As filed with the Securities and Exchange Commission on [June 30, 2003]
Yesþ NoWashington,WASHINGTON, D.C. 20549 o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 ORx þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 o Commission file number: 1-14660SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934BAIYUN INTERNATIONAL AIRPORT278 JI CHANG ROAD
GUANGZHOU
PEOPLE’S REPUBLIC OF CHINA, 510405Act: Title of each class:class Name of each exchange on which registered:
registered Ordinary H Shares of par value RMB1.00 per share New York Stock Exchange, Inc. RMB 1.00 per share represented by American Depositary Shares Act: Act.SEC 1852 (05-06) Persons who respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number. Act: Act.report:report. 2,200,000,000 ordinary Domestic Shares of par value RMB1.00RMB 1.00 per share and 1,174,178,000 ordinary H Shares of par value RMB1.00RMB 1.00 per share and 1,000,000 ordinary A Shares of par value RMB 1.00 per share were issued and outstanding as of December 31, 2002.2005. YesxNoAccelerated filerþ Non-accelerated filero Item 17oItem 18x
o Yesþ No
TABLE OF CONTENTS
2 Page 4 4 5 Forward-Looking Statements1Introductory Note1Glossary of Airline Industry Terms2 PART IItem 1. Identity of Directors, Senior Management and Advisers 36 36 36 36 79 710 710 1113 1113 Business Overview 1215 Organizational Structure 3015 31 32 33 33Overview 34 35 34Operating Results 36 Liquidity and Capital Resources 4137 42 47 4349 4349 4349 455454 54 54 56 56 56 56 60 60 60 60 60 61 61 61 62 62 62 62 62 62 62 66 67 67 i
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iii
-• general economic and business conditions, including changes in interest rates; -• prices and other economic conditions; -• natural phenomena; -• actions by government authorities, including changes in government regulation; -• the Company’s relationship with CSAHC (formerly the “SA Group”);CSAHC; -• uncertainties associated with legal proceedings; -• technological development; -• future decisions by management in response to changing conditions; -• the Company’s ability to execute prospective business plans; and -• misjudgments in the course of preparing forward-looking statements.
Company. 4CSAHC“CSAHC” means China Southern Air Holding Company, the Company’s parent company which holds a 65.2%50.3% controlling interest in the Company (Southern Airlines (Group) changed its official name to China Southern Air Holding Company on October 11, 2002.).20012004 and 2002, and the consolidated financial statements for the years ended December 31, 2000, 2001 and 2002, together with the notes thereto (collectively, the2005 (the “Financial Statements”), have been prepared in accordance with International Financial Reporting Standards (“IFRS”) promulgated by the International Accounting Standards Board. IFRS includes International Accounting Standards (“IAS”) and related interpretations. IFRS differs in certain materialsignificant respects from accounting principles generally accepted in the United States of
Statements.
1
5 “available seat kilometers” or “ASKs” the number of seats made available for sale multiplied by the kilometers flown “available ton kilometers” or “ATKs” the number of tons of capacity available for the transportation of revenue load (passengers and cargo) multiplied by the kilometers flown “revenue passenger kilometers” or “RPKs” the number of revenue passengers carried multiplied by the kilometers flown “cargo ton kilometers” the cargo load in tons multiplied by the kilometers flown “revenue ton kilometers” or “RTKs” the load (passenger and cargo) in tons multiplied by the kilometers flown “passenger yield” revenue from passenger operations divided by RPKs “cargo yield” revenue from cargo operations divided by cargo ton kilometers “average yield” revenue from airline operations (passenger and cargo) divided by RTKs “ton” a metric ton, equivalent to 2,204.6 pounds “passenger load factor” RPKs expressed as a percentage of ASKs “overall load factor” RTKs expressed as a percentage of ATKs “breakeven load factor” the load factor required to equate scheduled traffic revenue with operating costs assuming that total operating surplus is attributable to scheduled traffic operations “utilization rate” the actual number of flight hours per aircraft per operating day “rotables” aircraft parts that are ordinarily repaired and reused “expendables” aircraft parts that are ordinarily used up and replaced with new parts 2
PART I
6consolidated income statementfinancial data of the Company as of and for each of the years in the five-year period ended December 31, 2002 and2005. The selected data of consolidated balance sheet datastatements of operations for each of the years in the five-yearthree-year period ended December 31, 20022005 and consolidated balance sheets as of December 31, 2004 and 2005 have been derived from the consolidated financial statements of the Company. SuchCompany, including the related notes, included elsewhere in this Annual Report. The selected IFRS data of consolidated statements of operations for the years ended December 31, 2001 and 2002 and IFRS consolidated balance sheets of December 31, 2001, 2002 and 2003 are derived from the Company’s audited consolidated financial statements have been audited by KPMG, independent certified public accountants,that are not included in this Annual Report.preparedpresented in accordance with IFRSIFRS.basis thatface of the consolidated statements of operations as an allocation of the total profit or loss for the period between the minority interests and the equity shareholders of the Company. These changes in presentation have been applied retrospectively with comparatives restated.with— History and Development of the Company”) such that at December 31, 2004 only the acquired assets and liabilities are included inthe consolidated financial statements. The results of the acquired operations and their related cash flows was included in the consolidated financial statements of the Group beginning January 1, 2005. Under U.S. GAAP, such transaction is considered to be “a combination of entities under common control”. A combination of entities under common control is accounted for in a manner similar to a “pooling-of-interests”. Consequently, the assets and liabilities of CNA and XJA are reflected at their U.S. GAAP carrying values and the U.S. GAAP consolidated financial statements are restated to include the assets and liabilities of CNA and XJA, and their results of operations and cash flows for all its present divisions and subsidiaries had been so constituted during the relevant periods. IFRS differs in certain material respects from U.S. GAAP.periods presented. See Note 3150 to the Financial Statementsconsolidated financial statements for a descriptionthe nature and effect of the materialsuch differences and other significant differences related to the Group between IFRS and U.S. GAAP as of December 31, 20012004 and 20022005 and for each of the years in the three-year period ended December 31, 2002.2005 and the condensed consolidated financial statements prepared and presented in accordance with U.S. GAAP for the relevant periods. The following information should be read in conjunction with, and is qualified in its entirety by, the Financial Statements of the Group. Year ended December 31, 1998 1999 2000 2001 2002 2002 RMB RMB RMB RMB RMB US$ (in million, except per share data) IFRS: Operating revenue 11,849.4 13,299.6 15,178.3 16,879.7 18,018.6 2,176.9 Operating expenses 11,259.4 11,449.7 13,996.2 15,479.0 15,992.5 1,932.1 Operating income 590.0 1,849.9 1,182.1 1,400.7 2,026.1 244.8 Equity (loss) income of affiliated companies (1.8 ) 36.1 45.9 53.0 37.0 4.5 Equity loss of jointly controlled entities — — — (4.0 ) (3.4 ) (0.4 ) Gain (loss) on sale of fixed assets 182.9 (18.7 ) 372.6 (55.9 ) 170.7 20.6 Interest expense (1,197.4 ) (1,192.2 ) (1,074.2 ) (933.7 ) (959.2 ) (115.9 ) Exchange (loss) gain, net (366.3 ) (426.5 ) 318.5 296.8 (175.4 ) (21.2 ) Other, net 205.2 119.9 86.3 38.4 43.3 5.2 (Loss) income before taxation and minority interests (587.4 ) 368.5 931.2 795.3 1,139.1 137.6 Taxation 178.6 (128.0 ) (338.9 ) (320.5 ) (398.2 ) (48.1 ) Minority interests (105.8 ) (158.1 ) (90.5 ) (134.6 ) (165.1 ) (19.9 ) Net (loss) income (514.6 ) 82.4 501.8 340.2 575.8 69.6 Basic (loss) earnings per share (0.15 ) 0.02 0.15 0.10 0.17 0.021 Basic (loss) earnings per ADS (7.63 ) 1.22 7.44 5.04 8.53 1.03 U.S. GAAP: Net (loss) income (582.2 ) 370.3 354.4 430.7 474.0 57.3 Basic (loss) earnings per share (0.17 ) 0.11 0.11 0.13 0.14 0.017 Basic (loss) earnings per ADS (8.63 ) 5.49 5.25 6.38 7.02 0.85 Year ended December 31, 2001 2002 2003 2004 2005 2005 RMB RMB RMB RMB RMB US$ (in million, except per share data) IFRS: (Restated) (Restated) (Restated) (Restated) Operating revenue 16,880 18,019 17,470 23,974 38,293 4,745 Operating expenses 15,479 15,993 17,014 23,065 39,598 4,907 Operating income/(loss) 1,401 2,026 456 909 (1,305 ) (162 ) Interest expense (934 ) (959 ) (824 ) (691 ) (1,616 ) (200 ) Exchange gain/(loss), net 297 (176 ) (164 ) (59 ) 1,220 151 Income/(loss) before taxation 788 1,130 (521 ) 220 (1,853 ) (230 ) Taxation (expense)/benefit (313 ) (389 ) 334 (65 ) 7 1 Income/ (loss) for the year 475 741 (187 ) 155 (1,846 ) (229 ) Income/(loss) attributable to : Equity shareholders of the Company 340 576 (358 ) (48 ) (1,848 ) (229 ) Minority interests 135 165 171 203 2 — Basic earnings/(loss) per share 0.10 0.17 (0.09 ) (0.01 ) (0.42 ) (0.052 ) Basic earnings/(loss) per ADS 5.04 8.53 (4.68 ) (0.55 ) (21.12 ) (2.62 ) 3
December 31, | |||||||||||||||||||||||||
1998 | 1999 | 2000 | 2001 | 2002 | 2002 | ||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | ||||||||||||||||||||
(in million) | |||||||||||||||||||||||||
Balance Sheet Data: | |||||||||||||||||||||||||
IFRS: | |||||||||||||||||||||||||
Cash and cash equivalents | 4,103.7 | 4,588.4 | 4,197.5 | 2,817.9 | 3,771.0 | 455.6 | |||||||||||||||||||
Other current assets | 2,080.7 | 1,715.2 | 1,691.9 | 1,560.5 | 1,834.8 | 221.7 | |||||||||||||||||||
Fixed assets, net | 22,904.3 | 24,211.2 | 23,282.1 | 22,352.2 | 26,920.8 | 3,252.4 | |||||||||||||||||||
Total assets | 32,083.3 | 32,557.7 | 30,924.0 | 30,653.1 | 37,188.0 | 4,492.8 | |||||||||||||||||||
Notes payable, including current portion of long term notes payable | 666.8 | 613.3 | 783.1 | 2,177.5 | 5,240.7 | 633.1 | |||||||||||||||||||
Current installments of obligations under capital leases | 1,120.0 | 1,999.7 | 1,776.2 | 1,451.9 | 1,566.7 | 189.3 | |||||||||||||||||||
Notes payable, excluding current portion | 5,032.6 | 4,424.2 | 3,788.7 | 3,627.6 | 5,835.4 | 705.0 | |||||||||||||||||||
Obligations under capital leases, excluding current installments | 11,845.3 | 11,490.9 | 9,416.3 | 7,691.6 | 6,631.8 | 801.2 | |||||||||||||||||||
Shareholders’ equity | 8,297.3 | 8,379.7 | 8,881.4 | 9,221.7 | 9,613.2 | 1,161.4 | |||||||||||||||||||
U.S. GAAP: | |||||||||||||||||||||||||
Shareholders’ equity | 7,857.1 | 8,227.4 | 8,527.3 | 8,958.0 | 9,287.3 | 1,122.0 |
Year ended December 31, | ||||||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | 2005 | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in million, except per share data) | ||||||||||||||||||||||||
Cash dividends declared per share | — | 0.02 | — | — | — | — | ||||||||||||||||||
U.S. GAAP: | ||||||||||||||||||||||||
Traffic revenue | 23,615 | 24,854 | 24,897 | 33,235 | 37,419 | 4,637 | ||||||||||||||||||
Other operating revenue | 657 | 904 | 586 | 930 | 874 | 108 | ||||||||||||||||||
Operating income/(loss) | 1,584 | 1,948 | 366 | 1,877 | (1,092 | ) | (135 | ) | ||||||||||||||||
Interest expense | (1,800 | ) | (1,820 | ) | (1,604 | ) | (1,184 | ) | (1,589 | ) | (197 | ) | ||||||||||||
Foreign currency exchange gain/(loss), net | 532 | (327 | ) | (381 | ) | (124 | ) | 1,220 | 151 | |||||||||||||||
Income/(loss) before income taxes and minority interests | 468 | (145 | ) | (1,549 | ) | 693 | (1,574 | ) | (193 | ) | ||||||||||||||
Income tax (expense)/benefit | (401 | ) | (356 | ) | 536 | (261 | ) | 46 | 4 | |||||||||||||||
Minority interests | (97 | ) | (154 | ) | (127 | ) | (193 | ) | (2 | ) | — | |||||||||||||
Net (loss)/income | (30 | ) | (655 | ) | (1,140 | ) | 239 | (1,530 | ) | (189 | ) | |||||||||||||
Basic (loss)/earnings per share | (0.009 | ) | (0.194 | ) | (0.298 | ) | 0.055 | (0.350 | ) | (0.043 | ) | |||||||||||||
Basic (loss)/earnings per ADS | (0.432 | ) | (9.706 | ) | (14.876 | ) | 2.732 | (17.489 | ) | (2.172 | ) | |||||||||||||
Cash dividend declared per share | — | 0.02 | — | — | — | — | ||||||||||||||||||
December 31, | ||||||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | 2005 | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in million) | ||||||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||
IFRS: | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||||||||
Cash and cash equivalents | 2,818 | 3,771 | 2,080 | 3,083 | 2,901 | 360 | ||||||||||||||||||
Other current assets | 1,561 | 1,835 | 1,922 | 4,286 | 4,320 | 535 | ||||||||||||||||||
Property, plant and equipment, net | 22,352 | 26,921 | 28,536 | 46,841 | 54,266 | 6,725 | ||||||||||||||||||
Total assets | 30,653 | 37,188 | 39,062 | 62,383 | 71,402 | 8,848 | ||||||||||||||||||
Notes payable, including current installments of long term notes payable | 2,178 | 5,241 | 7,097 | 11,518 | 16,223 | 2,010 | ||||||||||||||||||
Current installments of obligations under capital leases | 1,452 | 1,567 | 1,298 | 2,144 | 3,373 | 418 | ||||||||||||||||||
Notes payable, excluding current installments | 3,628 | 5,835 | 4,522 | 11,935 | 12,740 | 1,579 | ||||||||||||||||||
Obligations under capital leases, excluding current installments | 7,692 | 6,632 | 5,543 | 9,599 | 12,459 | 1,544 | ||||||||||||||||||
Total equity | 10,600 | 11,130 | 13,569 | 13,903 | 11,936 | 1,479 | ||||||||||||||||||
U.S. GAAP: | ||||||||||||||||||||||||
Cash and cash equivalents | 4,384 | 4,772 | 2,999 | 3,083 | 2,901 | 360 | ||||||||||||||||||
Other current assets | 3,065 | 3,391 | 3,034 | 4,505 | 4,551 | 561 | ||||||||||||||||||
Property, plant and equipment, net | 35,676 | 40,277 | 41,012 | 46,202 | 53,759 | 6,662 | ||||||||||||||||||
Total assets | 48,456 | 54,860 | 58,610 | 65,144 | 74,906 | 9,283 | ||||||||||||||||||
Notes payable, including current portion of long term notes payable | 5,359 | 10,304 | 8,600 | 11,518 | 16,223 | 2,010 | ||||||||||||||||||
Current installments of obligations under capital leases | 2,428 | 2,591 | 2,368 | 2,106 | 3,401 | 421 | ||||||||||||||||||
Notes payable, excluding current portion | 8,856 | 9,179 | 8,634 | 11,935 | 12,740 | 1,579 | ||||||||||||||||||
Obligations under capital leases, excluding current installments | 14,167 | 13,333 | 13,849 | 11,975 | 14,807 | 1,835 | ||||||||||||||||||
Net shareholders’ equity | 7,315 | 6,796 | 13,098 | 11,169 | 9,639 | 1,194 |
Apart from the data set out in the table below, the operating data and the profit analysis and comparison for theother years 2001 and 2002 below is calculated and disclosed in accordance with the new statistical standards.standards, which has been implemented since January 1, 2001. See “Glossary of Airline Industry Terms” at the front of this Annual Report for definitions of certain terms used herein.
Year ended December 31, | ||||||||||||||||||||||
1998 | 1999 | 2000 | 2001 | 2002 | ||||||||||||||||||
Capacity | ||||||||||||||||||||||
ASK (million) | ||||||||||||||||||||||
— Domestic | 23,417 | 24,900 | 28,345 | 31,393 | 33,753 | |||||||||||||||||
— Hong Kong regional | 1,673 | 1,791 | 1,744 | 1,690 | 1,746 | |||||||||||||||||
— International | 5,060 | 5,155 | 5,742 | 6,981 | 8,746 | |||||||||||||||||
Total | 30,150 | 31,846 | 35,831 | 40,064 | 44,245 | |||||||||||||||||
ATK (million) | ||||||||||||||||||||||
— Domestic | 2,709 | 2,865 | 3,322 | 3,622 | 3,924 | |||||||||||||||||
— Hong Kong regional | 206 | 214 | 198 | 185 | 193 | |||||||||||||||||
— International | 667 | 683 | 1,087 | 1,317 | 1,798 |
7
4
Year ended December 31, | ||||||||||||||||||||||
1998 | 1999 | 2000 | 2001 | 2002 | ||||||||||||||||||
Total | 3,582 | 3,762 | 4,607 | 5,124 | 5,915 | |||||||||||||||||
Kilometers flown (thousand) | 170,188 | 182,200 | 209,431 | 234,051 | 258,379 | |||||||||||||||||
Hours flown (thousand) | 239 | 287 | 326 | 365 | 405 | |||||||||||||||||
Number of flights | ||||||||||||||||||||||
— Domestic | 121,902 | 126,120 | — | — | — | |||||||||||||||||
— Hong Kong regional | 12,477 | 13,460 | — | — | — | |||||||||||||||||
— International | 5,930 | 6,600 | — | — | — | |||||||||||||||||
Total | 140,309 | 146,180 | — | — | — | |||||||||||||||||
Number of landing and take-offs | ||||||||||||||||||||||
— Domestic | — | — | 165,726 | 183,651 | 194,776 | |||||||||||||||||
— Hong Kong regional | — | — | 14,255 | 13,712 | 13,891 | |||||||||||||||||
— International | — | — | 8,861 | 10,698 | 13,990 | |||||||||||||||||
Total | — | — | 188,842 | 208,061 | 222,657 | |||||||||||||||||
Traffic | ||||||||||||||||||||||
RPK (million) | ||||||||||||||||||||||
— Domestic | 14,637 | 14,511 | 16,974 | 19,447 | 22,092 | |||||||||||||||||
— Hong Kong regional | 972 | 1,106 | 1,074 | 1,060 | 1,081 | |||||||||||||||||
— International | 2,652 | 3,068 | 3,605 | 4,550 | 5,767 | |||||||||||||||||
Total | 18,261 | 18,685 | 21,653 | 25,057 | 28,940 | |||||||||||||||||
RTK (million) | ||||||||||||||||||||||
— Domestic | 1,487 | 1,518 | 1,941 | 2,217 | 2,532 | |||||||||||||||||
— Hong Kong regional | 92 | 106 | 107 | 105 | 108 | |||||||||||||||||
— International | 336 | 379 | 565 | 712 | 974 | |||||||||||||||||
Total | 1,915 | 2,003 | 2,613 | 3,034 | 3,614 | |||||||||||||||||
Passengers carried (thousand) | ||||||||||||||||||||||
— Domestic | 12,985 | 12,769 | 14,450 | 16,499 | 18,535 | |||||||||||||||||
— Hong Kong regional | 1,287 | 1,434 | 1,444 | 1,409 | 1,369 | |||||||||||||||||
— International | 780 | 909 | 957 | 1,213 | 1,589 | |||||||||||||||||
Total | 15,052 | 15,112 | 16,851 | 19,121 | 21,493 | |||||||||||||||||
Cargo and mail carried (tons) | 348,041 | 390,750 | 353,000 | 398,000 | 470,000 | |||||||||||||||||
Load Factors | ||||||||||||||||||||||
Passenger load factor (RPK/ASK) (%) | ||||||||||||||||||||||
— Domestic | 62.5 | 58.3 | 59.9 | 61.9 | 65.5 | |||||||||||||||||
— Hong Kong regional | 58.1 | 61.8 | 61.6 | 62.7 | 61.9 | |||||||||||||||||
— International | 52.4 | 59.5 | 62.8 | 65.2 | 65.9 | |||||||||||||||||
Total | 60.6 | 58.7 | 60.4 | 62.5 | 65.4 | |||||||||||||||||
Overall load factor (RTK/ATK) (%) | ||||||||||||||||||||||
— Domestic | 54.9 | 53.0 | 58.4 | 61.2 | 64.5 | |||||||||||||||||
— Hong Kong regional | 44.9 | 49.5 | 54.0 | 56.8 | 55.8 | |||||||||||||||||
— International | 50.4 | 55.5 | 52.0 | 54.1 | 54.2 | |||||||||||||||||
Total | 53.5 | 53.2 | 56.7 | 59.2 | 61.1 | |||||||||||||||||
Breakeven load factor (%) | 52.3 | 47.5 | 54.0 | 55.6 | 55.9 | |||||||||||||||||
Yield | ||||||||||||||||||||||
Yield per RPK (RMB) | ||||||||||||||||||||||
— Domestic | 0.58 | 0.65 | 0.62 | 0.62 | 0.55 | |||||||||||||||||
— Hong Kong regional | 1.14 | 1.00 | 1.06 | 1.06 | 0.98 | |||||||||||||||||
— International | 0.40 | 0.42 | 0.43 | 0.41 | 0.42 | |||||||||||||||||
Total | 0.58 | 0.63 | 0.61 | 0.60 | 0.54 | |||||||||||||||||
Yield per cargo and mail ton kilometers | 1.72 | 1.63 | 2.13 | 1.76 | 1.73 |
Year ended December 31, | ||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | ||||||||||||||||
Capacity | ||||||||||||||||||||
ASK (million) | ||||||||||||||||||||
— Domestic | 31,393 | 33,753 | 32,590 | 41,330 | 72,107 | |||||||||||||||
— Hong Kong and Macau | 1,690 | 1,746 | 1,347 | 1,896 | 2,656 | |||||||||||||||
— International | 6,981 | 8,746 | 6,930 | 10,543 | 13,598 | |||||||||||||||
Total | 40,064 | 44,245 | 40,867 | 53,769 | 88,361 | |||||||||||||||
ATK (million) | ||||||||||||||||||||
— Domestic | 3,622 | 3,924 | 3,772 | 4,773 | 8,352 | |||||||||||||||
— Hong Kong and Macau | 185 | 193 | 150 | 211 | 315 | |||||||||||||||
— International | 1,317 | 1,798 | 1,999 | 2,462 | 2,842 | |||||||||||||||
Total | 5,124 | 5,915 | 5,921 | 7,446 | 11,509 | |||||||||||||||
Kilometers flown (thousand) | 234,051 | 258,379 | 249,068 | 324,827 | 539,844 | |||||||||||||||
Hours flown (thousand) | 365 | 405 | 385 | 501 | 846 | |||||||||||||||
Number of landing and take-offs | ||||||||||||||||||||
— Domestic | 183,651 | 194,776 | 191,460 | 243,410 | 394,069 | |||||||||||||||
— Hong Kong and Macau | 13,712 | 13,891 | 11,400 | 15,380 | 17,807 | |||||||||||||||
— International | 10,698 | 13,990 | 11,330 | 15,790 | 26,798 | |||||||||||||||
Total | 208,061 | 222,657 | 214,190 | 274,580 | 438,674 | |||||||||||||||
Traffic | ||||||||||||||||||||
RPK (million) | ||||||||||||||||||||
— Domestic | 19,447 | 22,092 | 21,294 | 29,121 | 51,472 | |||||||||||||||
— Hong Kong and Macau | 1,060 | 1,081 | 778 | 1,203 | 1,549 | |||||||||||||||
— International | 4,550 | 5,767 | 4,315 | 6,872 | 8,902 | |||||||||||||||
Total | 25,057 | 28,940 | 26,387 | 37,196 | 61,923 | |||||||||||||||
RTK (million) | ||||||||||||||||||||
— Domestic | 2,217 | 2,532 | 2,424 | 3,206 | 5,571 | |||||||||||||||
— Hong Kong and Macau | 105 | 108 | 78 | 120 | 159 | |||||||||||||||
— International | 712 | 974 | 1,059 | 1,337 | 1,554 | |||||||||||||||
Total | 3,034 | 3,614 | 3,561 | 4,663 | 7,284 | |||||||||||||||
Passengers carried (thousand) | ||||||||||||||||||||
— Domestic | 16,499 | 18,535 | 18,259 | 25,002 | 39,545 | |||||||||||||||
— Hong Kong and Macau | 1,409 | 1,369 | 1,019 | 1,394 | 1,556 | |||||||||||||||
— International | 1,213 | 1,589 | 1,192 | 1,811 | 3,018 | |||||||||||||||
Total | 19,121 | 21,493 | 20,470 | 28,207 | 44,119 | |||||||||||||||
Cargo and mail carried (tons) | 398,000 | 470,000 | 464,000 | 545,000 | 775,000 | |||||||||||||||
Load Factors | ||||||||||||||||||||
Passenger load factor (RPK/ASK) (%) | ||||||||||||||||||||
— Domestic | 61.9 | 65.5 | 65.3 | 70.5 | 71.4 | |||||||||||||||
— Hong Kong and Macau | 62.7 | 61.9 | 57.8 | 63.4 | 58.3 | |||||||||||||||
— International | 65.2 | 65.9 | 62.3 | 65.2 | 65.5 | |||||||||||||||
Total | 62.5 | 65.4 | 64.6 | 69.2 | 70.1 | |||||||||||||||
Overall load factor (RTK/ATK) (%) | ||||||||||||||||||||
— Domestic | 61.2 | 64.5 | 64.2 | 67.2 | 66.7 | |||||||||||||||
— Hong Kong and Macau | 56.8 | 55.8 | 52.2 | 56.9 | 50.4 | |||||||||||||||
— International | 54.1 | 54.2 | 53.0 | 54.3 | 54.7 | |||||||||||||||
Total | 59.2 | 61.1 | 60.1 | 62.6 | 63.3 | |||||||||||||||
Breakeven load factor (%) | 55.6 | 55.9 | 61.6 | 61.9 | 67.0 |
Year ended December 31, | ||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | ||||||||||||||||
Yield | ||||||||||||||||||||
Yield per RPK (RMB) | ||||||||||||||||||||
— Domestic | 0.62 | 0.55 | 0.57 | 0.58 | 0.55 | |||||||||||||||
— Hong Kong and Macau | 1.06 | 0.98 | 0.96 | 0.92 | 0.77 | |||||||||||||||
— International | 0.41 | 0.42 | 0.47 | 0.46 | 0.56 | |||||||||||||||
Total | 0.60 | 0.54 | 0.57 | 0.57 | 0.55 | |||||||||||||||
Yield per cargo and mail ton kilometers (RMB) | 1.76 | 1.73 | 1.62 | 1.67 | 1.75 |
8
5
Year ended December 31, | ||||||||||||||||||||||
1998 | 1999 | 2000 | 2001 | 2002 | ||||||||||||||||||
Yield per RTK (RMB) | ||||||||||||||||||||||
— Domestic | 6.15 | 6.69 | 5.90 | 5.83 | 5.21 | |||||||||||||||||
— Hong Kong regional | 12.59 | 11.00 | 11.19 | 11.26 | 10.36 | |||||||||||||||||
— International | 3.71 | 3.96 | 3.63 | 3.31 | 3.25 | |||||||||||||||||
Total | 6.04 | 6.40 | 5.63 | 5.43 | 4.84 | |||||||||||||||||
Fleet | ||||||||||||||||||||||
— Boeing | 81 | 81 | 89 | 91 | 102 | |||||||||||||||||
— Other | 21 | 20 | 20 | 20 | 20 | |||||||||||||||||
Total aircraft in service at period end | 102 | 101 | 109 | 111 | 122 | |||||||||||||||||
Overall utilization rate (hours per day) | 7.7 | 8.1 | 8.7 | 9.1 | 9.8 | |||||||||||||||||
Financial | ||||||||||||||||||||||
Operating cost per ASK (RMB) | 0.37 | 0.36 | 0.39 | 0.39 | 0.36 | |||||||||||||||||
Operating cost per ATK (RMB) | 3.14 | 3.04 | 3.04 | 3.02 | 2.70 |
Year ended December 31, | ||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | ||||||||||||||||
Yield per RTK (RMB) | ||||||||||||||||||||
— Domestic | 5.83 | 5.21 | 5.40 | 5.53 | 5.30 | |||||||||||||||
— Hong Kong and Macau | 11.26 | 10.36 | 10.35 | 9.83 | 8.18 | |||||||||||||||
— International | 3.31 | 3.25 | 2.90 | 3.31 | 4.24 | |||||||||||||||
Total | 5.43 | 4.84 | 4.76 | 5.01 | 5.14 | |||||||||||||||
Fleet | ||||||||||||||||||||
— Boeing | 91 | 102 | 108 | 137 | 140 | |||||||||||||||
— Airbus | 20 | 20 | 24 | 46 | 71 | |||||||||||||||
— McDonnell Douglas | — | — | — | 35 | 36 | |||||||||||||||
— Others | — | — | — | 13 | 14 | |||||||||||||||
Total aircraft in service at period end | 111 | 122 | 132 | 231 | 261 | |||||||||||||||
Overall utilization rate (hours per day) | 9.1 | 9.8 | 8.5 | 9.9 | 9.6 | |||||||||||||||
Financial | ||||||||||||||||||||
Operating cost per ASK (RMB) | 0.39 | 0.36 | 0.42 | 0.43 | 0.45 | |||||||||||||||
Operating cost per ATK (RMB) | 3.02 | 2.70 | 2.87 | 3.10 | 3.44 |
Average(1) | ||||||||||||||||
Period | ||||||||||||||||
Period | End | (RMB per US$) | High | Low | ||||||||||||
Annual Exchange Rate | ||||||||||||||||
1998 | 8.2789 | 8.2789 | 8.2802 | 8.2770 | ||||||||||||
1999 | 8.2793 | 8.2793 | 8.2917 | 8.2669 | ||||||||||||
2000 | 8.2781 | 8.2784 | 8.2799 | 8.2768 | ||||||||||||
2001 | 8.2766 | 8.2766 | 8.2910 | 8.2642 | ||||||||||||
2002 | 8.2773 | 8.2773 | 8.2897 | 8.2152 |
Average(1) | ||||||||||||||||
Period | Period End | (RMB per US$) | High | Low | ||||||||||||
Annual Exchange Rate | ||||||||||||||||
2001 | 8.2766 | 8.2766 | 8.2910 | 8.2642 | ||||||||||||
2002 | 8.2773 | 8.2773 | 8.2897 | 8.2152 | ||||||||||||
2003 | 8.2767 | 8.2772 | 8.2800 | 8.2769 | ||||||||||||
2004 | 8.2765 | 8.2765 | 8.2889 | 8.2641 | ||||||||||||
2005 | 8.0694 | 8.1825 | 8.2767 | 8.0702 |
Period | High | Low | ||||||
Monthly Exchange Rate | ||||||||
December 2002 | 8.2775 | 8.2770 | ||||||
January 2003 | 8.2772 | 8.2766 | ||||||
February 2003 | 8.2775 | 8.2768 | ||||||
March 2003 | 8.2775 | 8.2770 | ||||||
April 2003 | 8.2774 | 8.2769 | ||||||
May 2003 | 8.2771 | 8.2768 |
On June 20, 2003, the noon rate of exchange, as reported by the Federal Reserve Bank of New York, was RMB8.2770 per U.S. dollar.
Period | High | Low | ||
Monthly Exchange Rate | ||||
December 2005 | 8.0808 | 8.0702 | ||
January 2006 | 8.0702 | 8.0601 | ||
February 2006 | 8.0616 | 8.0402 | ||
March 2006 | 8.0505 | 8.0172 | ||
April 2006 | 8.0240 | 8.0050 | ||
May 2006 | 8.0265 | 8.0025 | ||
June 2006 (up to June 28, 2006) | 8.0230 | 7.9964 |
(1) | Determined by averaging the rates on the last business day of each month during the relevant period. |
9
6
Capitalization and Indebtedness
Not applicable.
10relatingRelating to the Company65.2%50.3% of the equity of the Company. The interests of the Chinese Government in the Company and in other Chinese airlines may conflict with the interests of the holders of the ADSs, H Shares and the HA Shares. The public policy considerations of the Chinese Government in regulating the Chinese commercial aviation industry may also conflict with its indirect ownership interest in the Company. including payments made in connection with the Company’s aircraft leases, the expenses relating to the operation of any flight do not vary proportionately with the number of passengers carried, while revenues generated from a flight are directly related to the number of passengers carried and the fare structure of such flight. Accordingly, a decrease in revenues could result in a proportionately higher decrease in net income. Moreover, becauseas the CompanyGroup has substantial obligations denominated in foreign currencies, its results of operations are significantly affected by fluctuations in foreign exchange rates, particularly for the USU.S. dollar and the Japanese Yen. The Company recognized a net exchange gain of RMB297 million for 2001 and incurred a net exchange loss of RMB175RMB59 million for 2002,2004 and a net exchange gain of RMB1,220 million for 2005, mainly as a result of yen fluctuations.Japanese Yen fluctuation in 2004 and Renminbi appreciation in July 2005, respectively. A majority of thesethis exchange gain/loss wereor gain was unrealized in nature.Company andCompany. CSAHC and certain of its affiliated companies will continue to provide certain important services to the Company, including the import and export of aircraft spare parts and other flight equipment, housing services and pension and financial services. In addition, Mr. Yan Zhi Qing,Liu Shao Yong, the Chairman of the Board of Directors, of the Company (“Board of Directors”), also serves as the PresidentGeneral Manager of CSAHC. The interests of CSAHC may conflict with those of the Company. In addition, any disruption of the provision of services by theCSAHC’s affiliated companies or a default by CSAHC of its obligations owed to the Company could affect the Company’s operations and financial condition.conditions. In particular, as part of its cash management system, the Company periodically places significant amount of demand deposits towith China Southern Airlines Group Finance Company Limited (“SA Finance”), a PRC authorized financial institution controlled by CSAHC and an affiliated company of the Group.Company. As a result, the Company’s deposits with SA Finance are subject to the risks associated with the business of SA Finance over which the Company does not exercise control. As of December 31, 20012004 and 2002,2005, the Group had short-term deposits of RMB1,341RMB406 million and RMB901RMB544 million, respectively, with SA Finance.Management reporting practices The Company’s management and other employees have experience operating the Company’s businesses since such businesses were conducted by CSAHC. However, by comparison to other long-established international airlines, the Company has fewer and less sophisticated financial, management and other reporting and planning practices.7related aircraft maintenance and other facilities are located and the buildings that the Company uses at its route base in Wuhan Haikou and ZhengzhouHaikou are leased by the Company from CSAHC. However, CSAHC lacks adequate documentation evidencing CSAHC’s rights to such land and buildings, and, as a consequence, the lease agreements between CSAHC and the Company for such land have not been registered with the relevant authorities. As a result, such lease agreements may not be enforceable. There are certain other parcels of land and buildings owned or used by the Company and the subsidiaries that lack adequate documentation. Lack of adequate documentation for land use rights and ownership of buildings subjects the Company to challenges and claims by third parties with respect to the Company’s use of such land and buildings, and impairs the ability of the Company to dispose of or mortgage such land use rights and buildings.
Impact of the Recent Outbreak of Severe Acute Respiratory Syndrome (“SARS”)
The outbreak of SARS in the PRC, Hong Kong, Singapore and Taiwan has brought about uncertainty to the global economy. In particular, the outbreak of SARS in the PRC affected the domestic demand and has an overdue impact on the overall economy of the PRC.
Based on the currently available information and certain historical figures of the Group,
In response to the adverse change in operational environment of the Group brought about by the outbreak of SARS, the Group has implemented various continuing measures to adjust its operational capacity accordingly, which include negotiating with aircraft manufacturers to explore the possibility of postponing the delivery date of new aircraft and requesting its staff to take leave at a reduced salary on rotation. In addition, the Group has continued its efforts in fully implementing the precautionary measures in accordance with the general guidelines issued by the Hygiene Department of the Chinese Government, in order to tackle the potential spread of SARS on its airlines and at all contact points with its passenger.
8
domestic, Hong Kong regional and international route allocation, air fares, aircraft acquisition, jet fuel prices and standards for aircraft maintenance, airport operations and air traffic control. Such regulations and policies limit the flexibility of the Company to respond to market conditions, competition or changes in the Company’s cost structure. The implementation of specific CAAC policies could from time to time adversely affect the Company’s operations. The CAAC has confirmed in writing that the Company will be treated equally with other Chinese airlines with respect to certain matters regulated by the CAAC. Nevertheless, there can be no assurance that the CAAC will, in all circumstances, apply its regulations and policies in a manner that results in equal treatment of all airlines that are similarly situated.
airlines.
11
9
markets.
failure to achieve the anticipated synergies, cost savings or revenue enhancing opportunities resulting from the restructuring activities; | |||
diversion of management’s attention from existing business concerns and other business opportunities of the Group; | |||
difficulty in integrating the assets and business of other airlines, including its employees, corporate culture, managerial systems and processes, business information systems and services; | |||
difficulty in exercising control and supervision over various new operations within the Group; | |||
failure to retain key personnel; and | |||
increase in financial pressure due to assumption of |
12
foreign currency terms.
10
1365.2%50.3% owned by CSAHC. The registered address of the Company is Baiyun International Airport, Guangzhou 510405,Economic & Technology Development Zone, People’s Republic of China (telephone no: (86)20-8612-4738, website: www.cs-air.com).
In the second half of 2000, the CAAC announced a restructuring policy with respect to the PRC aviation industry. Domestic airlines are directed, on a voluntary basis to consolidate into three major airline groups: CSAHC, China National Aviation Holding Company and China Eastern Air Holding Group . In line with such policy, CSAHC has acquired Zhongyuan Airlines, a regional airline based in Henan Province, the PRC in 2001.
In April 2001, SA Group informed
14
On October 11, 2002, SA Group, China Northern Airlines and Xinjiang Airlines restructured and consolidated into a new airline group named as China Southern Air Group after a long period of preparation. On the same date, SA Group changed its official name to China Southern Air Holding Company (“CSAHC”).
Shareholders resolutions
The Company has on June 18, 2002 entered into an Interest Transfer and Capital Injection Agreement with China State Post Bureau, Shanghai Municipal Post Office, Post Office of the Inner Mongolian Autonomous Region and China Philately Corporation, pursuant to which the
11
Company has injected RMB150 million (equivalent to approximately US$18.12 million) in cash to acquire 49% interest in China Postal Airlines, Ltd. The China State Post Bureau holds the remaining 51%.
In addition, during the year, the Group acquired 39% interest in Sichuan Airlines Corporation Limited to further expand its market shares in South-western China. The Group also jointly established Zhuhai Xiang Yi Aviation Technology Company Limited, the first sino-foreign joint venture company engaging in aviation training services in the PRC, with CAE.Group.
operated 559 routes, of which 452 were domestic, 78 were international and 29 were Hong Kong and Macau. The Group operates the most extensive domestic route network among all Chinese 152002,2005, ranked first in terms of passengers carried, number of scheduled flights per week, number of hours flown and size of route network and aircraft fleet. During the three years ended December 31, 2002,2005, the Group’s RPKs increased at a compound annual rate of 15.6%53.2%, from 21,65326,387 million in 20002003 to 28,94061,923 million in 2002,2005, while its capacity, measured in terms of ASKs, increased at a compound annual rate of 11.1%47.1%, from 35,83140,867 million in 20002003 to 44,24588,361 million in 2002.2005. In 2002,2005, the Group carried 21.4944.12 million passengers and had passenger revenue of RMB15,696RMB34,328 million (US$1,8964,254 million). Net incomeThe loss for 20022005 attributable to equity shareholders of the Company was RMB576RMB1,848 million (US$70229 million).2002,2005, the Airline Subsidiaries carried 7.4111.30 million passengers and had operating revenue of RMB4,829RMB8,019 million (US$583994 million) and accounted for 34.5%25.6% and 26.8%20.9% of the Group’s passengers carried and operating revenue, respectively. The cargo and mail revenueincreased by 27.0% to RMB1,786 million (US$216 million) in 2002 as compared with 2001.airlines with a total of 349 routes as of December 31, 2002, including 286 domestic routes, 20 Hong Kong regional routes (which include Hong Kong routes and Macau routes), and 43 international routes.airlines. In 2002,2005, the Group operated an average of 4,282 landing8,436 landings and take-offs per week, serving 88 destinations, including 64 cities in China, including Beijing, Shanghai, Tianjin, Guangzhou, Shenzhen, Wuhan, Changsha, Zhengzhou, Xiamen, Xian and Chengdu. Most of the cities served by the Group are located in142 destinations. Its route network covers commercial centerscentres or rapidly developing economic regions in Mainland China.
12
of 2005.
The
16
Traffic
Cargo and Mail Carried | Total Traffic | |||||||||||||||||||||||
Passengers Carried | (tons) | (ton kilometers) | ||||||||||||||||||||||
Increase | ||||||||||||||||||||||||
(decrease) | Increase | Increase | ||||||||||||||||||||||
over | over | over | ||||||||||||||||||||||
Year | Total | previous year | Total | previous year | Total | previous year | ||||||||||||||||||
(in million) | (%) | (in thousand) | (%) | (in million) | (%) | |||||||||||||||||||
1998 | 15.05 | (1.3 | ) | 348.0 | 11.6 | 1,915.0 | 6.7 | |||||||||||||||||
1999 | 15.11 | 0.4 | 390.8 | 12.3 | 2,003.0 | 4.6 | ||||||||||||||||||
2000 | 16.85 | 11.5 | 353.0 | 9.7 | 2,613.0 | 30.5 | ||||||||||||||||||
2001 | 19.12 | 13.5 | 398.0 | 12.7 | 3,034.0 | 16.1 | ||||||||||||||||||
2002 | 21.49 | 12.4 | 470.0 | 18.1 | 3,614.0 | 19.1 |
13
Passenger carried | Cargo and Mail Carried (tons) | Total traffic (tons kilometers) | ||||||||||||||||||||||
Increase | Increase | Increase | ||||||||||||||||||||||
(decrease) | (decrease) | (decrease) | ||||||||||||||||||||||
over | over | over | ||||||||||||||||||||||
Year | Total | previous year | Total | previous year | Total | previous year | ||||||||||||||||||
(in million) | (%) | (in thousand) | (%) | (in million) | (%) | |||||||||||||||||||
2001 | 19.12 | 13.5 | 398.0 | 12.7 | 3,034.0 | 16.1 | ||||||||||||||||||
2002 | 21.49 | 12.4 | 470.0 | 18.1 | 3,614.0 | 19.1 | ||||||||||||||||||
2003 | 20.47 | (4.7 | ) | 464.0 | (1.3 | ) | 3,561.0 | (1.5 | ) | |||||||||||||||
2004 | 28.21 | 37.8 | 545.0 | 17.5 | 4,663.0 | 30.9 | ||||||||||||||||||
2005 | 44.12 | 56.4 | 775.0 | 42.2 | 7,284.0 | 56.2 |
take-offs per week, serving 142 destinations.
The Group has also entered into code-sharing agreements with several international airlines, such asincluding Delta Airlines, Asiana Airlines, Japan Air System, Vietnam Airlines, Royal Dutch Airlines and Garuda Indonesian. Such operating measures expandUnder the code sharing agreements, the participating airlines are permitted to sell tickets on certain international routes operated by the Group to passengers using the Group’s route network.
codes. Similarly, the Group is permitted to sell tickets for the other participating airlines using its “CZ” code. The code sharing agreements help increase the number of the Group’s international sales outlets.
The Group’s
PRC.
17
14
Changchun.
Zhengzhou.
Paris.
18
Average | ||||||||||||
Number of | Average Age | Passenger | ||||||||||
Model | Aircraft | (years) | Capacity | |||||||||
Boeing 777-200 | 4 | 6.53 | 380 | |||||||||
Boeing 777-21B1GW | 5 | 5.28 | 292 | |||||||||
Boeing 757-200 | 26 | 10.48 | 200 | |||||||||
Boeing 737-800 | 5 | 0.22 | 167 | |||||||||
Boeing 747F | 4 | 7.01 | n/a | |||||||||
Boeing 737-700 | 7 | 3.14 | 138 | |||||||||
Boeing 737-500 | 18 | 10.15 | 132 | |||||||||
Boeing 737-300 | 31 | 8.96 | 145 | |||||||||
Boeing 737-200 | 2 | 15.77 | 128 | |||||||||
Airbus 320-200 | 20 | 4.69 | 158 | |||||||||
122 |
15
2005.
Average | ||||||||||||
Number of | Average age | Passenger | ||||||||||
Model | Aircraft | (years) | Capacity | |||||||||
Boeing 777-200 | 4 | 9.53 | 380 | |||||||||
Boeing 777-21B | 6 | 7.20 | 292 | |||||||||
Boeing 757-200 | 38 | 11.12 | 200 | |||||||||
Boeing 747F | 2 | 3.42 | n/a | |||||||||
Boeing 737-800 | 15 | 2.32 | 167 | |||||||||
Boeing 737-700 | 29 | 2.85 | 138 | |||||||||
Boeing 737-500 | 15 | 12.80 | 130 | |||||||||
Boeing 737-300 | 31 | 11.89 | 145 | |||||||||
Airbus 300-600 | 6 | 10.96 | 272 | |||||||||
Airbus 319-100 | 21 | 1.05 | 128 | |||||||||
Airbus 320-200 | 30 | 5.38 | 158 | |||||||||
Airbus 321-100 | 10 | 2.50 | 182 | |||||||||
Airbus 330-200 | 4 | 0.72 | 264 | |||||||||
McDonnell Douglas 82 | 23 | 14.63 | 144 | |||||||||
McDonnell Douglas 90 | 13 | 7.85 | 157 | |||||||||
Embraer 145 Jet | 6 | 1.23 | 50 | |||||||||
Cessna 208B | 3 | 3.50 | 14 | |||||||||
ATR-72 | 5 | 7.95 | 72 | |||||||||
261 | ||||||||||||
Very Substantial Acquisition
On October 3, 2001
The twenty Boeingthree 737-800 aircraft acquired pursuant to the Transactions will replace twenty existing Boeing 737 series aircraft that the Company currently operates under operating leases. The Board considered that the Transactions arefor a term of 138 months, with total future lease payments totalling approximately Rmb986 million, scheduled for deliveries in the best interest of the Company and its shareholders as a whole.2006.
19
Waiver from the Stock Exchange of Hong Kong Limited
A. In March 2002, the Hong Kong Stock Exchange granted a waiver to allow the Company to use a new size test based on ATKs to replace the normal net asset test and consideration test under Chapter 14 of the Listing Rules in respect of acquisition and disposal of aircraft.
16
17
B.
2008.
18
operated under capital leases, 4986 were operated under operating leases, 1751 were financed by long-term mortgage loans, while the remaining were acquired either with cash proceeds or acquired by exercising the purchase options upon expiry of the respective capital leases. The Group’s planned acquisitionsacquisition of aircraft in the foreseeable future will generally be made pursuant to operating leases or capital leases. The Group’s determination as to its acquisition strategy depends on the Group’s evaluation at the time of its capacity requirements, anticipated deliveries of aircraft, the Group’s capital structure and cash flow, prevailing interest rates and other general market conditions.
Average | ||||||||||||
Capital | Operating | Remaining | ||||||||||
Model | Lease | Lease | Lease Term | |||||||||
Boeing 777-200 and 777-21B | 6 | 3 | 7.69 | |||||||||
Boeing 757-200 | 3 | 11 | 5.17 | |||||||||
Boeing 737-500 | — | 18 | 2.80 | |||||||||
Boeing 737-300 | 9 | 12 | 2.16 | |||||||||
Airbus 320-200 | 18 | 2 | 6.44 | |||||||||
Boeing 737-700 | — | 1 | 6.67 | |||||||||
36 | 49 |
Average | ||||||||||||
Capital | Operating | Remaining | ||||||||||
Model | Lease | Lease | Lease Term | |||||||||
Boeing 777-200 and 777-21B | 5 | 4 | 4.48 | |||||||||
Boeing 757-200 | — | 15 | 3.10 | |||||||||
Boeing 737-700 | — | 10 | 5.60 | |||||||||
Boeing 737-800 | — | 3 | 8.17 | |||||||||
Boeing 737-500 | — | 15 | 0.99 | |||||||||
Boeing 737-300 | 4 | 10 | 1.32 | |||||||||
Airbus 300-600 | 6 | — | 1.20 | |||||||||
Airbus 319-100 | 6 | 15 | 9.05 | |||||||||
Airbus 320-200 | 24 | 6 | 4.35 | |||||||||
Airbus 321-100 | 6 | — | 8.02 | |||||||||
Airbus 330-200 | 4 | — | 11.28 | |||||||||
McDonnell Douglas 82 | — | 8 | 2.17 | |||||||||
McDonnell Douglas 90 | 10 | — | 1.69 | |||||||||
65 | 86 | |||||||||||
20
Rotables and certain of the expendables for the Group’s aircraft are generally purchased by Southern Airlines (Group) Import & Export Trading Corporation (“SAIETC”), a subsidiary of CSAHC acting as agent for the Group, in consideration of an agency fee. The Group arranges the ordering of aircraft, jet engines and other flight equipment for the Airline Subsidiaries and keeps an inventory of rotables and expendables for the Airline Subsidiaries.
19
Under theairlines.
RMB535 million.
21
20
prices have become higher than those in the international market since the beginning of 1994. With the WTO entry, the jet fuel price in China will probably be trimmed by the market force to be in line with the international market.
To address2004.
Group.
2005.
22
As
Such flight simulation training has been shifted to Zhuhai Xiang Yi Aviation Technology Company Limited (“Zhuhai Xiang Yi), a jointly controlled entity between the Company and CAE International Holdings Limited, since January 2003. Zhuhai Xiang Yi currently leases the flight simulation facilities of Zhuhai Training Center from the Group and provides flight simulation training services to the Group.
21
23
Pursuant to an agreement dated March 24, 2001, Nanland has been providing and will provide in-flight meals to the Xinjiang Airlines, a subsidiary of CSAHC from time to time for a period of one year. The agreement will then be automatically extended annually.
For the year ended December 31, 2002, the amount paid by Xinjiang Airlines to Nanland for the provision of in-flight meals was approximately RMB2.9 million.
Pursuant to an agreement dated September 20, 1999, Xinjiang Airlines has been providing and will provide in-flight meals to the Company for a period of one year. The agreement will then be automatically extended annually. The amount paid by the Group to Xinjiang Airlines for the provision of in-flight meals for the year ended December 31, 2002 was approximately RMB1.1 million.
22
construction was completed in 2005.
24
23
framework for regulation of many of these aspects of commercial aviation activities. Although China’s airlines operate under the supervision and regulation of the CAAC, they are accorded an increasingly significant degree of operational autonomy, including with respect to the application for domestic, Hong Kong regionaland Macau and international routes, the allocation of aircraft among routes, the purchase of flight equipment, the pricing of Hong Kong regional and international air fares within a certain range, the training and supervision of personnel and their day-to-day operations.
The Group understands that the criteria for determining whether a Hong Kong regionaland Macau route will be allocated to a particular airline, include market demand, the ability of the airline to service the route and the appropriateness of the airline’s aircraft for such route.
25
24
Published air fares
In November 1997, the CAAC announced that Chinese airlines would be permitted to offer discounts within specified ranges to their customers. In response to this policy, the Group instituted a multiple class airfareabove pricing policy under which discounted rates were offered on certain air routes and flights within the parameters of the CAAC’s policy.
This air fare policy resulted in severe price competition among Chinese airlines. The CAAC believed that this development was not conducive to the healthy development of Chinese airlines, and therefore in late May 1998 required that Chinese airlines may not offer a discount rate which is more than 20% below the published fare.
In February 1999, the CAAC adopted a new air fare policy prohibiting discounting of domestic airfares except for special group of passengers such as teachers, students, touring group and disabled soldiers, etc. The new policy was intended to encourage Chinese airlines to compete on the basis of overall service instead of fares. The Group believes that the stabilization in ticket price to a certain extent contributed to the increase of the Group’s revenue and improved its results of operations in 2001.
reform.
26
25
27
26
Group’s planned aircraft acquisitions, will permit the Group to expand its operations and to improve the deployment of the aircraft in its fleet. The Group also believes that its dominant presence in the populous and economically developed southern and central regions of China provides it with a competitive advantage in attracting new customers and that its fully integrated flight training, aircraft and engine maintenance, and air catering operations enable it to achieve and maintain high quality service to its customers.
Passengers | Cargo and Mail | Total Traffic | ||||||||||||||||||||||
Carried | Carried (tons) | (ton kilometers) | ||||||||||||||||||||||
Industry | Group’s | Industry | Group’s | Industry | Group’s | |||||||||||||||||||
Year | Total | Share | Total | Share | Total | Share | ||||||||||||||||||
(in million) | (% of total) | (in thousand) | (% of total) | (in billion) | (% of total) | |||||||||||||||||||
1997 | 56.3 | 27.1 | 1,247 | 25.0 | 8.7 | 20.7 | ||||||||||||||||||
1998 | 57.5 | 26.2 | 1,401 | 24.9 | 9.3 | 20.4 | ||||||||||||||||||
1999 | 60.9 | 24.8 | 1,704 | 22.9 | 10.6 | 18.9 | ||||||||||||||||||
2000 | 67.2 | 24.9 | 1,967 | 22.5 | 12.3 | 20.0 | ||||||||||||||||||
2001 | 75.2 | 25.4 | 1,709 | 23.3 | 14.1 | 21.5 | ||||||||||||||||||
2002 | 85.9 | 25.0 | 2,021 | 23.3 | 16.5 | 21.9 |
Total traffic | ||||||||||||||||||||||||
Passenger carried | Cargo and Mail Carried (tons) | (ton kilometers) | ||||||||||||||||||||||
Industry | Group’s | Industry | Group’s | Industry | Group’s | |||||||||||||||||||
Year | Total | Share | Total | Share | Total | Share | ||||||||||||||||||
(in million) | (% of total) | (in thousand) | (% of total) | (in billion) | (% of total) | |||||||||||||||||||
1999 | 60.9 | 24.8 | 1,704 | 22.9 | 10.6 | 18.9 | ||||||||||||||||||
2000 | 67.2 | 24.9 | 1,967 | 22.5 | 12.3 | 20.0 | ||||||||||||||||||
2001 | 75.2 | 25.4 | 1,709 | 23.3 | 14.1 | 21.5 | ||||||||||||||||||
2002 | 85.9 | 25.0 | 2,021 | 23.3 | 16.5 | 21.9 | ||||||||||||||||||
2003 | 87.6 | 23.4 | 2,190 | 21.2 | 17.1 | 20.8 | ||||||||||||||||||
2004 | 121.2 | 23.3 | 2,770 | 19.7 | 23.1 | 20.2 | ||||||||||||||||||
2005 | 138.3 | 31.8 | 3,067 | 25.3 | 26.1 | 27.9 |
28
Passengers | Cargo and | Departing | ||||||||||
Airport | Carried (% of total) | Mail Carried (% of total) | Flights (% of total) | |||||||||
Beijing | 12.5 | 12.6 | 11.8 | |||||||||
Shanghai Hongqiao | 15.5 | 10.6 | 15.2 | |||||||||
Guangzhou | 55.7 | 46.6 | 52.3 | |||||||||
Shenzhen | 33.5 | 35.8 | 28.6 | |||||||||
Kunming | 11.4 | 10.5 | 9.7 | |||||||||
Chengdu | 11.4 | 12.0 | 10.3 | |||||||||
Xiamen | 73.3 | 47.9 | 59.5 | |||||||||
Haikou | 28.5 | 32.5 | 20.4 | |||||||||
Xian | 10.2 | 13.7 | 7.2 | |||||||||
Shanghai Pudong | 11.2 | 5.8 | 11.2 |
2005.
Cargo and Mail | ||||||||||||
Passenger carried | Carried | Departing flight | ||||||||||
Airport | (% of total) | (% of total) | (% of total) | |||||||||
Beijing | 19.14 | % | 19.06 | % | 17.95 | % | ||||||
Shanghai Pudong | 9.86 | % | 5.13 | % | 10.38 | % | ||||||
Guangzhou | 54.71 | % | 45.10 | % | 53.75 | % | ||||||
Shanghai Hongqiao | 18.18 | % | 18.41 | % | 16.95 | % | ||||||
Shenzhen | 33.08 | % | 31.59 | % | 29.98 | % | ||||||
Chengdu | 13.99 | % | 17.07 | % | 10.72 | % | ||||||
Kunming | 21.71 | % | 18.27 | % | 18.24 | % | ||||||
Hangzhou | 38.31 | % | 32.91 | % | 35.00 | % | ||||||
Xian | 14.75 | % | 19.69 | % | 10.18 | % | ||||||
Haikou | 30.26 | % | 33.19 | % | 23.73 | % |
Passengers | Cargo and | Departing | ||||||||||
Airport | Carried (% of total) | Mail Carried (% of total) | Flights (% of total) | |||||||||
Wuhan Tianhe | 53.9 | 52.5 | 36.9 | |||||||||
Changsha | 50.3 | 71.8 | 35.6 | |||||||||
Zhengzhou | 73.6 | 80.2 | 54.3 |
27
Passengers | Cargo and | Departing | ||||||||||
Airport | Carried (% of total) | Mail Carried (% of total) | Flights (% of total) | |||||||||
Guiyang | 29.9 | 39.8 | 23.6 | |||||||||
Shantou | 75.5 | 64.2 | 67.0 | |||||||||
Guilin | 38.3 | 17.9 | 32.9 | |||||||||
Zhuhai | 69.8 | 79.0 | 23.8 |
2005.
Cargo and Mail | ||||||||||||
Passenger carried | Carried | Departing flight | ||||||||||
Airport | (% of total ) | (% of total) | (% of total) | |||||||||
Changsha | 51.60 | % | 71.54 | % | 47.39 | % | ||||||
Wuhan Tianhe | 39.60 | % | 43.56 | % | 33.79 | % | ||||||
Guilin | 38.90 | % | 38.26 | % | 38.69 | % | ||||||
Sanya | 43.45 | % | 29.70 | % | 40.33 | % | ||||||
Zhengzhou | 71.79 | % | 61.78 | % | 59.17 | % | ||||||
Nanning | 43.60 | % | 40.67 | % | 35.27 | % | ||||||
Zhang Jia Jie | 40.45 | % | 80.56 | % | 38.33 | % | ||||||
Shantou | 81.64 | % | 80.67 | % | 69.55 | % |
29
28
2005.
30
29
3120022005 and the aggregate effective equity interest of the Company in each of its principal subsidiaries, affiliated companies and jointly controlled entity.entities.30
32atas of December 31, 20022005 are as follows: Place and date of Attributable equity Place and date ofestablishment interest to theProportion of ownershipName of company establishment//operation interest held by the Company DirectIndirect%%China Southern Airlines (Group)PRC100Shenzhen Co.October 14, 1983Guangxi Airlines Company Limited PRC 60—
April 28, 1994 95 Southern Airlines Group(Group) ShantouPRC60Airlines Company Limited PRC
July 20, 1993 60 Zhuhai Airlines Company Limited PRC 60
May 8, 1995 60 Xiamen Airlines Company Limited PRC 60—
August 11, 1984 60 Guizhou Airlines Company Limited PRC
November 12, 1991 60 Guangzhou Air Cargo Company Limited —November 12, 1991PRC
March 31, 2004 70 Guangzhou Nanland Air Catering PRC51—Company Limited PRC
November 21, 1989 75 China Southern West Australian Flying College Pty Ltd. Australia
January 26, 1971 65 —Flying College Pty Ltd.January 26, 1971Baiyun Xinhua (Guangzhou) AirPRC70—Cargo Service Co.January 4, 1989China Southern Airlines (Group)PRC100—Zhuhai Helicopter Company LimitedAugust 31, 1993Guangzhou Baiyun International Logistic Company Ltd PRC
July 23, 2002 61 Xinjiang Civil Aviation Property Management Limited —Logistic Company LtdJuly 23,PRC
February 12, 2002 51.8 atas of December 31, 20022005 are as follows:Place and date ofAttributable equity interestName of companyestablishment/operationto the companyDirectIndirect%%Guangzhou Aircraft MaintenancePRC50—Engineering Company LimitedOctober 28, 198931 Place and date of Attributable equity interest Name of company establishment/operation to the company Direct Indirect % % Southern Airlines Group PRC 30 16.86 Finance Company Limited June 28, 1995 Sichuan Airlines Corporation PRC 30 — Limited August 28, 2002 China Postal Airlines Limited PRC 49 — November 25, 1996 MTU Maintenance Zhuhai PRC 50 — Company Limited April 6, 2001 Zhuhai Xiang Yi Aviation PRC 51 — Technology Company Limited July 10, 2002 Proportion of ownership Place and date of interest held by establishment Group Name of company /operation effective interest The Company Subsidiaries Guangzhou Aircraft Maintenance Engineering Company Limited PRC
October 28, 1989 50 50 — China Southern Airlines Group Finance Company Limited PRC
June 28, 1995 49.3 32 26 Sichuan Airlines Corporation Limited PRC
August 28, 2002 39 39 — China Postal Airlines Limited PRC
November 25, 1996 49 49 — MTU Maintenance Zhuhai Co. Ltd PRC
April 6, 2001 50 50 — Zhuhai Xiang Yi Aviation Technology Company Limited PRC
July 10, 2002 51 51 — Beijing Southern Airlines Ground Service Company Limited PRC
April 1, 2004 50 50 -Aircraft— Aircraft Fleet.”
Land | Buildings | |||||||||||||||||||||||
(in square meters) | (in square meters) | |||||||||||||||||||||||
Owned | Leased | Owned | Leased | |||||||||||||||||||||
Guangzhou | — | 80,909 | 103,957 | 1,755 | ||||||||||||||||||||
Shenzhen | 208,740 | — | 35,936 | — | ||||||||||||||||||||
Zhuhai | 170,062 | — | 18,791 | — | ||||||||||||||||||||
Changsha | 138,949 | — | 21,482 | — | ||||||||||||||||||||
Zhengzhou | 290,841 | — | 9,672 | — | ||||||||||||||||||||
Haikou | 5,265 | — | — | 19,633 | ||||||||||||||||||||
Wuhan | — | — | 435 | 26,061 | ||||||||||||||||||||
Nanyang | — | — | 12,156 | — |
Land | Buildings | |||||||||||||||
(in square meters) | (in square meters) | |||||||||||||||
Owned | Leased | Owned | Leased | |||||||||||||
Guangzhou | 9,797 | 80,809 | 514,957 | 1,755 | ||||||||||||
Shenzhen | 208,740 | — | 54,093 | — | ||||||||||||
Zhuhai | 170,062 | — | 18,791 | — | ||||||||||||
Changsha | 138,949 | — | 47,190 | — | ||||||||||||
Zhengzhou | 290,841 | — | 60,582 | — | ||||||||||||
Haikou | 5,265 | — | 63,570 | 19,633 | ||||||||||||
Wuhan | — | 31,061 | 17,335 | — | ||||||||||||
Nanyang | — | — | 12,156 | — |
Land | Buildings | |||||||||||||||
(in square meters) | (in square meters) | |||||||||||||||
Owned | Leased | Owned | Leased | |||||||||||||
Xiamen | 211,632 | — | 29,292 | 1,564 | ||||||||||||
Shantou | 20,292 | — | 27,810 | 3,127 | ||||||||||||
Zhuhai | 53,797 | — | 29,697 | 1,513 | ||||||||||||
Guilin | — | — | 14,594 | 349 |
32
Land | Buildings | |||||||||||||||
(in square meters) | (in square meters) | |||||||||||||||
Owned | Leased | Owned | Leased | |||||||||||||
Guizhou | 270,001 | — | 10,466 | — |
Land | Buildings | |||||||||||||||
(in square meters) | (in square meters) | |||||||||||||||
Owned | Leased | Owned | Leased | |||||||||||||
Xiamen | 451,121 | — | 355,038 | 12,509 | ||||||||||||
Shantou | 36,931 | 55,407 | 40,624 | — | ||||||||||||
Zhuhai | 68,186 | — | 54,398 | 2,135 | ||||||||||||
Guilin | 72,563 | — | 73,379 | 139 | ||||||||||||
Guizhou | 259,879 | — | 93,390 | 3,533 |
The Group has been occupying all of the land and buildings described above without challenge. CSAHC has received written assurance from the CAAC to the effect that CSAHC is entitled to continued use and occupancy of the land in Guangzhou. The Group understands that the CAAC is basing its conclusion on an agreement among certain governmental authorities relating to such land. CSAHC has agreed to indemnify the Group against any loss or damage caused by any challenge of, or interference with, the use by the Group of any of their respective land and buildings.
33accounting principles generally accepted in the PRC Accounting Rules and Regulations (“PRC GAAP”) and prepares its financial statements in accordance with both PRC GAAP and IFRS. The Financial Statements contained elsewhere in this Annual Report have been prepared in accordance with IFRS. IFRS differs in certain materialsignificant respects from U.S. GAAP. For a discussion of the material differences between IFRS and U.S. GAAPInformation relating to the Group, see “U.S. GAAP Reconciliation”nature and effect of such differences is presented in Note 3151 to the Financial Statements.
Group during 2003, 2004 and 2005. The Group amount that is a reasonable approximation of recoverable amounts, including estimates based on industry trends and reference to market rates and transactions. Changes to the above estimates may have a material effect on the Group’s Financial Statements. As of December 31, 2005, based on the result of evaluation, the Group considered that no impairment is required. Under U.S. GAAP, property, plant, and equipment of the Group are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. During 2003, the impairment losses of RMB510 million was recognized on certain aircraft of CNA. 34ourthe consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.The Group makes estimates about a current liabilitySales in advance of carriage therefore represents ticket sold for tickets sold but not yet reported to the Group, the timingfuture travel dates and amount of tickets uplifted by other airlinesestimated future refunds and the amountexchanges of tickets sold that will not be used.for past travel dates. The Group’s balance of sales in advance of carriage as of December 31, 2005 was RMB1,413 million.periodically evaluateshas approximately RMB54,266 million fixed assets as of December 31, 2005. In addition to the liabilityoriginal cost of these assets, their recorded value is impacted by a number of policy elections, including the estimation of useful lives and record any resulting adjustments, which may beresidual values and when necessary, impairment charges.inchanges to the consolidated statementoriginal estimated useful lives or residual values of operations in the period in whichproperty, plant and equipment of the evaluations are completed. Fixed Assetsdepreciates its fixed assetsrecords aircraft at acquisition cost. Depreciable life is determined through economic analysis, reviewing existing fleet plans, recommendations from manufacturers and comparing estimated lives to other airlines that operate similar fleets. Residual values are estimated based on a straight-line basisour historical experience with regards to the sale of aircraft and are established in conjunction with the estimated useful lives of the aircraft. Residual values are based on current dollars when the aircraft are acquired and typically reflect asset values that have not reached the end of their estimatedphysical life. Both depreciable lives and residual values over their respective estimated useful life.are reviewed periodically to recognize changes in our fleet plan and changes in conditions.IfUnder IFRS, if circumstances indicate that the net book value of an asset or investment may not be recoverable, this asset may be considered “impaired”, and an impairment loss may be recognized in accordance with IAS 36 “Impairment of Assets”. The amount of impairment loss is the difference between the carrying amount of the asset and its recoverable amount. The recoverable amount is the greater of the net selling price and the value in use. In determining the value in use, the Group utilizes certain assumptions, including, but not limited to: (i) estimated fair market value of the assets, and (ii) estimated future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service the asset will be used in the Group’s operations and estimated residual values. The Group will use all readily available information in determining an33 Year ended December 31, 2004 2005 RMB RMB At January 1 70 92 Impairment losses for bad and doubtful accounts 27 — Through the CNA/XJA Acquistions 44 — Bad and doubtful accounts written off (49 ) (48 ) At December 31 92 44
from RMB40 to RMB60 for distance exceeding 800 kilometres, during the period temporarily from April 10, 2006 to October 10, 2006. The Group. borrowings. 35Duringyear,growth in airline market, and acquisition of the economic conditionsairline operations and related assets of China Northern Airlines Company (“CNA”) and Xinjiang Airlines Company (“XJA”), the Group’s business benefited from the increase of transport capacity, passenger volume and cargo and mail carried. Nevertheless, the Group is facing pressure on its operation due to continuing increase of jet fuel cost and intensified competition.PRCairports of other countries, the Group benefited from the RMB appreciation. RMB appreciation has brought a one-off exchange gain to the Group and reduced its operating costs which are denominated in foreign currencies. On the other Asian regions continuedhand, RMB appreciation will also present the Group with a challenge in price competition in international route operations.show steady improvement, leadingthe Notice of the National Development and Reform Commission (“NDRC”) and the Civil Aviation Administration of China (“CAAC”) on Issues Relating to an increase in demandIntroduction of the Fuel Surcharge for aviation services. To increase the efficiency and global competitiveness of PRCDomestic Routes, domestic airlines imposed fuel surcharges for all the domestic routes (excluding those from the mainland PRC Government implemented various measures to maintainHong Kong and Macau) with effect from August 1, 2005 (based on flight time). On February 16, 2006, the momentumNDRC and CAAC released a supplementary document on Issues Relating to the Introduction of economic growthFuel Surcharge for Domestic Routes, stating that due to the rising jet fuel price, the period of imposition of fuel surcharge by airlines was extended. On March 28, 2006, the NDRC and CAAC released another supplementary document on Issues Relating to streamline the airline industry through mergersIntroduction of Fuel Surcharge for Domestic Routes, thereby adjusting the amount of fuel surcharges from RMB20 to RMB30 per passenger for distance flown being less than 800 kilometres, and restructuring.Group conducts a portionintroduction of its airline operations throughfuel surcharge and the Airline Subsidiaries. Operating results for the Airline Subsidiaries are included in eachextension of the years presented in the Financial Statements. The Airline Subsidiaries, which derive substantially all of their operating revenue from passenger traffic, accounted for 29.7%, 29.7% and 26.8%duration of the Group’s total operating revenue, and 35.0%, 34.2% and 33.5%same will help relieve, to a certain extent, the burden of high jet fuel cost on the Group’s total passengers carried, in 2000, 2001 and 2002, respectively. Xiamen Airlines is the largest member of the Airline Subsidiaries, with operating revenue of RMB2,737 million, RMB3,185 million and Rmb3,162 million in 2000, 2001 and 2002, respectively, or 18.0%, 18.9% and 17.5% of the Group’s total operating revenue in such years.overallthe passenger and cargo traffic volume carried, which is subject to seasonal and other changes in traffic patterns, the availability of appropriate time slots for the Group’s flights and alternative routes, the degree of competition from other airlines and alternate means of transportation, as well as other factors that may influence passenger travel demand and cargo and mail volume. In particular, the Group’s airline revenue is generally higher in the second and third quarters than in the first and fourth quarters.load factorsyields or the number of passengers carried.load factors. These fixed costs include depreciation expense, jet fuel costs, landing and navigation fees, financing costs, operating lease payments, aircraft maintenance costs and labor for flight crew, cabin crew and ground personnel. Thus, a minor change in the Group’s yields or load factors would have a material effect on the Group’s results of operations. In addition, certain of these expenses, primarily financing costs and operating lease payments, labor costs and depreciation and amortization of aircraft and flight equipment, do not vary based on the number of flights flown. Thus, the Group’s operating results can also be substantially affected by minor changes in aircraft utilization rates. The Group is and will continue to be highly leveraged with substantial obligations denominated in foreign currencies and, accordingly, the results of its operations are significantly affected by fluctuations in foreign exchange rates, particularly for the U.S. dollar and the Japanese yen. The Group recordedrecognized a net exchange gain (loss)loss of RMB319 million, RMB297RMB59 million and RMB(175)net exchange gain of RMB1,220 million in 2000, 20012004 and 2002,2005, respectively. These amounts represented mainly unrealized exchange differences resulting from the retranslation of the foreign currency borrowings as of year end 2000, 2001 and 2002.CAAC,PRC government, the Group’s operating revenues and expenses are directly affected by the CAAC’sPRC government’s policies with respect to domestic airfares, jet fuel prices and landing and navigation charges,fees, among others. The nature and extent of airline competition and the ability of Chinese airlines to expand are also affected by CAAC’s control
3620012003, 2004 and 2002: Year ended December 31, 2002 vs. 2001 2001 2002 % Increase/
(Decrease) RPK (million) Domestic 19,447 22,092 13.6 Hong Kong regional 1,060 1,081 2.0 International 4,550 5,767 26.7 Year ended 2004 vs. 2003 2005 vs. 2004 December 31, % increase/ % increase/ 2003 2004 2005 (decrease) (decrease) RPK (million) Domestic 21,294 29,121 51,472 36.8 76.8 Hong Kong and Macau 778 1,203 1,549 54.6 28.8 International 4,315 6,872 8,902 59.3 29.5 Total 26,387 37,196 61,923 41.0 66.5 RTK (million) Domestic 2,424 3,206 5,571 32.3 73.8 Hong Kong and Macau 78 120 159 53.8 32.5 International 1,059 1,337 1,554 26.3 16.2 Total 3,561 4,663 7,284 30.9 56.2 Passengers carried (thousand) Domestic 18,259 25,002 39,545 36.9 58.2 Hong Kong and Macau 1,019 1,394 1,556 36.8 11.6 International 1,192 1,811 3,018 51.9 66.6 Total 20,470 28,207 44,119 37.8 56.4 Cargo and mail carried (thousand tons) Domestic 379 442 639 16.6 44.6 Hong Kong and Macau 12 15 19 25.0 26.7 International 73 88 117 20.5 33.0 Total 464 545 775 17.5 42.2 Year ended 2004 vs. 2003 2005 vs. 2004 December 31, % increase/ % increase/ 2003 2004 2005 (decrease) (decrease) ASK (million) Domestic 32,590 41,330 72,107 26.8 74.5 Hong Kong and Macau 1,347 1,896 2,656 40.8 40.1 International 6,930 10,543 13,598 52.1 29.0 Total 40,867 53,769 88,361 31.6 64.3 ATK (million) Domestic 3,772 4,773 8,352 26.5 75.0 Hong Kong and Macau 150 211 315 40.7 49.3 International 1,999 2,462 2,842 23.2 15.4 Total 5,921 7,446 11,509 25.8 54.6 Passenger load factor (RPK/ASK) (%) Domestic 65.3 70.5 71.4 8.0 1.3 Hong Kong and Macau 57.8 63.4 58.3 9.7 (8.0 ) International 62.3 65.2 65.5 4.7 0.5 Overall 64.6 69.2 70.1 7.1 1.3 Overall load factor (RTK/ATK) (%) Domestic 64.2 67.2 66.7 4.7 (0.7 ) Hong Kong and Macau 52.2 56.9 50.4 9.0 (11.4 ) International 53.0 54.3 54.7 2.5 0.7 Overall 60.1 62.6 63.3 4.2 1.1 Yield per RPK (RMB) Domestic 0.57 0.58 0.55 1.8 (5.2 ) 34
Year ended December 31, | 2002 vs. 2001 | ||||||||||||||
2001 | 2002 | % Increase/ (Decrease) | |||||||||||||
Total | 25,057 | 28,940 | 15.5 | ||||||||||||
RTK (million) | |||||||||||||||
Domestic | 2,217 | 2,532 | 14.2 | ||||||||||||
Hong Kong regional | 105 | 108 | 2.9 | ||||||||||||
International | 712 | 974 | 36.8 | ||||||||||||
Total | 3,034 | 3,614 | 14.1 | ||||||||||||
RTK (million) | |||||||||||||||
Passenger ton kilometres | 2,236 | 2,584 | 15.6 | ||||||||||||
Cargo and mail ton kilometers | 798 | 1,030 | 29.1 | ||||||||||||
Total | 3,034 | 3,614 | 19.1 | ||||||||||||
Passengers carried (thousand) Domestic | 16,499 | 18,535 | 12.3 | ||||||||||||
Hong Kong regional | 1,409 | 1,369 | (2.8 | ) | |||||||||||
International | 1,213 | 1,589 | 31.0 | ||||||||||||
Total | 19,121 | 21,493 | 12.4 | ||||||||||||
Cargo and mail carried (thousand tons) | |||||||||||||||
Domestic | 348 | 404 | 16.1 | ||||||||||||
Hong Kong regional | 14 | 14 | — | ||||||||||||
International | 36 | 52 | 44.4 | ||||||||||||
Total | 398 | 470 | 18.1 | ||||||||||||
Capacity | |||||||||||||||
ASK (million) | |||||||||||||||
Domestic | 31,393 | 33,753 | 7.5 | ||||||||||||
Hong Kong regional | 1,690 | 1,746 | 3.3 | ||||||||||||
International | 6,981 | 8,746 | 25.3 | ||||||||||||
Total | 40,064 | 44,245 | 10.4 | ||||||||||||
ATK (million) | |||||||||||||||
Domestic | 3,622 | 3,924 | 8.3 | ||||||||||||
Hong Kong regional | 185 | 193 | 4.3 | ||||||||||||
International | 1,317 | 1,798 | 36.5 | ||||||||||||
Total | 5,124 | 5,915 | 15.4 | ||||||||||||
Load Factors | |||||||||||||||
Passenger load factor (RPK/ASK) (%) | |||||||||||||||
Domestic | 61.9 | 65.5 | 5.8 | ||||||||||||
Hong Kong regional | 62.7 | 61.9 | (1.3 | ) | |||||||||||
International | 65.2 | 65.9 | 1.1 | ||||||||||||
Total | 62.5 | 65.4 | 4.6 | ||||||||||||
Overall load factor (RTK/ATK) (%) | |||||||||||||||
Domestic | 61.2 | 64.5 | 5.4 | ||||||||||||
Hong Kong regional | 56.8 | 55.8 | (1.8 | ) | |||||||||||
International | 54.1 | 54.2 | 0.2 | ||||||||||||
Total | 59.2 | 61.1 | 3.2 | ||||||||||||
Yield | |||||||||||||||
Yield per RPK (RMB) | |||||||||||||||
Domestic | 0.62 | 0.55 | (11.3 | ) | |||||||||||
Hong Kong regional | 1.06 | 0.98 | (7.5 | ) | |||||||||||
International | 0.41 | 0.42 | 2.4 | ||||||||||||
Total | 0.60 | 0.54 | (10.0 | ) | |||||||||||
Yield per RTK (RMB) | |||||||||||||||
Domestic | 5.83 | 5.21 | (10.6 | ) | |||||||||||
Hong Kong regional | 11.26 | 10.36 | (8.0 | ) | |||||||||||
International | 3.31 | 3.25 | (1.8 | ) | |||||||||||
Total | 5.43 | 4.84 | (10.9 | ) | |||||||||||
Financial | |||||||||||||||
Passenger revenue (RMB million) |
35
Year ended December 31, | 2002 vs. 2001 | ||||||||||||||
2001 | 2002 | % Increase/ (Decrease) | |||||||||||||
Domestic | 12,068 | 12,234 | 1.4 | ||||||||||||
Hong Kong regional | 1,128 | 1,055 | (6.5 | ) | |||||||||||
International | 1,860 | 2,407 | 29.4 | ||||||||||||
Total | 15,056 | 15,696 | 4.3 | ||||||||||||
Cargo and mail revenue (RMB million) | 1,406 | 1,786 | 27.0 |
Year ended | 2004 vs. 2003 | 2005 vs. 2004 | ||||||||||||||||||
December 31, | % increase/ | % increase/ | ||||||||||||||||||
2003 | 2004 | 2005 | (decrease) | (decrease) | ||||||||||||||||
Hong Kong and Macau | 0.96 | 0.92 | 0.77 | (4.2 | ) | (16.3 | ) | |||||||||||||
International | 0.47 | 0.46 | 0.56 | (2.1 | ) | 21.7 | ||||||||||||||
Overall | 0.57 | 0.57 | 0.55 | — | (3.5 | ) | ||||||||||||||
Yield per RTK (RMB) | ||||||||||||||||||||
Domestic | 5.40 | 5.53 | 5.30 | 2.4 | (4.2 | ) | ||||||||||||||
Hong Kong and Macau | 10.35 | 9.83 | 8.18 | (5.0 | ) | (16.8 | ) | |||||||||||||
International | 2.90 | 3.31 | 4.24 | 14.1 | 28.1 | |||||||||||||||
Overall | 4.76 | 5.01 | 5.14 | 5.3 | 2.6 | |||||||||||||||
Financial IFRS | ||||||||||||||||||||
Passenger revenue (RMB million) | ||||||||||||||||||||
Domestic | 12,242 | 16,869 | 28,182 | 37.8 | 67.1 | |||||||||||||||
Hong Kong and Macau | 750 | 1,104 | 1,194 | 47.2 | 8.2 | |||||||||||||||
International | 2,018 | 3,127 | 4,952 | 55.0 | 58.4 | |||||||||||||||
Total | 15,010 | 21,100 | 34,328 | 40.6 | 62.7 | |||||||||||||||
Cargo and mail revenue (RMB million) | 1,955 | 2,244 | 3,091 | 14.8 | 37.7 | |||||||||||||||
U.S. GAAP | ||||||||||||||||||||
Passenger revenue (RMB million) | ||||||||||||||||||||
Domestic | 18,679 | 24,773 | 28,182 | 32.6 | 13.8 | |||||||||||||||
Hong Kong and Macau | 781 | 1,151 | 1,194 | 47.4 | 3.7 | |||||||||||||||
International | 2,978 | 4,519 | 4,952 | 51.7 | 9.6 | |||||||||||||||
Total | 22,438 | 30,443 | 34,328 | 35.7 | 12.8 | |||||||||||||||
Cargo and mail revenue (RMB million) | 2,459 | 2,792 | 3,091 | 13.5 | 10.7 |
2004 services. 37 The Group expects depreciation expenses to increase in future as the Group continues to expand its fleet. 20022001Group recorded a net incomeloss for 2005 attributable to equity shareholders of RMB576the Company is RMB1,848 million, for 2002, as compared to a net incomeloss of RMB340RMB48 million for 2001.2004. The scale of operations increased as a result of acquisition of the airline operations and related assets of CNA and XJA on December 31, 2004. The Group’s operating revenue increased by RMB1,139RMB14,319 million or 6.7%59.7% from RMB16,880RMB23,974 million in 20012004 to RMB18,019RMB38,293 million in 2002.2005. Passenger load factor increased by 2.90.9 percentage pointspoint from 62.5%69.2% in 20012004 to 65.4%70.1% in 2002.2005. Passenger yield (in passenger revenue per RPK) decreased slightly by 10.0% from RMB0.60 in 20013.5% to RMB0.54 in 2002.RMB0.55. Average yield (in traffic revenue per RTK) decreasedincreased by 10.9%2.6% from RMB5.43RMB5.01 in 20012004 to RMB4.84RMB5.14 in 2002.2005. Operating expenses increased by RMB514RMB16,533 million or 3.3%71.7% from RMB15,479RMB23,065 million in 20012004 to RMB15,993RMB39,598 million in 2002.2005. As the increase in operating revenue increased moreis smaller than the increase in operating expenses, operating profit increaseddecreased by 44.7%243.6% from RMB1,401an operating profit of RMB909 million in 20012004 to RMB2,026an operating loss of RMB1,305 million in 2002.2005. The Group’s net non-operating expenses increaseddecreased by 46.5%20.5%, from RMB605RMB689 million in 20012004 to RMB887RMB548 million in 2002,2005, mainly dueattributable to an unfavorable movementthe combined effect of increase in exchange differencesgain of RMB472RMB1,279 million, partly offset byincrease in interest expense of RMB925 million and a gain on disposaldecrease in share of four Boeing 757-200 aircraftresults of RMB199associates of RMB295 million. Overall, the Group’s net income increased by 69.2%, from RMB340 million in 2001 to RMB576 million in 2002.Revenuerevenueits airline and airline related operations. Traffic revenue in 2002 and 2001 accounted for 97.0%97.7% and 97.5% respectively97.4% of total operating revenue.revenue in 2005 and 2004 respectively. Passenger revenue and, cargo and mail revenue accounted for 89.8%91.7% and 10.2%8.3% respectively of total traffic revenue in 2002.2005. The balance of the Group’sother operating revenue is mainly derived from commission income, income from general aviation operations, fees charged for ground services rendered to other Chinese airlines that operate flights in and out of airports in Southern China (including the airports in Guangzhou, Shenzhen, Xiamen and Wuhan), air catering services and aircraft lease income.6.7%59.7% from RMB16,880RMB23,974 million in 20012004 to RMB18,019RMB38,293 million in 2002. This2005. The increase was primarily due to a 4.3%62.7% rise in passenger revenue from RMB15,055RMB21,100 million in 20012004 to RMB15,696RMB34,328 million in 2002 due to higher2005 resulting from increased traffic volume. The total number of passengers carried increased by 12.4%56.4% to 21.4944.12 million passengers and the ASKs increased by 64.3% to 88,361 million in 2005. The increase in 2005 compared to 2004 was attributable to the general increasing traffic demand in the PRC airline market and deliveries of 108 aircraft during 2005 which caused an increase in passenger capacity of 68.1%.
38
39
remained constant at RMB0.57.
Included in 2004 Hong Kong passenger revenue which accounted for 6.7% of total passenger revenue, decreased by 6.5% from RMB1,128 million in 2001 to RMB1,055 million in 2002. Forwas fuel surcharge imposed on Hong Kong regional flights passenger traffic in RPKs increased by 2.0%, while passenger capacity in ASKs increased by 3.3%, resulting in 0.8 percentage point decrease in passenger load factor, or a decrease of 1.3% from 2001. Passengerapproximately RMB67 million (2003: RMB24 million). Excluding the effect of fuel surcharge revenue, the passenger yield decreased from RMB1.06RMB0.93 in 20012003 to RMB0.98RMB0.86 in 2002 mainly due to slack in traffic volume.
36
2004.
2004 mainly resulted from the increases in traffic derived from long haul routes which generally had a lower yield than short haul routes.
Other operating revenue increased by 28.4% from RMB418 million in 2001 to RMB537 million in 2002. The increase was primarily due to increase in fees charged for ground services rendered to other Chinese airlines as the traffic volume increased as well as an income from a lease arrangement effected during the year.
various auxiliary operations.
40
2004.
flying hours.
years.
landing and takeoffs.
37
increased traffic volume.
Depreciation and amortization, which accounted for 11.5% of total operating expenses, increased by 1.4% from RMB1,815 million in 2001 to RMB1,840 million in 2002. This was primarily as a result of the additions of aircraft during 2002.
2004.
replacement of certain RMB denominated bank loans of higher interest rates with US$ denominated bank loans of lower interest rates.
The Group recognized a net gain on sale of fixed assets of RMB171 million in 2002, mainly resulting from disposal of four Boeing 757-200 aircraft.
41
The Group
TaxationRMB334 million resulting from reduction in net deferred taxation liability balance of RMB392 million. In 2004, income tax expense increased by 24.2% from RMB321 million in 2001 to RMB398 million in 2002, reflecting primarily an increase in profit before taxation. A deferred tax asset of RMB149RMB65 million was recognized at December 31, 2002 in respect of the unrelieved PRC tax losses brought forward from prior years. Such tax losses are available for carry-forward to offset against future PRC taxable profits for a maximum period of 5 years.
recorded.
2001 Compared With 2000
The Group recorded net incomeairline operations and related assets of RMB340 million for 2001, a decrease of 32.2% from RMB502 million for 2000.CNA and XJA on December 31, 2004. The Group’s operating revenue increased by RMB1,702RMB4,128 million or 11.2%12.1% from RMB15,178RMB34,165 million in 20002004 to RMB16,880RMB38,293 million in 2001.2005. Passenger load factor increased by 2.11.2 percentage point from 60.4%68.9% in 20002004 to 62.5%70.1% in 2001.2005. Passenger yield (in passenger revenue per RPK) decreased slightly by 1.6% from RMB 0.61 in 20003.1% to RMB0.60 in 2001.RMB0.55. Average yield (in traffic revenue per RTK) decreased by 3.6%1.6% from RMB5.63RMB5.22 in 20002004 to RMB5.43RMB5.14 in 2001.2005. Operating expenses increased by RMB1,483RMB7,097 million or 10.6%22.0% from RMB13,996RMB32,288 million in 20002004 to RMB15,479RMB39,385 million in 2001. Of2005. As the increase in operating revenue is smaller than the increase in operating expenses, an approximate amount of RMB243 million was attributable to the increase in aircraft repair and maintenance expense and the remaining amount of approximately RMB1,240 million was primarily due to operational growth. As operating revenue increased more than operating expenses, operating income increaseddecreased by 18.5%158.2% from RMB1,182an operating profit of RMB1,877 million in 20002004 to RMB1,401an operating loss of RMB1,092 million in 2001.2005. The Group’s net non-operating expenses increaseddecreased by 141.3%60.8%, from RMB251RMB1,184 million in 20002004 to RMB605RMB464 million in 2001,2005, mainly reflecting a dropattributable to the combined effect of increase in saleexchange gain of aircraft under sale and leaseback transactionsRMB1,344 million, increase in interest expense of RMB318RMB405 million and a loss on saledecrease in share of staff quartersresults of RMB111associates of RMB280 million.
revenue
42
43
38
total traffic revenue in 2001, respectively.2004. The balance of the Group’s operating revenue is derived from commission income, income from general aviation operations, fees charged for ground services rendered to other Chinese airlines which operate flights in and out of airports in Southern China, including the airports in Guangzhou, Shenzhen, Xiamen and Wuhan, air catering services and aircraft lease income.
services.
RMB0.57.
44
Hong Kong passenger revenue, which accounted for 7.5% of total passenger revenue, decreased by 1.3% from RMB1,143 millionRMB1.00 in 20002003 to RMB1,128 millionRMB0.88 in 2001. For Hong Kong flights, passenger traffic in RPKs decreased by 1.3%, while passenger capacity in ASKs, decreased 3.1%, resulting in a 1.1 percentage point increase in passenger load factor, or an increase of 1.8% from 2000. Passenger yield remained unchanged at RMB1.06.
2004 mainly due to intensified competition among airlines.
2004 and at RMB0.55.
Other operating revenue decreased by 11.4%income from RMB472 million in 2000 to RMB418 million in 2001. This decrease was primarily due to a drop in aircraft lease income of RMB45 million.
various auxiliary operations.
asset impairment charges.
2004.
39
51.1% from RMB3,240RMB5,662 million in 20002003 to RMB3,549RMB8,555 million in 20012004 mainly as a result of the traffic capacity growth.increased fuel prices and fuel consumption. Operating lease rentalspayments increased by 18.4%16.6% from RMB1,616RMB1,808 million in 20002003 to RMB1,913RMB2,109 million in 2001,2004, primarily due primarily to the full year effect of five Boeing 737-300/37Kadditional rental payments for new aircraft wet leased from Zhongyuan Airlines commencing in 2000.under operating leases. Catering expenses increased by 14.5%30.9% from RMB483RMB754 million in 20002003 to RMB554RMB987 million in 2001, reflecting2004, primarily andue to increase in number of passengers carried. Aircraft insurance costs increaseddecreased by 44.7%7.9% from RMB85RMB291 million in 20002003 to RMB123RMB268 million in 2001, due largely to2004, primarily because of a risedecrease in aircraft insurance premiums levied on PRC airlinesprescribed by the People’s Insurance (Property) Company of China as a result of the September 11 attacks in the United States of America. LaborPRC insurance company. Labour costs for flight personnel increased by 14.1%37.2% from RMB576RMB1,126 million in 20002003 to RMB657RMB1,545 million in 2001,2004, largely due largely to anthe increase in flight hours as well as an increase in bonuses for flight personnel.
flying hours.
45
landing and takeoffs.
volume.
Depreciation and amortization, which accounted for 11.7% of total operating expenses, decreased by 2.6% from RMB1,864 million in 2000 to RMB1,815 million in 2001. This was primarily as a result of the disposaladditions of four Boeing 757-200 aircraft and two Airbus 320-200 aircraft under sale and leaseback transactions in 2000 and 2001 respectively and full depreciation of certain old flight equipment during 2001.
2004.
replacement of certain RMB denominated bank loans of higher interest rates with US$ denominated bank loans of lower interest rates.
The Group recognized a net loss on sale of fixed assets of RMB56 million in 2001, mainly resulting from the net effect of a loss of RMB111 million on disposal of staff quarters and a gain of RMB60 million on disposal of two Airbus 320-200 aircraft under sale and leaseback arrangements.
unrealised translational exchange loss.
40
2004.
46
47werewas utilized to finance the Group’s working capital and capital expenditure requirements. In July 2003, the Company issued 1,000,000,000 A Shares with a par value of RMB1.00 each at issue price of RMB2.70 by way of a public offering to natural persons and institutional investors in the PRC. The proceeds received by the Company, net of the issuance costs of RMB59,233, amounted to RMB2,641 million and have been used for the purchase of Boeing 737-800 aircraft in accordance with the disclosure in the Prospectus for Offering of the A Shares.2002,2005, the Group had loanbanking facilities fromwith several PRC commercial banks for providing long term loan finance up to an approximate amount of RMB12,360RMB39,294 million to the Group. As of December 31, 2002,2005, an approximate amount of RMB7,258RMB28,242 million was utilized. As of December 31, 20012004 and 2002,2005, the Group’s cash and cash equivalents totaled RMB2,818RMB3,083 million and RMB3,771RMB2,901 million, respectively.2000, 20012003, 2004 and 20022005 were RMB2,355RMB2,129 million, RMB2,224RMB3,596 million and RMB3,698RMB3,835 million, respectively.2000, 20012003, 2004 and 20022005 was RMB256RMB5,434 million, RMB3,036RMB8,824 million and RMB5,895RMB8,009 million, respectively. Cash capital expenditures in 2000, 20012003, 2004 and 20022005 were RMB1,381RMB4,707 million, RMB1,492RMB6,631 million and RMB6,351RMB4,935 million, respectively, reflecting predominantly additional investments in aircraft and flight equipment under the Group’s fleet expansion plans and Guangzhou new airport, and, to a small extent, additional investments in pilot training facilities and other facilities and buildings for operations.(outflows)/inflowinflows of RMB(2,490)RMB1,615 million, RMB(568)RMB6,231 million and RMB3,150RMB3,992 million in 2000, 20012003, 2004 and 2002,2005, respectively. The net cash outflows of 2000 and 2001 were primarily as a result of making scheduled repayments of bank borrowings and capital lease obligations in excess of proceeds from new bank borrowings.2002,2005, the Group’s aggregate long-term debt and obligations under capital leases totaled RMB14,851RMB30,449 million. Based on such amount, in 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010 and thereafter, amounts payable under such debt and obligations will be RMB2,384RMB5,250 million, RMB2,115RMB7,246 million, RMB2,111RMB4,764 million, RMB5,125RMB2,812 million, RMB1,472 million and RMB3,116 respectively.RMB8,905 million. Such borrowings were denominated, to a larger extent, in United States dollars and, to a smaller extent, in Japanese yen and Hong Kong dollars, with almost alla significant portion being fixed interest rate borrowings. In the normal course of business, the Group is exposed to fluctuations in foreign currencies. The Group’s exposure to foreign currencies was primarily as a result of its foreign currency debts. Depreciation or appreciation of the Renminbi against foreign currencies affects the Group’s results significantly because the Group’s foreign currency payments generally exceed its foreign currency receipts. The Group is not able to hedge its foreign currency exposure effectively other than by retaining its foreign currency denominated earnings and receipts to the extent permitted by the State Administration of Foreign Exchange, or subject to certain restrictive conditions, entering into forward foreign exchange contracts with authorised PRC banks.2002,2005, the Group’s short term bank debt was RMB4,423RMB14,346 million with interest rates ranging from 1.9%3.15% to 5.3%.5.34% per annum. The Group’s weighted average interest rate on short-term bank notes payable was 3.11%4.83% per annum as of December 31, 2002.2005. The primary use of the proceeds of the Group’s short-term debt is to finance working capital needs. The Group has generally been able to arrange short-term bank loans with domestic banks in China as necessary and believes it can continue to obtain them based on its well-established relationships with various lenders.2002,2005, the Group had obligations under operating leases totalling RMB8,537totaling RMB24,594 million, predominately for aircraft. Of such amount, RMB1,280RMB3,340 million, RMB1,328RMB2,881 million, RMB1,245RMB2,785 million, RMB1,002RMB2,609 million, RMB2,523 million and RMB3,682RMB10,456 million, respectively, was due in 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010 and thereafter.
41
The Group has obtained firm commitments from several PRC banksits principal bankers to providerenew its short-term bank loans upoutstanding at December 31, 2005 when they fall due during 2006. Subsequent to approximately RMB5,102 million and sought letters of intent from several PRC banks to provide additional loans up to approximately RMB5,876 million. With regard to the Group’s long-term debt and lease obligations due in 2003 of RMB3,664 million,December 31, 2005, the Group intends to meet such payment using its operating cashflows.renewed short-term debts of RMB2,611 million.
The Group acquired certain of its aircraft pursuant to capital or operating leases that obligate the Group to indemnify the lessors against any withholding or similar taxes that may be imposed on the lessors by taxing authorities in China with regard to payments made pursuant to such leases. In accordance with relevant PRC tax regulations, a PRC lessee is liable to pay PRC withholding tax in respect of any lease payments regularly made to an overseas lessor. Depending on the circumstances, this tax is generally imposed at a fixed rate ranging from 10% to 20% of the lease payments, or in certain cases, the interest components of such payments. Pursuant to an approval document from the State Taxation Bureau, lease arrangements executed prior to September 1, 1999 are exempt from PRC withholding tax. The PRC withholding tax payable in respect of the operating leases executed after September 1, 1999 of RMB5 million, RMB12 million and RMB14 million during 2000, 2001 and 2002 respectively, have been included as part of the operating lease charges.
entities.
A final dividend of RMB0.02 (before tax) per share totaling RMB67.5 million (before tax) in respect of financial year 2001 was paid to shareholders during the year.currencies.
2005. The Board of Directors does not recommend the payment of a final dividend in respect of the year ended December 31, 2005.
48
42
2002. As of December 3, 2002 Payment due by period less than Total 1 year 1-3 year 4-5 year After 5 years (RMB million) Short-term debt 4,423 4,423 — — — Long-term debt 6,653 817 1,887 2,686 1,263 Capital lease obligations 8,198 1,567 2,339 2,439 1,853 19,274 6,807 4,226 5,125 3,116 Operating leases commitment 8,537 1,280 2,573 1,002 3,682 Aircraft purchase commitments 5,876 2,801 2,344 731 — Capital commitments in respect of investments in the Guangzhou new airport 526 526 — — — Other capital commitments 44 44 — — — Investing commitments 261 261 — — — 15,244 4,912 4,917 1,733 3,682 Note 1 Amounts shown are net of previously paid purchase deposits.2005. As of December 31, 2005 As of December Payment due by period 31, 2004 less than Total 1 year 1-3 years 4-5 years After 5 years Total (RMB million) Short-term debt (Note 2) 14,346 11,735 2,611 — — 9,925 Long-term debt 14,617 1,877 6,472 2,095 4,173 13,528 Capital lease obligations 15,832 3,373 5,538 2,189 4,732 11,743 Cash payable for CNA/ XJA Acquisitions — — — — — 1,959 44,795 16,985 14,621 4,284 8,905 37,155 Operating lease commitments 24,594 3,340 5,666 5,132 10,456 12,750 Aircraft purchase commitments (Note 1) 45,628 7,341 23,299 14,988 — 11,776 Capital commitments in respect of investments in the Guangzhou new airport 840 840 — — — 824 Other capital commitments 1,335 752 583 — — 700 Investing commitments 83 83 — — — 83 72,480 12,356 29,548 20,120 10,456 26,133 Fixed rates 3,285 785 1,071 640 789 2,388 Variable rates 2,171 935 635 369 232 939 5,456 1,720 1,706 1,009 1,021 3,327 Note 1 Amounts shown are net of previously paid purchase deposits. Note 2 Short term bank debts included certain debts of RMB2,611 million which were renewed subsequent to December 31, 2005. The renewed debts are unsecured, bear interest at floating rates ranging from 3-month HIBOR/6-month LIBOR + 0.55% to 0.60% per annum and are repayable one year from their respective renewal dates.
and Employees 49 and Senior Management2002.2005. There were certain changes in the Company’s Directors, Senior Management and Supervisors subsequent to December 31, 2002,2005, details of which are set forth below. Name AgePosition Position
Gender
AgeYan Zhi Qing60Liu Shao Yong Chairman of the Board of DirectorsWang Chang ShunMale 4548 Liu Ming Qi(1) Vice Chairman of the Board of Directors; PresidentLi Feng HuaMale 5362Peng An Fa(2) Director Male Director; Vice President58Wang Shao XiQuan HuaDirector Male 52 Zhao Liu An Director Male 58 Zhou Yong Qian(3) Director Male 61 Si Xian Min Director, President Zhang Rui AiMale 6149Zhou Yong Jin(1) Director Male DirectorZhou Yong Jin63 59DirectorXu Jie Bo Director, Chief Financial Officer and Vice President 37Male Director; Chief Financial Officer41Wu Rong NanNan(1)Director Male 6164Simon To(4) Independent Non-executive Director Male DirectorSimon To55 51Independent Non-Executive DirectorPeter Lok Independent Non-executive Director 66Male Independent Non-Executive Director70Wei Ming Hai 38Independent Non-executive Director Independent Non-Executive DirectorLiang Hua Fu61Chairman of the Supervisory CommitteeGan Yu Hua74SupervisorLi Qi Hong55SupervisorJiang Ping52Vice PresidentLi KunMale 42 Vice President43
Name | ||||||||
Gender | Age | |||||||
Wang Zhi | Independent Non-executive Director | Male | 64 | |||||
Sui Guang Jun | Independent Non-executive Director | Male | 45 | |||||
Sun Xiao Yi | Chairman of the Supervisory Committee | Male | 52 | |||||
Yang Guang Hua | Supervisor | Male | 53 | |||||
Yang Yi Hua | Supervisor | Female | 46 | |||||
Li Kun(5) | Vice President | Male | 46 | |||||
Yuan Xin An | ||||||||
49 | ||||||||
Zheng En Ren(6) | Vice President | Male | 61 | |||||
Vice President | Male | 55 | ||||||
Ren Ji Dong(7) | Vice President | Male | 41 | |||||
He Zong Kai(7) | Vice President | Male | 55 | |||||
Liu Qian | Chief Pilot | Male | 40 | |||||
Su Liang | Company Secretary | Male | 44 | |||||
Chen Wei Hua | General Counsel | Male | 40 |
On April 12, 2002,
(1) | The resignation of Liu Ming Qi, Zhou Yong Jin and Wu Rong Nan as Directors due to their retirement was approved at the first and second extraordinary general meetings of the Company on December 16, 2005. | |
(2) | The removal of Peng An Fa as Director of the Company owing to suspicion that he had committed a crime was discussed and approved at the first extraordinary general meeting of the Company on December 16, 2005. | |
(3) | The resignation of Zhou Yong Qian as Director of the Company due to his retirement was approved at the 2005 annual general meeting of the Company on June 15, 2006. | |
(4) | The resignation of Simon To as independent non-executive Director upon the expiry of his six years’ term was approved at the second extraordinary general meeting of the Company on December 16, 2005. | |
(5) | Li Kun was relocated to another position and his resignation as Vice President of the Company was approved by the Board of the Company on December 13, 2005. | |
(6) | The resignation of Zheng En Ren as Vice President of the Company due to his retirement was approved by the Board of the Company on April 19, 2006. | |
(7) | The appointment of Ren Ji Dong and He Zong Kai as Vice Presidents of the Company were approved by the Board on March 29, 2005. |
On October 11, 2002, Li Feng Hua resigned as the DirectorCompany and Vice President of the Company due to work arrangement.
On March 14, 2003, Mr. Wang Shao XiCSAHC and Mr. Zhang Rui An tendered their resignations tobecame the Company as Directors of the Company due to retirement. Such resignation took effect after approval at the 2002 Annual General Meeting of the Company.
In the Annual General Meeting held on May 13, 2003, it was resolved that Mr. Li Feng Hua, Mr. Wang Shao Xi and Mr. Zhang Rui Ai resigned as directors of the Company. It was also resolved that Mr. Liu Ming Qi, Mr. Peng An Fa, Mr. Wang Quan Hua, Mr. Zhao Liu An, Mr. Zhou Yong Qian, Mr. Wang Zhi and Mr. Sui Guang Jun were elected as directors of the Company during the same meeting.
Yan Zhi Qing is the Chairman of the Board of Directors. He became an employee of the Company in February 1996. Mr. Yan has 36 years of experience inMarch 1995 after the Chinese aviation industry. Administrative positions which Mr. Yan has held include Director of Flight Operationsestablishment of the Hunan Provincial Civil Aviation Administration, Director of the Guangxi Provincial Civil Aviation Administration, Director of the Central and Southern China Civil Aviation Administration, Director of the Political Department of the CAAC and Party Secretary and Managing Vice President of CSAHC.Company. Mr. Yan is currently the President and Party Secretary of CSAHC. Mr. YanWang graduated from the SchoolEconomic Management Department of Aviation Administration and Flight Control in 1962.
Central Communist Party College. Mr. Wang Chang Shun is the Vice Chairman of the Board of Directors and the President of the Company. He began his career in civil aviation in February 1976, mainly involved in air traffic control. He has held positions such1972, and successively served as the Director of Planning Department of Guangzhou Civil Aviation Administration, the Office Director of China Southern Airlines Shenzhen Co., the Director of the Flight Operations OfficePlanning and Operation Division of CSAHC, the President of Strategy and Development Department of China Southern Airlines
50
Zhou Yong Jin isSi became a Director of the Company. He joined CSAHC in January 1991 and became an employee of the Company upon its establishment in March 1995. on December 31, 2004.
Xu Jie Bois a Director, Vice President and the Chief Financial Officer of the Company. HeMr. Xu joined the Company in July 1998. Mr. XuHe graduated from the Management Department of Tianjin University and was subsequently awarded with a master degree in business administration from Hong Kong Baptist University. A qualified senior accountant by profession, Mr. Xu started his career in August 1986 and worked in the Financial Department of Guangzhou Civil Aviation Administration upon graduation. In January 1992, he was a supervisoras Supervisor of the Financial Management Office for Infrastructure Projects. Subsequently inProjects of Guangzhou Civil Aviation Administration. In December 1992, he worked as atook up the posts of Deputy Director and Director of the Financial Department of Central and Southern China Civil Aviation Administration. In July 1998, he became General Manager of the Financial Department and Chief Financial Officer of the Company. Currently, he is a Director and the Vice President and Chief Financial Officer of the Company. He is a Director and the Chief Financial Officer. In addition, he is also a Director of Southern Airlines Group ShantouGuizhou Airlines Company Limited, Vice Chairman of Sichuan Airlines Corporation Limited, and GuangxiVice Chairman of Xiamen Airlines Company Limited.
Wu Rong Nan is Mr. Xu became a Director of the Company. He joined CSAHC in January 1991 and becameCompany on April 16, 2001.
Simon To is an Independent Non-executive Director of the Company.April 16, 2001. He is currentlyalso a Managing Director of Hutchison Whampoa (China) Limited, and also serves as director of several companiesveteran in Hong Kong and Foreign-invested companies in China.the civil aviation industry. Mr. To has managed investment projects in China since early 1980’s and is familiar with the laws and regulations of Hong Kong and China. Mr. To graduated from Stanford University with a degree of Master of Business Administration.
Peter Lok is an Independent Non-executive Director of the Company. He joined the Civil Aviation Department of Hong Kong in 1956 and became its Assistant Director in 1982, Deputy Director in 1988, and Director from 1990 to 1996. During the period ofFrom 1997 to 2000, Mr. Lok first served as thewas an advisor and later became the president of Hong Kong Commercial Airlines Center. Mr. Lok has sat on various Committees
44
such as the Evaluation Committees for the Design of Shanghai’s Pudong Airport, Committee for China’s Zhuhai Aviation and Spaceflight Fair, Evaluation Committees for the IATA Eagle Award. He is also an independent director of several other publiclisted airline companies.
51
Supervisory
of Applied Economics and the Dean of Management College in Jinan University. Mr. Sui is currently the Deputy Vice Chancellor of Guangdong University of Foreign Studies.
Liang16, 2004.
Gan Yu Hua is a SupervisorDeputy General Manager of the Company. Mr. Gan held various positions inYang became a Supervisor on June 16, 2004.
52
Li Qi Hong is a Supervisorthe Chinese aviation industry. He has been the Manager of Quality Assurance and Deputy Controller of Quality Control of Guangzhou Aircraft Maintenance Engineering Company Limited, Deputy General Manager of the Aircraft Engineering Department of the Company, and Vice President of Guangzhou Aircraft Maintenance Engineering Company Limited. Mr. Yuan became the RepresentativeChief Engineer of the Labor UnionCompany in 2000, and a Vice President of the Group. Company in April 2002.
All Directorsaircraft maintenance workshop of Xinjiang Airlines Company, including Head of Workshop, Deputy Director of Workshop and SupervisorsPresident of the Engineering Department. Mr. Ren served as the Deputy Director of Urumqi Civil Aviation Administration and Vice President of Xinjiang Airlines Company. He was the Vice President of Xinjiang Airlines from 2002 to 2004. Mr. Ren became a Vice President of the Company have entered into service contracts with the Company forin March 2005.
53
RMB0.1 milliondirectorsDirectors for the year ended December 31, 2002.2005. The aggregate compensation paid by the Company to all directorsDirectors (excluding non-executive directors)Directors), supervisorsSupervisors and senior managementSenior Management for 20022005 was RMB1.4RMB5.9 million. For the year ended December 31, 2002,2005, the Company accrued an aggregate of approximately RMB64,000RMB132,000 on behalf of its executive directors, supervisorsDirectors, Supervisors and senior managementSenior Management pursuant to the SA Pension Scheme and the retirement plans operated by various municipal governmentgovernments in which the Company participates. Salaries, allowances Retirement Directors’ and benefits Discretionary scheme Name fees in kind bonuses contributions Total Note RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Liu Shao Yong (i ) — 299 — 12 311 Liu Ming Qi — 242 — 10 252 Peng An Fa — 101 — 6 107 Wang Quan Hua — 237 — 12 249 Zhao Liu An (i ) — 237 — 12 249 Zhou Yong Qian — 237 — 12 249 Si Xian Min — 281 — 12 293 Zhou Yong Jin — 127 — 2 129 Xu Jie Bo — 226 — 12 238 Wu Rong Nan — 368 162 7 537 Sun Xiao Yi — 237 — 12 249 Yang Guang Hua — 225 — 12 237 Yang Yi Hua — 48 70 11 129 Simon To (ii ) — — — — — Peter Lok 58 — — — 58 Wei Ming Hai 58 — — — 58 Wang Zhi 58 — — — 58 Sui Guang Jun 58 — — — 58 232 2,865 232 132 3,461 Notes: (i) The above amounts included the salaries paid to these Directors as pilots of the Company. (ii) Simon To received director’s fee of RMB1 during the year ended December 31, 2005.
The term of office of a Director is three years. The term of office of the current Directors will end in 2007. A Director may serve consecutive terms upon re-election.contractscontract with the Company or any of its subsidiaries provide prorated monthly salary upon termination of employment in accordance with his contract. The Director is entitled to paid leave in accordance with his contract.45Mr. Simon To, Mr. Peter Lok and Mr. Wei Ming Hai.Hai, Wang Zhi and Sui Guang Jun. Wei Ming Hai is the chairman of the audit committee. The term of office of each member is three years. The term of office of the current members will end in 2007. A member may serve consecutive terms upon re-election. At least once a year, the committee is required to meet with the Company’s external auditors without any executive members of the Board in attendance. The quorum necessary for the transaction of any business is two committee members. The committee will normally meet four times a year.Audit Committee held nine meetings in 2005, which were attended by all members. The external auditors or the Chief Financial Officer of the Company may request a meeting of the audit committee.Board.Board of Directors. Moreover, the committee discusses problems arising from the audit and reviews the external auditors’ management letter and management’s response. Furthermore, the audit committee reviews the effectiveness of the system of internal financial controls from information provided by the Executive Directorate and management of the Company and by the independent auditors and ensures adherence to the Company’s control policies so that the Company’s assets are safeguarded and that the financial records are complete and accurate. The audit committee meets regularly with the Company’s senior financial,positions from finance department and internal audit department and the independentexternal auditors to consider the Company’s financial reporting, the nature and scope of audit review and the effectiveness of the systems of internal control. The audit committee also reviews any significant transactions that are not in the ordinary course of business.Company does not have a Remuneration Committee.remuneration committee comprises three members. Currently, the remuneration committee is chaired by independent non-executive Director Sui Guang Jun with independent non-executive Director Wei Ming Hai and executive Director Wang Quan Hua as members. The executive compensation programterm of office of each member is three years. The term of office of the Companycurrent members will end in 2007. A member may serve consecutive terms upon re-election. The remuneration committee met once in 2005, which meeting was attended by all members. In addition, the remuneration committee also meets as and when required to consider remuneration related matters.administered byalso responsible for assessing performance of executive Directors and approving the Boardterms of Directors.executive Directors’ service contracts.
542002,2005, the Group had 17,03134,417 employees, including 1,8202,567 pilots, 2,5704,539 flight attendants, 2,1995,076 maintenance personnel, 3,83210,445 sales and marketing personnel, 3,243 administrative personnel and 3,583 administrative personnel.8,547 temporary employees. All of the Group’s pilots, flight attendants, technicalmaintenance personnel, managementadministrative personnel and sales and marketing personnel are contract employees, and most of the Group’s ancillary service workers are temporary employees. Contract employees are hired by the Group pursuant to renewable employment contracts with terms ranging from
Pension Programs
Historically, the Group participated in an industry-wide pension scheme managed by the CAAC. With effect from January 1, 1998, the pension scheme of the CAAC was replaced by several new retirement schemes operated under the auspices of various municipal governments.
46
are assumed by these schemes.
The Group is also required to provide retirees with medical benefits, transportation subsidies and other welfare facilities. Previously,the Group. In return, the Group paid a fixed annual fee of RMB85 million to CSAHC for a ten-year period from 1995 to 2004. The agreement expired by December 31, 2004 and no further payment was made in return for2005.
payable when applications are received from eligible employees.
55
At no time during 2002 had any Director, Supervisor or member of the Senior Management or any of their spouses or minor children, been granted or exercised or subscribed for shares or debentures or options of the Company.
CSAHC owns 50.30% of the total share capital of the Company, therefore it is entitled to exercise all the rights of a controlling shareholder, including the election of executive Directors.DecemberMay 31, 2002,2006, the total share capital of the Company was 3,374,178,000divided into 4,374,178,000 shares, of which approximately 65.2%50.3% (2,200,000,000 domestic shares) iswas held by CSAHC, and approximately 34.8%26.84% (1,174,178,000 H shares) iswas held by Hong Kong and overseas shareholders and approximately 22.86% (1,000,000,000 A shares) was held by domestic shareholders.DecemberMay 31, 2002,2006, the following shareholders had an interest of 5% or more in the Company’s shares: Approximate PercentageName Approximate Percentage of the Total Name Number of Shares of the Total Number of SharesCSAHC 2,200,000,000 domestic shares 65.20%50.30%HKSCC Nominees Limited 1,148,129,9991,150,854,998 H shares 34.03%26.31%DecemberMay 31, 2002,2006, the following entities hold 5% or more of the total number of H shares issued by the Company. Approximate Percentage of Name Number of H Shares the Total Number of H Shares The Hongkong and Shanghai Banking 643,649,717 54.82 % 47 Approximate Percentage of Name Number of H Shares the Total Number of H Shares Corporation Limited Standard Chartered Bank 154,060,050 13.12 % Approximate Percentage of the Total Number of H Name Number of H Shares Shares HKSCC Nominees Limited 1,150,854,998 98.01%
562236 to the Financial Statements. In particular, the following arrangements, which the Company believes are material to its operations, have been made between the Company and CSAHC and its affiliates. The Company believes that these arrangements are effected in the prevailing market rates and are commercially reasonable and on terms no less favorable than terms available from third parties. Acquisition of Assets from CSAHC During the year, the Group acquired five Boeing 737-300/37K aircraft and related spare parts and certain vehicles from Zhongyuan Airlines, a subsidiary of CSAHC, at a consideration of approximately RMB1,097 million. The consideration was satisfied by cash of approximately RMB132 million together with an assumptionhave been entered into by the Group in the ordinary course of Zhongyuan Airlines’ debts of approximately RMB965 million. In addition,business and in accordance with the Group received reimbursements of wet lease rentals totaling RMB150 million which it paid to Zhongyuan Airlines during the period from July 1, 2001 to December 31, 2001. Such reimbursements have been applied to reduce the purchase costs of the acquired assets. On August 29, 2002, the Company entered into agreements governing such transactions. to acquire 90% registered capital in each of Guangzhou Aviation Hotel, South China International Aviation & Travel Services Company and Southern Airlines Advertising Company from CSAHC at considerations of RMB99 million, RMB5 million and RMB4 million, respectively. The remaining 10% registered capital in each of these companies are still held by CSAHC. Following the transfer, Guangzhou Aviation Hotel, South China International Aviation & Travel Services Company and Southern Airlines Advertising Company became subsidiaries of the Company. These acquisitions did not have a significant impact on the operating results of the Group for the year ended December 31, 2002 or its financial position at that date. Arrangement with CSAHChave entered into the Trademark License Agreementa ten year trademark licence agreement dated May 22, 1997 pursuant to which CSAHC has acknowledgedacknowledges that the GroupCompany has the right to use the name “China Southern” and “China Southern Airlines” in both Chinese and English, and has granted togrants the Company a 10-year renewable royalty free license to use the kapok logo on a world-wideworldwide basis in connection with itsthe Company’s airline and airline-related businesses. CSAHC has retained the right to use the kapok logo in connection with its non-airline related businesses conducted as of the date of the Trademark License Agreement and to permit its affiliates that do not compete, directly or indirectly, with the Group to use the kapok logo. Unless CSAHC gives a written notice of termination three months before the expiration of the 10-year term of the agreement, the agreement will be automatically extendedrenewed for another 10-yearten-year term.
both parties thereafter (subject to mutual agreement with respect to rental terms).
parties thereafter (subject to mutual agreement with respect to rental terms).
48
Comprehensive Services and Employee Benefits
57
2006 by mutual agreement between the parties. The parties have determined the various rates for import and export services provided by SAIETC after negotiations on a fair and equitable basis, which are not higher than the market rates for similar services.
compliance with the relevant provisions of the Hong Kong Listing Rules by the Company. Both parties agreed that the agency fee for import and export shall be determined after arm’s length negotiation and shall not be higher than the market rate.
In August 2002, the Group entered into a takeover agreement with CSAHC. As a result, the Group owns 90% and CSAHC owns 10% of SAAC.
2006.
RMB3,062,000.
In order to comply with the new requirements under the Hong Kong Listing Rules, so that SA Finance can continue to provide deposit of money service and other financial services (subject to execution of separate agreements and further compliance with the Hong Kong Listing Rules), the Company and SA Finance entered into a new financial agreement on November 12, 2004, commencing from that date for a period of three years, and is renewable, subject to compliance with the requirements of the relevant Hong Kong Listing Rules by the Company, by an application in writing by the Company not less than 30 days before the end of the fixed term.
58
annum; the balance of the loans extended to the Group by SA Finance amounted to RMB300,000,000.
can be renewed automatically.
RMB60,542,000.
The Company and GAMECO have entered into an Aircraft Maintenance and Engineering Agreement for the provision of aircraft repair and maintenance services. On May 17, 1996, the Company and GAMECO entered into an agreement regarding the fee arrangement for
49
the provision of such repair and maintenance services (the “Fee Agreement”). Pursuant to the Fee Agreement and subsequent agreements, GAMECO charged the Company for expendables at cost plus 15%, and labor costs at US$30.0 per hour during 2002.
For the year ended December 31, 2002, the amount incurred by the Company for such repair and maintenance services was RMB592.3 million.
The China Southern West Australian Flying College Pty Ltd (the “Australian Pilot College”), which is 65% owned by the Company and 35% owned by CSAHC. The 35% shareholding was acquired by CSAHC from a previous shareholder in the Australian Pilot College in 2000.
RMB81,471,000.
Guangzhou Nanland Air Catering Company Limited (“Nanland”), which is 51% owned by the Company and 49% owned by an independent third party.
The Company and Nanland have entered into a catering agreement dated May 22, 1999, for the sale and purchase of in-flight meals for flights originating or stopping at the airport in Guangzhou. Pursuant to such agreement, Nanland will supply inflight meals to the Company from time to time during the term from May 22, 1999 to May 22, 2000. The agreement will then be automatically extended annually.
For the year ended December 31, 2002, the amount paid by the Group to Nanland for the provision of in-flight meals was RMB88.9 million.
RMB87,521,000.
Group. The rates of commission are not higher than market rates for similar services.
59
50
60 Legal Proceedings The Company is not party to any material legal proceedings. A final dividend of RMB0.02 (before tax) per share totaling RMB67.5 million (before tax) in respect of financial year 2001 was paid to shareholders during the year.2002.2005. The Board of Directors does not recommend the payment of a final dividend in respect of the year ended December 31, 2005.
61“ZNH.” As“ZNH”.May 31, 2003, approximately 71,405,500 of the Company’s H“600029”. The 2,200,000,000 Domestic Shares in the form of 1,428,110 ADSs were held in the U.S. by approximately 43 record holders in the U.S., including the Depository Trust Company. The Company’s Domestic SharesCSAHC are not listed on any stock exchange and are essentially not transferabletransferrable by CSAHC.and ADSs on the New York Stock Exchange and A Shares on the Shanghai Stock Exchange. Price per H Share Price per ADS (HK$) (US$) High Low High Low Annual Market Prices 2.40 0.50 14.75 3.06 2.25 0.61 13.94 3.88 2.93 1.02 18.38 6.06 2.95 1.35 18.10 8.00 3.60 1.50 22.25 10.35 1.86 1.02 11.19 6.88 2.05 1.06 12.44 6.06 2.93 1.63 18.38 10.19 2.40 1.46 15.06 9.56 2.70 1.83 17.38 12.22 2.95 1.89 18.10 12.00 2.53 1.35 16.50 8.00 2.42 1.66 15.25 9.8 The Stock Exchange The New York The Shanghai of Hong Kong Stock Exchange Stock Exchange Price per H Share Price per ADS Price per A Share (HK$) (US$) (RMB) High Low High Low High Low 2.93 1.02 18.38 6.06 N/A N/A 2.95 1.35 18.10 8.00 N/A N/A 3.60 1.50 22.25 10.35 N/A N/A 3.50 1.46 22.78 9.53 5.34 3.75 4.68 2.47 29.73 15.95 6.87 3.96 2.22 2.17 14.25 14.20 2.68 2.62 2.83 2.22 17.63 14.80 N/A N/A 3.42 2.33 21.74 14.95 N/A N/A 3.60 1.89 22.25 12.00 N/A N/A 2.42 1.50 15.00 10.35 N/A N/A 2.62 1.71 16.50 11.75 N/A N/A 2.40 1.46 14.85 9.53 N/A N/A 2.88 2.03 18.59 13.25 4.15 3.75 3.50 2.50 22.78 16.76 5.34 3.86 4.68 3.20 29.73 20.91 6.87 4.95 Second Quarter 3.90 2.47 24.89 15.95 6.24 4.14 Third Quarter 3.17 2.47 20.17 16.00 5.19 4.16 Fourth Quarter 3.53 2.55 22.74 16.71 5.40 3.96 3.10 2.47 19.93 16.10 5.30 3.56 Second Quarter 2.72 2.20 17.33 14.72 4.02 2.95 Third Quarter 2.20 2.03 16.86 13.50 3.00 2.35 Fourth Quarter 2.40 1.83 15.45 11.68 2.77 2.23 Monthly Market Prices December 2005 2.40 2.10 15.45 13.68 2.74 2.52 January 2006 2.40 2.12 15.50 13.91 3.03 2.53 February 2006 2.53 2.17 15.88 14.05 2.85 2.55 March 2006 2.47 2.20 15.78 14.16 2.84 2.45 April 2006 2.30 1.96 15.03 13.06 2.59 2.19 May 2006 2.08 1.86 13.59 12.01 2.75 2.25 June 19, 2006 1.94 1.68 12.65 10.76 2.97 2.53 51
Price per H Share | Price per ADS | ||||||||||||||||
(HK$) | (US$) | ||||||||||||||||
First Quarter | 2.83 | 2.22 | 17.63 | 14.80 | |||||||||||||
Second Quarter | 3.42 | 2.33 | 21.74 | 14.95 | |||||||||||||
Third Quarter | 3.60 | 1.89 | 22.25 | 12.00 | |||||||||||||
Fourth Quarter | 2.42 | 1.50 | 15.00 | 10.35 | |||||||||||||
Monthly Market Prices | |||||||||||||||||
December 2002 | 2.42 | 2.08 | 15.00 | 13.42 | |||||||||||||
January 2003 | 2.55 | 2.10 | 16.50 | 13.24 | |||||||||||||
February 2003 | 2.62 | 2.12 | 16.50 | 13.40 | |||||||||||||
March 2003 | 2.22 | 1.71 | 14.38 | 11.75 | |||||||||||||
April 2003 | 1.87 | 1.46 | 12.33 | 9.53 | |||||||||||||
May 2003 | 2.15 | 1.66 | 13.65 | 10.46 |
OfferdetailsNot applicable.Details” above.
Plan of Distribution
Markets
Selling Shareholders
Not applicable.
Dilution
Not applicable.
Expenses of the Issue
Directors. 62China’s State Administration Bureau of Industry and Commerce of the People’s Republic of China on March 25, 1995. The Company’s business license number is 1000001001760.52 Director154179 of the Articles of Association, where a directorDirector of the Company is in any way, directly or indirectly, materially interested in a contract, transaction or arrangement or proposed contract, transaction or arrangement with the Company, (other than his contract of service with the Company), he shall declare the nature and extent of his interests to the boardBoard of directorsDirectors at the earliest opportunity, whether or not the contract, transaction or arrangement or proposal therefor is otherwise subject to the approval of the boardBoard of directors.108130 of the Articles of Association, where a directorDirector is interested in any resolution proposed at a board meeting, such directorDirector shall not be present and shall not have a right to vote. Such directorDirector shall not be counted in the quorum of the relevant meeting.
Directors.
53
(1) | the right to attend or appoint a proxy to attend shareholders’ general meetings and to vote thereat; | |
(3) | the right of supervisory management over the Company’s business operations, and the right to present proposals or enquiries; | |
(4) | the right to transfer, donate or pledge his shares in accordance with laws, administrative regulations and provisions of these articles of association; | |
(5) | the right of knowledge and decision making power with respect to important matters of the Company in accordance with laws, administrative regulations and these articles of association; | |
(6) | the right to obtain relevant information in accordance with the provisions of these articles of association, including: |
63
(7) | in the event of the termination or liquidation of the Company, to participate in the distribution of surplus assets of the Company in accordance with the number of shares held; | |
(8) | other rights conferred by laws, administrative regulations and these articles of association. |
54
(1) | to abide by these articles of association; | |
(2) | to pay subscription monies according to the number of shares subscribed and the method of subscription; | |
(3) | no right to return shares to the Company unless laws and regulations provide otherwise; | |
(4) | other obligations imposed by laws, administrative regulations and these articles of association. |
64
119.
(1) | in the case of a repurchase of shares by offers to all shareholders or public dealing on a stock exchange under Article 31, a “controlling shareholder” within the meaning of Article 57; | |
(2) | in the case of a repurchase of share by an off-market contract under Article 31, a holder of the shares to which the proposed contract relates; | |
(3) | in the case of a restructuring of the Company, a shareholder within a class who bears less than a proportionate obligation imposed on that class under the proposed restructuring or who has an interest in the proposed restructuring different from the interest of shareholders of that class. |
55
(1) | where the Company issues, upon the approval by special resolution of its shareholders in general meeting, either separately or concurrently once every twelve months, not more than 20 per cent of each of its existing issued Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares; | |
(2) | where the Company’s plan to issue Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares at the time of its establishment is carried out within fifteen (15) months from the date of approval of the Securities Committee of the State Council. |
65
(1) | when the number of | |
(2) | when the unrecovered losses of the Company amount to one third of the total amount of its share capital; | |
(3) | when shareholder(s) holding 10 per cent or more of the Company’s issued and outstanding shares carrying voting rights request(s) in writing the convening of an extraordinary general meeting; | |
(4) | when deemed necessary by the |
56
66duringand other than those described in this Item 10, Item 4, “Information on the preceding two years.Company” or elsewhere in this annual report on Form 20-F.(a) A sale and purchase agreement (the “Sale and Purchase Agreement”) dated November 12, 2004 between the Company, CSAHC, CNA, a wholly owned subsidiary of CSAHC, and XJA, a wholly owned subsidiary of CSAHC, pursuant to which the Company agreed to acquire, and CSAHC, CNA and XJA agreed to sell certain airlines and airlines-related operations, assets and properties of CNA, XJA and their respective subsidiaries, which included aircraft, engines, spare parts, aviation equipment and facilities, properties, office facilities, and other fixed, current and intangible assets. In addition, the Company will also assume all indebtedness in the aggregate sum of RMB13,438,191,000 owed by XJA, CNA and their respective subsidiaries in connection with their civil aviation business. The total consideration, including the assumption of the debts under the Sale and Purchase Agreement was RMB15,397,524,000. It became effective upon approval by the shareholders of the Company on December 31, 2004. (b) A lease agreement (the “Lease Agreement 1”) dated November 12, 2004 between the Company, CSAHC and CNA, pursuant to which CSAHC and CNA lease to the Company certain buildings, facilities and other infrastructure related to the civil aviation business of CNA situated at various locations in Shenyang, Dalian, Jilin, Harbin, Chaoyang and Russia for a period of three years. The consideration for Lease Agreement 1 is RMB41,993,318.44 per year. It became effective upon approval by the shareholders of the Company on December 31, 2004. (c) A lease agreement (the “Lease Agreement 2”) dated November 12, 2004 between the Company, CSAHC and XJA, pursuant to which CSAHC and XJA lease to the Company certain buildings, facilities and other infrastructure related to the civil aviation business of XJA situated at Xinjiang and Russia for a period of three years. The consideration for Lease Agreement 2 is RMB5,797,908.61 per year. It became effective upon approval by the shareholders of the Company on December 31, 2004. (d) A lease agreement (the “Lease Agreement 3”) dated November 12, 2004 between the Company and CSAHC, pursuant to which CSAHC leases to the Company certain lands situated in Urumqi, Shenyang, Dalian and Harbin, by leasing the land use rights of such lands to the Company for a period of three years. The consideration for Lease Agreement 3 is RMB22,298,033 per year. It became effective upon approval by the shareholders of the Company on December 31, 2004. (e) A catering agreement (the “Catering Agreement”) dated November 12, 2004 between the Company and China Southern Airlines Group Air Catering Company Limited (the “Catering Company”), a wholly owned subsidiary of CSAHC, pursuant to which the Catering Company supplies in-flight meal and catering services to the flights of the Company originating or stopping at the domestic airports, mainly in Northern China and Xinjiang regions where the Catering Company provides catering services for a period of three years. The consideration for the catering agreement is based on the price of each type of in-flight meals and the service price for each type of aircraft, and is capped at RMB220 million per year. It became effective upon approval by the shareholders of the Company on December 31, 2004. (f) A financial agreement (the “Financial Agreement”) dated November 12, 2004, between the Company and Southern Airlines Group Finance Company Limited (“SA Finance”), a connected person of the Company which is 42% owned by CSAHC, 32% owned by the Company and 26% owned in aggregate by five subsidiaries of the Company. The Financial Agreement commenced from November 12, 2004 for a period of three years, and is renewable, subject to compliance with the requirements of the relevant Hong Kong Listing Rules by the Company, by an application in writing by the Company not less than 30 days before the end of the fixed term. Under the Financial Agreement, SA Finance provides deposit of money service and, subject to the execution of further agreements with the Company, other financial services like loan facilities, credit facilities, financial guarantees and credit references to the Company. The Company is not subject to any extra charges for depositing money with SA Finance. For the other financial services provided by SA Finance under the financial agreement, the Company is liable to pay SA Finance the standard charging rates set by the People’s Bank of China. The PRC commercial banks also charge similar charging rates set by the People’s Bank of China. The Company will make payment for such interest, fees and commissions in accordance with the payment terms of the separate agreements for the provision of loans or other financial services as might be entered into between the Company and SA Finance. It became effective upon approval by the shareholders of the Company on December 31, 2004. (g) A framework agreement on lease and operation dated January 1, 2006 between the Company and China Southern Airlines Group Travel Development Company Limited (the “CSA Travel”), a wholly owned subsidiary of CSAHC, pursuant to which the Company leases certain hotels belonging to it to CSA Travel for operation and management for a period of three years. The consideration for the framework agreement on lease and operation is based on the rent payable and fees for operation and management of the hotels, and is capped at RMB6 million per year. It became effective on April 25, 2006 has been approved by the directors of the Company. (h) An advertising agency agreement dated January 1, 2006 between the Company and Southern Airlines Advertising Company (the “SAAC”), a related party that is 45% owned by the Company and 55% owned by CSAHC, pursuant to which the SAAC produces advertisement script, graphic and music for the Company with the copyright of such products belonging to the Company for a period of three years. The consideration for the advertising agency agreement is based on the fees payable for advertising services to be provided, and is capped at RMB30 million per year. It became effective on April 25, 2006 has been approved by the directors of the Company. (i) A property management framework agreement dated January 1, 2006 between the Company and Guangzhou China Southern Airlines Property Management Company Limited (the “GCSAPMC”), a related party that is 90% owned by CSAHC and 10% owned by the Company’s union, pursuant to which the GCSAPMC provides property management and improvement services for certain properties of the Company for a period of three years. The consideration for the property management framework agreement is based on the fees payable for management and maintenance services to be provided, and is capped at RMB47,010,000 per year. It became effective on April 25, 2006 has been approved by the directors of the Company. (j) An acquisition agreement dated April 1, 2006 between the Company and CSAHC Hainan Co., Ltd. (the “Hainan Co., Ltd.”), a subsidiary of CSAHC, pursuant to which the Company has agreed to acquire and Hainan Co., Ltd. has agreed to sell the assets and liabilities in relation to the airline operations of Hainan Co., Ltd. The total consideration payable by the Company, including the assets to be acquired and the liabilities to be assumed by the Company, was RMB5,150,000. It became effective upon approval by the directors of the Company on April 18, 2006. (k) An agency agreement for sale of freight and passenger services dated May 16, 2006 between the Company and Nan Lung Travel & Express (Hong Kong) Ltd. (the “Nanlung”), a wholly owned subsidiary of CSAHC, pursuant to which the Nanlung acts as agent in the Company’s sales and account settlement and the ground operations of the Company’s flights in Hong Kong region for a period of one year. The consideration for the agency agreement is based on the fees payable for ticket sale and other services to be provided, and is capped at RMB60 million for the entire term of the agency agreement. It became effective on May 16, 2006 and was approved by the directors of the Company on December 24, 2005.
This restriction on capital account transactions could affect the ability of the Company to acquire foreign currency for capital expenditures. banks. The Company may purchase foreign exchange directly from Chinese banks for any current account transactions, such as trade transactions in its usual and normal course of business, including acquisition of aircraft, jet fuel and flight equipment (such acquisition requires approvals from the relevant Chinese Government agencies). Payment of dividends by the Company to holders of the Company’s H Shares and ADSs is also considered a current account transaction under Chinese law. Therefore, there is no legal restriction on the conversion of Renminbi into foreign exchange for the purpose of paying dividends to such holders of H Shares and ADSs. In addition, the Company’s Articles of Association require the Company to pay dividends to holders of the Company’s H Shares and ADSs in foreign currency.banks at the exchange rates published by Chinese banks on each business day, which rates may deviate only within a very narrow range from the official rate published daily by the People’s Bank of China, China’s central bank.The Company is permitted to retain the foreign exchange proceeds from its initial public offering in July 1997. A portion of the proceeds has been used, and the remaining proceeds will be used for the purposes which are consistent with the disclosure made in the Company’s prospectus dated July 1997.exchange.
6757
• | dealers in securities or currencies; | ||
• | traders in securities that elect to use a mark-to-market method of accounting for securities holdings; | ||
• | banks or other financial institutions; | ||
• | insurance companies; | ||
• | tax-exempt organizations; | ||
• | partnerships and other entities treated as partnerships for U.S. federal income tax purposes or persons holding ADSs through any such entities; | ||
• | persons that hold ADSs as part of a hedge, straddle, constructive sale, conversion transaction or other integrated investment; | ||
• | U.S. Holders (as defined below) whose functional currency for tax purposes is not the U.S. dollar; | ||
• | persons liable for alternative minimum tax; or | ||
• | persons who actually or constructively own 10% or more of the total combined voting power of all classes of the Company’s shares (including ADSs) entitled to vote. |
• | a citizen or resident of the United States for U.S. federal income tax purposes; | ||
• | a corporation, or other entity taxable as a corporation, that was created or organized in or under the laws of the United States or any political subdivision thereof; | ||
• | an estate the income of which is subject to U.S. federal income tax regardless of its source; or | ||
• | a trust if (a) a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) the trust has a valid election in effect to be treated as a U.S. person. |
• | that gain is effectively connected with the conduct of a U.S. trade or business and, if an applicable income tax treaty so requires as a condition for you to be subject to U.S. federal income tax with respect to income from your ADSs, such gain is attributable to a permanent establishment that you maintain in the United States; or | ||
• | you are a nonresident alien individual and are present in the United States for at least 183 days in the taxable year of the sale or other disposition and either (1) your gain is attributable to an office or other fixed place of business that you maintain in the United States or (2) you have a tax home in the United States. |
payingPaying Agents
at 450 Fifth Street N.W. 20549.annual reportAnnual Report as to the contents of any document referred to are not necessarily complete. With respect to each such document filed as an exhibit to this annual report,Annual Report, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.facilitiesroom of the Securities and Exchange Commission at:58Room 1024
Washington D.C. 205497 World Trade CenterNew York, New York 10048500 West Madison StreetSuite 1400Chicago, Illinois 60661-2511materialAnnual Report on Form 20-F by mail from the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the Securities and Exchange Commission’s Internet site at http://www.sec.gov. The Commission’s telephone number is 1-800-SEC-0330.
68Corporate governance rules applicable to the domestically listed companies in China and the Company’s governance practices
A listed company must have a majority of independent directors on its board of directors. No director qualifies as “independent” unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company). In addition, a director must meet certain standards to be deemed independent. For example, a director is not independent if the director is, or has been within the last three years, an employee of the listed company, or if the director has received, during any twelve-month period within the last three years, more than US$100,000 in direct compensation from the listed company.Director Independence
Any listed company must establish an independent director system and set forth specific requirements for the qualification of independent directors. An independent director shall not hold any other position in the listed company other than being a director and shall not be influenced by the main shareholders or the controlling persons of the listed company, or by any other entities or persons with whom the listed company has a significant relationship.
The Company’s governance practices
The Company has complied with the relevant Chinese corporate governance rules and has implemented internal rules governing the independence and responsibilities of independent directors. The Company determines the independence of independent directors every year.The non-management directors of each listed company must meet at regularly scheduled executive sessions without management. No similar requirements.
Listed companies must have a nominating/corporate governance committee composed entirely of independent directors.
The nominating/corporate governance committee must have a written charter that addresses the committee’s purposes and responsibilities which, at minimum, must be to: search for eligible people for the board of directors, select and nominate directors for the next session of the shareholders’ annual meeting, study and propose corporate governance guidelines, supervise the evaluation of the board of directors and management, and evaluate the performance of the committee every year.Nominating/Corporate Governance Committee
The board of directors of a listed company may, through the resolution of the shareholders’ meeting, establish a nominating committee composed entirely of directors, of which the independent directors shall be the majority and the convener.
The Company’s governance practices
The Company has not established a nominating committee. The independent non-executive Directors of the Company are nominated by the Board of Directors, and their appointment must be approved by the shareholders of the Company in a general meeting. The executive Directors of the Company are nominated by CSAHC, the controlling shareholder of the Company, and their appointment must be approved by the shareholders of the Company in a general meeting.
Listed companies must have a compensation committee composed entirely of independent directors.Compensation Committee
The board of directors of a listed company can, through the resolution of shareholders’ meeting, have a compensation and evaluation committee composed entirely of directors, of whom the independent directors are the majority and act as the convener.
The Company’s governance practices
The Company has established a remuneration committee consisting of three members. The remuneration committee is chaired by independent non-executive Director Sui Guang Jun with independent non-executive Director Wei Ming Hai and executive Director Wang Quan Hua as members.The written charter of the compensation committee must state, at least, the following purposes and responsibilities:
(1) review and approve the corporate goals associated with CEO’s compensation, evaluate the performance of the CEO in fulfilling these goals, and based on such evaluation determine and approve the CEO’s compensation level;
(2) make recommendations to the board with respect to non-CEO executive officer compensation, and incentive-compensation and equity-based plans that are subject to board approval;
(3) produce a committee report on executive compensation as required by the SEC to be included in the annual proxy statement or annual report filed with the SEC.
The charter must also include the requirement for an annual performance evaluation of the compensation committee.The responsibilities are similar to those stipulated by the NYSE rules, but the committee is not required to produce a report on the executive compensation or make an annual performance evaluation of the committee. The responsibilities of the remuneration committee are to approve the remuneration packages of Directors and senior management of the Group, and the Company’s “preliminary proposals on annual emoluments of the directors and senior management of the Group”. The remuneration committee is also responsible for assessing performance of executive director and approving the terms of executive directors’ service contracts.
Listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 of Exchange Act. It must have a minimum of three members, and all audit committee members must satisfy the requirements for independence set forth in Section 303A.02 of NYSE Corporate Governance Rules as well as the requirements of Rule 10A-3b (1) of the Exchange Act.Audit Committee
The board of directors of a listed company can, through the resolution of the shareholders’ meeting, establish an audit committee composed entirely of directors, of which the independent directors are the majority and act as the convener, and, at minimum, one independent director is an accounting professional.The written charter of the audit committee must specify that the purpose of the audit committee is to assist the board oversight of the integrity of financial statements, the company’s compliance with legal and regulatory requirements, qualifications and independence of independent auditors and the performance of the listed company’s internal audit function and independent auditors.
The written charter must also require the audit committee to prepare an audit committee report as required by the SEC to be included in the listed company’s annual proxy statement as well as an annual performance evaluation of the audit committee.The responsibilities of the audit committee are similar to those stipulated by the NYSE rules, but according to the domestic practices, the Company is not required to make an annual performance evaluation of the audit committee and the audit committee is not required to prepare an audit report to be included in the Company’s annual proxy statement.
The Company’s governance practices
The Board of Directors of the Company has established an audit committee that satisfies relevant domestic requirements and the audit committee has a written charter.Each listed company must have an internal audit department. China has a similar regulatory provision, and the Company has an internal audit department. Shareholders must be given the opportunity to vote on equity-compensation plans and material revisions thereto, except for employment incentive plans, certain awards and plans in the context of mergers and acquisitions. The relevant regulations of China require the board of directors to propose plans and types of director compensation for the shareholders’ meeting to approve. The compensation plan of executive officers is subject to approval by the board and announced at the shareholders’ meeting and disclosed to the public upon the approval of the board of directors. The approval of director compensation and compensation plan of executive officers of the Company satisfies relevant domestic requirements.
Listed companies must adopt and disclose corporate governance guidelines, involving director qualification standards, director compensation, director continuing education, annual performance evaluation of the board of directors, etc.Corporate Governance Guidelines
China Securities Regulatory Commission (“CSRC”) has issued the Corporate Governance Rules, with which the Company has complied.
Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.Code of Ethics for Directors, Officers and Employees
China does not have such requirement for a code for ethics. But, the directors and officers must perform their legal responsibilities in accordance with the Company Law of PRC, relative requirements of CSRC and Mandatory Provisions to the Charter of Companies Listed Overseas.The Company’s governance practices
The Company does not have, in form, a code of ethics that applies to the president, chief financial officer and principal accounting officer, or collectively, the senior corporate officers. The senior executive officers, all of whom currently serve as our directors, are subject to the director service contracts that they have with the Company. Under the director service contracts, the directors, including the senior corporate officers, agree that each director owes a fiduciary and diligence obligation to the Company and that no director shall engage in any activities in competition with the Company’s business or carry any activities detrimental to the interests of the Company. Each of the directors, including the senior corporate officers, also agreed to perform their respective duties as directors and senior officers in accordance with the Company Law of the PRC, relevant rules and regulations promulgated by China Securities Regulatory Commission and the Mandatory Provisions of Articles of Association of Overseas Listed Companies.Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards and he or she must promptly notify the NYSE on writing of any material non-compliance with any applicable provisions of Section 303A. No similar requirements.
2005.
2005.
As of December 31, 2005 | As of December 31, 2004 | |||||||||||||||||||||||||||||||||||||||
Expected maturity date | ||||||||||||||||||||||||||||||||||||||||
Total | Total | |||||||||||||||||||||||||||||||||||||||
recorded | recorded | |||||||||||||||||||||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | amount | Fair value(2) | amount | Fair value(2) | |||||||||||||||||||||||||||||||
Debt | ||||||||||||||||||||||||||||||||||||||||
Fixed-rate notes payable In US$ | 484 | 449 | 303 | 266 | 215 | 697 | 2,414 | 2,440 | 2,252 | 2,464 | ||||||||||||||||||||||||||||||
Average interest rate | 6.47 | % | 6.47 | % | 6.47 | % | 6.62 | % | 6.47 | % | 6.47 | % | 6.47 | % | 6.09 | % | ||||||||||||||||||||||||
Variable-rate notes payable In US$(3) | 12,169 | 5,188 | 1,801 | 1,047 | 345 | 2,924 | 23,474 | 23,474 | 15,327 | 15,327 | ||||||||||||||||||||||||||||||
Average interest rate | 4.57 | % | 4.52 | % | 4.44 | % | 4.44 | % | 4.46 | % | 4.46 | % | 4.57 | % | 2.40 | % | ||||||||||||||||||||||||
In HKD(3) | 657 | 1,238 | — | — | — | — | 1,895 | 1,895 | 3,327 | 3,327 | ||||||||||||||||||||||||||||||
Average interest rate | 4.11 | % | 4.83 | — | — | — | — | 4.11 | % | 1.42 | % | |||||||||||||||||||||||||||||
In RMB | 302 | 52 | 52 | 122 | 100 | 552 | 1,180 | 1,180 | 2,547 | 2,547 | ||||||||||||||||||||||||||||||
Average interest rate | 5.06 | % | 5.12 | % | 5.12 | % | 5.12 | % | 5.12 | % | 2.75 | % | 4.15 | % | 5.04 | % |
As of December 31, 2002 | |||||||||||||||||||||||||||
Expected maturity date | |||||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | Thereafter | ||||||||||||||||||||||
(Expressed in RMB million, except interest rates) | |||||||||||||||||||||||||||
Debt | |||||||||||||||||||||||||||
Fixed-rate notes payable | |||||||||||||||||||||||||||
In US$ | 818 | 609 | 644 | 402 | 370 | 586 | |||||||||||||||||||||
Average interest rate | 6.72 | % | 6.73 | % | 6.96 | % | 6.95 | % | 6.98 | % | 6.97 | % | |||||||||||||||
Variable-rate notes payable | |||||||||||||||||||||||||||
In US$ | 2,254 | — | — | — | — | — | |||||||||||||||||||||
Average interest rate (1) | 2.10 | % | — | — | — | — | — | ||||||||||||||||||||
In RMB | 2,169 | 233 | 401 | 474 | 1,440 | 676 |
[Additional columns below]
[Continued from above table, first column(s) repeated] As of December 31, 2002 As of December 31, 2001 Total Total Recorded Fair recorded Fair Amount value(2) amount value(2) (Expressed in RMB million, except interest rates) Debt Fixed-rate notes payable In US$ 3,429 3,793 3,769 3,924 Average interest rate 6.86 % — 6.82 % — Variable-rate notes payable In US$ 2,254 2,254 498 498 Average interest rate (1) 2.10 % — 6.82 % — In RMB 5,393 5,391 1,538 1,538
59
As of December 31, 2002 Expected maturity date 2003 2004 2005 2006 2007 Thereafter (Expressed in RMB million, except interest rates) Average interest rate (1) 4.19 % 5.40 % 5.00 % 5.15 % 5.08 % 5.18 %
[Additional columns below]
[Continued from above table, first column(s) repeated] As of December 31, 2002 As of December 31, 2001 Total Total Recorded Fair recorded Fair Amount value(2) amount value(2) (Expressed in RMB million, except interest rates) Average interest rate (1) 4.65 % — 5.30 % —
(1) | These interest rates are calculated based on the year end indices. | |
(2) | Fair value of debt instruments was estimated based on the interest rates applicable to similar debt instruments | |
(3) | Short term bank debts included certain debts of RMB2,611 million which were renewed subsequent to December 31, 2005. The renewed debts are unsecured, bear interest at floating rates ranging from 3-month HIBOR/6-month LIBOR + 0.55% to 0.60% per annum and are repayable one year from their respective renewal dates. |
6920022005 and 2001 :2004: As of December 31, 2005 As of December 31, 2004 Expected maturity date Total Total recorded recorded 2006 2007 2008 2009 2010 Thereafter amount Fair value(2) amount Fair value(2) Debt Fixed-rate notes payable In US$ 484 449 303 266 215 697 2,414 2,440 2,252 2,464 Average interest rate 6.47 % 6.47 % 6.47 % 6.62 % 6.47 % 6.47 % 6.47 % 6.09 % Variable-rate notes payable in US$(3) 12,169 5,188 1,801 1,047 345 2,924 23,474 23,474 15,327 15,327 Average interest rate 4.57 % 4.52 % 4.44 % 4.44 % 4.46 % 4.46 % 4.57 % 2.40 % In HKD(3) 657 1,238 — — — — 1,895 1,895 3,327 3,327 Average interest rate 4.11 % 4.83 — — — — 4.11 % 1.42 % Capital commitment in US$ 7,341 8,945 14,354 5,300 9,688 — 45,628 45,628 11,776 11,776 As of December 31, 2002 Expected maturity date 2003 2004 2005 2006 2007 Thereafter (Expressed in RMB’ million, except interest rates) Debt Fixed-rate notes payable In US$ 818 609 644 402 370 586 Average interest rate (1) 6.72 % 6.73 % 6.96 % 6.95 % 6.98 % 6.97 % Variable-rate notes payable In US$ 2,254 — — — — — Average interest rate (1) 2.10 % — — — — — Capital commitments in US$ 2,801 2,344 731 — — —
[Additional columns below]
[Continued from above table, first column(s) repeated] As of December 31, 2002 As of December 31, 2001 Total Total Recorded Fair recorded Fair Amount value(2) amount value(2) (Expressed in RMB’ million, except interest rates) Debt Fixed-rate notes payable In US$ 3,429 3,793 3,769 3,924 Average interest rate (1) 6.86 % — 6.82 % — Variable-rate notes payable In US$ 2,254 2,254 498 498 Average interest rate (1) 2.10 % — 6.82 % — Capital commitments in US$ 5,876 5,876 12,053 12,053
(1) | These interest rates are calculated based on the year end indices. | |
(2) | Fair value of debt instruments was estimated based on the floating interest rates applicable to similar debt instruments | |
(3) | Short term bank debts included certain debts of RMB2,611 million which were renewed subsequent to December 31, 2005. The renewed debts are unsecured, bear interest at floating rates ranging from 3-month HIBOR/6-month LIBOR + 0.55% to 0.60% per annum and are repayable one year from their respective renewal dates. |
2005. 702002.(1) Effective date of the Securities Act registration statement for which the use of proceeds information is being disclosed: 60 July 23, 1997.
SEC file number assigned to such registration statement: 333-7114. (2) The offering commenced on July 23, 1997. (3) The offering was not terminated prior to the sale of any securities registered under the registration statement. (4) (i) The offering was not terminated prior to the sale of all securities registered under the registration statement. (ii) (ii)Name of the managing underwriter: Goldman Sachs (Asia) L.L.C. (global coordinator). (iii) (iii) and (iv) Aggregate Aggregate Title of each price of offering class of offering price of securities Amount amount Amount amount registered registered(1) registered(2) sold(3) sold(4) Ordinary H Shares of par value RMB 1.00 per share represented by American Depositary Shares 861,823,000 shares US$ 528,469,864 851,501,000 shares US$ 522,140,413 (1) The amount does not include 322,677,000 H Shares (some of which in the form of ADSs) which have not been registered with the SEC, of which 290,477,000 H Shares were sold to certain corporate investors in Hong Kong as part of the global offering of the Company in July 1997 and 32,200,000 H Shares were sold to certain limited partnership investment funds affiliated with Goldman, Sachs & Co. in a private placement in June 1997 prior to the Company’s global offering.
(2) | Assumes that all H Shares were sold in the form of ADSs. The price to public for each ADS is US$30.66. Each ADS represents 50 H Shares. | |||||||||||||||
(3) | ||||||||||||||||
(4) | ||||||||||||||||
Notes:
(1) The amount does not include 322,677,000 H Shares (some of which in the form of ADSs) which have not been registered with the SEC, of which 290,477,000 H Shares were sold to certain corporate investors in Hong Kong as part of the global offering of the Company in July 1997 and 32,200,000 H Shares were sold to certain limited partnership investment funds affiliated with Goldman, Sachs & Co. in a private placement in June 1997 prior to the Company’s global offering.
(2) Assumes that all H Shares were sold in the form of ADSs. The price to public for each ADS is US$30.66. Each ADS represents 50 H Shares.
(3) The amount does not include 322,677,000 H Shares referred to in note (1) above.
(4) The amount does not include US$197,865,536 which represents the proceeds from the sale of 322,677,000 H Shares referred to in note (1) above. If the latter amount is included, the aggregate amount of proceeds to the Company would be US$720,005,950. In addition, the aggregate amount is calculated on the assumption that all H Shares were sold in the form of ADSs. Based on the actual sale of H Shares and ADSs, the aggregate amount of proceeds to the Company was US$719,494,700. The issue price per H Share was HK$4.70.
total expenses in item (4)(v) above: 71 Underwriting discounts and commissions US$ 36,593,000 Finder’s fees — Expenses paid to or for underwriters US$ 2,958,000 Other expenses US$ 21,411,000 Total expenses US$ 60,962,000 Note: Note: No direct or indirect payments were made to directors, officers, general partners of the Company or their associates, or to persons owning ten percent or more of any class of equity securities of the Company, or to affiliates of the Company. All payments were made to third parties. or their associates, or to persons owning ten percent or more of any class of equity securities ofafter deducting the Company, or to affiliates of the Company. All payments were made to third parties.(vi) Net offeringNote: The amount is calculated on the basis of the actual aggregate amount of proceeds to the Company, after deductingand includes the total expensesproceeds from the sale of 322,677,000 H Shares referred to in note (1) of item (4)(v) above:US$658,532,700(iv) above.61Note: The amount is calculated onbasis of the actual aggregate amount ofnet offering proceeds to the Company and includes the proceeds from the sale of 322,677,000 H Shares referred to in note (1) of item (4)(iv) above.(vii)Amount of net offering proceeds to the Company used for as of December 31, 2002: Construction of plant, building and facilities US$41.9 million Purchase and installation of machinery and equipment US$ 389.7394.6 millionPurchase of real estate — Acquisition of other business(es) — Repayment of indebtedness US$192.4 million Working Capital US$29.6 million Temporary investments (interest-bearing bank deposits) US$4.9 millionNote: Note: No direct or indirect payments were made to directors, officers, general partners of the Company or their associates, or to persons owning ten percent or more of any class of equity securities of the Company, or to affiliates of the Company. All payments were made to third parties.
perform their respective duties as directors and senior officers in accordance with the Company Law of the PRC, relevant rules and regulations promulgated by China Securities Regulatory Commission and the Mandatory Provisions of Articles of Association of Overseas Listed Companies.
PART III
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
PART IV
ITEM 17. FINANCIAL STATEMENTS.
Not applicable.
ITEM 18. FINANCIAL STATEMENTS.
Index to Financial Statements
Audit-Related Fees | Tax Fees | |||||||||||
2004 | RMB8.9 million | RMB6.6 million | RMB0.11 million | |||||||||
2005 | RMB13.9 million | RMB5.8 million | RMB0.11 million |
a) | Review of the Group’s 2005 interim financial report prepared under IFRS; and |
b) | In connection with the Company’s acquisition of the airline operations and related assets of China Northern Airlines Company and Xinjiang Airlines Company; |
– | Audit of the financial statements of China Northern Airlines Company and Xinjiang Airlines Company; | ||
– | Issuance of comfort letter on profit forecast; | ||
– | Issuance of comfort letter on working capital forecast; and | ||
– | Issuance of report on statement of indebtedness. |
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Page | ||||
CONSOLIDATED FINANCIAL STATEMENTS OF CHINA SOUTHERN AIRLINES COMPANY LIMITED | ||||
Report of Independent | F-1 | |||
Consolidated Statements of | F-2 | |||
Consolidated Balance Sheets as of December 31, | F-3 | |||
Consolidated Statements of Changes in Shareholders’ Equity for | F-5 | |||
F-7 | ||||
Notes to Consolidated Financial Statements | F-9 |
74
ITEM 19. EXHIBITS.
62
Exhibit No. | Description of Exhibit | |
4.1 | Form of Director’s Service Agreement is incorporated by reference in Exhibit 4(c).1 of Form 20-F for the year of | |
4.2 | Form of Non-Executive Director’s Service Agreement is incorporated by reference in Exhibit 4(c).2 of Form 20-F for the year of | |
8 | Subsidiaries of the Company | |
Section 302 Certification of Chairman | ||
12.2 | Section 302 Certification of President | |
12.3 | Section 302 Certification of Chief Financial Officer | |
13.1 | Section 906 Certification of Chairman | |
13.2 | Section 906 Certification of President | |
13.3 | Section 906 Certification of Chief Financial Officer |
75
63
76CHINA SOUTHERN AIRLINES COMPANY LIMITED(Registrant)/s/ Yan Zhi Qing Name: Yan Zhi Qing Title: Chairman of the Board of DirectorsDate: June 27, 200364CERTIFICATION I, Yan Zhi Qing, Chairman of the Board of Directors of CHINA SOUTHERN AIRLINES COMPANY LIMITED, hereby certify in connection with the filing with the U.S. Securities and Exchange Commission (“SEC”) of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s Annual Report on Form 20-F for the fiscal year ended December 31, 2002 (the “Annual Report”) that:1.I have reviewed this annual report on Form 20-F of CHINA SOUTHERN AIRLINES COMPANY LIMITED;2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of CHINA SOUTHERN AIRLINES COMPANY LIMITED as of, and for, the periods presented in this annual report;4.CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for CHINA SOUTHERN AIRLINES COMPANY LIMITED and have: (a)designed such disclosure controls and procedures to ensure that material information relating to CHINA SOUTHERN AIRLINES COMPANY LIMITED, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;(b)evaluated the effectiveness of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and(c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5.CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I have disclosed, based on our most recent evaluation, to CHINA SOUTHERN AIRLINES COMPANY LIMITED’s auditors and the audit committee of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s board of directors (or persons performing the equivalent function):(a)all significant deficiencies in the design or operation of internal controls which could adversely affect CHINA SOUTHERN AIRLINES COMPANY LIMITED’s ability to record, process, summarize and report financial data and have identified for CHINA SOUTHERN AIRLINES COMPANY LIMITED’s auditors any material weaknesses in internal controls; and(b)any fraud, whether or not material, that involves management or other employees who have a significant role in CHINA SOUTHERN AIRLINES COMPANY LIMITED’s internal controls; and6.CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses./s/ Yan Zhi QingName: Yan Zhi QingTitle: Chairman of the Board of DirectorsDate: June 27, 200365CERTIFICATION I, Wang Chang Shun, President of CHINA SOUTHERN AIRLINES COMPANY LIMITED, hereby certify in connection with the filing with the U.S. Securities and Exchange Commission (“SEC”) of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s Annual Report on Form 20-F for the fiscal year ended December 31, 2002 (the “Annual Report”) that:1.I have reviewed this annual report on Form 20-F of CHINA SOUTHERN AIRLINES COMPANY LIMITED;2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of CHINA SOUTHERN AIRLINES LIMITED as of, and for, the periods presented in this annual report;4.CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for CHINA SOUTHERN AIRLINES COMPANY LIMITED and have:(a)designed such disclosure controls and procedures to ensure that material information relating to CHINA SOUTHERN AIRLINES COMPANY LIMITED, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;(b)evaluated the effectiveness of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and(c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5.CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I have disclosed, based on our most recent evaluation, to CHINA SOUTHERN AIRLINES COMPANY LIMITED’s auditors and the audit committee of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s board of directors (or persons performing the equivalent function):(a)all significant deficiencies in the design or operation of internal controls which could adversely affect CHINA SOUTHERN AIRLINES LIMITED’s ability to record, process, summarize and report financial data and have identified for CHINA SOUTHERN AIRLINES COMPANY LIMITED’s auditors any material weaknesses in internal controls; and(b)any fraud, whether or not material, that involves management or other employees who have a significant role in CHINA SOUTHERN AIRLINES COMPANY LIMITED’s internal controls; and6.CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses./s/ Wang Chang ShunName: Wang Chang ShunTitle: PresidentDate: June 27, 200366CERTIFICATION I, Xu Jie Bo, Chief Financial Officer of CHINA SOUTHERN AIRLINES COMPANY LIMITED, hereby certify in connection with the filing with the U.S. Securities and Exchange Commission (“SEC”) of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s Annual Report on Form 20-F for the fiscal year ended December 31, 2002 (the “Annual Report”) that:1.I have reviewed this annual report on Form 20-F of CHINA SOUTHERN AIRLINES COMPANY LIMITED;2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of CHINA SOUTHERN AIRLINES COMPANY LIMITED as of, and for, the periods presented in this annual report;4.CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for CHINA SOUTHERN AIRLINES LIMITED and have:(a)designed such disclosure controls and procedures to ensure that material information relating to CHINA SOUTHERN AIRLINES COMPANY LIMITED, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;(b)evaluated the effectiveness of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and(c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5.CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I have disclosed, based on our most recent evaluation, to CHINA SOUTHERN AIRLINES COMPANY LIMITED’s auditors and the audit committee of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s board of directors (or persons performing the equivalent function):(a)all significant deficiencies in the design or operation of internal controls which could adversely affect CHINA SOUTHERN AIRLINES COMPANY LIMITED’s ability to record, process, summarize and report financial data and have identified for CHINA SOUTHERN AIRLINES COMPANY LIMITED’s auditors any material weaknesses in internal controls; and(b)any fraud, whether or not material, that involves management or other employees who have a significant role in CHINA SOUTHERN AIRLINES COMPANY LIMITED’s internal controls; and6.CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses./s/ Xu Jie BoName: Xu Jie BoTitle: Chief Financial OfficerDate: June 27, 200367CHINA SOUTHERN AIRLINES COMPANY LIMITEDAND SUBSIDIARIESCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2001 and 2002CHINA SOUTHERN AIRLINES COMPANY LIMITEDAND SUBSIDIARIESINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageCHINA SOUTHERN AIRLINES COMPANY LIMITED /s/ Liu Shao Yong Name: Liu Shao Yong Title: Chairman of the Board of Directors
Page | ||||
Report of Independent | F-1 | |||
Consolidated Statements of | F-2 | |||
Consolidated Balance Sheets as of December 31, | F-3 | |||
Consolidated Statements of Changes in Shareholders’ Equity for | F-5 | |||
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005 | F-7 | |||
Notes to Consolidated Financial Statements |
Standards promulgated by the International Accounting Standards Board. F-1AUDITORS’ REPORTTo theREGISTERED PUBLIC ACCOUNTING FIRM
China Southern Airlines Company Limited:20012004 and 2002,2005, and the related consolidated statements of income,operations, cash flows and changes in shareholders’ equity for each of the three years in the three-year period ended December 31, 2002,2005, all expressed in Renminbi. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.auditingthe standards generally accepted inof the United States of America and Hong Kong.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.20012004 and 2002,2005, and the results of their operations and their cash flows for each of the three years in the three-year period ended December 31, 20022005 in conformity with International Financial Reporting Standards.materialsignificant respects from accounting principles generally accepted in the United States of America. Application of accounting principles generally accepted in the United States of America would have affected results of operations for the years ended December 31, 2000, 2001 and 2002 and shareholders’ equity as of December 31, 2001 and 2002Information relating to the extent summarizednature and effect of such differences is presented in Note 3151 to the consolidated financial statements.20022005 have been translated into United States dollars solely for the convenience of the reader.readers. We have audited the translation, and in our opinion, the consolidated financial statements expressed in Renminbi have been translated into United States dollars on the basis set forth in Note 1 to the consolidated financial statements.KPMGMarch 14, 2003April 19, 2006, except as to Note 44, which is as of May 31, 2006.
F-2
AND SUBSIDIARIESINCOMEOPERATIONS
For the years ended December 31, 2000, 20012003, 2004 and 20022005thousands,millions, except per share data) Note 2000 2001 2002 2002 RMB RMB RMB U.S. dollars Operating revenue: Traffic revenue, net 3 14,706,159 16,461,532 17,481,892 2,112,028 Other revenue 4 472,159 418,126 536,728 64,843 Total operating revenue 15,178,318 16,879,658 18,018,620 2,176,871 Operating expenses: Flight operations 5 6,109,021 6,905,628 6,732,543 813,374 Maintenance 6 1,758,581 2,014,579 2,333,419 281,906 Aircraft and traffic servicing 7 2,069,114 2,297,521 2,511,284 303,394 Promotion and sales 8 1,377,682 1,540,780 1,499,587 181,169 General and administrative 9 809,225 892,233 1,060,010 128,062 Depreciation and amortization 1,863,789 1,814,974 1,839,871 222,279 Other 8,805 13,270 15,829 1,912 Total operating expenses 13,996,217 15,478,985 15,992,543 1,932,096 Operating income 1,182,101 1,400,673 2,026,077 244,775 Non-operating income/(expenses): Equity income of affiliated companies 45,949 53,077 36,988 4,469 Equity loss of jointly controlled entities — (4,034 ) (3,352 ) (405 ) Gain/(loss) on sale of fixed assets 12, 21 372,596 (55,889 ) 170,740 20,627 Interest income 90,283 49,878 52,618 6,357 Interest expense 17 (1,074,236 ) (933,717 ) (959,193 ) (115,882 ) Exchange gain/(loss), net 318,502 296,777 (175,451 ) (21,197 ) Other, net (3,965 ) (11,509 ) (9,328 ) (1,127 ) Total non-operating expenses (250,871 ) (605,417 ) (886,978 ) (107,158 ) Income before taxation and minority interests 931,230 795,256 1,139,099 137,617 Taxation 10 (338,907 ) (320,519 ) (398,227 ) (48,111 ) Income before minority interests 592,323 474,737 740,872 89,506 Minority interests (90,552 ) (134,512 ) (165,111 ) (19,947 ) Net income 501,771 340,225 575,761 69,559 Basic earnings per share 2(w) 0.15 0.10 0.17 0.021 Note 2003 2004 2005 2005 RMB RMB RMB U.S. dollars (restated, (restated, Note 3) Note 3) Operating revenue: Traffic revenue 4 16,965 23,344 37,419 4,637 Other operating revenue 4 505 630 874 108 Total operating revenue 17,470 23,974 38,293 4,745 Operating expenses: Flight operations 5 7,070 10,418 19,394 2,403 Maintenance 6 2,589 3,459 4,589 569 Aircraft and traffic servicing 7 2,767 3,503 5,759 714 Promotion and sales 8 1,480 1,940 2,780 345 General and administrative 9 1,053 1,323 2,457 304 Depreciation and amortization 10 2,038 2,413 4,440 550 Others 17 9 179 22 Total operating expenses 17,014 23,065 39,598 4,907 Operating income/(loss) 456 909 (1,305 ) (162 ) Non-operating income/(expenses): Interest income 13 22 55 7 Interest expense 12 (824 ) (691 ) (1,616 ) (200 ) Equity income/(loss) of affiliated companies 23 45 10 (285 ) (35 ) Equity (loss)/income of jointly controlled entities 24 (46 ) (16 ) 36 4 Loss on sale of property, plant and equipment (22 ) (1 ) (32 ) (4 ) Exchange (loss)/gain, net (164 ) (59 ) 1,220 151 Others, net 21 46 74 9 Total net non-operating expenses (977 ) (689 ) (548 ) (68 ) Loss/(income) before taxation (521 ) 220 (1,853 ) (230 ) Income tax benefit/(expense) 13 334 (65 ) 7 1 (Loss)/income for the year (187 ) 155 (1,846 ) (229 ) Attributable to: Equity shareholders of the Company (358 ) (48 ) (1,848 ) (229 ) Minority interests 171 203 2 — Net (loss)/income (187 ) 155 (1,846 ) (229 ) Basic loss per share 15 (0.09 ) (0.01 ) (0.42 ) (0.052 )
millions) F-3
AND SUBSIDIARIES
As of December 31, 20012004 and 20022005thousands) Note 2001 2002 2002 RMB RMB U.S. dollars CURRENT ASSETS Cash and cash equivalents 15 2,817,863 3,771,043 455,589 Trade receivables 11 556,542 671,776 81,159 Other receivables 196,751 372,586 45,013 Inventories 467,018 545,700 65,927 Prepaid expenses and other current assets 340,157 244,690 29,562 TOTAL CURRENT ASSETS 4,378,331 5,605,795 677,250 FIXED ASSETS 12 22,352,215 26,920,829 3,252,368 CONSTRUCTION IN PROGRESS 340,063 661,352 79,899 LEASE PREPAYMENTS 357,622 201,854 24,386 INVESTMENTS 13 900,594 1,355,842 163,802 LEASE AND EQUIPMENT DEPOSITS 2,265,003 2,147,038 259,389 OTHER ASSETS 59,274 295,337 35,680 TOTAL ASSETS 30,653,102 37,188,047 4,492,774 CURRENT LIABILITIES Notes payable, including current portion of long-term notes payable 17 2,177,516 5,240,726 633,144 Current instalments of obligations under capital leases 18 1,451,929 1,566,698 189,276 Accounts payable 590,700 532,480 64,330 Bills payable — 1,299,680 157,017 Sales in advance of carriage 370,546 390,531 47,181 Taxes payable 73,464 78,145 9,441 Amounts due to related companies 718,265 525,090 63,437 Accrued expenses 16 2,013,555 2,341,454 282,877 Other liabilities 678,133 646,989 78,164 TOTAL CURRENT LIABILITIES 8,074,108 12,621,793 1,524,867 NOTES PAYABLE, EXCLUDING CURRENT PORTION 17 3,627,594 5,835,434 704,992 OBLIGATIONS UNDER CAPITAL LEASES, EXCLUDING CURRENT INSTALMENTS 18 7,691,634 6,631,751 801,197 PROVISION FOR MAJOR OVERHAULS 6 125,661 141,887 17,142 DEFERRED CREDITS 19 15,072 48,095 5,811 DEFERRED TAXATION 14 519,577 779,234 94,141 TOTAL LIABILITIES 20,053,646 26,058,194 3,148,150 MINORITY INTERESTS 1,377,793 1,516,646 183,230 SHAREHOLDERS’ EQUITY 23,24 9,221,663 9,613,207 1,161,394 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 30,653,102 37,188,047 4,492,774 Note 2004 2005 2005 RMB RMB U.S. dollars (restated, Note 3) CURRENT ASSETS Cash and cash equivalents 16 3,083 2,901 360 Trade receivables 17 1,203 1,518 188 Inventories 18 1,302 1,382 171 Short term investments 19 683 — — Other receivables 20 720 956 119 Prepaid expenses and other current assets 378 380 47 Amounts due from related companies 30 — 84 10 Total current assets 7,369 7,221 895 NON-CURRENT ASSETS Property, plant and equipment, net 21 46,841 54,266 6,725 Construction in progress 22 565 674 84 Other investments 19 272 320 40 Interest in affiliated companies 23 429 142 18 Interest in jointly controlled entities 24 782 805 99 Lease prepayments 346 333 41 Lease and equipment deposits 5,397 7,265 900 Deferred tax assets 25 51 74 9 Other assets 26 331 302 37 Total non-current assets 55,014 64,181 7,953 TOTAL ASSETS 62,383 71,402 8,848 CURRENT LIABILITIES Notes payable, including current installments of long-term notes payable 27 11,518 16,223 2,010 Current installments of obligations under capital leases 28 2,144 3,373 418 Trade and bills payables 29 1,690 3,929 487 Sales in advance of carriage 874 1,413 175 Amounts due to related companies 30 2,434 116 14 Accrued expenses 31 4,551 4,250 527 Other liabilities 32 2,974 3,796 471 Taxes payable 39 28 3 Total current liabilities 26,224 33,128 4,105
F-4
AND SUBSIDIARIES
As of December 31, 2004 and 2005 Note 2004 2005 2005 RMB RMB U.S. dollars (restated, Note 3) NON-CURRENT LIABILITIES Notes payable, excluding current installments 27 11,935 12,740 1,579 Obligations under capital leases, excluding current installments 28 9,599 12,459 1,544 Provision for major overhauls 33 284 301 37 Deferred tax liabilities 25 338 342 42 Deferred credits 100 496 62 Total non-current liabilities 22,256 26,338 3,264 TOTAL LIABILITIES 48,480 59,466 7,369 SHAREHOLDERS’ EQUITY Equity attributable to equity shareholders of the Company 34,35 11,848 10,000 1,239 Minority interests 2,055 1,936 240 TOTAL SHAREHOLDERS’ EQUITY 13,903 11,936 1,479 TOTAL LIABILITIES AND TOTAL SHAREHOLDERS’ EQUITY 62,383 71,402 8,848
Attributable to equity shareholders of the company | ||||||||||||||||||||||||||||
Retained | ||||||||||||||||||||||||||||
earnings/ | ||||||||||||||||||||||||||||
Share | Share | Other | (accumulated | Minority | Total | |||||||||||||||||||||||
capital | premium | reserves | loss) | Total | interests | equity | ||||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||||
(Note (i)) | (Note (ii)) | |||||||||||||||||||||||||||
At December 31, 2002 | 3,374 | 3,684 | 586 | 1,969 | 9,613 | 1,516 | 11,129 | |||||||||||||||||||||
Issue of A Shares | 1,000 | 1,641 | — | — | 2,641 | — | 2,641 | |||||||||||||||||||||
(Loss)/income for the year | — | — | — | (358 | ) | (358 | ) | 171 | (187 | ) | ||||||||||||||||||
Appropriations to reserves | — | — | 25 | (25 | ) | — | — | — | ||||||||||||||||||||
Capital contributions from minority shareholders | — | — | — | — | — | 1 | 1 | |||||||||||||||||||||
Distributions to minority shareholders | — | — | — | — | — | (15 | ) | (15 | ) | |||||||||||||||||||
At December 31, 2003 | 4,374 | 5,325 | 611 | 1,586 | 11,896 | 1,673 | 13,569 | |||||||||||||||||||||
(Loss)/income for the year | — | — | — | (48 | ) | (48 | ) | 203 | 155 | |||||||||||||||||||
Appropriations to reserves | — | — | 61 | (61 | ) | — | — | — | ||||||||||||||||||||
Capital contributions from minority shareholders | — | — | — | — | — | 71 | 71 | |||||||||||||||||||||
Distributions to minority shareholders | — | — | — | — | — | (15 | ) | (15 | ) | |||||||||||||||||||
Through the CNA/XJA Acquisitions | — | — | — | — | — | 123 | 123 | |||||||||||||||||||||
At December 31, 2004 | 4,374 | 5,325 | 672 | 1,477 | 11,848 | 2,055 | 13,903 | |||||||||||||||||||||
F-5
Attributable to equity shareholders of the company | ||||||||||||||||||||||||||||
Retained | ||||||||||||||||||||||||||||
earnings/ | ||||||||||||||||||||||||||||
Share | Share | Other | (accumulated | Minority | Total | |||||||||||||||||||||||
capital | premium | reserves | loss) | Total | interests | equity | ||||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||||
(Note (i)) | (Note (ii)) | |||||||||||||||||||||||||||
At December 31, 2004 | 4,374 | 5,325 | 672 | 1,477 | 11,848 | 2,055 | 13,903 | |||||||||||||||||||||
(Loss)/income for the year | — | — | — | (1,848 | ) | (1,848 | ) | 2 | (1,846 | ) | ||||||||||||||||||
Appropriations to reserves | — | — | 19 | (19 | ) | — | — | — | ||||||||||||||||||||
Capital contributions from minority shareholders | — | — | — | — | — | 17 | 17 | |||||||||||||||||||||
Acquisition of equity interest held by minority shareholders | — | — | — | — | — | (118 | ) | (118 | ) | |||||||||||||||||||
Distributions to minority shareholders | — | — | — | — | — | (20 | ) | (20 | ) | |||||||||||||||||||
At December 31, 2005 | 4,374 | 5,325 | 691 | (390 | ) | 10,000 | 1,936 | 11,936 | ||||||||||||||||||||
Total equity at December 31, 2005 in U.S. dollars | 542 | 660 | 85 | (48 | ) | 1,239 | 240 | 1,479 | ||||||||||||||||||||
F-6
2000 | 2001 | 2002 | 2002 | ||||||||||||||
RMB | RMB | RMB | U.S. dollars | ||||||||||||||
Cash inflows from operations (Note 27) | 3,506,432 | 3,185,523 | 4,762,923 | 575,420 | |||||||||||||
Interest received | 90,283 | 49,878 | 52,618 | 6,357 | |||||||||||||
Interest paid | (1,115,283 | ) | (970,734 | ) | (1,051,027 | ) | (126,977 | ) | |||||||||
Income tax paid | (126,346 | ) | (40,724 | ) | (66,970 | ) | (8,091 | ) | |||||||||
Net cash inflows from operating activities | 2,355,086 | 2,223,943 | 3,697,544 | 446,709 | |||||||||||||
Investing activities: | |||||||||||||||||
Proceeds from sale of aircraft | 948,863 | 566,493 | 778,047 | 93,998 | |||||||||||||
Proceeds from sale of other fixed assets | 70,948 | 38,892 | 47,150 | 5,696 | |||||||||||||
Proceeds from sale of investments | 5,000 | — | 68 | 8 | |||||||||||||
Dividends received from affiliated companies | 59,064 | 5,946 | 3,093 | 374 | |||||||||||||
Decrease/(increase) in other assets | 21,291 | (345 | ) | (943 | ) | (114 | ) | ||||||||||
Payment of lease and equipment deposits | (105,740 | ) | (2,027,063 | ) | (1,999,233 | ) | (241,532 | ) | |||||||||
Refund of lease and equipment deposits | 262,465 | 200,029 | 2,117,386 | 255,806 | |||||||||||||
Capital expenditures | (1,381,018 | ) | (1,492,126 | ) | (6,351,030 | ) | (767,283 | ) | |||||||||
Purchase of investments | (137,119 | ) | (1,241 | ) | (6,721 | ) | (812 | ) | |||||||||
Investments in affiliated companies | — | (147,875 | ) | (136,500 | ) | (16,491 | ) | ||||||||||
Investments in jointly controlled entities | — | (178,372 | ) | (295,670 | ) | (35,721 | ) | ||||||||||
Governmental subsidy for safety related capital expenditures | — | — | 40,240 | 4,861 | |||||||||||||
Effect of acquisition of subsidiaries, net of cash and cash equivalents acquired | — | — | (90,491 | ) | (10,932 | ) | |||||||||||
Net cash used in investing activities | (256,246 | ) | (3,035,662 | ) | (5,894,604 | ) | (712,142 | ) | |||||||||
Net cash inflows/(outflows) before financing activities | 2,098,840 | (811,719 | ) | (2,197,060 | ) | (265,433 | ) | ||||||||||
Financing activities: | |||||||||||||||||
Proceeds from bank notes payable | 261,849 | 2,123,613 | 6,996,780 | 845,297 | |||||||||||||
Repayment of bank notes payable | (726,286 | ) | (890,228 | ) | (2,194,630 | ) | (265,138 | ) | |||||||||
Repayment of principal under capital lease obligations | (1,986,768 | ) | (1,756,098 | ) | (1,546,185 | ) | (186,798 | ) | |||||||||
Minority shareholders’ contributions | 505 | 707 | 10,625 | 1,284 | |||||||||||||
Dividends paid to shareholders | — | — | (67,484 | ) | (8,153 | ) | |||||||||||
Dividends paid to minority shareholders | (39,038 | ) | (45,867 | ) | (48,866 | ) | (5,903 | ) | |||||||||
Net cash (outflows)/inflow from financing activities | (2,489,738 | ) | (567,873 | ) | 3,150,240 | 380,589 | |||||||||||
(Decrease)/increase in cash and cash equivalents | (390,898 | ) | (1,379,592 | ) | 953,180 | 115,156 | |||||||||||
Cash and cash equivalents at beginning of year | 4,588,353 | 4,197,455 | 2,817,863 | 340,433 | |||||||||||||
Cash and cash equivalents at end of year | 4,197,455 | 2,817,863 | 3,771,043 | 455,589 | |||||||||||||
millions)
Note | 2003 | 2004 | 2005 | 2005 | ||||||||||||||||
RMB | RMB | RMB | U.S. dollars | |||||||||||||||||
(restated, | (restated, | |||||||||||||||||||
Note 3) | Note 3) | |||||||||||||||||||
(Loss)/income before taxation | (521 | ) | 220 | (1,853 | ) | (230 | ) | |||||||||||||
Adjustments to reconcile (loss)/income before taxation to cash inflows from operations | ||||||||||||||||||||
Depreciation of property, plant and equipment | 1,998 | 2,363 | 4,420 | 548 | ||||||||||||||||
Other amortization | 40 | 50 | 40 | 5 | ||||||||||||||||
Amortization of deferred credits | (2 | ) | (4 | ) | (78 | ) | (10 | ) | ||||||||||||
Equity (loss)/income of affiliated companies | (45 | ) | (10 | ) | 285 | 36 | ||||||||||||||
Equity income/(loss) of jointly controlled entities | 46 | 16 | (36 | ) | (5 | ) | ||||||||||||||
Loss on sale of property, plant and equipment | 22 | 1 | 32 | 4 | ||||||||||||||||
Interest income | (13 | ) | (22 | ) | (55 | ) | (7 | ) | ||||||||||||
Interest expense | 824 | 691 | 1,616 | 200 | ||||||||||||||||
Net realised and unrealised gain on equity securities held for trading | — | (15 | ) | (6 | ) | (1 | ) | |||||||||||||
Non-cash exchange loss/(gain), net | 177 | 42 | (1,164 | ) | (144 | ) | ||||||||||||||
Decrease/(increase) in inventories | 2 | (29 | ) | 46 | 6 | |||||||||||||||
Increase in trade receivables | (162 | ) | (218 | ) | (315 | ) | (39 | ) | ||||||||||||
Decrease/(increase) in other receivables | 77 | (166 | ) | (236 | ) | (29 | ) | |||||||||||||
Increase in prepaid expenses and other current assets | (6 | ) | (31 | ) | (2 | ) | — | |||||||||||||
Increase in deferred expenditure | — | (2 | ) | — | — | |||||||||||||||
Increase/(decrease) in net amounts due from/(to) related companies | 404 | (586 | ) | (493 | ) | (61 | ) | |||||||||||||
(Decrease)/increase in trade and bills payables | (466 | ) | (30 | ) | 2,239 | 277 | ||||||||||||||
Increase in sales in advance of carriage | 76 | 408 | 539 | 67 | ||||||||||||||||
Increase/(decrease) in accrued expenses | 203 | 541 | (399 | ) | (49 | ) | ||||||||||||||
Increase in other liabilities | 373 | 1,223 | 822 | 102 | ||||||||||||||||
Increase in provision for major overhauls | 48 | 113 | 17 | 2 | ||||||||||||||||
Cash inflows from operations | 3,075 | 4,555 | 5,419 | 672 | ||||||||||||||||
Interest received | 13 | 22 | 55 | 7 | ||||||||||||||||
Interest paid | (924 | ) | (754 | ) | (1,616 | ) | (200 | ) | ||||||||||||
Income tax paid | (35 | ) | (227 | ) | (23 | ) | (3 | ) | ||||||||||||
Net cash inflows from operating activities | 2,129 | 3,596 | 3,835 | 476 | ||||||||||||||||
F-7
F-4
millions) F-8
AND SUBSIDIARIESConsolidated Statements of Changes in Shareholders’ EquityCONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2000, 20012003, 2004 and 20022005thousands) Share Share Other Retained capital premium reserves profits Total RMB RMB RMB RMB RMB Shareholders’ equity at January 1, 2000 3,374,178 3,813,659 639,884 551,946 8,379,667 Net income — — — 501,771 501,771 Appropriations to reserves — — 25,061 (25,061 ) — Shareholders’ equity at December 31, 2000 3,374,178 3,813,659 664,945 1,028,656 8,881,438 Net income — — — 340,225 340,225 Appropriations to reserves — — 22,229 (22,229 ) — Shareholders’ equity at December 31, 2001 3,374,178 3,813,659 687,174 1,346,652 9,221,663 Land use right adjustment (Notes 24 (f)) — (129,703 ) — 12,970 (116,733 ) Adjustments from adoption of new PRC accounting regulations (Notes 24(c)) — — (185,540 ) 185,540 — Dividend paid — — — (67,484 ) (67,484 ) Net income — — — 575,761 575,761 Appropriations to reserves — — 83,738 (83,738 ) — Shareholders’ equity at December 31, 2002 3,374,178 3,683,956 585,372 1,969,701 9,613,207 Shareholders’ equity at December 31, 2002 in U.S. dollars 407,642 445,068 70,720 237,964 1,161,394 Note 2003 2004 2005 2005 RMB RMB RMB U.S. dollars (restated, (restated, Note 3) Note 3) Investing activities: Proceeds from sale of property, plant and equipment 57 47 238 30 Proceeds from sale of other investments — — 689 85 Increase in deferred credits — — 57 7 Dividends received from affiliated companies — 12 2 — Dividends received from jointly controlled entities — 5 39 5 Dividends received from other non-current assets — — 4 1 Dividends received from equity securities held for trading — 13 — — Decrease/(increase) in other non-current assets 6 (9 ) 4 1 Payment for the CNA/XJA Acquisitions — — (1,959 ) (243 ) Payment for acquisition of equity interest held by minority shareholders — — (118 ) (15 ) Payment of lease and equipment deposits (1,852 ) (3,151 ) (6,649 ) (824 ) Refund of lease and equipment deposits 1,066 1,253 4,619 572 Capital expenditures (4,707 ) (6,631 ) (4,935 ) (612 ) Purchase of other investments (1 ) (680 ) — — Investments in an affiliated company — (9 ) — — Investments in jointly controlled entities (3 ) (72 ) — — Effect of the CNA/XJA Acquisitions 40 (a) — 398 — — Net cash used in investing activities (5,434 ) (8,824 ) (8,009 ) (993 ) Net cash outflows before financing activities (3,305 ) (5,228 ) (4,174 ) (517 ) Financing activities: Proceeds from A Shares issue, net of issuance costs 2,641 — — — Proceeds from notes payable 8,914 14,555 18,238 2,260 Repayment of notes payable (8,371 ) (7,108 ) (12,193 ) (1,511 ) Repayment of principal under capital lease obligations (1,555 ) (1,272 ) (2,050 ) (254 ) Capital contributions received from minority shareholders 1 71 17 2 Dividends paid to minority shareholders (15 ) (15 ) (20 ) (2 ) Net cash inflows from financing activities 1,615 6,231 3,992 495 Decrease/(increase) in cash and cash equivalents (1,690 ) 1,003 (182 ) (22 ) Cash and cash equivalents at January 1 3,770 2,080 3,083 382 Cash and cash equivalents at December 31 2,080 3,083 2,901 360 F-5
In July 2003, the Company issued 1,000,000,000 A shares which are listed on the Shanghai Stock Exchange. F-9
AND SUBSIDIARIES
(Amounts in thousands,millions, except share data)subsidiary companies (hereinafter collectively referred to as thesubsidiaries (the “Group”) are principally engaged in the provision of domestic, Hong Kong regionaland Macau and international passenger, and cargo and mail airline services, with flights operating primarily from the Guangzhou Baiyun International Airport, which is both the main hub of the Group’s route network and the location of its corporate headquarters.Reorganizationreorganization (the “Reorganization”) of the Company’s holding company, China Southern Air Holding Company (“CSAHC”) (formerly named as Southern Airlines (Group)). CSAHC is a state-owned enterprise under the supervision of the PRC central government.Sharesshares and American Depositary Shares (“ADS”) (each ADS representing 50 H Shares) arehave been listed on theThe Stock Exchange of Hong Kong Limited and the New York Stock Exchange, respectively since July 1997.China. Solelythe PRC. Translation of amounts from RMB into United States dollar (“US$”) solely for the convenience of the reader, the 2002 financial statements havereaders has been translated into United States dollarsmade at the rate of US$1.00 = RMB 8.2773,to RMB8.0694, being the rateaverage of the buying and selling rates as quoted by the People’s Bank of China (the “PBOC”) at the close of business on December 31, 2002.2005. No representation is made that the RMB amounts could have been, or could be, converted into United States dollars (“US$”) at that rate or at any other certain rate on December 31, 20022005 or at any other certain date. The of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”IFRSs”) promulgated by the International Accounting Standards Board. IFRS includesBoard (the “IASB”). IFRSs include International Accounting Standards (“IAS”) and related interpretations. DifferencesIFRSIFRSs and accounting principles generally accepted in the United States of America (“U.S. GAAP”(''U.S. GAAP’’) and their effect on net income for the years ended December 31, 2000, 2001 and 2002, and on consolidated shareholders’ equity as of December 31, 2001 and 2002 are set forth in Note 31.51.F-6
Note 47. F-10
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)Group are prepared onconsolidated financial statements is the historical cost basis except that the following assets are stated at their fair value as modified byexplained in the revaluation of certain fixed assets (Note 12). The accounting policies set out below:– Certain property, plant and equipment (Note 2(d)); and – Short term investments (Note 2(h)). been consistently applied bysignificant effect on the Groupfinancial statements and except forestimates with a changesignificant risk of material adjustment in accounting policy for land use rights (refer to note 24(f)),the next year are consistent with those useddisclosed in previous years.
The consolidated financial statements include the financial statements of the Company and all of its subsidiaries (see Note 28 for details of the Company’s principal subsidiaries) made up to December 31, each year. Subsidiaries are those enterprises
The results
All significant intercompany balances and transactions have been eliminated on consolidation.
(d)Interest- bearing borrowings
Interest-bearing borrowings are recognized initially at cost, less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized Minority interests in the consolidated statement of income over the periodresults of the borrowingsGroup are presented on an effective interest basis.
(e)Cash and cash equivalents
Cash and cash equivalents consist of cash in hand and balances with banks and other financial institutions with an original maturity within three months. For the purposesface of the consolidated statement of cash flows,operations as an allocation of the total income or loss for the year between minority interest and the equity shareholders of the Company.
(f)Tradethe extent that the Group has incurred legal or constructive obligations or made payments on behalf of an affiliated company.
F-11
F-7
F-12
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)
Trade
F-13
F-14
Buildings | 15 to 40 years | |
Owned and leased aircraft | 15 to 20 years | |
Other flight equipment | ||
Jet engines | 8 to 15 years | |
Others, including rotable spares | 8 to 15 years | |
Machinery and equipment | 5 to 10 years | |
Vehicles | 6 years |
F-15
fair value could not be measured reliably.
Fixed assets
F-16
Depreciation is provided to write off the costs, or revalued amounts where appropriate, of the fixed assets on a straight line basis over their estimated useful lives, to residual values, as follows:
No depreciation is provided in respect of construction in progress.
F-8
F-17
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)(i)(k) Cash and cash equivalentsLeased assets Flight equipment under capital leases is statedamount equal to lower of its fair value and the present value of minimum lease payments at inceptionintegral part of the lease,Group’s cash management are also included as a component of cash and is amortized on a straight line basis overcash equivalents for the shorterpurposes of the lease term or estimated useful life of the asset to residual values. In cases where title to the asset will be acquired by the Group at the end of the lease, the asset is amortized on a straight line basis over the estimated useful life of the asset to its residual value. Amounts payable in respect of capital leases are apportioned between interest charges and reductions of obligations based on the interest rates implicit in the leases. Interest charges are included in the consolidated statement of incomecash flows.(l) Impairment of assets (i) Impairment of investments in debt and equity securities and other receivables providedetermine whether there is objective evidence of impairment. If any such evidence exists, any impairment loss is determined and recognized as follows:– For unquoted equity securities and current receivables that are carried at cost, the impairment loss is measured as the difference between the carrying amount of the financial asset and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. Impairment losses for current receivables are reversed if in a subsequent period the amount of the impairment loss decreases. Impairment losses for equity securities are not reversed. – For financial assets carried at amortized cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets). constant periodic ratesubsequent period the amount of charge overan impairment loss decreases and the lease term. Gains on aircraft sale and leaseback transactions whichdecrease can be linked objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through the statement of operations. A reversal of an impairment loss shall not result in capital leases are deferred and amortized over the terms of the related leases. Gains on other aircraft sale and leaseback transactions areasset’s carrying amount exceeding that which would have been determined had no impairment loss been recognized as income immediately if the transactions are established at fair value. Any excess of the sales price over fair value is deferred and amortized over the period the assets are expected to be used. Operating lease payments are charged to the consolidated statement of income on a straight line basis over the terms of the related leases.(j)Construction in progressprior years. Construction in progress represents office buildings, various infrastructure projects under construction and equipment pending installation, and is stated at cost. Cost comprises direct costs of construction as well as interest charges during the periods of construction and installation. Capitalization of these costs ceases and the construction in progress is transferred to fixed assets when the asset is substantially ready for its intended use, notwithstanding any delays in the issue of the relevant commissioning certificates by the relevant PRC authorities.(k)Lease prepayments Lease prepayments represent the purchase costs of land use rights and are amortized on a straight line basis over the period of land use rights (Note 24(f)).F-9
F-18
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)(l)(ii) Impairment of other assetsInvestments An affiliated company is an entity in which the Group has significant influence, but not control or joint control, over its management, including participating in the financialoperating policy decisions. A jointly controlled entity is an entity over whose activities the Group has joint control, established by contractual agreement. The consolidated statementexternal sources of income includes the Group’s share of the results of its affiliated companies and jointly controlled entities for the year. In the consolidatedinformation are reviewed at each balance sheet date to identify indications that the investments in affiliated companies and jointly controlled entities are stated atfollowing assets may be impaired or an impairment loss previously recognized no longer exists or may have decreased:– Property, plant and equipment; – Construction in progress; – Lease and equipment deposits; – Lease prepayments; – Deferred expenditure; and – Interests in affiliated companies and jointly controlled entities. Group’s attributable share of net assets. When the Group’s share of losses exceeds the carryingasset’s recoverable amount is estimated.– Calculation of recoverable amount the affiliated company or jointly controlled entity, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the affiliated company or jointly controlled entity. Other investments are stated at cost less impairment losses (refer to accounting policy n). Other investments represent unquoted available-for-sale equity securities of companies established in the PRC. There is no quoted market price for such equity securities and accordingly a reasonable estimate of the fair value could not be made without incurring excessive costs.(m)Deferred expenditure Custom duties and other direct costs in relation to modifying, introducing and certifying certain operating leased aircraft are deferred and amortized over the terms of the related leases. Lump sum housing benefits payable to employees of the Group are deferred and amortized on a straight line basis over a period of 10 years, which represents the vesting benefit period of the employees.(n)Impairment loss The carrying amounts of the Group’s assets, other than inventories (refer to accounting policy g) and deferred tax assets (refer to accounting policy u) are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount. The recoverable amountan asset is the greater of theits net selling price and the value in use. In determining theassessing value in use, expectedthe estimated future cash flows generated by the asset are discounted to their present value. Thevalue using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).– Recognition of impairment losses reduction is recognized as an expenseother assets in the consolidated statementunit (or group of income.units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.– Reversals of impairment losses F-10
F-19
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data) The Group assesses at each balance sheet date whether there is any indication that an impairment loss recognized for an asset in prior years may no longer exist.subsequent increase in the recoverable amountreversal of an asset, when the circumstances and events that ledimpairment loss is limited to the write-down or write-off cease to exist, is recognized as income. The reversal is reduced by theasset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment losses are credited to the statement of operations in the year in which the reversals are recognized.
the amount cannot be estimated reliably, the obligation is disclosed as contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.
F-20
F-21
F-22
– | in the case of current tax assets and liabilities, the Group intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously; or | ||
– | in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either: |
• | the same taxable entity; or | ||
• | different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realize the current tax assets and settle the current tax liabilities on a net basis or realize and settle simultaneously. |
Interest income is recognized as it accrues unless collectibility is in doubt. Dividend income is recognized when the Group’s right to receive payment is established.
Operating lease income is recognized on a straight line basis over the terms of the respective leases.
tax.
(ii) | Interest income is recognized as it accrues using the effective interest method. | |
(iii) | Dividend income is recognized when the Group’s right to receive dividend is established. | |
(iv) | Operating lease income is recognized on a straight line basis over the terms of the respective leases. |
F-23
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Amounts in thousands, except share data)
(s)Translation of foreign currencies
Foreign currency transactions during the year are translated into Renminbi at the applicable rates of exchange prevailing on the transaction dates.
Foreign currency monetary balances at the balance sheet date are translated into Renminbi at the exchange rates quoted by the People’s Bank of China ruling at the balance sheet date. Exchange differences are dealt with in the consolidated statement of income.
(t)(v) Borrowing costs
Deferred tax is provided using the balance sheet liability method on all temporary differences between the carrying amounts for financial reporting purposes and the amounts used for taxation purposes, except differences relating to the initial recognition of assets or liabilities which affect neither accounting nor taxable profit/loss.
The tax value of losses expected to be available for utilization against future taxable income is recognized as a deferred tax asset and offset against the deferred tax liability attributable to the same legal tax unit and jurisdiction. Net deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
(v)(w) Retirement benefits
(w)Basic earnings per share
Basic earnings per share foryear in which the years ended December 31, 2000, 2001 and 2002 have been computedassociated services are rendered by dividing net income of RMB501,771, RMB340,225 and RMB575,761, respectively, by the weighted average number of shares in issue of 3,374,178,000 in 2000, 2001 and 2002.
employees.
F-12
CHINA SOUTHERN AIRLINES COMPANY LIMITEDAND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Amounts in thousands, except share data)
(x)
F-24
A provision is
was determined.
(aa)Segmental reporting
The Group operates principally as a single business segment fortheir close family members) or other entities and include entities which are under the provisionsignificant influence of air transportation services. The analysis of operating revenue and operating income by geographical segment is based on the following criteria:
(ab)Use of estimates
The preparation of consolidated financial statementsrelated parties of the Group in accordance with IFRS requires management to make estimateswhere those parties are individuals, and assumptions that affectpost-employment benefit plans which are for the reported amountsbenefit of assets and liabilities and disclosure of contingent assets and liabilities at the dateemployees of the consolidated financial statementsGroup or of any entity that is a related party of the Group.
F-25
F-13
F-26
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)
3.TRAFFIC REVENUE
Traffic revenue
(b) | Changes in presentation of minority interests (IAS 1, Presentation of financial statements and IAS 27, Consolidated and separate financial statements) |
F-27
F-28
Year ended December 31, | ||||||||||||
2000 | 2001 | 2002 | ||||||||||
RMB | RMB | RMB | ||||||||||
Passenger | 13,254,714 | 15,055,496 | 15,695,622 | |||||||||
Cargo and mail | 1,451,445 | 1,406,036 | 1,786,270 | |||||||||
14,706,159 | 16,461,532 | 17,481,892 | ||||||||||
tax. An analysis of turnover is as follows:
Year ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
RMB | RMB | RMB | ||||||||||
Traffic revenue | ||||||||||||
Passenger | 15,010 | 21,100 | 34,328 | |||||||||
Cargo and mail | 1,955 | 2,244 | 3,091 | |||||||||
16,965 | 23,344 | 37,419 | ||||||||||
Other operating revenue | ||||||||||||
Commission income | 140 | 203 | 237 | |||||||||
General aviation income | 40 | 55 | 77 | |||||||||
Ground services income | 99 | 146 | 195 | |||||||||
Air catering income | 31 | 53 | 25 | |||||||||
Net income from lease arrangements (Note 21) | 69 | — | — | |||||||||
Rental income | 40 | 45 | 69 | |||||||||
Aircraft lease income | — | 11 | 1 | |||||||||
Others | 86 | 117 | 270 | |||||||||
505 | 630 | 874 | ||||||||||
17,470 | 23,974 | 38,293 | ||||||||||
F-29
F-30
F-14
F-31
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data) Year ended December 31, 2003 2004 2005 RMB RMB RMB Jet fuel costs 3,867 6,050 11,929 Operating lease rentals - Aircraft and flight equipment 1,536 1,665 2,497 - Land and buildings 136 109 302 Air catering expenses 474 705 1,196 Aircraft insurance 196 185 105 Flight personnel payroll and welfare 728 1,026 1,619 Training expenses 123 183 373 CAAC Infrastructure Development Fund contributions (Note 4) — 466 978 Others 10 29 395 7,070 10,418 19,394 Year ended December 31, 2003 2004 2005 RMB RMB RMB Repairing and maintenance charges 2,289 3,247 4,153 Maintenance materials 300 212 436 2,589 3,459 4,589 Pursuant to approval documents issued by the CAAC, the Group imposes a fuel surcharge on passengers carried by its domestic and Hong Kong regional flights at the following prescribed rates:Applicable flights and periodsRates of fuel surchargeDomestic flightsFrom November 1, 2000 to February 5, 2001Not more than 20% of published fare or RMB150 per passenger, whichever is lowerFrom February 6, 2001 to December 31, 2001Not more than 14% of published fare or RMB150 per passenger, whichever is lowerFrom January 1, 2002 to October 9, 2002Not more than 8% of published fareFrom October 10, 2002 onwardNot more than 14% of published fareHong Kong regional flightsFrom Novmeber 16, 2000 to December 31, 2001RMB64 to RMB70 per passengerFrom January 1, 2002 onwardNil The fuel surcharge forms part of the traffic revenue of the Group. For the year ended December 31, 2000, 2001 and 2002, the fuel surcharge revenue totaled RMB149,000, RMB1,001,000 and RMB554,000, respectively.4.OTHER OPERATING REVENUE Year ended December 31, 2000 2001 2002 RMB RMB RMB Commission income 134,252 129,157 137,928 General aviation income 53,161 61,292 68,225 Ground services income 63,111 55,388 78,616 Air catering income 23,654 29,523 38,077 Aircraft lease income 110,635 65,486 46,640 Net income from a lease arrangement (Note 12) — — 51,682 Other 87,346 77,280 115,560 472,159 418,126 536,728 F-15
F-32
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)5.FLIGHT OPERATION7. AIRCRAFT AND TRAFFIC SERVICING EXPENSES Year ended December 31, 2000 2001 2002 RMB RMB RMB Fuel costs 3,240,129 3,548,860 3,519,005 Operating lease rentals 1,615,574 1,912,832 1,416,524 Air catering expenses 482,838 554,165 625,489 Aircraft insurance 85,431 123,439 256,238 Flight personnel payroll and welfare 575,861 657,193 781,223 Training expenses 30,885 24,374 38,908 Other 78,303 84,765 95,156 6,109,021 6,905,628 6,732,543 Year ended December 31, 2003 2004 2005 RMB RMB RMB Landing and navigation fees 2,562 3,222 4,891 Ground service charges 205 281 868 2,767 3,503 5,759 6.MAINTENANCE8. PROMOTION AND SALES EXPENSES Year ended December 31, 2000 2001 2002 RMB RMB RMB Repairing and maintenance charges 1,327,248 1,558,331 1,842,213 Maintenance materials 274,987 286,505 292,492 Labor costs 94,565 104,949 130,254 Other 61,781 64,794 68,460 1,758,581 2,014,579 2,333,419 Year ended December 31, 2003 2004 2005 RMB RMB RMB Sales commissions 757 1,062 1,503 Ticket office expenses 504 552 659 Computer reservation services 175 233 417 Advertising and promotion 24 36 32 Others 20 57 169 1,480 1,940 2,780 Year ended December 31, 2003 2004 2005 RMB RMB RMB General corporate expenses 1,011 1,260 2,408 Impairment losses for trade and other receivables (Note 17) 12 27 — Auditors’ remuneration 8 11 12 Other taxes and levies 22 25 37 1,053 1,323 2,457 F-16
F-33
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data) An analysis Year ended December 31, 2003 2004 2005 RMB RMB RMB Depreciation - Owned assets 1,502 1,891 3,292 - Assets acquired under capital leases 496 472 1,128 Amortization of deferred credits — — (20 ) Other amortization 40 50 40 2,038 2,413 4,440 provision for major overhauls in respect of aircraft heldproperty, plant and equipment leased out under operating leases is as follows: Year ended December 31, 2000 2001 2002 RMB RMB RMB Balance at beginning of year 289,228 241,895 187,125 Additional amount provided 15,267 12,889 49,051 Amount utilized (62,600 ) (67,659 ) (42,289 ) Balance at end of year 241,895 187,125 193,887 Balance of provisionamounted to RMB55, RMB55 and RMB35 for major overhauls atthe years ended December 31, 20012003, 2004 and 2002 consisted of: December 31, 2001 2002 RMB RMB Current portion (included in accrued expenses) (Note 16) 61,464 52,000 Non-current portion 125,661 141,887 187,125 193,887 Year ended December 31, 2003 2004 2005 RMB RMB RMB Salaries, wages and welfare 1,496 2,260 3,515 Retirement schemes contributions 150 168 472 1,646 2,428 3,987 7.AIRCRAFT AND TRAFFIC SERVICING EXPENSES Year ended December 31, 2000 2001 2002 RMB RMB RMB Landing and navigation fees 1,955,144 2,157,392 2,353,412 Ground service charges 113,970 140,129 157,872 2,069,114 2,297,521 2,511,284 F-17
F-34
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)8.12. INTEREST EXPENSEPROMOTION AND SALES EXPENSES Year ended December 31, 2000 2001 2002 RMB RMB RMB Sales commissions 802,277 891,646 749,953 Ticket office expenses 414,161 440,445 515,648 Computer reservation services 120,071 153,409 174,547 Advertising and promotion 24,719 26,434 31,513 Other 16,454 28,846 27,926 1,377,682 1,540,780 1,499,587 9.GENERAL AND ADMINISTRATIVE EXPENSES Year ended December 31, 2000 2001 2002 RMB RMB RMB General corporate expenses 493,484 557,083 658,833 Salaries and welfare 294,358 312,396 379,406 Provision for doubtful accounts (Note 30) 2,072 1,729 1,304 Other taxes and levies 19,311 21,025 20,467 809,225 892,233 1,060,010 10.TAXATION Pursuant Year ended December 31, 2003 2004 2005 RMB RMB RMB Interest on bank and other notes payable wholly repayable within five years 288 221 211 Interest on other notes payable 176 156 877 Finance charges on obligations under capital leases 443 348 626 Less: borrowing costs capitalized (83 ) (34 ) (98 ) 824 691 1,616 incomeyears ended December 31, 2003, 2004 and 2005, respectively.rules(benefit)/expense in the consolidated statements of operations Year ended December 31, 2003 2004 2005 RMB RMB RMB (restated, (restated, Note 3) Note 3) PRC income tax 47 176 12 Deferred tax (Note 25) - current year 11 (111 ) (19 ) - adjustment for change in enacted tax rate (392 ) — — (334 ) 65 (7 ) regulationsRegulations for Implementation of Income Tax for Foreign Investment Enterprises and Foreign Enterprises of the PRC and a taxation approval document “Guangzhou Municipal State Tax Bureau Suo De Shui Zi Que 020043”, the GroupCompany is liableentitled to PRCenjoy the preferential tax policy implemented in the Guangzhou Economic & Technology Development Zone effective October 1, 2003. As a result, the Company’s income tax rate has been changed from 33% to 15% beginning from that date.
operations for the year ended December 31, 2003.
Year ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
RMB | RMB | RMB | ||||||||||
(restated, | (restated, | |||||||||||
Note 3) | Note 3) | |||||||||||
(Loss)/income before tax | (521 | ) | 220 | (1,853 | ) | |||||||
Expected tax on (loss)/income before tax calculated at 15% for the years ended December 31, 2003, 2004 and 2005 | (78 | ) | 33 | (278 | ) | |||||||
Adjustments: | ||||||||||||
Effect on change in income tax rate on deferred taxation | (392 | ) | — | — | ||||||||
Rate differential on subsidiaries/branches | 5 | 3 | 7 | |||||||||
Tax effect of non-deductible expenses | 80 | 29 | 82 | |||||||||
Tax effect of non-taxable income | — | — | (8 | ) | ||||||||
Tax effect of share of results of affiliated companies and jointly controlled entities | (9 | ) | (1 | ) | 37 | |||||||
Tax effect of unused tax losses not recognized | 22 | — | 135 | |||||||||
Expired tax losses | 34 | — | — | |||||||||
Others | 4 | 1 | 18 | |||||||||
Actual tax (benefit)/expense | (334 | ) | 65 | (7 | ) | |||||||
F-35
F-18
F-36
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data) Income tax provision consisted of: Year ended December 31, 2000 2001 2002 RMB RMB RMB Provision for income tax: Company and subsidiaries 59,297 37,032 71,651 Affiliated companies 12,024 8,085 9,424 71,321 45,117 81,075 Deferred taxation (Note 14) 267,586 275,402 317,152 338,907 320,519 398,227 Actual income tax expense differed from the amounts computed by applying the PRC income tax rate of 33% to income before taxation and minority interests as a result of the following: Year ended December 31, 2000 2001 2002 RMB RMB RMB Expected PRC taxation expense 307,306 262,434 375,903 Adjustments: Gains on sale and leaseback transactions and their amortization (7,612 ) (5,075 ) (851 ) Rate differential on subsidiaries taxed at 15% (40,745 ) (51,245 ) (60,530 ) Non-deductible expenses 70,512 154,152 61,454 Other, net 9,446 (39,747 ) 22,251 338,907 320,519 398,227 TaxationTax Bureau, lease arrangements executed prior to September 1, 1999 arewere exempted from PRC withholding tax.F-19CHINA SOUTHERN AIRLINES COMPANY LIMITEDAND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Amounts in thousands, except share data)of RMB5,020, RMB11,962 and RMB14,305, respectively, during 2000, 2001 and 2002 has been included as part of the operating lease rentals.
December 31, | ||||||||
2004 | 2005 | |||||||
United States Dollars | US$ 37 | US$ 24 | ||||||
Japanese Yen | JPY1, 272 | JPY1, 161 |
F-37
December 31, | ||||||||
2001 | 2002 | |||||||
RMB | RMB | |||||||
Trade receivables, principally traffic | 615,561 | 731,894 | ||||||
Less: Allowance for doubtful accounts (Note 30) | (59,019 | ) | (60,118 | ) | ||||
556,542 | 671,776 | |||||||
December 31, | ||||||||
2004 | 2005 | |||||||
RMB | RMB | |||||||
Trade receivables, principally traffic | 1,295 | 1,562 | ||||||
Less: Impairment losses for bad and doubtful accounts | (92 | ) | (44 | ) | ||||
1,203 | 1,518 | |||||||
December 31, | ||||||||
2004 | 2005 | |||||||
RMB | RMB | |||||||
Within 1 month | 998 | 1,366 | ||||||
More than 1 month but less than 3 months | 163 | 137 | ||||||
More than 3 months but less than 12 months | 42 | 14 | ||||||
More than 12 months | — | 1 | ||||||
1,203 | 1,518 | |||||||
December 31, | ||||||||
2004 | 2005 | |||||||
United States Dollars | US$ | 11 | US$ | 15 | ||||
F-38
12.FIXED ASSETS
December 31, | ||||||||
2001 | 2002 | |||||||
RMB | RMB | |||||||
Buildings | 2,966,159 | 3,207,816 | ||||||
Aircraft | 19,845,652 | 24,970,695 | ||||||
Flight equipment, including rotable spares | 5,858,622 | 6,350,363 | ||||||
Machinery, equipment and vehicles | 1,539,889 | 1,667,764 | ||||||
30,210,322 | 36,196,638 | |||||||
Less: Accumulated depreciation and amortization | (7,858,107 | ) | (9,275,809 | ) | ||||
22,352,215 | 26,920,829 | |||||||
Year ended December 31, | ||||||||
2004 | 2005 | |||||||
RMB | RMB | |||||||
At January 1 | 70 | 92 | ||||||
Impairment losses for bad and doubtful accounts (Note 9) | 27 | — | ||||||
Through the CNA/XJA Acquisitions | 44 | — | ||||||
Bad and doubtful accounts written off | (49 | ) | (48 | ) | ||||
At December 31 | 92 | 44 | ||||||
December 31, | ||||||||
2004 | 2005 | |||||||
RMB | RMB | |||||||
Expendable spare parts and maintenance materials | 1,175 | 1,241 | ||||||
Other supplies | 127 | 141 | ||||||
1,302 | 1,382 | |||||||
December 31, | ||||||||
2004 | 2005 | |||||||
RMB | RMB | |||||||
Consumption | 596 | 720 | ||||||
Write-down of inventories | — | 209 | ||||||
596 | 929 | |||||||
F-39
December 31, | ||||||||
2004 | 2005 | |||||||
RMB | RMB | |||||||
Non-current investments | ||||||||
Unlisted equity securities available for sale, at cost | 272 | 320 | ||||||
Current investments | ||||||||
Listed equity securities held for trading | 523 | — | ||||||
Listed debt securities held-to-maturity | 160 | — | ||||||
683 | — | |||||||
Market value of listed securities | 683 | — | ||||||
Gross | Gross | |||||||||||||||
unrealized | unrealized | |||||||||||||||
Amortized | holding | holding | ||||||||||||||
cost | gains | losses | Fair value | |||||||||||||
RMB | RMB | RMB | RMB | |||||||||||||
As of December 31, 2004 | ||||||||||||||||
Debt securities held-to-maturity | 160 | — | — | 160 | ||||||||||||
As of December 31, 2005 | ||||||||||||||||
Debt securities held-to-maturity | — | — | — | — | ||||||||||||
F-40
Other flight | ||||||||||||||||||||||||
Aircraft | equipment, | Machinery, | ||||||||||||||||||||||
Held | including | equipment | ||||||||||||||||||||||
under capital | rotable | and | ||||||||||||||||||||||
Buildings | Owned | leases | spares | vehicles | Total | |||||||||||||||||||
Cost or valuation: | ||||||||||||||||||||||||
At January 1, 2004 | 3,288 | 17,222 | 10,463 | 6,842 | 1,930 | 39,745 | ||||||||||||||||||
Exchange adjustments | 5 | — | — | — | 12 | 17 | ||||||||||||||||||
Reclassification on exercise of purchase options | — | 550 | (550 | ) | — | — | — | |||||||||||||||||
Additions | 336 | 4,156 | — | 525 | 5 | 5,022 | ||||||||||||||||||
Transfer from construction in progress | 2,472 | — | — | — | 235 | 2,707 | ||||||||||||||||||
Through the CNA/XJA Acquisitions | 915 | 5,206 | 4,616 | 1,753 | 490 | 12,980 | ||||||||||||||||||
Disposals | (28 | ) | — | — | (76 | ) | (73 | ) | (177 | ) | ||||||||||||||
At December 31, 2004 | 6,988 | 27,134 | 14,529 | 9,044 | 2,599 | 60,294 | ||||||||||||||||||
Representing: | ||||||||||||||||||||||||
Cost | 6,633 | 20,905 | 10,189 | 6,870 | 2,115 | 46,712 | ||||||||||||||||||
Valuation - 1996 (Note (b)) | 355 | 6,229 | 4,340 | 2,174 | 484 | 13,582 | ||||||||||||||||||
6,988 | 27,134 | 14,529 | 9,044 | 2,599 | 60,294 | |||||||||||||||||||
At January 1, 2005 | 6,988 | 27,134 | 14,529 | 9,044 | 2,599 | 60,294 | ||||||||||||||||||
Exchange adjustments | (6 | ) | — | — | — | (14 | ) | (20 | ) | |||||||||||||||
Additions | 64 | 1,827 | 8,146 | 1,336 | 307 | 11,680 | ||||||||||||||||||
Transfer from construction in progress | 513 | — | — | — | 56 | 569 | ||||||||||||||||||
Transfer to inventories | — | — | — | (126 | ) | — | (126 | ) | ||||||||||||||||
Disposals | (256 | ) | — | — | (207 | ) | (81 | ) | (544 | ) | ||||||||||||||
At December 31, 2005 | 7,303 | 28,961 | 22,675 | 10,047 | 2,867 | 71,853 | ||||||||||||||||||
Representing: | ||||||||||||||||||||||||
Cost | 6,948 | 22,732 | 18,335 | 7,873 | 2,383 | 58,271 | ||||||||||||||||||
Valuation - 1996 (Note (b)) | 355 | 6,229 | 4,340 | 2,174 | 484 | 13,582 | ||||||||||||||||||
7,303 | 28,961 | 22,675 | 10,047 | 2,867 | 71,853 | |||||||||||||||||||
F-41
Other flight | ||||||||||||||||||||||||
Aircraft | equipment, | Machinery, | ||||||||||||||||||||||
Held | including | equipment | ||||||||||||||||||||||
under capital | rotable | and | ||||||||||||||||||||||
Buildings | Owned | leases | spares | vehicles | Total | |||||||||||||||||||
Accumulated depreciation: | ||||||||||||||||||||||||
At January 1, 2004 | 594 | 3,192 | 2,605 | 3,644 | 1,174 | 11,209 | ||||||||||||||||||
Exchange adjustments | 1 | — | — | — | 9 | 10 | ||||||||||||||||||
Reclassification on exercise of purchase options | — | 183 | (183 | ) | — | — | — | |||||||||||||||||
Charge for the year | 179 | 956 | 472 | 544 | 212 | 2,363 | ||||||||||||||||||
Disposals | (17 | ) | — | — | (51 | ) | (61 | ) | (129 | ) | ||||||||||||||
At December 31, 2004 | 757 | 4,331 | 2,894 | 4,137 | 1,334 | 13,453 | ||||||||||||||||||
At January 1, 2005 | 757 | 4,331 | 2,894 | 4,137 | 1,334 | 13,453 | ||||||||||||||||||
Exchange adjustments | (1 | ) | — | — | — | (11 | ) | (12 | ) | |||||||||||||||
Charge for the year | 227 | 1,546 | 1,108 | 1,121 | 418 | 4,420 | ||||||||||||||||||
Disposals | (74 | ) | — | — | (145 | ) | (55 | ) | (274 | ) | ||||||||||||||
At December 31, 2005 | 909 | 5,877 | 4,002 | 5,113 | 1,686 | 17,587 | ||||||||||||||||||
Net book value: | ||||||||||||||||||||||||
At December 31, 2004 | 6,231 | 22,803 | 11,635 | 4,907 | 1,265 | 46,841 | ||||||||||||||||||
At December 31, 2005 | 6,394 | 23,084 | 18,673 | 4,934 | 1,181 | 54,266 | ||||||||||||||||||
F-20
CHINA SOUTHERN AIRLINES COMPANY LIMITEDAND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Amounts in thousands, except share data)
The Group is obligated under various capital leases for aircraft that expire at various dates during the next nine years. The gross amount of aircraft and related accumulated amortization recorded under capital leases are as follows:
December 31, | ||||||||
2001 | 2002 | |||||||
RMB | RMB | |||||||
Aircraft | 11,454,527 | 11,459,978 | ||||||
Less: Accumulated amortization | (2,238,389 | ) | (2,499,495 | ) | ||||
9,216,138 | 8,960,483 | |||||||
As of December 31, 2001 and 2002, certain aircraft of the Group with an aggregate carrying amount of approximately RMB5,079,342 and RMB5,822,076, respectively, were pledged as security under certain loan agreements. See Note 17.
(Note 36).
F-42
In accordance with IAS 16 “Property, Plant and Equipment”, subsequent
The effect Consequently, no additional fair value adjustment was recorded during the year ended December 31, 2005.
Pursuant to certain salelease agreements (Notes 27 and leaseback arrangements,28).
F-43
F-21
F-44
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data) During 2000, 2001 and 2002, theto lease several of its aircraft to independent third parties. The terms of such leases generally range from one to twelve months. Depreciation of the relevant aircraft from the date of commencement of the leases to December 31, 2000, 2001 and 2002 or the expiry date of the leases, whichever is earlier, was RMB19,027, RMB9,671 and RMB4,176, respectively. During 2002, the Group entered into an arrangement(the “Arrangements”) with certain independent third parties under whichduring each of 2002 and 2003. Under each of the Arrangements, the Group sold an aircraft and then immediately leased back the aircraft for a period of 26 years. Asan agreed theperiod. The lease payment obligations, with pre-determined net present value, totaling RMB1,295,680 equivalent, isare to be satisfied solely out of the sale proceeds and such amount has been placed irrevocably by the Group in form of deposits and debt securities in favor of the lessor. The Group has an option to purchase the aircraft at the 16.6th yeara pre-determined date and thean agreed purchase price is to be satisfied by the balances of the deposits and debt securities outstanding at that date. In the event that the lease agreement is early terminated by the Group, the Group is liable to pay a pre-determined penalty to the lessor. As long asProvided that the Group complies with the lease agreement,agreements, the Group is entitled to the quiet use of, and continued possession and use or operation of the aircraft. Since the Group retains substantially all risks and rewards incident to ownership of the aircraft and enjoys substantially the same rights to itstheir use as before the arrangement,Arrangements, no adjustment has been made to the fixed assets.property, plant and equipment. As of December 31, 2002,2004 and 2005, the net present value of the lease commitments and the corresponding defeased deposits and debt securities amounted to RMB1,322,843.RMB2,462 and RMB2,376, respectively. As a result of the arrangement,Arrangements, the Group received a net cash benefit of RMB51,682RMB69 in 2003, which has beenwas recognized as income for 2003.year.date of approval of these consolidated financial statements, the Group is in the process of applying for the land use right certificates and property title certificates in respect of the properties located in the Guangzhou Baiyun International Airport, in which the Group has interests and for which such certificates have not been granted. As of December 31, 2004 and 2005, carrying value of such properties of the Group amounted to RMB2,319 and RMB2,316, respectively. The directors of the Company are of the opinion that the use of and the conduct of operating activities at the properties referred to above are not affected by the fact that the Group has not yet obtained the relevant land use right certificates and property title certificates. December 31, 2004 2005 RMB RMB At January 1 1,630 565 Additions 1,616 678 Through the CNA/XJA Acquisitions 26 — Transfer to property, plant and equipment (2,707 ) (569 ) At December 31 565 674
13.INVESTMENTS
2001 | 2002 | |||||||
RMB | RMB | |||||||
Share of net assets in affiliated companies | 531,055 | 692,026 | ||||||
Share of net assets in jointly controlled entities | 174,338 | 461,962 | ||||||
Other investments, at cost | 195,201 | 201,854 | ||||||
900,594 | 1,355,842 | |||||||
December 31, | ||||||||
2004 | 2005 | |||||||
RMB | RMB | |||||||
Share of net assets | 429 | 142 | ||||||
100% | Group’s effective interest | |||||||||||||||||||||||
December 31, | December 31, | |||||||||||||||||||||||
2003 | 2004 | 2005 | 2003 | 2004 | 2005 | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | RMB | |||||||||||||||||||
Non-current assets | 4,254 | 5,334 | 1,672 | 2,081 | ||||||||||||||||||||
Current assets | 2,165 | 2,275 | 1,049 | 455 | ||||||||||||||||||||
Non-current liabilities | (2,918 | ) | (3,897 | ) | (1,290 | ) | (1,520 | ) | ||||||||||||||||
Current liabilities | (2,568 | ) | (3,318 | ) | (1,002 | ) | (874 | ) | ||||||||||||||||
Net assets | 933 | 394 | 429 | 142 | ||||||||||||||||||||
Revenues | 1,756 | 2,676 | 3,314 | 682 | 1,042 | 1,318 | ||||||||||||||||||
Expenses | (1,637 | ) | (2,633 | ) | (3,798 | ) | (634 | ) | (1,030 | ) | (1,618 | ) | ||||||||||||
Taxation | (6 | ) | (5 | ) | (39 | ) | (3 | ) | (2 | ) | 15 | |||||||||||||
Income/(loss) for the year | 113 | 38 | (523 | ) | 45 | 10 | (285 | ) | ||||||||||||||||
December 31, | ||||||||
2004 | 2005 | |||||||
RMB | RMB | |||||||
Share of net assets | 782 | 805 | ||||||
F-45
F-22
F-46
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data) Group’s effective interest December 31, 2003 2004 2005 RMB RMB RMB Non-current assets 845 920 Current assets 794 877 Non-current liabilities (389 ) (524 ) Current liabilities (468 ) (468 ) Net assets 782 805 Revenues 545 762 1,115 Expenses (585 ) (767 ) (1,082 ) Taxation (6 ) (11 ) 3 (Loss)/income for the year (46 ) (16 ) 36 14.25. DEFERRED TAXATIONTAX ASSETS/LIABILITIESinof net deferred tax liabilities(liabilities)/assets are as follows: December 31, 2001 2002 RMB RMB Balance at beginning of year (244,175 ) (519,577 ) Land use rights adjustment (Note 24(f)) — 57,495 (244,175 ) (462,082 ) Transferred to consolidated statement of income (Note 10) (275,402 ) (317,152 ) Balance at end of year (519,577 ) (779,234 ) December 31, 2004 2005 RMB RMB At January 1 (398 ) (287 ) Credited to consolidated statements of operations (Note 13) 111 19 At December 31 (287 ) (268 ) The deferred tax liabilities were made up of the taxation effect of: December 31, 2001 2002 �� RMB RMB Deferred tax assets: Tax losses carried forward 175,926 149,338 Repairs and maintenance accruals 171,122 63,896 Repair charges capitalized 265,319 319,697 Accrued expenses 295,597 311,893 Other 122,321 129,423 Total deferred tax assets 1,030,285 974,247 Deferred tax liabilities: Undistributed profits of subsidiaries 219,330 254,210 Repairs and maintenance accruals 73,851 78,083 Depreciation of fixed assets 1,237,532 1,403,278 Other 19,149 17,910 Total deferred tax liabilities 1,549,862 1,753,481 Net deferred tax liabilities (519,577 ) (779,234 ) F-23
F-47
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data) December 31, 2004 2005 RMB RMB Deferred tax assets: Tax losses 39 159 Repair charges capitalized 254 275 Accrued expenses 275 175 Others 21 29 Total deferred tax assets 589 638 Deferred tax liabilities: Accrued expenses 75 58 Depreciation allowances in excess of the related depreciation 752 832 Others 49 16 Total deferred tax liabilities 876 906 (287 ) (268 ) Net deferred tax asset recognized on the consolidated balance sheet 51 74 Net deferred tax liability recognized on the consolidated balance sheet (338 ) (342 ) (287 ) (268 )
losses from operations in Hong Kong of approximately RMB303, as it is not probable that future taxable income against which the losses can be utilized will be available. The tax losses do not expire under current tax legislation.
16.ACCRUED EXPENSES
December 31, | ||||||||
2001 | 2002 | |||||||
RMB | RMB | |||||||
Landing and traffic charges | 353,148 | 497,372 | ||||||
Duties and levies | 446,180 | 360,827 | ||||||
Fuel | 169,777 | 297,626 | ||||||
Interest | 202,274 | 174,626 | ||||||
Lease charges | 11,658 | 40,900 | ||||||
Accrued salaries, wages and benefits | 237,804 | 245,124 | ||||||
Insurance premium | 2,955 | 1,972 | ||||||
Repairs and maintenance | 306,088 | 198,465 | ||||||
Current portion of provision for major overhauls (Note 6) | 61,464 | 52,000 | ||||||
Lump sum housing benefits payable (Note 21) | — | 213,675 | ||||||
Other | 222,207 | 258,867 | ||||||
2,013,555 | 2,341,454 | |||||||
F-24
CHINA SOUTHERN AIRLINES COMPANY LIMITEDAND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Amounts in thousands, except share data)
17.DEBT
Short-term notes payable
December 31, | ||||||||
2001 | 2002 | |||||||
RMB | RMB | |||||||
Short-term notes payable | 1,431,105 | 4,422,926 | ||||||
As of December 31, 2001 and 2002, borrowings under short-term notes payable2005, other assets of the Group totaling RMB976,644include lump sum housing benefits of RMB197 and RMB1,450,000, respectively, were guaranteed by CSAHC.
RMB171, respectively. Further details are set out in Note 37.
December 31, | ||||||||
2004 | 2005 | |||||||
RMB | RMB | |||||||
At January 1 | 223 | 197 | ||||||
Amortization for the year | (26 | ) | (26 | ) | ||||
At December 31 | 197 | 171 | ||||||
27. | DEBT | |
Short-term notes payable |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB | RMB | |||||||
Short-term notes payable | 9,925 | 14,346 | ||||||
Current installments of long-term notes payable | 1,593 | 1,877 | ||||||
11,518 | 16,223 | |||||||
F-48
F-25
F-49
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data) December 31, Interest rate and final maturity 2001 2002 RMB RMB Renminbi denominated notes payable: Loans for construction projects Floating interest rates ranging from 4.94% to 6.21% per annum as of December 31, 2002, with maturity through 2009. 115,562 893,838 Non-interest bearing loans from a municipal
government authority, repayable in 2004 3,000 3,000 Loans for purchase of aircraft Floating interest rates ranging from 5.02% to 5.49% per annum as of December 31, 2002, with maturities through 2012 485,700 2,310,268 U.S. dollar denominated notes payable: Loans for purchase of aircraft Fixed interest rates ranging from 5.00% to 8.33% per annum as of December 31, 2002, with maturities through 2011. 3,741,749 3,426,038 Loan for purchase of flight equipment Fixed interest rate of 8.35% per annum as of December 31, 2002, with maturity through 2004 27,994 20,090 4,374,005 6,653,234 Less: current portion (746,411 ) (817,800 ) 3,627,594 5,835,434 December 31, Interest rate and final maturity 2004 2005 RMB RMB Non-interest bearing loan from a municipal government authority repayable on demand 3 3 Floating interest rates ranging from 5.02% to 5.51% per annum as of December 31, 2005, with maturities through 2011 1,217 877 Fixed interest rates ranging from 4.43% to 7.73% per annum as of December 31, 2005, with maturities through 2015 2,676 2,414 Floating interest rates ranging from 3 months LIBOR + 0.70% to 0.90% per annum as of December 31, 2005, with maturities through 2012 1,426 3,610 Floating interest rates ranging from 6 months LIBOR + 0.3% to 1.20% per annum as of December 31, 2005, with maturities through 2013 8,206 7,713 13,528 14,617 Less: current installments (1,593 ) (1,877 ) 11,935 12,740 20012004 and 2002, borrowings under long-term2005, bank and other notes payable of the Group totaling RMB3,741,749RMB8,620 and RMB3,360,945,RMB8,116, respectively, were guaranteed by certain financial institutions and secured by the mortgages over certain of the Group’s aircraft. In addition, asaircraft with carrying amount of December 31, 2001RMB11,927 and 2002, borrowings under long-term notes payable of the Group totaling RMB321,700 and RMB1,890,118, respectively, were guaranteed by CSAHC and as of December 31, 2002, RMB561,531 was guaranteed by SA Finance.RMB11,735, respectively.
December 31, | ||||||||
2004 | 2005 | |||||||
RMB | RMB | |||||||
Guarantors | ||||||||
Short-term notes payable | ||||||||
CSAHC | 411 | 300 | ||||||
Long-term notes payable | ||||||||
Industrial Commercial Bank of China | 149 | 111 | ||||||
Export-Import Bank of the United States | 1,732 | 1,171 | ||||||
Bank of China | 291 | 155 | ||||||
CSAHC | 2,041 | 1,608 | ||||||
Shenzhen Yingshun Investment Development Company Limited | — | 22 | ||||||
SA Finance | 9 | 7 | ||||||
4,633 | 3,374 | |||||||
F-50
F-26
F-51
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)20022005 and thereafter are as follows: RMB 2003 817,800 2004 842,036 2005 1,045,049 2006 875,127 2007 1,810,673 Thereafter 1,262,549 6,653,234 Interest expense, net RMB 2006 1,877 2007 4,316 2008 2,156 2009 1,435 2010 660 Thereafter 4,173 14,617 amounts capitalized, represents: Year ended December 31, 2000 2001 2002 RMB RMB RMB Interest incurred 1,074,236 938,944 1,023,379 Interest capitalized — (5,227 ) (64,186 ) Interest expense 1,074,236 933,717 959,193 December 31, 2004 2005 United States Dollars US$1,969 US$3,208 Hong Kong Dollars HK$2,678 HK$1,821 F-27
expiring during the years 2006 to 2017. F-52
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)18.28. LEASE OBLIGATIONS As of December 31, 2002, theleased 34 aircrafthas commitments under capital leases.lease agreements in respect of aircraft and related equipment. The majority of these leases have terms of 10 to 15 years and expiration dates range from 2003 through 2011.2002,2005, future scheduled minimum lease payments under these capital leases which were 78% and 22%, respectively, denominated in U.S. dollars and Japanese yen, are as follows: Payments *Interest Obligations RMB RMB RMB 2003 2,006,392 439,694 1,566,698 2004 1,624,381 351,237 1,273,144 2005 1,352,472 286,208 1,066,264 2006 1,390,900 205,592 1,185,308 2007 1,409,863 156,188 1,253,675 Thereafter 1,960,607 107,247 1,853,360 9,744,615 1,546,166 8,198,449 Less: current instalments of obligations under capital leases (1,566,698 ) 6,631,751 Payments *Interest Obligations RMB RMB RMB 2006 4,030 657 3,373 2007 3,423 493 2,930 2008 3,016 408 2,608 2009 1,684 307 1,377 2010 1,050 238 812 Thereafter 5,412 680 4,732 18,615 2,783 15,832 Less: current installments of obligations under capital leases (3,373 ) 12,459 * Interest rates ranging from 1.44% to 8.01% per annum Payments *Interest Obligations RMB RMB RMB 2005 2,580 436 2,144 2006 3,213 350 2,863 2007 2,844 279 2,565 2008 2,699 146 2,553 2009 997 71 926 Thereafter 722 30 692 13,055 1,312 11,743 Less: current installments of obligations under capital leases (2,144 ) 9,599 * Interest rates ranging from 1.92% to 8.48% per annum
*Interest rates ranged from 1.0% to 11.0%.
In addition to the assets pledged as security under certain loan agreements (see Note 12), As of December 31, 2004 and 2005, certain of the Group’s aircraft with an aggregate carrying amount of RMB9,216,138RMB11,635 and RMB8,960,483,RMB18,673, respectively as of December 31, 2001 and 2002 were pledgedmortgaged to secure facilities with financial institutions grantedfinance lease obligations RMB11,743 and RMB15,832, respectively.
F-28
which they relate:
December 31, | ||||||||
2004 | 2005 | |||||||
United States Dollars | US$958 | US$1,556 | ||||||
Japanese Yen | JPY47,840 | JPY47,795 | ||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Amounts in thousands, except share data)
Operating leases
RMB | ||||
Year ending December 31, | ||||
2003 | 1,280,060 | |||
2004 | 1,327,631 | |||
2005 | 1,245,150 | |||
2006 | 1,001,954 | |||
2007 | 783,739 | |||
Thereafter | 2,898,104 | |||
Total minimum lease payments | 8,536,638 | |||
RMB | ||||
Year ending December 31, | ||||
2006 | 3,340 | |||
2007 | 2,881 | |||
2008 | 2,785 | |||
2009 | 2,609 | |||
2010 | 2,523 | |||
Thereafter | 10,456 | |||
Total minimum lease payments | 24,594 | |||
F-53
Amounts charged to rental expenses for operating leases for the years ended December 31, 2000, 2001 and 2002 totaled RMB1,415,997, RMB1,723,338 and RMB1,348,277, respectively.
All of the Group’s obligations under capital and operating leases are guaranteed by financial institutions.
19.DEFERRED CREDITS
December 31, | ||||||||
2001 | 2002 | |||||||
RMB | RMB | |||||||
Gains from sale and leaseback of fixed assets | 2,999 | — | ||||||
Operating lease rebates | 12,073 | 7,855 | ||||||
Governmental subsidy for safety related capital expenditures | — | 40,240 | ||||||
15,072 | 48,095 | |||||||
Movements during the year are as follows: | ||||||||
Balance at beginning of year | 33,555 | 15,072 | ||||||
Additions during the year | — | 40,240 | ||||||
Transferred to consolidated statement of income | (18,483 | ) | (7,217 | ) | ||||
Balance at end of year | 15,072 | 48,095 | ||||||
F-29
F-54
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)Gains from saleleaseback of fixed assets During 1991 and 1992, a total of ten aircraft under capitalflight equipment operating leases were sold. Sevenas follows (principally denominated in U.S. dollars): RMB 2005 1,761 2006 1,622 2007 1,562 2008 5,259 2009 764 Thereafter 1,782 Total minimum lease payments 12,750 29. TRADE AND BILLS PAYABLES December 31, 2004 2005 RMB RMB Trade payables 1,554 3,033 Bills payable 136 896 1,690 3,929 these aircraft were leased back under operating leases for a periodtrade and bills payables: December 31, 2004 2005 RMB RMB Within 1 month 735 2,000 More than 1 month but less than 3 months 431 1,225 More than 3 months but less than 6 months 524 704 1,690 3,929 two years. Pursuant to the sales agreement,December 31, 2004 and 2005, the Group agreedhad an amount due to lease an additional ten replacement aircraft. The gain on the salea fellow subsidiary of RMB838 and RMB859, respectively, which was included in trade and bills payables.ten aircraft was RMB575,811. Of this amount, RMB215,693trade and RMB129,464, respectively, were recorded directly to other income in 1991 and 1992, and the balance, representing the sale price in excess of fair value of the replacement aircraft, has been deferred and amortized over the respective operating lease periods.Operating lease rebates Pursuant to several operating lease arrangements for aircraft commenced in January 1998, the Group received cash rebates totaling RMB24,838 from an operating lessor in 1998. Such rebates have been deferred and amortized over the terms of the respective lease to reduce the future operating lease charges.Governmental subsidy for safety related capital expenditures During 2002, the Group received governmental subsidy for safety related capital expenditures amounting to RMB40,240 for enhancing future flight protection and safety standards. Such governmental subsidy isbills payables are expected to be amortized over the depreciable lives of the related fixed assets.settled within one year.20.COMMITMENTS AND CONTINGENCIES The Company has been advised by its Chinese legal counsel that, except for liabilities constituting or arising out of or relating to the business assumed by the Company in the Reorganization (see Note 1), no other liabilities were assumed by the Company, and the Company is not jointly and severally liable for other debts and obligations incurred by CSAHC prior to the Reorganization, except for certain loans from PRC banks which were fully repaid by CSAHC. There are not, however, any definitive PRC regulations or other pronouncements confirming such conclusion. The Group leases from CSAHC certain land in Guangzhou and certain land and buildings in Wuhan, Haikou and Zhengzhou. The Group has a significant investment in buildings and other leasehold improvements located on such land. However, such land in Guangzhou and such land and buildings in Wuhan, Haikou and Zhengzhou lack adequate documentation evidencing CSAHC’s rights thereto and the lease agreements between CSAHC and the Company may not be registered with the relevant authorities. Lack of registration may affect the validity of such lease agreements.F-30
F-55
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data) With respect tofacilitiesfollowing amounts denominated in Guangzhou, CSAHC has received written assurance froma currency other than the CAAC to the effect that CSAHC is entitled to continued use and occupancyfunctional currency of the land in Guangzhou.entity to which they relate: December 31, 2004 2005 United States Dollars US$ 108 US$ 147 30. AMOUNTS DUE FROM/TO RELATED COMPANIES (a) Amounts due from related companies December 31, 2004 2005 RMB RMB Jointly controlled entities — 84 Company understands that the CAAC is basing its conclusion on an agreement among certain government authorities relatingamounts due from related companies were unsecured, interest free and have no fixed terms of repayment.(b) Amounts due to related companies December 31, 2004 2005 RMB RMB CSAHC and its subsidiaries 2,094 12 An affiliated company — 5 Jointly controlled entities 340 99 2,434 116 such land. Such assurance does not constitute formal evidencerelated companies were unsecured, interest free and have no fixed terms of CSAHC’s right to transfer, mortgage or lease such real property interests. The Group cannot predict the magnitude of the effect on its financial condition or results of operations to the extent that its use of one or more of these parcels of land or the related facilities were successfully challenged. CSAHC has agreed to indemnify the Group against any loss or damage caused by any challenge or interference with the Group’s use of any of its land and buildings.repayment. As of December 31, 2002, the Group had on order fifteen Boeing 737-800 aircraft and certain flight equipment, scheduled for deliveries in 2003 to 2005. Deposits of RMB1,659,964 have been made towards the purchase of these aircraft and related equipment. As of December 31, 2002, the aggregate future payments, including estimated amounts for price escalation through anticipated delivery dates for these aircraft and related equipment totaled approximately RMB5,875,996. As of December 31, 2002, additional capital expenditures of approximately RMB3,671,852 have been authorized, of which approximately RMB569,587 have been committed, for the Group’s principal facilities. Such expenditures comprised mainly RMB3,127,420 for facilities and equipment at the Guangzhou New Airport and RMB544,432 for other airport and office facilities and equipment, overhaul and maintenance bases and training centers. As of December 31, 2002, the Group was committed to make a capital contribution of approximately RMB60,000 and RMB201,000, respectively, to jointly controlled entity and affiliated company.21.RETIREMENT AND POST-RETIREMENT MEDICAL BENEFITS Employees of the Group participate in several defined contribution retirement schemes organized separately by PRC municipal governments in regions where the major operations of the Group are located. The Group is required to contribute to these schemes at the rates ranging from 13% to 17% for 2000, 14% to 17% for 2001, and 14% to 19% for 2002, of salary costs including certain allowances. A member of the retirement schemes is entitled to pension benefits equal to a fixed proportion of the salary at the retirement date. The retirement benefit obligations of all existing and future retired staff of the Group are assumed by these schemes. In addition, the Group was selected as one of the pilot enterprises to establish a supplementary defined contribution retirement scheme for the benefit of employees. In this connection, employees of the Group participate in a supplementary defined contribution retirement scheme whereby the Group is required to make defined contributions at the rate of 4.5% of total salaries. This scheme which was previously organized by CSAHC has been handed over to relevant PRC government agencies since January 1, 2002. The Group has no obligation for the payment of pension benefits beyond the contributions described above. Contributions to the retirement schemes are changed to consolidated statement of income as and when incurred.F-31
F-56
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)31. ACCRUED EXPENSES December 31, 2004 2005 RMB RMB Jet fuel costs 743 686 Operating lease charges 29 86 Air catering expenses 192 132 Salaries and welfare 349 193 Lump sum housing benefits payable 108 92 Repairs and maintenance 976 996 Provision for major overhauls (Note 33) 75 151 Landing and navigation fees 1,331 1,129 Computer reservation services 195 190 Interest expense 240 338 Duties and levies 71 12 Property management fee — 37 Others 242 208 4,551 4,250 32. OTHER LIABILITIES December 31, 2004 2005 RMB RMB CAAC Infrastructure Development fund 161 177 Airport construction surcharge 316 542 Airport tax 112 198 Construction cost payable 864 793 Advance payment on chartered flights 119 104 Sales agent deposits 182 198 Other tax payable 332 441 Others 888 1,343 2,974 3,796 The Group is also required to provide retirees with medical benefits, transportation subsidies and other welfare facilities. Previously, the Group paid a fixed annual fee to CSAHC in return for CSAHC providing such benefits to the retired employees of the Group. With effect from January 1, 2002, such arrangement was terminated and the services are now provided by the Group itself. Furthermore, pursuant to the comprehensive services agreement (the “Services Agreement”) dated May 22, 1997 between the Company and CSAHC, CSAHC agrees to provide adequate quarters to eligible employees of the Group as and when required. In return, the Group agrees to pay a fixed annual fee of RMB85,000 to CSAHC for a ten-year period effective January 1, 1995. During 2001 and 2002, the Group provided additional quarters at its own expense to certain employees who are not eligible for quarters pursuant to the Services Agreement. These quarters were provided to the employees in accordance with the relevant PRC housing reform policy. In 2001 and 2002, the Group recognized a loss of RMB110,723 and RMB17,624, respectively, being the excess of the cost of these quarters over the considerations received by the Group from the employees, under “Non-operating income/(expenses)” in the consolidated statements of income. Subsequently, pursuant to an additional staff housing benefit scheme effective September 2002, the Group has agreed to pay lump sum housing allowances to certain employees who have not received quarters from CSAHC or the Group according to the relevant PRC housing reform policy, for subsidizing their purchases of housing. Such expenditure has been deferred and amortized on a straight line basis over a period of 10 years, which represents the vesting benefit period of the employees. An employee who quits prior to the end of the vesting benefit period is required to pay back a portion of the lump sum housing benefits determined on a pro-rata basis of the vesting benefit period remained. The Group has the right to effect a charge on the employee’s house and to enforce repayment through selling the house in the event of default in repayment. Any shortfall in repayment would be charged against consolidated statement of income. As of December 31, 2002, the Group already made payments totaling RMB46,325 under the scheme and recorded its remaining contractual liabilities totaling RMB213,675 as accrued liabilities on the consolidated balance sheet (See Note 16).22.RELATED PARTY TRANSACTIONS Substantially all transactions undertaken by the Group during the periods presented were effected on such terms as have been determined by the CAAC or other relevant PRC authorities. In addition, many of the involved counterparties were either regulated by or connected with such authorities. The principal related party transactions are described as follows:Allocation of routes and air fares Both domestic and international routes on which the Group and other PRC airlines offer scheduled services are allocated by the CAAC.F-32
F-57
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data) International air fares are subject to bilateral agreements between33. PROVISION FOR MAJOR OVERHAULS Details of provision for major overhauls in respect of aircraft held under operating leases are as follows: Year ended December 31, 2004 2005 RMB RMB At January 1 200 359 Provision for the year 89 129 Through the CNA/XJA Acquisitions 70 — Amount utilized — (36 ) At December 31 359 452 Less: current portion included in accrued expenses (Note 31) (75 ) (151 ) 284 301 34. SHARE CAPITAL December 31, 2004 2005 RMB RMB Registered, issued and paid up capital: 2,200,000,000 domestic state-owned shares of RMB1.00 each 2,200 2,200 1,174,178,000 H shares of RMB1.00 each 1,174 1,174 1,000,000,000 A shares of RMB1.00 each 1,000 1,000 4,374 4,374 CAAC, acting on behalfdomestic state-owned, H and A shares rank pari passu in all material respects.PRC government,Group included RMB81 and other governments. Domestic air faresRMB(200), respectively, of undistributed earnings/losses of companies which are regulated jointly by the CAAC and the PRC Price Administrative Bureau.Procurement of aircraft and jet engines Certain PRC airlines, including the Group, were granted permission to acquire aircraft directly from manufacturers subject to the approval of their fleet expansion plans by the relevant PRC government authorities. The Group acquires engines through Southern Airlines (Group) Import and Export Trading Company (“SAIETC”), a wholly-owned subsidiary of CSAHC. In this connection, handling fees totaling RMB2,181, RMBNil and RMB2,840, respectively, were paid to SAIETC for 2000, 2001, and 2002.Procurement of rotables and engineering spare parts The Group also acquires rotables and engineering spare parts through SAIETC and pays handling fees to it in return. Total purchases amounted to RMB352,679, RMB324,998 and RMB583,548, respectively, for 2000, 2001 and 2002. Handling fees totaling RMB11,602, RMB16,161 and RMB 33,466, respectively, were paid to SAIETC for 2000, 2001 and 2002.Jet fuel supplies Jet fuel is subject to allocation in the PRC. The Group is required to purchase jet fuel domestically from the China Aviation Oil Supply Company and Lan Tian Oil Supply Company, companies controlled by the CAAC, at prices set by such suppliers in conjunction with the CAAC and other PRC government authorities. During the periods presented, such prices exceeded the international market prices. The cost of jet fuel purchased50% or less owned by the Group in accordance with such allocation was RMB2,387,646, RMB2,586,688 and RMB2,373,956, respectively, during 2000, 2001 and 2002. The remainder ofaccounted for under the Group’s jet fuel was purchased from domestic markets and, to a lesser extent, from international markets.equity method.Aircraft insurance Aviation insurance covering hull, war and passenger liability risk is arranged by the CAAC on behalf of all PRC airlines with the People’s Insurance (Property) Company of China (“PICC”) under a master policy. PICC reinsures a substantial portion of its aircraft insurance business through the international reinsurance market. Insurance premiums are allocated to each individual PRC airline by the CAAC based on the value of the airline’s aircraft and after taking into account the claims history of the airline. Insurance premiums totaling RMB85,431, RMB123,439 and RMB256,238, respectively, were incurred by the Group during 2000, 2001 and 2002.Financial arrangementsF-33
F-58
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data) The Group’s obligations under various lease and bank loan arrangements in connection with aircraft acquisitions are secured by guarantees provided by certain PRC financial institutions which obtained back-to-back guarantees from the CAAC. Guarantee fees totaling RMB1,985, RMB1,490 and RMB1,025, respectively, were paid to these financial institutions during 2000, 2001 and 2002. Interest income is received from short-term deposits with SA Finance. The applicable interest rate is determined in accordance with the savings rate published by the People’s Bank of China. Interest income totaling RMB35,728, RMB13,771 and RMB10,530, respectively, was earned by the Group on such deposits during 2000, 2001 and 2002. See Note 15.Airline-related services The Group, jointly with other PRC airlines, participates in the CAAC’s computer reservation system, under which the Group purchases computer reservation services from the CAAC at rates determined based on the utilization of the system. Service fees paid by the Group to the CAAC during 2000, 2001 and 2002 totaled RMB82,725, RMB110,134 and RMB107,234, respectively. The Group utilizes the passenger departure and cargo handling computer systems installed by the CAAC at certain PRC airports. Service fees are levied by the CAAC based on the utilization of these systems. Service fees totaling RMB40,584, RMB57,424 and RMB62,111, respectively, were paid by the Group to the CAAC during 2000, 2001 and 2002. The Group is required to pay take-off and landing fees to various PRC airports in respect of take-off and landing slots allocated to the Group and other ancillary services provided. Fees are payable by the Group based on the scale rates published by the CAAC. Take-off and landing fees totaling RMB1,327,413, RMB1,527,600 and RMB1,667,706, respectively, were paid to various PRC airports during 2000, 2001 and 2002. The Group purchases certain inflight meals and related services from Shenzhen Air Catering Company Limited, a cooperative joint venture established in the PRC, in respect of which CSAHC is entitled to 33% of its income after tax. Such purchases amounted to RMB17,941, RMB22,707 and RMB29,058, respectively, during 2000, 2001 and 2002. Commission is earned by the CAAC’s sales offices, various PRC airlines and certain subsidiaries of CSAHC in connection with the air tickets sold by them on behalf of the Group. Commission is calculated based on a fixed rate ranging from 1.5% to 12% on the ticket value. Commission expenses incurred by the Group in respect of tickets sold by the CAAC’s sales offices, various PRC airlines and certain subsidiaries of CSAHC totaled RMB554,102, RMB547,186 and RMB481,446, respectively, during 2000, 2001 and 2002. Commission income received from other PRC airlines in connection with air tickets sold by the Group, calculated based on a fixed rate ranging from 3% to 9% on the ticket value, totaled RMB100,994, RMB89,842 and RMB81,931, respectively, during 2000, 2001 and 2002.F-34CHINA SOUTHERN AIRLINES COMPANY LIMITEDAND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Amounts in thousands, except share data) Ground service fees are received from other airlines in respect of ground services provided by the Group and Baiyun International Airport Group at Guangzhou Baiyun International Airport. The Group was entitled to 50% of the service fees. The Group’s share of ground service fees received totaled RMB20,933, RMB23,513 and RMB39,735, respectively, during 2000, 2001 and 2002. The Company has a 50% equity interest in Guangzhou Aircraft Maintenance Engineering Company Limited (“GAMECO”), which provides comprehensive maintenance services to the Group. Maintenance fees totaling RMB471,044, RMB534,828 and RMB592,311, respectively, were incurred by the Group for services provided by GAMECO during 2000, 2001 and 2002. Certain aircraft sundry supplies are purchased from Southern Airlines (Group) Economic Development Company (“SAGEDC”), a subsidiary of CSAHC. Supplies totaling RMB72,054, RMB86,386 and RMB101,350, respectively, were purchased by the Group from SAGEDC during 2000, 2001 and 2002.Advertising services Advertising services are provided by Southern Airlines Advertising Company (“SA Advertising”). SA Advertising was a subsidiary of CSAHC up to July, 2002. In August 2002, the Group acquired 90% equity interest in SA Advertising from CSAHC. Expenses totaling RMB10,712, RMB9,940 and RMB3,275, respectively, were incurred by the Group for services provided by SA Advertising during 2000, 2001 and 2002.Wet lease rentals Pursuant to certain wet lease arrangements effected in August and November 2000, the Group incurred RMB108,699 and RMB300,000, respectively, during 2000 and 2001 in respect of five Boeing 737-300/37K aircraft leased from Zhongyuan Airlines, a subsidiary of CSAHC. No such rentals were paid in 2002 since the termination of lease arrangements in January 2002. During 2002, wet lease rentals totaling RMB26,164 were paid to Xinjiang Airlines, a subsidiary of CSAHC, pursuant to a wet lease agreement in respect of a Boeing 757-200 aircraft effective October 2002. During the period from August to October 2002, the Group received wet lease rentals totaling RMB27,599 from wet leasing of an Airbus 320-200 aircraft to Sichuan Airlines Corporation Limited, an affiliated company of the Group.Acquisition of aircraft and related spare parts and vehicles During the year, the Group acquired five Boeing 737-300/37K aircraft and related spare parts and certain vehicles from Zhongyuan Airlines, a subsidiary of CSAHC, at a consideration of approximately RMB1,096,866. The consideration was satisfied by cash of approximately RMB132,130 together with an assumption by the Group of Zhongyuan Airlines’ debts of approximately RMB964,736. In addition, the Group received reimbursements of wet lease rentals totaling RMB150,000 which it paid to Zhongyuan Airlines during the period from July 1, 2001 toF-35CHINA SOUTHERN AIRLINES COMPANY LIMITEDAND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Amounts in thousands, except share data)December 31, 2001. Such reimbursements have been applied to reduce the purchase costs of the acquired assets.Acquisition of subsidiaries In August 2002, the Group acquired 90% equity interest in each of Guangzhou Aviation Hotel, Southern Airlines Advertising Company and South China International Aviation & Travel Services Company from CSAHC at an aggregate cash consideration of approximately RMB107,846. Such consideration is determined by reference to the valuation reports prepared by GZAA Incorporated, a firm of independent valuers registered in the PRC. These acquisitions did not have a significant impact on the operating results of the Group for the year ended December 31, 2002 or its financial position at that date.Amounts due to related companies Amounts due to related companies include balances with the CAAC and CSAHC and their affiliated companies. These amounts are unsecured and non-interest bearing and have no fixed repayment terms. These amounts are normally settled on a current basis. Balances with other State-owned enterprises are excluded from this caption as other State-owned enterprises are not considered related parties.23.SHARE CAPITAL December 31, 2001 2002 RMB RMB Registered capital as of December 31: 2,200,000,000 domestic shares of RMB 1.00 each 2,200,000 2,200,000 1,174,178,000 H shares of RMB 1.00 each 1,174,178 1,174,178 3,374,178 3,374,178 Issued and paid up capital as of December 31: 2,200,000,000 domestic shares of RMB 1.00 each 2,200,000 2,200,000 1,174,178,000 H shares of RMB 1.00 each 1,174,178 1,174,178 3,374,178 3,374,178 All the domestic and H shares rank pari passu in all material respects. As of December 31, 2001 and 2002, the retained earnings of the Group included RMB110,539 and RMB135,010, respectively, of undistributed earnings of affiliated companies accounted for under the equity method.F-36CHINA SOUTHERN AIRLINES COMPANY LIMITEDAND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Amounts in thousands, except share data) Pursuant to an extraordinary general meeting of shareholders held on May 21, 2002, a resolution was passed for the Company to issue not more than 1,000,000,000 A shares of par value of RMB1.00 each. As of the date of approval of these consolidated financial statements, no A shares have been issued.F-37CHINA SOUTHERN AIRLINES COMPANY LIMITEDAND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Amounts in thousands, except share data)24.35. RESERVES Movements of reserves are as follows: December 31, 2001 2002 RMB RMB Balance at beginning of year 381,216 391,867 Adjustments from adoption of PRC accounting regulations (Note (c)) — (106,007 ) Transferred from consolidated statement of income 10,651 51,335 Balance at end of year 391,867 337,195 Balance at beginning of year 219,877 225,440 Adjustments from adoption of PRC accounting regulations (Note (c)) — (79,533 ) Transferred from consolidated statement of income 5,563 25,667 Balance at end of year 225,440 171,574 Balance at beginning of year 63,852 69,867 Transferred from consolidated statement of income 6,015 6,736 Balance at end of year 69,867 76,603 687,174 585,372 Notes: December 31, 2004 2005 RMB RMB At January 1 and December 31 5,325 5,325 At 1 January 361 402 Transfer from retained earnings 41 8 At December 31 402 410 At 1 January 173 193 Transfer from retained earnings 20 5 At December 31 193 198 At 1 January 77 77 Transfer from retained earnings — 6 At December 31 77 83 At 1 January 1,586 1,477 Loss for the year (48 ) (1,848 ) Appropriations to reserves (61 ) (19 ) At December 31 1,477 (390 ) 7,474 5,626 F-38
F-59
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)reservefund must be made before distribution of a dividend to shareholders. (c) During 2002, the Group adopted certain new PRC accounting regulations which resulted in adjustments to the amounts of the Group’s income determined under PRC accounting regulations in respect of prior yearsshareholders and corresponding adjustments to amounts appropriated to the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve for the prior years. (d) The transfer to this reserve from the consolidated statement of income is subject to the approvalrespective shareholders’ approval.shareholders at general meetings. Itsthis reserve is subject to shareholders’ approval. The usage of this reserve is similar to that of statutory surplus reserve. (e)Boardboard of Directors,directors, after consideration of the transfers referred to above and making up cumulative prior years’ losses, if any.losses. Pursuant to the Company’s Articles of Association of the Company, the net income of the Company for the purpose of dividend distribution is deemed to be the lesser of (i) net income determined in accordance with (i)the PRC accounting principlesrules and financial regulations, and (ii) IFRS;the net income determined in accordance with IFRSs; or if the financial statements of the Company are not prepared in accordance with IFRS,IFRSs, the accounting standards of one of the countries in which its shares are listed. See Note 26. (f) InAs of December 31, 2005, the current year, the Group adopted IAS 40 “Investment Property”. According to IAS 40, the land use rights which were previously included in fixed assets at revaluation base are now presented as lease prepayments and carried at historical cost base with effect from January 1, 2002. Accordingly, the unamortized surplus on previous revaluations of the land use rights, net of related deferred tax asset, are reversed to the share premium and retained profits accounts. The effect of this changeCompany did not have aany distributable reserves.impact onrelated party transactions.financial conditionaffiliated companies and resultsjointly controlled entities during the normal course of operations inits business. In the periods priorpast, CSAHC was under the direct control of the Civil Aviation Administration of China (the “CAAC”). However, such control has been shifted to the change. As such, comparative figures of fixed assets, lease prepayments and reserves have not been adjusted for but have been reclassified to conformChina State-owned Assets Administration Bureau since early 2003. Consequently, transactions with the current year’s presentation.CAAC and its affiliates beginning from 2003 are no longer presented as related party transactions of the Group.F-39
F-60
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data) 2003 2004 2005 Note RMB RMB RMB Handling charges (i) 27 33 32 Air catering supplies (ii) 90 170 173 Wet lease rentals (iii) 36 — — Commission expense (iv) 5 2 26 Sundry aviation supplies (v) 43 66 88 Lease charges for aircraft (vi) — — 10 Lease charges for land and buildings (vii) 15 18 90 Property management fee (viii) — — 28 Housing benefits (ix) 85 85 — Ground service expenses (x) — — 32 Repairing charges (xi) 693 1,159 1,118 Flight simulation service charges (xii) 101 100 126 Interest expense (xiii) — 3 37 Rental income (xii) 31 31 31 Interest income (xiii) 3 4 3 CNA/XJA Acquisitions (xiv) — 15,522 — Operating expenses recharged to related companies (xv) — 65 — Short term advances from CSAHC (xvi) 166 — — Refund of medical benefit payments (xvii) 58 — — (i) The Group acquires aircraft, flight equipment and other airline-related facilities through Southern Airlines (Group) Import and Export Trading Company (“SAIETC”), a wholly-owned subsidiary of CSAHC.
(ii) | The Group purchases certain inflight meals and related services from Shenzhen Air Catering Company Limited, a co-operative joint venture established in the PRC, in respect of which CSAHC is entitled to 33% of its income after tax, and Southern Airlines (Group) Catering Co., Ltd, a wholly owned subsidiary of CSAHC. | |
(iii) | During 2003, wet lease rentals totaling RMB36, were paid to XJA, pursuant to a wet lease agreement in respect of a Boeing 757-200 aircraft effective October 2002. The wet lease agreement was terminated in April 2003. | |
(iv) | Commission is earned by certain subsidiaries of CSAHC in connection with the air tickets sold by them on behalf of the Group. Commission is calculated based on a fixed rate ranging from 1.5% to 12% on the ticket value. | |
(v) | Certain sundry aviation supplies are purchased from Southern Airlines (Group) Economic Development Company (“SAGEDC”), a subsidiary of CSAHC. | |
(vi) | The Group leases an aircraft from China Southern Airlines (Group) Hainan Co., Ltd, a subsidiary of CSAHC. | |
(vii) | The Group leases certain land and buildings in the PRC from CSAHC. Rental payments for land and buildings amounted to RMB2 (Note 21(a)) and RMB13, respectively, RMB2 (Note 21(a)) and RMB16, respectively, and RMB24 (Note 21(a)) and RMB66, respectively were paid to CSAHC in 2003, 2004 and 2005, respectively. | |
(viii) | China Southern Airlines (Group) Property Management Co., Ltd, a subsidiary of CSAHC, provides property management services to the Group. | |
(ix) | The Group paid a fixed annual fee of RMB85 to CSAHC from 1995 to 2004 in respect of the provision of quarters to the eligible employees of the Group (Note 37). No such payment was made in 2005. | |
(x) | Airport ground service was provided by Beijing Southern Airlines Ground Services Company Limited, a jointly controlled entity of the Company. | |
(xi) | The Group has a 50% equity interest in both Guangzhou Aircraft Maintenance Engineering Company Limited (“GAMECO”) and MTU Maintenance Zhuhai Co., Ltd (“MTU Zhuhai”), which provide comprehensive maintenance services to the Group. | |
(xii) | The Group has a 51% equity interest in Zhuhai Xiang Yi, which provides flight simulation services to the Group. In addition, the Group entered into operating lease agreements to lease certain flight training facilities and buildings to Zhuhai Xiang Yi (Note 21(d)). |
F-61
(xiii) | Interest income was received from deposits with SA Finance. The applicable interest rates are determined in accordance with the deposit rates published by the PBOC (Note 16). | |
The Group obtained loans from SA Finance. The interest rates ranged from 3.30% to 5.02% per annum during the year ended December 31, 2005. | ||
(xiv) | On December 31, 2004, the Group acquired the airline operations and certain related assets of CNA and XJA at a total consideration of RMB15,522, which was partly satisfied by assumption of debts and liabilities of CNA and XJA totalling RMB13,563 outstanding as of that date. The remaining consideration of RMB1,959 was fully paid in cash during 2005. | |
(xv) | In 2004, the Group provided administrative services to CNA and XJA. Operating expenses amounted to RMB65 million were recharged to CNA and XJA on a cost basis. | |
(xvi) | In 2003, CSAHC made short term advances to the Group. These advances were unsecured, interest free and fully repaid in 2004. | |
(xvii) | Prior to January 1, 2002, the Group paid a fixed annual fee to CSAHC in return for CSAHC providing medical benefit, transportation subsidies and other welfare facilities to the retirees of the Group. Such arrangement was terminated on January 1, 2002. In 2003, CSAHC refunded RMB58 to the Group which represented the difference between the aggregate fixed annual fees received from the Group and the aggregate cost of services incurred by CSAHC under the above agreement. |
F-62
(b) | Loans from SA Finance | |
Loans from SA Finance are unsecured and have the following terms: |
December 31, | ||||||||||||
2004 | 2005 | |||||||||||
Interest rate | Guarantee | RMB | RMB | |||||||||
Floating interest rate at 90% of interest rates as published by the PBOC, repayable within 1 year | No guarantee | 76 | — | |||||||||
Floating interest rate at 90% of interest rates as published by the PBOC, repayable within 1 year | Guaranteed by CSAHC | 180 | 300 | |||||||||
256 | 300 | |||||||||||
(c) | Key management personnel remuneration | |
Remuneration for key management personnel is as follows: |
December 31, | ||||||||
2004 | 2005 | |||||||
RMB | RMB | |||||||
Short-term employees benefits | 6,748 | 5,926 | ||||||
Post-employment benefits | 182 | 221 | ||||||
6,930 | 6,147 | |||||||
Directors and supervisors | 4,684 | 3,461 | ||||||
Senior management | 2,246 | 2,686 | ||||||
6,930 | 6,147 | |||||||
(d) | The Group participates in various defined contribution retirement plans organized by municipal and provincial governments for its staff. Details of the Group’s employee benefits plan are disclosed in Note 37. |
F-63
F-64
(i) | Traffic revenue from domestic services within the PRC (excluding Hong Kong and Macau) is attributed to the domestic operation. Traffic revenue from inbound/outbound services between the PRC and Hong Kong/Macau, and the PRC and overseas destinations is attributed to the Hong Kong and Macau operation and international operation respectively. |
(ii) | Other revenue from ticket selling, general aviation and ground services, air catering and other miscellaneous services is attributed on the basis of where the services are performed. |
Hong Kong | ||||||||||||||||
Domestic | and Macau | International* | Total | |||||||||||||
RMB | RMB | RMB | RMB | |||||||||||||
2003 | ||||||||||||||||
Traffic revenue | 13,087 | 808 | 3,070 | 16,965 | ||||||||||||
Other operating revenue | 436 | — | 69 | 505 | ||||||||||||
Turnover | 13,523 | 808 | 3,139 | 17,470 | ||||||||||||
Operating income/(loss) | 440 | (29 | ) | 45 | 456 | |||||||||||
Depreciation and amortization | 1,581 | 85 | 372 | 2,038 | ||||||||||||
Significant non-cash items other than depreciation and amortization: | ||||||||||||||||
Impairment losses for trade and other receivables | 12 | — | — | 12 |
F-65
Hong Kong | ||||||||||||||||
Domestic | and Macau | International* | Total | |||||||||||||
RMB | RMB | RMB | RMB | |||||||||||||
2004 | ||||||||||||||||
Traffic revenue | 17,742 | 1,180 | 4,422 | 23,344 | ||||||||||||
Other operating revenue | 630 | — | — | 630 | ||||||||||||
Turnover | 18,372 | 1,180 | 4,422 | 23,974 | ||||||||||||
Operating income | 650 | 67 | 192 | 909 | ||||||||||||
Depreciation and amortization | 1,876 | 99 | 438 | 2,413 | ||||||||||||
Significant non-cash items other than depreciation and amortization: | ||||||||||||||||
Impairment losses for trade and other receivables | 27 | — | — | 27 | ||||||||||||
2005 | ||||||||||||||||
Traffic revenue | 29,533 | 1,298 | 6,588 | 37,419 | ||||||||||||
Other operating revenue | 874 | — | — | 874 | ||||||||||||
Turnover | 30,407 | 1,298 | 6,588 | 38,293 | ||||||||||||
Operating loss | (282 | ) | (97 | ) | (926 | ) | (1,305 | ) | ||||||||
Depreciation and amortization | 3,663 | 139 | 638 | 4,440 | ||||||||||||
Significant non-cash items other than depreciation and amortization: | ||||||||||||||||
Write-down of inventories | — | — | 209 | 209 |
* | Asian market accounted for approximately 70%, 67% and 74%, respectively, of the Group’s total international traffic revenue for the years ended December 31, 2003, 2004 and 2005. The remaining portion was mainly derived from the Group’s flights to/from European, North American and Australian regions. |
F-66
Year ended December 31, | ||||||||||||
2003 | 2004 | 2005 | ||||||||||
RMB | RMB | RMB | ||||||||||
Assets acquired: | ||||||||||||
Property, plant and equipment, net | — | 12,980 | — | |||||||||
Inventories | — | 729 | — | |||||||||
Trade receivables | — | 314 | — | |||||||||
Cash and cash equivalents | — | 398 | — | |||||||||
Other assets | — | 1,101 | — | |||||||||
— | 15,522 | — | ||||||||||
Liabilities assumed: | ||||||||||||
Notes payable | — | 4,587 | — | |||||||||
Obligations under capital leases | — | 6,125 | — | |||||||||
Trade payables | — | 343 | — | |||||||||
Accrued expenses | — | 1,475 | — | |||||||||
Other liabilities | — | 1,033 | — | |||||||||
— | 13,563 | — | ||||||||||
Net identifiable assets and liabilities | — | 1,959 | — | |||||||||
Cash consideration payable and not yet settled at December 31, 2004 | — | 1,959 | — | |||||||||
Net cash inflow from acquisitions - - cash and cash equivalents acquired | — | 398 | — | |||||||||
F-67
The Group | Results of | |||||||||||
(without effect | airline | |||||||||||
of CNA/XJA | operations | |||||||||||
Acquisitions) | of CNA/XJA | Combined | ||||||||||
RMB | RMB | RMB | ||||||||||
Turnover | 23,974 | 10,057 | 34,031 | |||||||||
Income for the year | 155 | 170 | 325 | |||||||||
41. | FINANCIAL INSTRUMENTS |
Business risk
The Group conducts its principal operations in Chinaleases, trade and accordingly is subjectbills payables, amounts due to special considerations and significant risks not typically associated with investments in equity securities of the United States of America and Western European companies. These include risks associated with, among others, the political, economic and legal environment, influence of the CAAC over many aspects of its operations and competition in the passenger, cargo and mail airline services industry.
Interest rate risk
The interest rates and terms of repayment of the notesrelated companies, taxes payable and capital lease obligations of the Group are disclosed in Notes 17 and 18, respectively.
Foreign currencyother liabilities.
The Group has significant exposure to foreign currency as substantially all of
Credit risk
Substantially all of the Group’s cash and cash equivalents are deposited with PRC financial institutions.
A significant portion of the Group’s air tickets are sold by agents participating in the Billing and Settlement Plan (“BSP”), a clearing scheme between airlines and sales agents organized by International Air Transportation Association. As ofyear ended December 31, 2001 and 2002, the balance due from BSP amounted to RMB226,135 and RMB353,246, respectively.
F-40
CHINA SOUTHERN AIRLINES COMPANY LIMITEDAND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Amounts in thousands, except share data)
Liquidity risk
As of December 31, 2001 and 2002, the Group’s net current liabilities amounted to RMB3,695,777 and RMB7,015,998, respectively. For the years ended December 2000, 2001 and 2002,2005, the Group recorded a net cash inflow from operating activities of RMB2,355,086, RMB2,223,943 and RMB3,697,544, respectively,RMB3,835, a net cash outflow from investing activities and financing activities of RMB2,745,984, RMB3,603,535RMB4,017, and RMB2,744,364, respectively, and an (decrease)/increasea decrease in cash and cash equivalents of RMB(390,898), RMB(1,379,592) and RMB953,180, respectively.
With regard to 2003RMB182.
F-68
Self insurance risk
The Group maintains a limited amount of property insurance in respect of certain personal and real property.
F-41
28, respectively. F-69
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)Fair valuecarrying amountsinterest rates and estimated fair values of significant financial assets and liabilities at December 31, 2001 and 2002 are set out below. December 31, 2001 2002 Carrying Fair Carrying Fair amount value amount value RMB RMB RMB RMB Cash and cash equivalents 2,817,863 2,817,863 3,771,043 3,771,043 Notes payable, current portion 2,177,516 2,208,056 5,240,726 5,326,511 Notes payable, non-current portion 3,627,594 3,752,143 5,835,434 6,111,052 The following methods and assumptions were used to estimate the fair value and each class of financial instrument:(i)Cash and cash equivalents, and short-term notes payable The carrying amounts approximate fair value becausematurity information of the short maturities of these instruments.(ii)Long-termGroup’s notes payable, The fair value has been estimated by applying a discounted cash flow approach using interest rates available to the Group for similar indebtedness. The economic characteristics and maturity information of the Group’s capital leases vary from lease to lease. It is impractical to compare such leases with those prevailingobligations are disclosed in the market within the constraints of timelinessNotes 27 and cost for the purpose of estimating the fair value of such leases. Investments are unquoted equity interests in companies established in the PRC. There is no quoted market price for such interests and securities in the PRC and accordingly a reasonable estimate of the fair value could not be made without incurring excessive costs. Fair value estimates are made at a specific point in time and based on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.F-42CHINA SOUTHERN AIRLINES COMPANY LIMITEDAND SUBSIDIARIESForeign currency riskNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Amounts in thousands, except share data)26.FOREIGN CURRENCY EXCHANGEPeople’s Bank of ChinaPBOC or other institutions authorized to buy and sell foreign exchange or at a swap center.SAFEState Administration of Foreign Exchange (“SAFE”) based on the Group’s expected payment obligations in foreign currencies for lease and debt payments and for dividends. Any amounts of foreign exchange that the Group receives in excess of such amount must be converted into Renminbi at the rate prevailing in the PRC inter-bank market. The Group will have access to foreign currency through the inter-bank system, subject to the approval of the SAFE, to satisfy its foreign exchange requirements where these exceed the amount of foreign exchange that the Group has retained.Articles of AssociationGroup has significant exposure to foreign currency as substantially all of the Company require cash dividends be declaredGroup’s lease obligations and notes payable are denominated in Renminbiforeign currencies, principally US dollars, and paid to holdersa lesser extent, Japanese Yen. Depreciation or appreciation of the H shares in Hong Kong dollars atRenminbi against foreign currencies affects the average closingGroup’s results significantly because the Group’s foreign currency payments generally exceed its foreign currency receipts. The Group is not able to hedge its foreign currency exposure effectively other than by retaining its foreign currency denominated earnings and receipts to the extent permitted by the SAFE, or subject to certain restrictive conditions, entering into forward foreign exchange contracts with authorized PRC banks.for Hong Kong dollars as announcedregime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of foreign currencies. In particular, the People’s Bankexchange rate of China forUS dollar against Renminbi was adjusted upward to 8.11 yuan per US dollar with effect from the calendar week preceding the dateclose of business on July 21, 2005.dividend declaration. To the extent that the Company is unable to pay dividends in foreign currency outGroup’s cash and cash equivalents are deposited with PRC financial institutions, which management believes are of its own resources, it will have to obtain foreign currency through the swap centers and PRC banks. Hong Kong dollar dividend payments will be converted by the depositary and distributed to holders of American Depositary Shares in United States dollars.high credit quality.F-43
F-70
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)27.Fair valueRECONCILIATION AND SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION December 31, 2004 2005 Carrying Fair Carrying Fair amount value amount value RMB RMB RMB RMB Notes payable 23,453 23,665 28,963 28,989 reconciliationfollowing methods and assumptions were used to estimate the fair value for each class of income before taxationfinancial instrument:(i) Cash and cash equivalents, short term investments, trade receivables, other receivables and other current assets. Obligation under capital leases, trade and bills payables, taxes payable and other liabilities. minority interestsbased on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.cash inflows from operationslease. It is as follows: Year ended December 31, 2000 2001 2002 RMB RMB RMB Income before taxation and minority interests 931,230 795,256 1,139,099 Adjustments to reconcile income before taxation and minority interests to cash inflows from operations: Depreciation and amortization of fixed assets 1,845,279 1,802,462 1,839,293 Other amortization 18,510 12,512 9,816 Amortization of deferred credits (26,160 ) (18,483 ) (7,217 ) Equity income of affiliated companies (45,949 ) (53,077 ) (36,988 ) Equity income of jointly controlled entities — 4,034 3,352 Gain on sale of aircraft (377,817 ) (59,855 ) (199,394 ) Loss on sale of other fixed assets 5,221 115,744 28,654 Interest income (90,283 ) (49,878 ) (52,618 ) Interest expense 1,074,236 933,717 959,193 Non-cash exchange (gain)/loss, net (312,592 ) (292,630 ) 174,978 Decrease/(increase) in inventories 41,682 (2,033 ) (76,472 ) Increase/(decrease) in amounts due to related companies 144,565 98,040 (193,175 ) (Increase)/decrease in trade receivables (26,364 ) 232,228 (110,749 ) Decrease/(increase) in other receivables 8,552 42,938 (166,004 ) Increase/(decrease) in prepaid expenses and other current assets (5,579 ) (136,600 ) 123,924 Decrease in accounts payable (137,333 ) (167,599 ) (61,843 ) Increase in bills payable — — 1,299,680 Increase in sales in advance of carriage 17,720 31,036 19,985 Increase/(decrease) in accrued expenses 393,476 (132,121 ) 86,215 Increase/(decrease) in other liabilities 95,371 70,254 (33,032 ) (Decrease)/increase in provision for major overhauls (47,333 ) (40,422 ) 16,226 Cash inflows from operations 3,506,432 3,185,523 4,762,923 F-44
F-71
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)(b) Disclosure of non-cash investing and financing activities: During 2002,42. COMMITMENTS (a) Capital commitments assumed from Zhongyuan Airlines debts totaling RMB964,736 in partly satisfaction of the consideration payable for acquisition of five Boeing 737-300/37K aircraft and other assets from Zhongyuan Airlines (Note 21).had capital commitments as follows: 2004 2005 RMB RMB Commitments in respect of aircraft and flight equipment — authorized and contracted for 11,776 45,628 — authorized but not contracted for 13,571 — 25,347 45,628 Commitments in respect of investments in the Guangzhou new airport — authorized and contracted for 110 79 — authorized but not contracted for 714 761 824 840 Other commitments — authorized and contracted for 132 11 — authorized but not contracted for 568 1,324 700 1,335 26,871 47,803 (C) Effect of acquisitions of subsidiaries: Year ended December 31, 2000 2001 2002 RMB RMB RMB Net assets acquired: Fixed assets — — 96,636 Cash and cash equivalents 17,355 Trade receivables and other current assets — — 20,681 — — 134,672 Accounts payable 3,623 Accrued expenses and other liabilities — — 11,220 — — 14,843 Total net assets value — — 119,829 Minority interests’ share of net asset value — — 11,983 Net asset value acquired by the Group — — 107,846 Consideration paid — — 107,846 Cash and cash equivalents acquired — — 17,355 Net cash outflow from acquisition of subsidiaries — — 90,491 F-45
F-72
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)28.PRINCIPAL SUBSIDIARIES AND AFFILIATED COMPANIES DetailsCompany’s principal subsidiariespurchase of these aircraft and affiliated companies asrelated equipment. As of December 31, 20022005, the approximate total future payments, including estimated amounts for price escalation through anticipated delivery dates for these aircraft and flight equipment are as follows: Attributable equity interest Place of establishment Direct Indirect Principal Name of company /operation % % activities Guangxi Airlines Company Limited PRC 60 — Airline Southern Airlines Group Shantou Airlines Company Limited PRC 60 — Airline Zhuhai Airlines Company Limited PRC 60 — Airline Guizhou Airlines Company Limited PRC 60 — Airline Xiamen Airlines Company Limited PRC 60 — Airline Guangzhou Nanland Air Catering Company Limited PRC 51 — Air catering Guangzhou Aircraft Maintenance Engineering Company Limited PRC 50 — Provision of aircraft
repair and maintenanceSouthern Airlines Group Finance Company Limited PRC 30 16.86 Provision of
financial servicesSichuan Airlines Corporation Limited PRC 39 — Airline MTU Maintenance Zhuhai Co. Limited PRC 50 — Provision of engine
repair and maintenance servicesChina Postal Airlines Limited PRC 49 — Airline Zhuhai Xiang Yi Aviation Technology Company Limited PRC 51 — Provision of flight
simulation service Certain 2004 2005 RMB RMB 2005 8,748 — 2006 2,996 7,341 2007 32 8,945 2008 — 14,354 2009 — 5,300 2010 — 9,688 11,776 45,628 Company’s subsidiaries, affiliated companies andcapital commitments of jointly controlled entities are PRC joint ventures which have limited lives pursuantwas as follows: 2004 2005 RMB RMB Authorized and contracted for — — Authorized but not contracted for 156 74 156 74 PRC law.make capital contributions in respect of: 2004 2005 RMB RMB Subsidiaries 181 — Jointly controlled entities 83 83 264 83 F-46
disclosed in Note 3. F-73
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)29.SEGMENTAL INFORMATION43. CONTINGENCIES operates primarilyleases from CSAHC certain land in Guangzhou and certain land and buildings in Wuhan and Haikou. The Group has a significant investment in buildings and other leasehold improvements located on such land. However, such land in Guangzhou and such land and buildings in Wuhan and Haikou lack adequate documentation evidencing CSAHC’s rights thereto.44. SUBSEQUENT EVENT 45. COMPARATIVE FIGURES single business segment forresult of the provision of air transportation services. Geographic information about the Group’s operating revenue and incomechanges in accounting policies. Further details are as follows: Domestic Hong Kong International* Total RMB RMB RMB RMB Traffic revenue 11,458,704 1,197,883 2,049,572 14,706,159 Other revenue 361,524 16,479 94,156 472,159 11,820,228 1,214,362 2,143,728 15,178,318 Operating income 899,082 179,640 103,379 1,182,101 Traffic revenue 12,924,892 1,182,492 2,354,148 16,461,532 Other revenue 359,895 58,231 — 418,126 13,284,787 1,240,723 2,354,148 16,879,658 Operating income 1,090,154 219,686 90,833 1,400,673 Traffic revenue 13,197,589 1,118,695 3,165,608 17,481,892 Other revenue 485,046 — 51,682 536,728 13,682,635 1,118,695 3,217,290 18,018,620 Operating income 1,614,975 193,440 217,662 2,026,077 46. * Asian market accounted for approximately 76%, 75% and 70%, respectively, of the Group’s total international traffic revenue for the years ended December 31, 2000, 2001 and 2002. The remaining portion was mainly derived from the Group’s flights to/from European and North American regions.PARENT AND ULTIMATE HOLDING COMPANY The major revenue-earning assetsare its aircraft fleet, most of which are registeredto be CSAHC, a state-owned enterprise established in the PRC. Since the Group’s aircraft fleet is employed flexibly across its route network, there is no suitable basis of allocating such assets to geographic segments. Substantially all of the Group’s non-aircraft identifiable assets are located in PRC.This entity does not produce financial statements available for public use.F-47
F-74
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)47. ACCOUNTING ESTIMATES AND JUDGMENTS
30.SUPPLEMENTAL INFORMATION
Movements
Year ended December 31, | ||||||||||||
2000 | 2001 | 2002 | ||||||||||
RMB | RMB | RMB | ||||||||||
Balance at beginning of the year | 72,110 | 72,644 | 59,019 | |||||||||
Provision for doubtful accounts (Note 9) | 2,072 | 1,729 | 1,304 | |||||||||
Doubtful accounts written-off | (1,538 | ) | (15,354 | ) | (205 | ) | ||||||
Balance at end of the year (Note 11) | 72,644 | 59,019 | 60,118 | |||||||||
48. | RECENTLY ISSUED ACCOUNTING STANDARDS |
Effective for | ||
accounting periods | ||
beginning on or after | ||
IFRS 6, Exploration for and evaluation of mineral resources | January 1, 2006 | |
IFRS 7, Financial instruments: disclosure | January 1, 2007 | |
IFRIC 4, Determining whether an arrangement contains a lease | January 1, 2006 | |
IFRIC 5, Rights to interests arising from decommissioning, restoration environmental rehabilitation funds | January 1, 2006 | |
IFRIC 6, Liabilities arising from participating in a specific market – Waste electrical and electronic equipment | December 1, 2005 | |
IFRIC 7, Applying the restatement approach under IAS 29, Financial reporting in hyperinflationary economies | March 1, 2006 | |
IFRIC 8, Scope of IFRS 2 | May 1, 2006 | |
IFRIC 9, Reassessment of embedded derivatives | June 1, 2006 |
F-75
Effective for | ||
accounting periods | ||
beginning on or after | ||
Amendments to IAS 1, Presentation of financial statements | January 1, 2007 | |
— capital disclosures | ||
Amendments to IAS 19, Employee benefits — actuarial gains and losses, group plans and disclosures | January 1, 2006 | |
Amendments to IAS 39, Financial instruments: recognition and measurement | January 1, 2006 | |
— Cash flow hedge accounting of forecast intragroup transactions | ||
— The fair value option | ||
Amendments to IAS 39, Financial instruments: recognition and measurement, and IFRS 4, Insurance contracts | January 1, 2006 | |
— Financial guarantee contracts | ||
Amendment to IAS 21, The effects of changes in foreign exchange rates | January 1, 2006 | |
— Net investment in a foreign operation | ||
Amendments to IFRS 1, First-time adoption | January 1, 2006 | |
Amendments to IFRS 1, First-time adoption and IFRS 6, Exploration for and evaluation of mineral resources | For entities that adopt IFRSs for the first time before 1 January 2006 and choose to apply IFRS 6 before that date | |
Revised guidance on implementing IFRS 4, Insurance contracts | For entities that begin to apply IFRS 7 on or after 1 January 2007 or choose to apply IFRS 7 before that date |
F-76
F-77
Proportion of | ||||||||||||
Place of | ownership | |||||||||||
establishment | interest held by | Principal | ||||||||||
Name of company | /operation | Registered capital | the Company | activities | ||||||||
Guangxi Airlines Company Limited (a) | PRC | RMB170,900,000 | 95 | % | Airline | |||||||
Southern Airlines (Group) Shantou Airlines Company Limited (a) | PRC | RMB280,000,000 | 60 | % | Airline | |||||||
Zhuhai Airlines Company Limited (a) | PRC | RMB250,000,000 | 60 | % | Airline | |||||||
Xiamen Airlines Company Limited (a) | PRC | RMB700,000,000 | 60 | % | Airline | |||||||
Guizhou Airlines Company Limited (a) | PRC | RMB80,000,000 | 60 | % | Airline | |||||||
Guangzhou Air Cargo Company Limited (a) | PRC | RMB238,000,000 | 70 | % | Cargo services | |||||||
Guangzhou Baiyun International Logistic Company Limited (a) | PRC | RMB50,000,000 | 61 | % | Logistics operations | |||||||
Guangzhou Nanland Air Catering Company Limited (b) | PRC | RMB120,000,000 | 75 | % | Air catering | |||||||
China Southern West Australian Flying College Pty Limited | Australia | AUD100,000 | 65 | % | Pilot training services | |||||||
Xinjiang Civil Aviation Property Management Limited (a) | PRC | RMB251,332,832 | 51.8 | % | Property management |
(a) | These subsidiaries are PRC limited liabilities companies. | |
(b) | This subsidiary is a Sino-foreign equity joint venture company established in the PRC. | |
(c) | Certain of the Group’s subsidiaries are PRC joint ventures which have limited lives pursuant to the PRC law. |
F-78
Proportion of | ||||||||||||||||||||
ownership interest held by | ||||||||||||||||||||
Place of | Group’s | |||||||||||||||||||
establishment | effective | The | Principal | |||||||||||||||||
Name of company | /operation | interest | Company | subsidiaries | activities | |||||||||||||||
Guangzhou Aircraft Maintenance Engineering Company Limited (a) | PRC | 50 | % | 50 | % | — | Provision of aircraft repair and maintenance services | |||||||||||||
China Southern Airlines Group Finance Company Limited | PRC | 49.3 | % | 32 | % | 26 | % | Provision of financial services | ||||||||||||
Sichuan Airlines Corporation Limited | PRC | 39 | % | 39 | % | — | Airline | |||||||||||||
MTU Maintenance Zhuhai Co. Ltd. (a) | PRC | 50 | % | 50 | % | — | Provision of engine repair and maintenance services | |||||||||||||
China Postal Airlines Limited (a) | PRC | 49 | % | 49 | % | — | Airline | |||||||||||||
Zhuhai Xiang Yi Aviation Technology Company Limited (a) | PRC | 51 | % | 51 | % | — | Provision of flight simulation services | |||||||||||||
Beijing Southern Airlines Ground Services Company Limited (a) | PRC | 50 | % | 50 | % | — | Provision of airport ground services |
(a) | These are jointly controlled entities. | |
(b) | Certain of the Group’s jointly controlled entities are PRC joint ventures which have limited lives pursuant to the PRC law. |
F-79
F-80
(c)Capitalized interest
F-48
F-81
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data)IFRS,IFRSs, the Group capitalizes interest costs to the extent the related borrowings are directly attributable to the acquisition or construction of an asset.(d)(e) Revaluation of fixed assetsproperty, plant and equipmentfixed assetsproperty, plant and equipment of the Group were revalued as of December 31, 1996 (see Notes 1 and 1221 to the consolidated financial statements). Such fixed asset revaluation resulted in an increase in shareholders’ equity with respect to the increase in carrying amount of certain fixed assetsproperty, plant and equipment above their historical cost bases, while a charge to the consolidated statement of incomeoperations was recorded with respect to the reduction in carrying amount of certain fixed assetsproperty, plant and equipment below their historical cost bases. In addition, the revalued fixed assetproperty, plant and equipment amounts serve as the tax bases of fixed assetsproperty, plant and equipment for years beginning in 1997. Accordingly, the fixed asset revaluation eliminated certain of the temporary differences which gave rise to a deferred tax asset as of December 31, 1996. Such tax asset was offset against the revaluation surplus.fixed assetsproperty, plant and equipment are stated at their historical cost unless an impairment loss has been recorded. An impairment loss on fixed assetsproperty, plant and equipment is recorded under U.S. GAAP if the carrying amount of such asset exceeds its future undiscounted cash flows, excluding finance costs. The future undiscounted cash flows, excluding finance costs, of the Group’s fixed assetsproperty, plant and equipment whose carrying amount was reduced in connection with the Reorganization, exceed their historical cost carrying amount and, therefore, impairment of such assets is not appropriate under U.S. GAAP. Accordingly, the revaluation reserve recorded directly to shareholders’ equity and the charge recorded under IFRSIFRSs in 1996 and the additional depreciation charges recorded in the sixnine years ended December 31, 2002,2005, as a result of the Reorganization are reversed for U.S. GAAP purposes.fixed assetsproperty, plant and equipment beginning 1997.
F-49
CHINA SOUTHERN AIRLINES COMPANY LIMITEDAND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Amounts in thousands, except share data)
In August 2002, the Company acquired 90% equity interest
operating leases for the fair value of contractual obligations to perform the overhauls and a deferred asset is recorded for the corresponding amount, which is amortized over the term of the operating lease. The carrying amounts of such liability and asset amounted to approximately RMB749 and RMB390 respectively as of December 31, 2004 and RMB941 and RMB489 respectively as of December 31, 2005.
F-82
(h)New accounting pronouncements
SFAS No. 143
In June 2001,classified as non-current when a classified balance sheet is presented under IFRSs. Under U.S. GAAP, an enterprise shall separate deferred tax liabilities and assets into a current amount and a non-current amount based on the FASB issued SFAS No. 143 “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires the Group to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal useclassification of the assets.related asset or liability for financial reporting.
December 31, | ||||||||
2004 | 2005 | |||||||
RMB | RMB | |||||||
Deferred tax assets: | ||||||||
Tax losses | 92 | 347 | ||||||
Repair charges capitalized | 254 | 275 | ||||||
Accrued expenses | 275 | 175 | ||||||
Others | 21 | 29 | ||||||
Total deferred tax assets | 642 | 826 | ||||||
Less: valuation allowance | (53 | ) | (188 | ) | ||||
589 | 638 | |||||||
Deferred tax liabilities: | ||||||||
Accrued expenses | 75 | 58 | ||||||
Depreciation allowances in excess of the related depreciation | 752 | 832 | ||||||
Others | 49 | 16 | ||||||
Total deferred tax liabilities | 876 | 906 | ||||||
(287 | ) | (268 | ) | |||||
Representing: | ||||||||
Deferred tax assets — current portion | 161 | 61 | ||||||
Deferred tax assets — non-current portion | 428 | 577 | ||||||
Deferred tax liabilities — current portion | (75 | ) | (58 | ) | ||||
Deferred tax liabilities — non-current portion | (801 | ) | (848 | ) | ||||
(287 | ) | (268 | ) | |||||
F-83
SFAS No. 145
F-50
been restated as follows: F - 84
AND SUBSIDIARIES-— (Continued)
(Amounts in thousands,millions, except share data) In April 2002,FASB issued SFAS No. 145, which rescinds SFAS No. 4 “Reporting Gains and Losses from Extinguishment of Debt”, and an amendment of that Statement, SFAS No. 64 “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”. SFAS No. 145 also rescinds SFAS No. 44 “Accounting for Intangible Assets of Motor Carriers”. SFAS No. 145 amends SFAS No. 13 “Accounting for Leases”, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are applied in fiscal years beginning after May 15, 2002. The provisions in paragraphs 8 and 9(c) of SFAS No. 145 related to SFAS No. 13 were effective for transactions occurring after May 15, 2002. All other provisions of SFAS No. 145 were effective for financial statements issued on or after May 15, 2002. The Group does not expect the adoption of SFAS No. 145 will have a material impact on its consolidated financial statements.SFAS No. 146 In July 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” which applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. SFAS No. 146 requires an entity to record a liability for cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. Commitment to an exit plan or a plan of disposal expresses only management’s intended future actions and does not meet the requirement for recognizing a liability and the related expense. An entity is required to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit or disposal activity is initiated and in any subsequent period until the activity is completed. The Group is required to adopt SFAS No. 146 on January 1, 2003. The provisions of SFAS No. 146 are required to be applied prospectively after the adoption date to newly exit or disposal activities. Therefore, management cannot determine the potential effect that adoption of SFAS No. 146 will have on the Group’s consolidated financial statements.SFAS No. 150 In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity, and requires the classification of a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after Mayended December 31, 2003 and otherwise is effective2004, the Group’s share of taxation of affiliated companies and jointly controlled entities accounted for using the equity method was included as part of the Group’s income tax in the consolidated statements of operations under both IFRS and U.S. GAAP. As discussed in Note 3, with effect from January 1, 2005, the Group has changed the presentation and includes the share of taxation of affiliated companies and jointly controlled entities accounted for using the equity method in the respective shares of income or loss reported in the consolidated statements of operations before arriving at the beginning of the first interim period beginning after June 15, 2003. Management believes the adoption of SFAS No. 150 will notGroup’s income or loss before tax. These changes in presentation have a material effect on the Group’s financial position or results of operations.F-51CHINA SOUTHERN AIRLINES COMPANY LIMITEDAND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Amounts in thousands, except share data)FIN No. 45 In November 2002, the FASB issued Interpretation No. 45 “Guarantor’s Accountingbeen applied retrospectively with comparatives restated for both IFRS and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34”. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligationsU.S. GAAP.guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liabilityU.S. GAAP for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified afteryears ended December 31, 2002. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 31, 2002. As of December 31, 2002, the Group did not have any significant guarantees which would be required to be disclosed pursuant to this Interpretation. The Group does not expect the application of this Interpretation will have a material effect on its consolidated financial statements.FIN No. 46 In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51”. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003 and to variable interests in variable interest entities obtained after January 31, 2003. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Group will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. The Group does not expect the application of this Interpretation will2004 have a material impact on its consolidated financial statements.F-52CHINA SOUTHERN AIRLINES COMPANY LIMITEDAND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Amounts in thousands, except share data) 2003 2004 RMB RMB Income tax (benefit)/expense as previously reported under U.S. GAAP (526 ) 274 Reclassification for share of taxation of affiliated companies and jointly controlled entities (10 ) (13 ) Income tax (benefit)/expense as restated under U.S. GAAP (536 ) 261 incomeincome/(loss) of significant differences between IFRS and U.S. GAAP is as follows: Year ended December 31, Note 2000 2001 2002 2002 RMB RMB RMB U.S. dollars Net income under IFRS 501,771 340,225 575,761 69,559 U.S. GAAP adjustments: Sale and leaseback accounting (a ) (281,101 ) 54,254 (100,664 ) (12,161 ) Lease arrangement (b ) — — (49,960 ) (6,036 ) Capitalized interest (c ) (11,300 ) 18,000 (31,473 ) (3,802 ) Reversal of additional depreciation arising from revaluation of fixed assets (d ) 68,000 65,000 33,000 3,987 Investments in affiliated company and jointly controlled entity (e ) 10,630 3,546 (541 ) (65 ) Deferred tax effects 66,440 (50,369 ) 47,849 5,780 Net income under U.S. GAAP 354,440 430,656 473,972 57,262 Basic earnings per share under U.S. GAAP 0.11 0.13 0.14 0.017 Basic earnings per ADS under U.S. GAAP* 5.25 6.38 7.02 0.849 Reference Year ended December 31, in Note 2003 2004 2005 2005 above RMB RMB RMB U.S. dollars Loss attributable to equity shareholders of the Company under IFRSs (358 ) (48 ) (1,848 ) (229 ) U.S. GAAP adjustments: Net (loss)/income before tax attributable to airline operations of CNA and XJA (a) (1,042 ) 354 159 19 Sale and leaseback accounting (b) 115 115 115 14 Lease arrangements (c) (64 ) 7 7 1 Capitalized interest (d) (33 ) (13 ) (9 ) (1 ) Reversal of additional depreciation arising from revaluation of property, plant and equipment (e) 33 13 — — Investments in affiliated company and jointly controlled entity (f) 7 7 7 1 Deferred tax effects — current year (8 ) (16 ) (17 ) (2 ) — effect on change in the Company’s income tax rate (51 ) — — — — tax effect of acquisitions of airline operations of CNA and XJA 261 (81 ) (23 ) (3 ) — effect on change in income tax rate applicable to airline operations of CNA and XJA — (99 ) 79 10 Net (loss)/income under U.S. GAAP (1,140 ) 239 (1,530 ) (190 ) Basic (loss)/earnings per share under U.S. GAAP (0.298 ) 0.055 (0.350 ) (0.043 ) Basic (loss)/earnings per ADS under U.S. GAAP* (14.876 ) 2.732 (17.489 ) (2.172 ) * Basic (loss)/earnings per ADS is calculated on the basis that one ADS is equivalent to 50 H shares.
December 31, | |||||||||||||||||
Note | 2001 | 2002 | 2002 | ||||||||||||||
RMB | RMB | U.S. Dollars | |||||||||||||||
Shareholders’ equity under IFRS | 9,221,663 | 9,613,207 | 1,161,394 | ||||||||||||||
U.S. GAAP adjustments: | |||||||||||||||||
Sale and leaseback accounting | (a | ) | (486,325 | ) | (586,989 | ) | (70,916 | ) | |||||||||
Lease arrangement | (b | ) | — | (49,960 | ) | (6,036 | ) | ||||||||||
Capitalized interest | (c | ) | 412,494 | 381,021 | 46,032 | ||||||||||||
Revaluation of fixed assets, net of depreciation | (d | ) | (253,348 | ) | (46,120 | ) | (5,572 | ) | |||||||||
Investments in affiliated company and jointly controlled entity | (e | ) | (40,346 | ) | (118,003 | ) | (14,256 | ) | |||||||||
Deferred tax asset adjustment on revaluation of fixed assets | 80,888 | 9,719 | 1,174 | ||||||||||||||
Deferred tax effects | 22,933 | 84,456 | 10,203 | ||||||||||||||
Shareholders’ equity under U.S. GAAP | 8,957,959 | 9,287,331 | 1,122,023 | ||||||||||||||
Reference | December 31, | |||||||||||||
in Note | 2004 | 2005 | 2005 | |||||||||||
above | RMB | RMB | U.S. Dollars | |||||||||||
Total shareholders’ equity under IFRSs | 13,903 | 11,936 | 1,479 | |||||||||||
U.S. GAAP adjustments: | ||||||||||||||
Shareholders’ equity attributable to airline operations of CNA and XJA | (a) | (531 | ) | (372 | ) | (46 | ) | |||||||
Sale and leaseback accounting | (b) | (357 | ) | (242 | ) | (30 | ) | |||||||
Lease arrangements | (c) | (107 | ) | (100 | ) | (13 | ) | |||||||
Capitalized interest | (d) | 335 | 326 | 41 | ||||||||||
Investments in affiliated company and jointly controlled entity | (f) | (104 | ) | (97 | ) | (12 | ) | |||||||
Deferred tax effect on airline operations of CNA and XJA | 66 | 122 | 15 | |||||||||||
Deferred tax effects | 19 | 2 | — | |||||||||||
Minority interests | (h) | (2,055 | ) | (1,936 | ) | (240 | ) | |||||||
Net shareholders’ equity under US GAAP | 11,169 | 9,639 | 1,194 | |||||||||||
F - 85
F-53
2003 | 2004 | |||||||
RMB | RMB | |||||||
Operating revenue: | ||||||||
Traffic revenue | 24,897 | 33,235 | ||||||
Other operating revenue | 586 | 930 | ||||||
Total operating revenue | 25,483 | 34,165 | ||||||
Operating expenses: | ||||||||
Flight operations | 10,351 | 15,016 | ||||||
Maintenance | 3,878 | 4,578 | ||||||
Aircraft and traffic servicing | 3,803 | 4,789 | ||||||
Promotion and sales | 2,043 | 2,606 | ||||||
General and administrative | 1,397 | 1,759 | ||||||
Depreciation and amortization | 3,042 | 3,523 | ||||||
Asset impairment charges | 510 | — | ||||||
Others | 93 | 17 | ||||||
Total operating expenses | 25,117 | 32,288 | ||||||
Operating income | 366 | 1,877 | ||||||
Non-operating income/(expenses): | ||||||||
Interest income | 27 | 33 | ||||||
Interest expense | (1,604 | ) | (1,184 | ) | ||||
Equity income/(loss) of affiliated companies | 50 | 15 | ||||||
Equity (loss)/income of jointly controlled entities | (44 | ) | (14 | ) | ||||
Investment income | — | 5 | ||||||
Exchange (loss)/gain, net | (381 | ) | (124 | ) | ||||
Others, net | 37 | 85 | ||||||
Total net non-operating expenses | (1,915 | ) | (1,184 | ) | ||||
(Loss)/income before income tax and minority interests | (1,549 | ) | 693 | |||||
Income tax benefit/(expense) | 536 | (261 | ) | |||||
(Loss)/income before minority interests | (1,013 | ) | 432 | |||||
Minority interest | (127 | ) | (193 | ) | ||||
(Loss)/income for the year | (1,140 | ) | 239 | |||||
F-86
2003 | 2004 | |||||||
RMB | RMB | |||||||
Net cash inflow/(outflow) from | ||||||||
Operating activities | 2,965 | 5,419 | ||||||
Investing activities | (7,558 | ) | (9,507 | ) | ||||
Financing activities | 2,820 | 4,172 | ||||||
(Decrease)/increase in cash and cash equivalents | (1,773 | ) | 84 | |||||
Cash and cash equivalents at January 1 | 4,772 | 2,999 | ||||||
Cash and cash equivalents at December 31 | 2,999 | 3,083 | ||||||
Total | ||||
RMB | ||||
Shareholders’ equity at December 31, 2002 | 6,796 | |||
Issue of A shares | 2,641 | |||
Net loss | (1,140 | ) | ||
Net liabilities assumed by CSAHC (note a) | 4,552 | |||
Recognition of deferred tax assets (note b) | 246 | |||
Contributions from CSAHC | 3 | |||
Shareholders’ equity at December 31, 2003 | 13,098 | |||
Net income | 239 | |||
Net assets distributed to CSAHC (note a) | (28 | ) | ||
Elimination of net deferred tax assets (note c) | (181 | ) | ||
Distributions to CSAHC | (1,959 | ) | ||
Shareholders’ equity at December 31, 2004 | 11,169 | |||
F-87
(a) | In connection with the CNA/XJA Acquisitions, certain assets and liabilities of CNA and XJA which were not to be acquired by the Company were transferred to CSAHC, the owner of CNA and XJA during 2003 and 2004. | |
(b) | In connection with the CNA/XJA Acquisitions, the property, plant and equipment of CNA and XJA were revalued as of December 31, 2003 according to the relevant PRC rules and regulations. The revalued amount serves as the tax base for future years. Such revaluation is not recorded under U.S. GAAP. However, a deferred tax asset is recognized for the tax deductibility of the resulting net revaluation surpluses with a corresponding credit to the equity under U.S. GAAP. | |
(c) | As a result of the CNA/XJA Acquisitions, the tax losses attributable to the airline operations of CNA and XJA are no longer available for utilization against future taxable income of such operations. Accordingly, the deferred tax assets arising from such tax losses and related valuation allowance was eliminated against equity. |
F-88
Year ended December 31, | ||||||||
2003 | 2004 | |||||||
RMB | RMB | |||||||
Traffic revenue | ||||||||
Passenger | 22,438 | 30,443 | ||||||
Cargo and mail | 2,459 | 2,792 | ||||||
24,897 | 33,235 | |||||||
Other operating revenue | ||||||||
Commission income | 157 | 227 | ||||||
General aviation income | 40 | 55 | ||||||
Ground services income | 123 | 202 | ||||||
Air catering income | 31 | 53 | ||||||
Rental income | 40 | 45 | ||||||
Aircraft lease income | 36 | 145 | ||||||
Gain on disposal of property, plant and equipment | — | — | ||||||
Maintenance services income | 30 | 23 | ||||||
Income on transfer of surplus pilot trainees | — | — | ||||||
Utility services income | 14 | 28 | ||||||
Other | 115 | 152 | ||||||
586 | 930 | |||||||
Total operating revenue | 25,483 | 34,165 | ||||||
F-89
Year ended December 31, | ||||||||
2003 | 2004 | |||||||
RMB | RMB | |||||||
PRC income tax | (47 | ) | (259 | ) | ||||
Deferred tax | ||||||||
— current year | 242 | 97 | ||||||
— adjustment for change in the Company’s enacted tax rate | 341 | — | ||||||
— adjustment for change in applicable tax rate for airline operations of CNA and XJA | — | (99 | ) | |||||
536 | (261 | ) | ||||||
Additional income taxes were allocated as follows: | ||||||||
Shareholders’ equity, for deferred tax asset recognized in connection with the tax deductibility resulting from net revaluation surpluses | 246 | — | ||||||
Shareholders’ equity, for elimination of deferred tax assets of the airline operations of CNA and XJA no longer available | — | (181 | ) | |||||
246 | (181 | ) | ||||||
F-90
Year ended December 31, | ||||||||
2003 | 2004 | |||||||
RMB | RMB | |||||||
Expected PRC taxation (expense)/benefit | 232 | (104 | ) | |||||
Adjustments: | ||||||||
Effect of change in the Company’s income tax rate | 341 | — | ||||||
Effect of change in the income tax rate applicable to the airline operations of CNA and XJA | — | (99 | ) | |||||
Rate differential on subsidiaries | (5 | ) | 3 | |||||
Rate differential on airline operations of CNA and XJA | 196 | (43 | ) | |||||
Non-deductible expenses | (90 | ) | (37 | ) | ||||
Increase in deferred tax valuation allowance | (110 | ) | (4 | ) | ||||
Expired tax losses | (34 | ) | — | |||||
Non-taxable income | — | 17 | ||||||
Effect of share of results of affiliated companies and jointly controlled entities | 9 | 12 | ||||||
Other, net | (3 | ) | (6 | ) | ||||
536 | (261 | ) | ||||||
F-91
(a) | For the years ended December 31, 2003 and 2004, repairing charges of RMB701 and RMB1,159, respectively, was incurred by the Group and the airline operations of CNA and XJA in connection with aircraft repair and maintenance services rendered by GAMECO and MTU Zhuhai. GAMECO and MTU Zhuhai are jointly controlled entities of the Company. | |
(b) | Operating lease charges of RMB15 and RMB82, respectively, were paid by the Group and the airline operations of CNA and XJA to CSAHC under lease arrangement for certain land and buildings in the PRC for the years ended December 31, 2003 and 2004. | |
(c) | Aircraft lease income of RMBNil and RMB111, respectively, for the years ended December 31, 2003 and 2004, represents rental receivables in respect of short term leasing of aircraft by the Group and the airline operations of CNA and XJA to certain airlines controlled by the CSAHC. |
F-92
Exhibit No. | Description of Exhibit | |
4.1 | Form of Director’s Service Agreement is incorporated by reference in Exhibit 4(c).1 of Form 20-F for the year of 2005. | |
4.2 | Form of Non-Executive Director’s Service Agreement is incorporated by reference in Exhibit 4(c).2 of Form 20-F for the year of 2005. | |
8 | Subsidiaries of the Company | |
Section 302 Certification of Chairman | ||
12.2 | Section 302 Certification of President | |
12.3 | Section 302 Certification of Chief Financial Officer | |
13.1 | Section 906 Certification of Chairman | |
13.2 | Section 906 Certification of President | |
13.3 | Section 906 Certification of Chief Financial Officer |