19th Apr 2006 07:02
Air China Ld19 April 2006 (a joint stock limited company incorporated in the People's Republic of China with limited liability) (Stock Code: 753) 2005 ANNUAL RESULTS ANNOUNCEMENT GROUP RESULTS The board of directors (the "Board") of Air China Limited (the "Company") ispleased to announce the audited consolidated financial results of the Companyand its subsidiaries (collectively, the "Group") for the year ended 31December 2005 with comparative figures for the corresponding year of 2004 asfollows: CONSOLIDATED INCOME STATEMENT 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 (4,442,585) (4,230,349) charges Depreciation (4,512,680) (3,463,252) Aircraft maintenance, repair and (1,341,773) (2,835,648) overhaul Employee compensation costs (3,406,825) (2,921,322) Air catering charges (1,242,933) (1,171,784) Aircraft and engine operating (1,530,754) (1,071,256) lease expenses 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 (631,291) (715,350) expenses Total operating expenses (34,617,150) (29,035,506) Profit from operations 6 3,673,816 4,485,251 Finance revenue 7 1,248,607 79,361 Finance costs 7 (1,773,099) (1,879,234) Dilution gains on investments 8 - 410,137 Share of profits less losses from 224,930 464,044associates Profit before tax 3,374,254 3,559,559 Tax 9 (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 10 Interim - - Proposed final 224,793 - 224,793 - Earnings per share attributable 11 to equity holders of the parent Basic 25.5 cents 36.0 cents Diluted NA 36.0 cents CONSOLIDATED BALANCE SHEET 31 December 31 December 2005 2004 RMB'000 RMB'000 NON-CURRENT ASSETS Property, plant and equipment 47,190,728 43,441,637Lease prepayments 1,072,066 933,898Interests in associates 3,793,957 4,001,521Advance payments for aircraft 7,329,322 2,825,612and related equipment Due from CNAHC 531,813 631,813Deposits for aircraft under 222,945 137,583operating leases Available-for-sale investments 22,266 21,666Deferred tax assets 498,371 776,084 60,661,468 52,769,814 CURRENT ASSETS Financial assets 127,659 -Trade receivables 2,764,475 2,364,816Inventories 851,315 743,288Prepayments, deposits and other 762,435 915,130receivables Pledged deposits 176,575 117,231Non-pledged deposits with 97,375 320,850maturity of more than three months when acquired Cash and cash equivalents 2,248,386 9,413,224Due from CNAHC 474,216 -Due from other CNAHC group 38,039 44,916companies 7,540,475 13,919,455 TOTAL ASSETS 68,201,943 66,689,269 CURRENT LIABILITIES Financial liabilities (1,791) -Trade payables (4,601,364) (4,443,608)Bills payable (327,937) (362,033)Other payables and accruals (4,168,435) (3,920,287)Provision for major overhauls (18,721) (28,130)Air traffic liabilities (1,476,619) (1,215,770)Tax payable (421,077) (186,055)Obligations under finance (1,954,873) (1,705,146)leases Bank and other loans (10,401,170) (8,806,051)Due to CNAHC and CNACG (133,680) (2,256,117)Due to other CNAHC group (40,471) (49,617)companies (23,546,138) (22,972,814) NET CURRENT LIABILITIES (16,005,663) (9,053,359) TOTAL ASSETS LESS CURRENT 44,655,805 43,716,455LIABILITIES NON-CURRENT LIABILITIES Obligations under finance (8,078,671) (10,576,241)leases Bank and other loans (12,822,879) (12,896,622)Long-term payables (352,880) (446,311)Deferred income (1,025,910) (1,102,853)Provision for major overhauls (635,718) (470,698)Provision for early retirement (189,141) (195,188)benefits 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 9,433,211 9,050,618Reserves 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 1 GROUP REORGANISATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATIONOF FINANCIAL STATEMENTS The Company was incorporated on 30 September 2004 in Beijing, the People's Republic of China (the "PRC" or "Mainland China"), as a joint stock limitedcompany as part of the restructuring (the "Restructuring") of China NationalAviation Holding Company ("CNAHC"), a PRC state-owned enterprise under thesupervision of the State Council, in preparation for the listing of the Company's H shares on The Stock Exchange of Hong Kong Limited and the London Stock Exchange as described below. As disclosed in the Company's prospectus dated 3 December 2004, pursuant to theRestructuring, CNAHC, and through its wholly-owned subsidiaries, effected thetransfer of the following to the Company upon its incorporation: (a) the assets, liabilities and undertakings which principally relate toairline operations (the "Relevant Businesses"); and (b) the shareholding interests in certain subsidiaries, joint venturesand associates which principally engage in airline operations and the provisionof aircraft engineering services, air catering services, airport ground handlingservices and other airline-related businesses (the "Relevant Companies"). The principal activities of the Group, joint ventures and associates are airlineoperations and the provision of airline-related services, including aircraftengineering services, air catering services and airport ground handling servicesconducted mainly in Mainland China, Hong Kong and Macau. The registered office of the Company is located at 9th Floor, Blue Sky Mansion,28 Tianzhu Road, Zone A, Tianzhu Airport Industrial Zone, Shunyi District,Beijing 101312, the PRC. In the opinion of the Directors, the Company's parent and ultimate holdingcompany is CNAHC. As CNAHC controlled the Relevant Businesses and the Relevant Companies beforethe Restructuring and continues to control the Company after the Restructuring,the consolidated financial statements of the Group prior to the incorporation ofthe Company on 30 September 2004 had been prepared as a reorganisation ofcompanies under common control in a manner similar to a pooling-of-interests. The consolidated results for the year ended 31 December 2004 include the Group'sresults of operations as if the Relevant Businesses and interests in theRelevant Companies had been transferred to the Group at 1 January 2001, which isthe earliest date for the preparation of the financial information in relationto the listing of the Company's H shares. The Company's Directors are of theopinion that the consolidated income statement prepared on this basis presentsfairly the consolidated results of the Group as a whole. 2 BASIS OF PREPARATION The consolidated financial statements of the Group have been prepared inaccordance with International Financial Reporting Standards ("IFRS") whichcomprise standards and interpretations approved by the International AccountingStandards Board, and International Accounting Standards ("IAS") and StandingInterpretations Committee interpretations approved by the InternationalAccounting Standards Committee that remain in effect. The consolidated financial statements of the Group have been prepared on ahistorical cost basis, except for the measurement at fair value of financialinstruments in accordance with IAS 39 (amended 2004) Financial Instruments:Recognition and Measurement. The principal accounting policies used in the preparation of the consolidatedfinancial statements of the Group are consistent with those used in the annualaudited financial statements of the Group for the year ended 31 December 2004,except that the Group has adopted the following new/revised standards mandatoryfor financial years beginning on or after 1 January 2005. (a) IFRS 2 Share-based Payment requires the Group to recogniseshare-based payment transactions in its financial statements, includingtransactions with employees or other parties to be settled in cash, otherassets, or equity instruments of the Group. For equity-settled share-basedpayment transactions, IFRS 2 requires an entity to measure the goods or servicesreceived, and the corresponding increase in equity, directly, at the fair valueof the goods or services received, unless that fair value cannot be estimatedreliably. If the Group cannot estimate reliably the fair value of the goods orservices received, the Group is required to measure their value, and thecorresponding increase in equity, indirectly, by reference to the fair value ofthe equity instruments granted. For cash-settled share-based paymenttransactions, IFRS 2 requires an entity to measure the goods or servicesacquired and the liability incurred at the fair value of the liability. Untilthe liability is settled, the Group is required to re-measure the fair value ofthe liability at each reporting date and at the date of settlement, with anychanges in value recognised in the income statement for the period. Forshare-based payment transactions in which the terms of the arrangement provideeither the Group or the supplier of goods or services with a choice of whetherthe Group settles the transaction in cash or by issuing equity instruments, theGroup is required to account for that transaction, or the components of thattransaction, as a cash-settled share-based payment transaction if, and to theextent that, the Group has incurred a liability to settle in cash (or otherassets), or as an equity settled share-based payment transaction if, and to theextent that, no such liability has been incurred. The provisions of IFRS 2 applyto grants of shares, share options or other equity instruments that were grantedafter 7 November 2002 and had not yet vested on or after 1 January 2005. Theadoption of IFRS 2 did not give rise to any adjustment to the opening balancesof retained earnings of the current and prior years or to any change incomparatives. (b) IAS 16 (amended 2004) Property, Plant and Equipment replaces IAS 16(revised 1998), Property, Plant and Equipment. There are a number of differencesbetween the amended standard and the previous version. Firstly, the amendedstandard requires an entity to evaluate under the general recognition principleall property, plant and equipment costs at the time they are incurred. Thosecosts include costs incurred initially to acquire or construct an item ofproperty, plant and equipment and costs incurred subsequently to add to, replacepart of, or service an item. The previous version of IAS 16 contained specificrecognition principles for the accounting of subsequent costs. Secondly, theamended standard requires that the cost of an item of property, plant andequipment includes the costs of its dismantlement, removal or restoration, andthe obligation for which an entity incurs as a consequence of installing theitem. Its cost also includes the costs of its dismantlement, removal orrestoration, and the obligation for which an entity incurs as a consequence ofusing the item during a particular period for purposes other than to produceinventories during that period. The previous version of the standard includedwithin its scope only the costs incurred as a consequence of installing theitem. Thirdly, under the amended standard an entity is required to determine thedepreciation charge separately for each significant part of an item of property,plant and equipment, a requirement which was not clearly set out in the previousversion. In addition, under the amended standard, an entity is required tomeasure the residual value of an item of property, plant and equipment as theamount that it estimates it would currently receive for the asset if the assetwas already of the age and in the condition expected at the end of its usefullife. The previous version of IAS 16 did not specify whether the residual valuewas to be this amount or the amount, inclusive of the effects of inflation, thatan entity expected to receive at the asset's actual retirement date.Furthermore, the amended standard requires major inspection and overhaul coststo be recognised in the carrying amount of an item of property, plant andequipment when such actions are performed. The adoption of the revised treatment of IAS 16 (amended 2004) has beenaccounted for prospectively, which resulted in the following: (i) In prior years, the aircraft were depreciated over their estimateduseful lives of 20 years. With effect from 1 January 2005, the estimated usefullives of certain components within the aircraft which are subject to replacementduring major overhauls have been reduced to the life of the overhaul cycle. Thechange in accounting estimate has increased the Group's depreciation charge forthe year ended 31 December 2005 by approximately RMB899 million. As a result,the profit after tax of the Group for the year ended 31 December 2005 hasdecreased by approximately RMB604 million. (ii) Major overhaul costs incurred for the year ended 31 December 2005 ofapproximately RMB1,639 million have been capitalised and depreciated over thelife of the overhaul cycle. Prior to 1 January 2005, such costs have beencharged to the income statement on an incurred basis. In this respect, the costsof aircraft maintenance, repair and overhaul of the Group charged to the incomestatement for the year ended 31 December 2005 decreased by RMB1,639 million. Inaddition, the Group has derecognised and charged to the income statement for theyear ended 31 December 2005 the carrying amount of certain components ofapproximately RMB430 million which have been replaced during the major overhaul.As a result, the profit after tax of the Group for the year ended 31 December2005 has increased by approximately RMB824 million. (c) IAS 24 (revised 2003) Related Party Disclosures replaces IAS 24Related Party Disclosures (reformatted in 1994). The main objective of suchrevision was to provide additional guidance and clarity in the scope of IAS 24for the definition and the disclosures for related parties. The wording of IAS24's objective was amended to clarify that the Group's financial statementsshould contain the disclosures necessary to draw attention to the possibilitythat the financial position and the income statement may have been affected bythe existence of related parties and by transactions and outstanding balanceswith them. Since IAS 24 is a standard for disclosure requirements only, there isno material effect on the Group's results of operations and financial positionupon adoption. IFRSs and International Financial Reporting Interpretation CommitteeInterpretations ("IFRIC Interpretations") not yet effective The Group has not applied the following new and revised IFRSs and IFRICinterpretations that have been issued but are not yet effective in thesefinancial statements: IAS 1 Amendment Capital Disclosures IAS 19 Amendment Actuarial Gains and Losses, Group Plans and Disclosures IAS 39 Amendment Cash Flow Hedge Accounting of Forecast Intragroup Transactions IAS 39 Amendment The Fair Value Option IAS 39 and IFRS 4 Financial Guarantee Contracts Amendments IFRS 1 and IFRS 6 First-time Adoption of International Financial Reporting Standards Amendments and Exploration for and Evaluation of Mineral Resources IFRS 6 Exploration for and Evaluation of Mineral Resources IFRS 7 Financial instruments: Disclosures IFRIC - Int 4 Determining whether an Arrangement contains a Lease IFRIC - Int 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds IFRIC - Int 6 Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment The above standards and interpretations are required to be applied for annualperiods beginning on or after 1 January 2006. The IAS 1 Amendment shall be applied for annual periods beginning on or after 1January 2007. The revised standard will affect the disclosures about qualitativeinformation about the Group's objective, policies and procedures for managingcapital; quantitative data about what the Company regards as capital andcompliance with any capital requirements and the consequences of anynon-compliance. IFRS 7 will replace IAS 32 and has modified the disclosure requirements of IAS32 relating to financial instruments. The IFRS shall be applied for annualperiods beginning on or after 1 January 2007. In accordance with the amendments to IAS 39 and IFRS 4 regarding financialguarantee contracts, financial guarantee contracts are initially recognised atfair value and are subsequently measured at the higher of (i) the amountdetermined in accordance with IAS 37 and (ii) the amount initially recognisedless cumulative amortisation, when appropriate, recognised in accordance withIAS 18. The IAS 19 Amendment, IAS 39 Amendments regarding cash flow hedge accounting offorecast intragroup transactions and the fair value option, IFRSs 1 and 6Amendments, IFRS 6, IFRIC-Int 4, IFRIC-Int 5 and IFRIC-Int 6 do not apply to theactivities of the Group. IFRIC-Int 6 shall be applied for annual periodsbeginning on or after 1 December 2005. Except as stated above, the Group expects that the adoption of the otherpronouncements listed above will not have any significant impact on the Group's financial statements in the period of initial application. 3 SEGMENT INFORMATION Business segments The following tables present revenue, profit and certain asset, liability andexpenditure information for the Group's business segments for the years ended31 December 2005 and 31 December 2004: For the year ended 31 December 2005: 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 37,380,669 376,437 320,477 213,383 - 38,290,966external customers Intersegment - 619,098 - 108,873 (727,971) -sales Total revenue 37,380,669 995,535 320,477 322,256 (727,971) 38,290,966 PROFIT FROM OPERATIONS Segment results 3,367,949 772,877 123,679 137,282 (727,971) 3,673,816Finance revenue 1,231,986 8,512 37 8,072 - 1,248,607Finance costs (1,762,481) (7,504) (2,320) (794) - (1,773,099)Share of 81,645 (8,628) 148,096 3,817 - 224,930 profits less losses from associates Profit before 2,919,099 765,257 269,492 148,377 (727,971) 3,374,254tax Tax (903,874)Minority (64,124)interests Net profit 2,406,256 attributable to equity holders of the parent ASSETS Segment assets 63,703,084 1,046,799 122,474 668,200 (1,630,942) 63,909,615Interests in 3,312,608 18,700 192,084 270,565 - 3,793,957associates Unallocated 498,371assets Total assets 68,201,943 LIABILITIES Segment (46,191,851) (489,320) (404,229) (775,802) 1,630,942 (46,230,260)liabilities Unallocated (421,077)liabilities Total (46,651,337)liabilities OTHER INFORMATION Capital expenditures - property, 13,222,058 37,219 855 30,836 - 13,290,968 plant and equipment Depreciation of 4,409,021 38,381 61,303 3,975 - 4,512,680 property, plant and equipment Amortisation of 19,555 - - - - 19,555 lease prepayments Increase in (125,868) - - - - (125,868) fair value of financial assets, net Provision/ 14,836 118 - (231) - 14,723 (write-back of provision) for doubtful debts, net For the year ended 31 December 2004: 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 32,766,164 296,775 287,905 169,913 - 33,520,757external customers Intersegment - 731,589 - 131,299 (862,888) -sales Total revenue 32,766,164 1,028,364 287,905 301,212 (862,888) 33,520,757 PROFIT FROM OPERATIONS Segment results 4,146,402 824,858 203,133 173,746 (862,888) 4,485,251Finance revenue 73,943 278 - 5,140 - 79,361Finance costs (1,859,139) (14,819) (1,978) (3,298) - (1,879,234)Dilution gains 330,222 - - 79,915 - 410,137on investments Share of 331,530 (5,083) 130,661 6,936 - 464,044 profits less losses from associates Profit before 3,022,958 805,234 331,816 262,439 (862,888) 3,559,559tax Tax (1,010,864)Minority (162,731)interests Net profit 2,385,964 attributable to equity holders of the parent ASSETS Segment assets 62,308,593 1,077,748 160,087 379,390 (2,014,154) 61,911,664Interests in 3,589,574 25,539 186,056 200,352 - 4,001,521associates Unallocated 776,084assets Total assets 66,689,269 LIABILITIES Segment (48,845,870) (652,749) (312,765) (677,442) 2,014,154 (48,474,672)liabilities Unallocated (186,055)liabilities Total (48,660,727)liabilities OTHER INFORMATION Capital expenditures - property, 6,046,355 32,697 25,912 33,641 - 6,138,605 plant and equipment Depreciation of 3,395,049 35,797 19,247 13,159 - 3,463,252 property, plant and equipment Amortisation of 4,884 - - - - 4,884 lease prepayments Decrease in 28,000 - - - - 28,000 fair value of financial assets, net Provision/ (4,483) 2,642 - 853 - (988) (write-back of provision) for doubtful debts, net Provision/ 12,492 (24,000) - - - (11,508) (write-back of provision) against inventories, net Geographical segments The following tables present consolidated revenue information by geographicalsegments for the years ended 31 December 2005 and 31 December 2004. For the year ended 31 December 2005 Asia North Japan/ Pacific, Domestic HK/Macau Europe America Korea others Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 REVENUE Sales to 20,490,055 2,269,256 5,081,774 2,964,247 4,250,255 3,235,379 38,290,966 external customers and total revenue For the year ended 31 December 2004 Asia North Japan/ Pacific, Domestic HK/Macau Europe America Korea others Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 REVENUE Sales to 18,482,949 1,744,590 4,232,489 2,477,214 3,846,973 2,736,542 33,520,757 external customers and total revenue 4 AIR TRAFFIC REVENUE Air traffic revenue comprises revenue from the airline operations business andis stated net of business tax. An analysis of air traffic revenue is as follows: Group 2005 2004 RMB'000 RMB'000 Passenger 31,584,426 27,665,018Cargo and mail 3,716,400 3,169,804 35,300,826 30,834,822 Pursuant to various PRC business tax rules and regulations, the Group isrequired to pay business tax to the local tax bureaus at the following rates: Type of revenue Applicable business tax rate Air traffic revenue 3% of air traffic revenue (all inbound international and Hong Kong and Macau regional flights are exempted from business tax) Other operating revenue 3% to 5% of other operating revenue PRC business tax incurred for the years ended 31 December 2005 and 2004, nettedagainst air traffic revenue, amounted to approximately RMB846 million and RMB711million, respectively. 5 OTHER OPERATING REVENUES Group 2005 2004 RMB'000 RMB'000 Bellyhold income from a joint venture 1,496,302 1,384,457Aircraft engineering income 376,437 296,775Ground services income 320,477 287,905General aviation income 155,521 159,990Air catering income 109,591 118,140Government grants: (i) Recognition of deferred income 76,943 70,593 (ii) Fixed cash subsidy - 37,500 (iii) Others 41,250 44,853Service charges on return of unused flight 97,951 63,821tickets Cargo handling service income 67,822 49,850Sale of materials 11,899 33,008Import and export service income 12,311 29,767Training service income 19,029 23,761Aircraft and related equipment lease income 7,072 11,516Gain on disposal of property, plant and 74,474 -equipment, net Others 123,061 73,999 2,990,140 2,685,935 6 PROFIT FROM OPERATIONS The Group's profit from operations is arrived at after charging/(crediting): Group 2005 2004 RMB'000 RMB'000 Repair and maintenance costs 2,078,382 3,608,348Depreciation 4,512,680 3,463,252Amortisation of lease prepayments 19,555 4,884Employee compensation costs 3,406,825 2,921,322Minimum lease payments under operating leases: Aircraft and engines 1,530,754 1,071,256 Land and buildings 211,177 187,471(Gain)/loss on disposal of property, plant and (74,474) 33,872equipment, net Loss on derecognition of property, plant and 430,010 -equipment Auditors' remuneration 11,029 7,206Provision/(write-back of provision) for doubtful 14,723 (988)debts, net Write-back of provision against inventories, net - (11,508) 7 FINANCE REVENUE AND FINANCE COSTS Finance revenue Group 2005 2004 RMB'000 RMB'000 Exchange gains, net 918,297 -Interest income 108,481 33,703Gains on fuel derivatives, net 221,661 41,036Dividend income from available-for-sale 168 4,622investments 1,248,607 79,361 Finance costs Group 2005 2004 RMB'000 RMB'000 Interest expense 1,792,408 1,827,002Less: Interest capitalised (19,309) (2,610) 1,773,099 1,824,392 Exchange losses, net - 54,842 1,773,099 1,879,234 The interest capitalisation rate represents the cost of capital from raising therelated borrowings and is approximately 4.5% (2004: ranging from 5.6% to 5.8%)per annum. 8 DILUTION GAINS ON INVESTMENTS Group 2005 2004 RMB'000 RMB'000 Dilution gain on investment in Air Cargo - 330,222Business Dilution gains on investments in BACL and - 79,915SWACL - 410,137 Notes: (a) Pursuant to the Restructuring, the air cargo business and relevantair cargo assets and liabilities (the "Air Cargo Business") were operated andowned solely by the Group as if it had been directly held by the Group prior to1 January 2004 in accordance with the basis of presentation as set out in note1. In 2004, the entire Air Cargo Business was transferred to Air China CargoCo., Ltd. ("Air China Cargo"), a 51% owned joint venture of the Company, inthe form of the Company's capital contribution and advance to Air China Cargo.Subsequent to the transfer of Air Cargo Business to Air China Cargo, the Group'seffective interest in the Air Cargo Business was diluted from 100% to 51% and,accordingly, a gain on dilution of the investment in Air Cargo Business ofapproximately RMB330 million arose. (b) In accordance with the basis of presentation as set out in note 1, a60% shareholding interest in Beijing Air Catering Co., Ltd. ("BACL") and a 75%shareholding interest in Southwest Air Catering Company Limited ("SWACL") weredeemed to be held by the Group prior to being transferred out during 2004. During 2004, the Group transferred its entire 60% shareholdinginterest in BACL and a 60% shareholding interest in SWACL to Fly Top Limited, awholly-owned subsidiary of China National Aviation Company Limited ("CNAC"), asubsidiary of the Company, for considerations of RMB294 million and RMB67million, respectively. In addition to the above, the Group transferred its remaining 15%shareholding interest in SWACL to Hongkong Southwest Air Catering Limited, theminority shareholder of SWACL, for a consideration of approximately RMB17million. Subsequent to the completion of the above transactions, the Group's effective shareholding interests in BACL and SWACL were diluted from 60% and75%, respectively, to 41% and accordingly gains on dilution of investments inBACL and SWACL in aggregate of approximately RMB80 million arose. 9 TAX According to the PRC Enterprise Income Tax Law, the Company, its subsidiaries,joint ventures and associates established in the PRC are subject to enterpriseincome tax at rates ranging from 15% to 33% (2004: 15% to 33%) on their taxableincome. Hong Kong profits tax has been provided at the rate of 17.5% (2004: 17.5%) onthe estimated assessable profits arising in Hong Kong during the year. The Group is subject to income tax on an entity basis on profits arising in orderived from the jurisdictions in which members of the Group are domiciled andoperate. In accordance with an approval document issued by the relevant taxauthorities, the filing of tax returns of the Relevant Businesses and allwholly-owned PRC-established subsidiaries of the Company prior to itsincorporation on 30 September 2004 was handled by CNAHC on a consolidated groupbasis. The share of the income tax liability of the Relevant Businesses and allwholly-owned PRC-established subsidiaries of the Company prior to itsincorporation was calculated at the applicable tax rates on their profitsdetermined in accordance with PRC accounting principles and after the relevantadjustments made under the prevailing PRC Enterprise Income Tax Law asapplicable to domestic enterprises. Such tax was payable to CNAHC which in turnwould settle the tax liability with the relevant tax bureau. Similarly, the netprofit attributable to CNAHC for the period from 1 January 2004 to 30 September2004 (the date of incorporation of the Company) was calculated after deductingthe amount of income tax payable to CNAHC, which in turn would settle any taxliability on profit arising during that period with the relevant tax bureau. Following the incorporation of the Company, the Company would settle its taxliability by itself with the respective tax bureau. In accordance with the PRC Enterprise Income Tax Law and an approval documentissued by the relevant tax bureau on 28 November 2005 (the "Approval Document"),Air China Cargo was approved to be subject to a corporate income tax rateof 24% on its taxable income as reported in its statutory financial statementsfor the year ended 31 December 2005 and was fully exempted from enterpriseincome tax for the year ended 31 December 2005 and followed by a 3-year 50%reduction in corporate income tax in the period between 1 January 2006 and 31December 2008. In addition, pursuant to the Approval Document, Air China Cargohas been granted a 4-year local income tax exemption in the period between 1January 2005 and 31 December 2008 and followed by a 5-year 50% reduction inlocal income tax in the period between 1 January 2009 and 31 December 2013. The determination of current and deferred income tax was based on enacted taxrates. Major components of income tax charge are as follows: Group 2005 2004 RMB'000 RMB'000 Current income tax Current income tax charge - Mainland China 614,313 398,944 - Hong Kong 11,848 4,096 Deferred income tax Relating to origination a-nd reversal of temporary differences 277,713 607,824 Income tax charge for the year 903,874 1,010,864 Share of tax attributable to associates amounting to RMB33,640,000 (2004:RMB96,974,000) is included in the "Share of profit less losses from associates"on the face of the consolidated income statement. A reconciliation of income tax expense applicable to profit before income tax atthe statutory income tax rates in Mainland China to income tax expense at theGroup's effective income tax rate, and a reconciliation of the applicable rates(i.e., the statutory tax rates) to the effective tax rates, are as follows: Group 2005 2004 RMB'000 % RMB'000 % Profit before income tax 3,374,254 3,559,559 At statutory income tax rate 1,113,504 33.0 1,174,654 33.0of 33% Profits and losses (74,227) (2.2) (153,135) (4.3)attributable to associates Lower income tax rates of (15,024) (0.5) (20,455) (0.6)other territories Tax exemption (49,558) (1.4) - -Income not subject to tax (115,131) (3.4) (211,035) (5.9)Expenses not deductible for 26,941 0.8 220,835 6.2tax purposes Tax losses expired 12,537 0.4 - -Effect on opening deferred 4,832 0.1 - - income tax assets due to decrease in other territories' income tax rates Tax charge at Group's 903,874 26.8 1,010,864 28.4effective income tax rate At 31 December 2005, there was no significant unrecognised deferred taxliability (2004: Nil) for taxes that would be payable on the unremitted earningsof certain of the Group's subsidiaries and joint ventures as the Directors ofthe Company do not have intention to remit any significant amount of earnings tothe Company in the foreseeable future. There are no income tax consequences attaching to the payment of dividends bythe Company to its shareholders. 10. The proposed final dividend of RMB0.2383 per 10 shares for the yearended 31 December 2005 is subject to the approval of the Company's shareholdersat the forthcoming annual general meeting (2004: nil). 11. EARNINGS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THEPARENT The calculation of basic earnings per share for the year ended 31 December 2005is based on the net profit attributable to equity holders of the parent for theyear ended 31 December 2005 of approximately RMB2,406,256,000, and the weightedaverage number of approximately 9,422,728,916 ordinary shares in issue duringthe year, as adjusted to reflect the new issue of 382,592,727 H shares on theexercise of the over-allotment options granted to international underwriters tosubscribe for the Company's H shares during the year. The calculation of basic earnings per share for the year ended 31 December 2004is based on the net profit attributable to equity holders of the parent for theyear ended 31 December 2004 of approximately RMB2,385,964,000, and the weightedaverage number of approximately 6,618,795,915 ordinary shares in issue duringthe year on the assumption that the 6,500,000,000 shares issued as at 30September 2004 had been in issue throughout the year ended 31 December 2004, asadjusted to reflect the new issue of 2,550,618,182 H shares by way of placingand public offering in connection with the public listing of the Company's Hshares on 15 December 2004. Diluted earnings per share for the year ended 31 December 2005 has not beendisclosed because no diluting events existed during 2005. The calculation of diluted earnings per share for the year ended 31 December2004 was based on the net profit attributable to equity holders of the parentfor the year ended 31 December 2004 of approximately RMB2,385,964,000. Theweighted average number of ordinary shares used in the calculation is theweighted average number of 6,618,795,915 shares in issue during the year, asused in the basic earnings per share calculation, and the weighted average of556,132 ordinary shares assumed to have been issued at no consideration on thedeemed exercise of all over-allotment options granted to internationalunderwriters to subscribe for the Company's H shares during the year. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OFOPERATIONS The following discussion and analysis are designed to assist the reader inunderstanding the information provided in this announcement so as to fullycomprehend the financial performance of the Group as a whole. 2005 Review During 2005, along with the rapid growth in demand in the PRC's aviationindustry, the Group's operations maintained good momentum throughout the yearand the Group achieved continued, steady and well-balanced development. In 2005,the Company and Air China Cargo recorded revenue tonne kilometres of 7.44billion and carried 27.69 million passengers and cargos and mails of 733,000tonnes, representing increases of 10.2%, 13.0% and 10.2% from 2004 respectively.The Group's total revenue amounted to RMB38.3 billion in 2005, representing anincrease of 14.2% compared with last year. Operating profit was RMB3,674million, representing a decrease of 18.1% from 2004, mainly due to thesignificant increase in the cost of jet fuel arising from the soaringinternational oil prices. The continual increase in international oil prices presented severe challengesto the aviation and transportation enterprises. In 2005, the cost of jet fuel asa percentage of operating expenses of the Group rose from 28.8% in 2004 to34.0%, representing an increase of RMB3.423 billion compared with 2004. TheGroup implemented various measures to mitigate the impact of rising jet fuelprices, such as the enhancement of operation control, promotion of computerisedplanning system, flight route optimisation, redespatch, purchase of advancedaircraft with lower fuel consumption, and jet fuel hedging transactions. As aresult of our measures to reduce costs and increase efficiency, the Groupsubstantially mitigated the impact of rising jet fuel price. In addition, thecollection of jet fuel surcharge also relieved pressure on operating costs to acertain extent. The Group's net profit attributable to equity holders for 2005was RMB2,406 million, representing an increase of 0.9% from last year, which wasprincipally attributable to factors such as the appreciation of Renminbi. TheGroup continued to maintain its leading position among fellow PRC airlines interms of profitability. In 2005, we introduced a new flight route between Hangzhou and Hong Kong andresumed the Lhaza - Chengdu - Hong Kong route. The Group also introduced orresumed 20 domestic routes, such as the Beijing - Ningbo route, bringing theCompany's total number of routes to 316 with destinations spanning across 22countries (regions) and 106 cities. In 2005, 25 new aircrafts were added to theCompany's fleet, increasing the number of aircrafts to 176. During the year,the Company also entered into purchase contracts for 35 aircrafts and leaseagreements for 17 aircrafts. The scale of the Company's fleet will be expandedfurther to meet the needs for additional routes and increased flight frequency.The expanded fleet capacity will directly contribute to its service capacity forthe 2008 Olympic Games. As at 31 December 2005, the Company had 18,447 employees and its subsidiariesand joint ventures had 12,145 employees. Employees of the Company receive cashremuneration consisting of salary and other cash subsidies. In addition, inorder to provide incentives to the flight crew, the Board of the Companyapproved the Proposal on the Reform of Remuneration and Benefits System for theFlight Crew on 30 December 2005, which came into effect on 1 March 2006. Earnings Per Share In 2005, the Group's earnings per share was RMB25.5 cents, representing adecrease of 29.2% compared with RMB36 cents for 2004. This was mainly due to theinitial public offering of 2,550,618,182 shares upon the Company's listing inlate 2004 and the issue of 382,592,727 shares pursuant to the over-allotmentoption in the beginning of 2005, which increased the weighted average number ofshares compared with last year. Details of earnings per share are set out innote 11 to the financial results in this announcement. Operating Revenue In 2005, the Group's operating revenue was RMB38,291 billion, representing anincrease of 14.2% compared with last year. Increase in the Group's operatingrevenue was mainly attributable to the rapid growth of air traffic revenue,which increased by 14.5% in 2005. In 2005, the daily utilization of aircraftaveraged at 10.4 hours, increased 0.2 hours as compared with 2004. Revenue Contribution by Business 2005 2004 ChangeSegments ( RMB'000) (%) Airline operations 37,380,669 32,766,164 14.1Engineering services 376,437 296,775 26.8Airport terminal services 320,477 287,905 11.3Others 213,383 169,913 25.6 Total operating revenue 38,290,966 33,520,757 14.2 The Group's operating revenues principally included air traffic and otheroperating revenue. Most of our operating revenue was from air traffic revenue,which represented 92.2% of the Group's total revenue in 2005, while the otheroperating revenue represented only 7.8% of the total operating revenue. Amongair traffic revenues in 2005, 89.5% was generated from passenger services and10.5% was from cargo and mail transport. The passenger transport income increased by 14.2% to RMB31.58 billion in 2005from RMB27,67 billion in 2004. It was mainly attributable to the increase intransport capacity, passenger load factor and profitability level. The Company'stransport capacity in terms of available seat kilometres increased by 8.9% to70.66 billion in 2005 from 64.89 billion million in 2004 . The Company's passenger load factor rose to 74.2% in 2005 as compared with 71.9% in 2004. TheCompany's passenger yield increased by 1.8% to RMB0.57 in 2005 from RMB0.56 in2004. Revenue from cargo and mail increased by 17.2% to RMB3,716 million in 2005 fromRMB3,170 million in 2004. Such increase was primarily as a result of theimprovements in the traffic capacity, cargo and mail load factor andprofitability level. Cargo transport capacity in terms of available freighttonne-kilometres increased by 4.5% to 5,063 million in 2005 from 4,843 millionin 2004. The load factor of cargo transport increased to 54.5% in 2005 from 53.3% in2004. The overall cargo yield increased by 2% to RMB2.03 for each yield tonnekilometre in 2005 from RMB1.99 for each yield tonne kilometre in 2004. Operating Expenses The operating expenses of the Group primarily comprise jet fuel costs, take-off,landing and depot charges, depreciation, aircraft maintenance, repair andoverhaul expenses, employee compensation costs and air catering charges. In2005, the Group recorded RMB34.617 billion in operating expenses, representingan increase of 19.2% compared with RMB29.036 billion in 2004, primarily as aresult of the rising jet fuel costs. Operating Expenses 2005 2004 Change( RMB'000) (%) Jet fuel 11,777,129 8,353,752 41.0Take-off, landing and depot charges 4,442,585 4,230,349 5.0Depreciation 4,512,680 3,463,252 30.3Aircraft maintenance, repair and 1,341,773 2,835,648 (52.7)overhaul Employee compensation costs 3,406,825 2,921,322 16.6Air catering expenses 1,242,973 1,171,784 6.1Others 7,893,225 6,059,399 30.3 Total Operating Expenses 34,617,150 29,035,506 19.2 Jet fuel costs increased by 41.0% to RMB11.7 billion in 2005 from RMB8,354million in 2004 and accounted for 34.0% of operating expenses as compared with28.8% in 2004. This increase was primarily due to jet fuel price rise and theincreased consumption of jet fuel as a result of the increased number of flightsoperated. Take-off, landing and depot charges increased by 5% to RMB4,443 million in 2005from RMB4,230 million in 2004, primarily due to the increased number of flightsoperated. Depreciation expenses increased by 30.3% to RMB4,513 million in 2005 fromRMB3,463 million in 2004, primarily due to the accounting changes and fleetexpansion. Details on the accounting changes are set out in note 2 to the Group's financial results in this announcement. Aircraft maintenance, repair and overhaul expenses decreased by 52.7% toRMB1,342 million in 2005 from RMB2,836 million in 2004, primarily due toaccounting changes. Details on the accounting changes are set out in note 2 tothe group's financial results in this announcement. Employee compensation costs increased by 16.7% to RMB3,407 million in 2005 fromRMB2,921 million in 2004, primarily due to the increased flight hours, growth ofthe number of employee, and increased income of employee. Air catering charges increased by 6.1% to RMB1,243 million in 2005 from RMB1,172million in 2004, primarily due to an increase in the number of passengerscarried. Other operating expenses, including aircraft and engines operating leaseexpenses, other flight operation expenses, selling and marketing expenses andgeneral and administrative expenses, increased by 30.3% to RMB7,893 million in2005 from RMB6,059 million in 2004. Expenses on operating leases of aircrafts and engines increased from RMB1,071million in 2004 to RMB1,531 million in 2005, mainly due to the increase inoperations with leased aircrafts as well as wet lease of aircrafts from AirMacau Company Limited, Hong Kong Dragon Airlines Limited and Shandong AirlinesCompany Limited. Other flight operation expenses increased to RMB3,745 million in 2005 fromRMB2,698 million in 2004, primarily due to the adjustments in the accountingpolicies and the increase in CAAC Infrastructure Development Fund as a result ofthe increased number of routes. Selling and marketing expenses increased to RMB1,775 million in 2005 fromRMB1,387 million in 2004, primarily due to higher related expenses as a resultof increased sales income. Analysis of Assets As at 31 December 2005, the Group had total assets of RMB68.2 billion,representing an increase of 2.3% from 31 December 2004. Of the total assets,RMB7,540 million of current assets accounted for 11.1%, while RMB60.66 billionof non-current assets accounted for 88.9%. Among the current assets, cash andcash equivalents were RMB2,248 million, decreasing by 76.1% as compared with 31December 2004, while trade receivables increased by 16.9% as compared with 31December 2004 to RMB2,764 million. Among the non-current assets, property, plantand equipment were RMB47.191 billion, representing an increase of 8.6% ascompared with 31 December 2004. Assets Mortgage As at 31 December 2005, the Group mortgaged certain aircraft with an aggregatecarrying value of approximate RMB26.958 billion (compared with RMB28.585 billionas at 31 December 2004) pursuant to certain loan and finance lease agreements.In addition, certain bank deposits of the Group in the sum of approximatelyRMB177 million (compared with approximately RMB117 million as at 31 December2004) were pledged against the Group's certain loans and obligations in respectof certain operating leases and financial derivatives. Debt Structure of the Group (In RMB'000) Bank, other loans and Obligations under corporate bonds finance leases 2005/12/31 2004/12/31 2005/12/31 2004/12/31 Within one year 10,401,170 8,806,051 1,954,873 1,705,146In the second year 2,747,158 3,063,899 1,949,802 1,943,630In the third to 4,699,654 6,215,259 6,071,492 6,722,448 fifth years, inclusive After five years 5,376,067 3,617,464 57,377 1,910,163 Total 23,224,049 21,702,673 10,033,544 12,281,387 A significant portion of the Group's debts will fall due within one year. TheGroup expects to meet its liabilities with bank loans, internal resources andother resources as they fall due. The Group is not exposed to any insolvencyrisk for the reasons set out in the sections titled "Liquidity and CapitalResources" and "Objective and Policy of Financial Risk Management". Gearing Ratio As at 31 December 2005, the Group's gearing ratio, which represents totalliabilities divided by total assets, was 68.4%, which dropped by 5 percentagepoints from 73.0% as at 31 December 2004. Interest Expense In 2005, interest expense of the Group decreased from RMB1.824 billion in 2004to RMB1.773 billion, primarily due to the repayment of certain bank loans anddecrease in obligations under finance leases. Interest Cover In 2005, earnings before finance revenue and finance costs (including interestexpense, interest income, exchange gains/losses, net gains on fuel derivativesand dividend income from available-for-sale investments), enterprise incometaxes, share of profits less losses of associates, dilution gains on investmentsand depreciation and amortisation ("EBITDA") as computed under IFRS, dividedby interest expense, were 4.62 times, compared with 4.36 times in 2004. Theincrease in interest cover was attributable to the decrease in interest expenseand rise in EBITDA. Capital Commitments and Contingent Liabilities As at 31 December 2005, capital commitments of the Group increased substantiallyfrom RMB11.832 billion as at 31 December 2004 to approximately RMB38.514billion, primarily due to commitments in the purchase of certain aircraft andrelevant flight equipment to be delivered in the coming years, and for theconstruction of certain properties. As at 31 December 2005, the Group had contingent liabilities in respect of bankand other guarantees and other matters arising in the ordinary course ofbusiness. Details of contingent liabilities of the Group will be set out in theCompany's 2005 annual report. Liquidity and Capital Resources The Group finances its operations through cash inflow from operating activitiesand bank loans. Like many other airline groups in the PRC, the Group has beenoperating with a net current liabilities position. As at 31 December 2005 and 31December 2004, net current liabilities of the Group were RMB16 billion andRMB9.053 billion respectively. The increase in net current liabilities wasprimarily due to a decrease in current assets, in particular, a RMB7.165 billiondecrease in cash and cash equivalents. In 2005, the Group's net cash inflow from operating activities decreased by 2%to RMB6.048 billion from RMB6.156 billion in 2004. Net cash outflow frominvesting activities in the same period increased by 151% to RMB12.500 billionfrom RMB4.979 billion in 2004, primarily due to an increase in prepayment forpurchase of aircraft. The Group recorded a net cash outflow in financingactivities of RMB0.766 billion, primarily due to the repayment of bank loans andthe distributions to shareholders pursuant to the Group's restructuring in2004. The major sources of finance of the Group are bank loans. As at 31December 2005, the Group had obtained bank facilities of up to RMB78.570 billionfrom a number of banks in the PRC. As at 16 September 2005, the Company successfully issued corporate bonds of RMB3billion in aggregate. The bonds received overwhelming subscription frominvestors upon issue and were completely taken up on the first date with morethan 10-time oversubscription. Prior to this, on 25 May 2005, the Company hassuccessfully issued short-term commercial papers in the amount of RMB2 billion. Capital Expenditure For 2005, the capital expenditure of the Company amounted to RMB10.547 billion.Among the capital expenditure of the Company, total investment in aircraft wasRMB9.069 billion, including a prepayment of RMB6.183 billion for purchasingaircraft from 2006 onwards. Other investments in capital expenditure items were RMB1.478 billion, whichmainly involved the improvement of first class and business class cabins ofcertain aircraft, ancillary projects in No. 3 Terminal of Beijing InternationalAirport, as well as certain long-term investment projects. The Group intended to fund its capital expenditure with internal generatedsource of funds, bank loans, corporate bonds and the proceeds from the proposedissue of A shares. Objective and Policy of Financial Risk Management The Group is exposed to the fluctuations in jet fuel price during its ordinaryoperations. International jet fuel prices have been historically, and will inthe future continue to be, subject to price volatility and fluctuations insupply and demand. The Group's strategy for managing its jet fuel price riskaims to provide itself with protection against sudden and significant priceincreases. Subject to the applicable laws of the PRC, the Group started toengage in fuel hedging transactions in March 2001. The subjects of hedginginstruments were mainly Singapore jet fuel and Brent crude oil derivatives thatare closely linked to jet fuel. In 2005, the Group applied hedging to 12.3% ofthe procured jet fuel, and the net gain on jet fuel derivatives was RMB222million, representing an increase of 440% compared with 2004. Foreign liabilities constitute a large proportion of the Group's liabilities.As at 31 December 2005, loans denominated in US dollar and Hong Kong dollar wereequivalent to RMB11.352 billion and RMB224 million respectively. Appreciation ofthe Renminbi will benefit the Company with exchange gains. In 2005, the netexchange gains of the Group was RMB918 million (2004: net exchange losses ofRMB55 million). The foreign exchange income and expenses of the Group aregenerally the same. The Group adopted "natural immunity" method to achieve amatching structure of income and expenses by adjusting the proportion of itsliabilities in foreign currencies. The Company will continue to avoid exposureto the risk of exchange rate fluctuation by adopting a strategy that matches theincome and payment in certain principal currencies. Information on financial risk management objectives and polices in other aspectsof the Group's operations will be set out in the Company's 2005 annual report. OUTLOOK FOR 2006 2006 will be a year full of opportunities and challenges. The Company willcontinue to face the severe challenge of oil price hike in the internationalmarket. Besides, with the rapid growth in the PRC's aviation industry, thecontinued deregulation in civil aviation industry to allow investments bydifferent entities, and the shortage in resources such as air route rights, timeslots and key technicians, the Company is expected to face more intense marketcompetition. The Company will continue to overcome these unfavourable factors,through taking full advantage of the golden opportunities arising from the 2008Beijing Olympic Games, maintaining our strategy of building hubs and networksthrough strategic alliance, optimising of resources allocation and activelydeveloping external cooperation such as code sharing arrangement and aviationalliance. Moreover, the Company will continue to promote organisationaltransformation, expand its service network and streamline its operation flow.The Company plans to establish an objective appraisal and performance managementsystem to enhance its overall management standard; further improve corporategovernance, strengthen the function of special committees; continue tostrengthen decision-making function and improve enforceability of decisions, payattention to risk control and the construction of internal control system,aiming to position itself as a highly recognised and most valuable andprofitable airline in the PRC with international competitive strength. SHARE CAPITAL 1. Share Capital Structure Information The Company issued 2,805,680,000 H shares in 2004 (including 255,061,818 Hshares sold by selling shareholders). In January 2005, upon the exercise of theover-allotment options granted to international underwriters, the Company issued420,852,000 H shares, consisting of 382,592,727 new shares, 29,749,686 H sharesconverted from state legal person shares and 8,509,587 H shares converted fromnon-H foreign shares. As at 31 December 2005, the total share capital of theCompany consisted of 9,433,210,909 shares with a par value of RMB1.00 each. Thefollowing table sets out the share structure of the Company as of 31 December2005: Percentage of theCategory of Shares Number of shares total share capital State legal person 4,826,195,989 51.16%Non-H Foreign Shares 1,380,482,920 14.64%H Shares 3,226,532,000 34.20% 9,433,210,909 100.00% 2. Substantial Shareholders As at 31 December 2005, to the knowledge of the directors (the "Directors"),supervisors and chief executive of the Company, the interests and shortpositions of the following persons (other than a Director, supervisor or chiefexecutive of the Company) who have an interest or short position in the sharesand underlying shares of the Company which would fall to be disclosed to theCompany pursuant to the Securities and Futures Ordinance (the "SFO"), or whoare, directly or indirectly, interested in 10% or more of the nominal value ofany class of share capital carrying rights to vote in all circumstances atgeneral meetings of any members of the Group are as follows: (a) Substantial interests in the Company Percentage Percentage Type and Percentage of the of the Percentage number of of the total total of the shares of total issued issued total the Company issued domestic non-H issued concerned shares of shares of foreign H shares Short Type of the the shares of of the positionName interests Company Company the Company Company CNAHC Beneficial 4,826,195,989 51.16% 100% - - - owner domestic shares CNAHC (1) Attributable 1,380,482,920 14.64% - 100% - - interests non-H foreign shares China Beneficial 1,380,482,920 14.64% - 100% - -National owner non-H foreign Aviation shares Corporation (Group) Limited Cathay Beneficial 943,321,091 10.00% - - 29.24% -Pacific owner H shares Swire Pacific Attributable 943,321,091 10.00% - - 29.24% - Limited (2) interests H shares John Swire & Attributable 943,321,091 10.00% - - 29.24% -Sons H shares Limited (2) interests John Swire & Attributable Sons (H.K.) interests 943,321,091 10.00% - - 29.24% -Limited (2) H shares Temasek Attributable 400,450,000 4.25% - - 12.41% -Holdings interests H shares (Private) Limited (3) Note: Based on the information available to the Directors, chief executive andSupervisors of the Company (including such information as was available on thewebsite of the Stock Exchange) and so far as the Directors, chief executive andSupervisors are aware, as at 31 December 2005: 1. By virtue of CNAHC's 100% interest in China National AviationCorporation (Group) Limited, CNAHC is deemed to be interested in the1,380,482,920 non-H foreign shares of the Company directly held by ChinaNational Aviation Corporation (Group) Limited. 2. By virtue of John Swire & Sons Limited's 100% interest in John Swire& Sons (H.K.) Limited and their approximately 30% equity interest and 53% votingrights in Swire Pacific Limited, and Swire Pacific Limited's approximately 46%interest in Cathay Pacific, John Swire & Sons Limited, John Swire & Sons (H.K.)Limited and Swire Pacific Limited are deemed to be interested in the 943,321,091H shares of the Company directly held by Cathay Pacific. 3. Temasek Holdings (Private) Limited, through its controlled entities,had an attributable interest in 400,450,000 H shares of the Company, out ofwhich the interest in 292,500,000 H shares (representing approximately 9.07% ofthe total issued H shares) was held directly by Aranda Investment (Mauritius)Pte Ltd. and the interest in the remaining 107,950,000 H shares was helddirectly by Dahlia Investments Ptd Ltd, FPL Alpha Investment Pte Ltd andFullerton (Private) Limited. 4. Pursuant to the notification filed by HSBC on 18 January 2006, HSBCHalbis Partners (Hong Kong) Limited was interested in 163,840,000 H shares ofthe Company, accounting for 5.08% of the total issued H shares of the Company. 3. Disclosure of Interests of Directors and Supervisors As at 31 December 2005, Mr. Zhang Xianlin, a Supervisor of the Company, hadinterests in 33,126,000 shares, which represents approximately 1% of the sharecapital of CNAC. Save as disclosed above, as at 31 December 2005, none of the Directors,supervisors or chief executive of the Company has interests or short positionsin the shares, underlying shares and/or debentures (as the case may be) of theCompany or its associated corporations (within the meaning of Part XV of theSFO) which were notified to the Company and the Stock Exchange pursuant to SFO(including interests or short positions which he is taken or deemed to haveunder such provisions of the SFO), or recorded in the register maintained by theCompany pursuant to Section 352 of the SFO, or which were notified to theCompany and the Stock Exchange pursuant to the Model Code for SecuritiesTransactions by Directors of the Listed Issuers. For this purpose the relevantprovisions of the SFO will be interpreted as if they applied to the Company's supervisors. None of the Directors or supervisors of the Company and their respectiveassociates (as defined in the Rules Governing the Listing of Securities on TheStock Exchange of Hong Kong Limited (the "Listing Rules")) has any competinginterests which would be required to be disclosed under Rule 8.10 of the ListingRules if each of them were a controlling shareholder of the Company. PURCHASE, SALE OR REDEMPTION OF SHARES During the year ended 31 December 2005, neither the Company nor any of itsubsidiaries had purchased, sold or redeemed any of the Company's listedsecurities. COMPLIANCE WITH THE CODE ON CORPORATE GOVERNANCE PRACTICES The Company has complied with the code provisions set out in the Code onCorporate Governance Practices (the "Code") contained in Appendix 14 to theListing Rules throughout the year of 2005, except for the following deviations: Deviation and considered reasons and or Relevant code provision subsequent compliance 1. Code provision A.5.4 A code of conduct regarding directors, requires, among others, the supervisors, and relevant employees' board should establish securities transactions on terms no less written guidelines on no exacting than the required standard set less exacting terms than out in the Model Code was adopted by the the Model Code for Company on 5 September 2005. Securities Transactions by Directors of Listed Issuers (the "Model Code") for relevant employees in respect of their dealings in the securities of the issuer. 2. Code provision E.1.2 Our Chairman, Mr. Li Jiaxiang, who is a requires, among others, the member of the Chinese government chairman of the board delegation, was required to attend the should attend the annual annual meeting of the International Air general meeting. Transport Association and was therefore unable to attend the annual general meeting of the Company on 30 May 2005. 3. Code provisions B.1.3 and The Company, as required by the relevant C.3.3. require for, among Code provisions, adopted written terms of others, specific written reference of the remuneration committee terms of reference of the and audit committee, on 12 April 2005. remuneration committee and audit committee, respectively. 4. Code provision A.1.3 Meetings of the Board of the Company are requires, among other convened by a 10-day notice served to all things, notice of at least directors. The reason behind the Board's 14 days should be given of practice is that a 10-day notice served a regular board meeting. to the directors is deemed sufficient pursuant to the laws of the PRC. Article 98 of the acticles of association of the Company has been amended so that a notice of at least 14 days must be serviced to all directors before a meeting of the Board, except for extraordinary meeting. The amendment to the articles of association of the Company has been approved by the extraordinary general meeting held on 28 March 2006 and will become effective upon approval by the relevant authorities. COMPLIANCE WITH MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS The Company has adopted the Model Code as set out in Appendix 10 of the ListingRules to govern securities transactions by directors. Having made enquiry to alldirectors of the Company, all directors have confirmed that they have compliedwith the Model Code throughout the period from 1 January 2005 to 31 December2005. DIVIDENDS Pursuant to a resolution passed at the Directors' meeting on 18 April 2006, afinal dividend equivalent to RMB0.2383 per 10 shares totaling approximatelyRMB225 million for the year ended 31 December 2005 was proposed for shareholders' approval at the annual general meeting. PRE-EMPTIVE RIGHTS Neither the Articles of Association of the Company nor the laws of the PRCprovide for any preemptive rights requiring the Company to offer new shares toexisting shareholders in proportion to their existing shareholdings. SERVICE CONTRACTS OF THE DIRECTORS AND SUPERVISORS Each of the Directors has entered into a service contract with the Company for aterm of three years from 30 September 2004 other than Mr. Fan Cheng, whoseservice contract has a term of three years from 18 October 2004, and the servicecontract is thereafter subject to termination by either party giving writtennotice to the other party. None of the Directors has any existing or proposed service contract with anymember of the Group which is not expiring or terminable by the Group within oneyear without payment of compensation (other than statutory compensation). ANNUAL REPORT The Annual Report for the year ended 31 December 2005 containing all informationrequired by Appendix 16 of the Listing Rules will be despatched to shareholdersand 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) indue course. FORWARD-LOOKING STATEMENT We would like to caution readers of this announcement that the airlineoperations are substantially influenced by global political and economicaldevelopments. Accidental and unexpected incidents may have a material impact onour operations or the industry as a whole. This 2005 Annual Results Announcementof the Group contains, inter alia, certain forward-looking statements, such asforward-looking statements on the global and Chinese economies and aviationmarkets. Such forward-looking statements are subject to some uncertainties andrisks. AUDIT COMMITTEE The annual results of the Company have been reviewed by the audit committee ofthe Board of Directors of the Company. By order of the Board Air China Limited Li Jiaxiang Chairman of the Board Beijing, PRC, 18 April 2006 As at the date of this announcement, the Directors of the Company are Messrs LiJiaxiang, Kong Dong, Wang Shixiang, Yao Weiting, Ma Xulun, Cai Jianjiang, FanCheng, Hu Hung Lick, Henry*, Wu Zhipan* and Zhang Ke*. * Independent non-executive Director of the Company This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Air China