework Agreement" |
the framework agreement, dated 26 August 2008, entered into between the Company and CNACG under which a framework is provided for entry into the Relevant Agreements |
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"CNACG Group" |
CNACG and its associates |
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"CNACG Transactions" |
transactions between members of the Group on the one hand and members of CNACG Group on the other hand comprising the provision of management services, engineering and ground handling services by CNACG Group to the Group and other services as may be agreed by parties to be undertaken under the CNACG Framework Agreement excluding those which have been contemplated by the related CNAHC Framework Agreements |
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"CNAHC" |
China National Aviation Holding Company, a substantial shareholder of the Company |
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"CNAHC Framework Agreements" |
the framework agreements entered into between the Company and CNAHC on 20 November 2012, respectively, relating to various continuing connected transactions between the Group and CNAHC Group |
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"CNAHC Group" |
CNAHC and its associates |
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"Company" |
Air China Limited, a company incorporated in the PRC, whose H shares are listed on the Hong Kong Stock Exchange as its primary listing venue and on the Official List of the UK Listing Authority as its secondary listing venue, and whose A shares are listed on the Shanghai Stock Exchange |
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"Director(s)" |
the director(s) of the Company |
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"EGM" |
the extraordinary general meeting of the Company to be held to seek Independent Shareholders' approval for, among other things, the ACC Transactions as set forth in this announcement |
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"Group" |
the Company and its subsidiaries |
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"Hong Kong Listing Rules" |
The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited |
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"Hong Kong Stock Exchange" |
The Stock Exchange of Hong Kong Limited |
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"Independent Board Committee" |
a board committee comprising Mr. Fu Yang, Mr. Li Shuang, Mr. Han Fangming and Mr. Yang Yuzhong, all being the independent non-executive directors of the Company |
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"Independent Shareholders" |
the shareholders of the Company excluding Cathay Pacific and its associates |
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"Percentage Ratios" |
the percentage ratios set out in Rule 14.07 of the Hong Kong Listing Rules, i.e. "assets ratio", "profits ratio", "revenue ratio", "consideration ratio" and "equity capital ratio" |
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"PRC" |
The People's Republic of China, excluding, for the purpose of this announcement only, Hong Kong, Macau and Taiwan |
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"Relevant Agreements" |
the agreements between members of the Group on the one hand and members of the CNACG on the other hand in respect of the CNACG Transactions |
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"RMB" |
Renminbi, the lawful currency of the PRC |
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"Shanghai Listing Rules" |
the Rules Governing the Trading of Stocks on the Shanghai Stock Exchange |
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"Shareholders" |
the shareholders of the Company |
By order of the Board
Air China Limited
Rao Xinyu Tam Shuit Mui
Joint Company Secretaries
Beijing, the PRC, 26 September 2013
As at the date of this announcement, the directors of the Company are Mr. Wang Changshun, Ms. Wang Yinxiang, Mr. Cao Jianxiong, Mr. Sun Yude, Mr. Christopher Dale Pratt,Mr. Ian Sai Cheung Shiu, Mr. Cai Jianjiang, Mr. Fan Cheng, Mr. Fu Yang*, Mr. Li Shuang*,Mr. Han Fangming* and Mr. Yang Yuzhong*.
* Independent non-executive director of the Company
This information is provided by RNS
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