The following selected operating data of the Group for the five years ended December 31, 20032005 have been derived from consolidated financial statements prepared in accordance with IFRS and other data provided by the Group and have not been audited. In accordance with Order No. 88 of the Civil Aviation Administration of China (the “CAAC”), titled Measures for the Administration of China’s Civil Aviation Statistics, new statistical standards have been implemented with effect from January 1, 2001.
The following table sets forth certain information concerning exchange rates, based on the noon buying rates in New York City for cable transfers in foreign currencies, as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”), between Renminbi and U.S. dollars for the five most recent financial years.
The following table sets out the range of high and low exchange rates, based on the Noon Buying Rate, between Renminbi and U.S. dollars, for the following periods.
The Group competes against its domestic competitors primarily on the basis of flight schedule, route network, quality of service, safety, type and age of aircraft and, to a lesser extent and until recently, price. The Group competes against nine10 other Chinese airlines in its various domestic route markets. Of these competitors, the largest are two airlines owned or controlled by the Chinese Government, and the remaining sixeight airlines are operated by or under the control of various Chinese provincial or municipal governments.
The following table sets forth the Group’s market share of the passengers carried, cargo and mail carried on departing flights and total departing flights at seven8 busiest airports in southern and central China (excluding Guangzhou, Shenzhen and Haikou, which are included in the table above), based on passenger volume, in 2003.2005.
The Group competes with Air China, China Eastern and many well-established foreign airlines on its international routes. Most of these international competitors have significantly longer operating histories, substantially greater financial and technological resources and greater name recognition than the Group. In addition, the public’s perception of the safety and service records of Chinese airlines may adversely affect the Group’s ability to compete against its Hong Kong regionaland Macau and international competitors. Many of the Group’s international competitors have larger sales networks and participate in reservation systems that are more comprehensive and convenient than those of the Group, or engage in promotional activities that may enhance their ability to attract international passengers.
Substantially all of the Group’s operating revenue is attributable to airline and airline related operations. Traffic revenue accounted for 97.7% and 97.4% of total operating revenue in 2005 and 2004 respectively. Passenger revenue and, cargo and mail revenue accounted for 91.7% and 8.3% respectively of total traffic revenue in 2005. The other operating revenue is mainly derived from commission income, income from general aviation operations, fees charged for ground services rendered to other Chinese airlines and air catering services.
| | | | | | | | |
| Name | | AgePosition | | Position |
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 | | | 47Vice President | | Male | | | 49 | |
| Zheng En Ren(6) | | Vice President |
Zheng En Ren | Male | | | 5961 | | | Vice President |
| Hao Jian Hua | | Vice President | 54 | 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 | 42 | Male | | | Company Secretary44 | |
| Chen Wei Hua | | General Counsel | | Male | | | 40 | |
| | |
| (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. |
BOARD OF DIRECTORS
Mr. Liu Ming Qi, Mr. Peng An Fa, Mr. Wang Quan Hua, Mr. Zhao Liu An, Mr. ZhouShao Yong Qian, Mr. Wang Zhi and Mr. Sui Guang Jun respectively were appointed as Directors of the Company at the Shareholders’ meeting of the Company. On May 13, 2003, Mr. Wang Shao Xi and Mr. Zhang Rui Ai tendered their resignations to the Company as Directors of the Company due to retirement. Their resignations were approved at the Shareholders’ meeting of the Company.
On July 30, 2003, the Board of Directors resolved to appoint Mr. Hao Jian Hua and Mr. Xu Jie Bo as Vice Presidents of the Company. On the same day, Mr. Yang Guang Hua resigned as Vice President of the Company due to work arrangement.
Mr. Yan Zhi Qingis the Chairmanchairman of the Board of Directors.Board. He became an employee ofis a qualified class one pilot. He joined the Company in February 1996. AdministrativeNovember 2004. Mr. Liu graduated from China Civil Aviation Flying College and obtained an EMBA from Tsinghua University in 2005. He joined the civil aviation industry in 1978. He held the positions which Mr. Yan has held includeof Captain of the Flying Squadron of China General Aviation Corporation and was appointed as the Deputy General Manager of China General Aviation Corporation, Deputy Director of Flight Operations of the HunanShanxi Provincial Civil Aviation Administration, DirectorGeneral Manager of the Guangxi ProvincialShanxi branch of China Eastern Airlines Corporation Limited and the Chief of the Flying Model Division of the Civil Aviation Administration Director of China. He served as the CentralGeneral Manager of China Eastern Airlines Corporation Limited and Southern Chinawas appointed as the Vice Minister of Civil Aviation Administration Director of the Political Department of the CAAC and Party Secretary and Managing Vice President of the CSAHC Group. Mr. Yan is currently the President and Vice Party Secretary of CSAHC. Mr. Yan graduated from the School of Aviation Administration and Flight Control in 1962. Save as disclosed above, Mr. Yan is not connected with any directors, senior management, substantial shareholders or controlling shareholders of the Company.
China. Since August 2004, Mr. Liu Ming Qiishas served as the Vice ChairmanGeneral Manager of China Southern Air Holding Company. Mr. Liu became the chairman of the Board of Directors of the Company and joined the Company since May 2003. Mr. Liu graduated from South China Normal University and obtained a master’s degree in economics from Fudan University. Mr. Liu is currently the Party Secretary and the Vice President of CSAHC. Mr. Liu began his career in 1968, and has successively served as the Municipal Secretary and Mayor of Sanya city of Hainan province, the Vice Governor of Hainan province, the Vice Director of Hong Kong and Macao Affairs office of the State Council and the Vice Director of Macao Liaison Office of the Central Government. Save as disclosed above, Mr. Liu is not connected with any directors, senior management, substantial shareholders or controlling shareholders of the Company.
on November 29 2004.
Mr. Wang Chang Shunis the Vice Chairman of the Board of Directors and the President of the Company and joined the Company in April 2001. He began his career in civil aviation in February 1976, mainly involved in air traffic control. He has held positions as Director of the Flight Operations Office of the Urumqi Civil Aviation Administration, Director of the Flight Meteorology and Flight Safety Monitoring Division, Deputy General Manager of Xinjiang Airlines and Deputy Director of Urumqi Civil Aviation Administration, Party Secretary and Deputy General Manager of Xinjiang Airlines and Party Secretary of Urumqi Civil Aviation Administration. Mr. Wang is also the Vice President of CSAHC. Mr. Wang graduated from the School of the Chinese Academy of Social Sciences as a post graduate in Business Management and is qualified as a Senior Expert of Political Science. Save as disclosed above, Mr. Wang is not connected with any directors, senior management, substantial shareholders or controlling shareholders of the Company.Mr. Peng An FaQuan Huais currently a Director of the Company and the Vice President of CSAHC and became the employee of the Company sincein March 1995 after the establishment of the Company. Mr. PengWang graduated from the pilot departmentEconomic Management Department of China Civil Aviation Flying College and the department of Chinese language and literature of South China Normal University.Central Communist Party College. Mr. PengWang began his career in civil aviation in 1969,1972, and successively served as the Pilot Director Vice Party Secretary and Party Secretary of the Sixth SquadronPlanning Department of theGuangzhou Civil Aviation Administration. In July 1994, Mr. Peng held office asAdministration, the Party Secretary of the Flight Operations Department of China Southern Airlines. In March 1998, Mr. Peng served as the President and Vice SecretaryOffice Director of China Southern Airlines Shenzhen Co. From August 2001 to October 2002, Mr. Peng served as, the Director of the Planning and Operation Division of CSAHC, the President of Strategy and Development Department of China Southern Airlines
50
Company Limited and the Vice President of CSAHC. Mr.
Peng is concurrently the Vice Chairman of Shenzhen Air Catering Co., Ltd and CATIC (Hong Kong). Save as disclosed above, Mr. Peng is not connected with any directors, senior management, substantial shareholders or controlling shareholdersWang became a Director of the
Company.Company on May 13, 2003.
Mr. Wu Rong NanZhao Liu Anis a Director of the Company. HeCompany and the Vice President of CSAHC. Mr. Zhao joined CSAHC in January 1991 and became an employee of the Company upon its establishment in March 1995.May 2003. Mr. Wu is an air traffic control engineer. He was once employedZhao began his career in civil aviation in 1966, and successively served as the Director of Flight OperationsMeteorology and Flight Safety Monitoring Division, Director of Science Education Division, the Director of Flying Model Division of Urumqi Civil Aviation Administration, Captain of the GuangzhouNinth Squadron of the Civil Aviation Administration, the Vice President and President of Urumqi Civil Aviation Administration and Xinjiang Airlines. Mr. Zhao became a Director of the Company on May 13, 2003.
Mr. Si Xian Minis a Director and President of the Company. Mr. Si graduated from No. 14 Aviation College as an aircraft piloting major with an associate degree. Mr. Si, a professional political tutor, he began his career in civil aviation in 1975. He held positions as Director of the political division of China Southern Airlines Henan Branch, Party Secretary and Vice President of Guizhou Airlines, Deputy Party Secretary of China Southern Airlines Company Limited, Secretary of the Disciplinary Department of China Southern Airlines Company Limited and Party Secretary of China Northern Airlines and has been the President of the Company since October 2004. Mr. Si became a Director of the Company on December 31, 2004.
Mr. Xu Jie Bois a Director, Vice President and Chief Financial Officer of the Company. Mr. Xu joined the Company in July 1998. He 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 as Supervisor of the Financial Management Office for Infrastructure Projects of Guangzhou Civil Aviation Administration. In December 1992, he took 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 also a Director of Guizhou Airlines Company Limited, Vice Chairman of Sichuan Airlines Corporation Limited, and Vice Chairman of Xiamen Airlines
since 1986.Company Limited. Mr.
Wu is not connected with any directors, senior management or substantial shareholders or controlling shareholdersXu became a Director of the
Company.Company on April 16, 2001.
Mr. Simon ToPeter Lokhas been an Independent Non-Executive Director of the Company since
June 1999. Mr. To is currently the Managing Director of Hutchison Whampoa (China) Limited, and also serves as director of several companies in Hong Kong and Foreign-invested companies in China. 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 the Stanford University with a Master degree in Business Administration. Mr. To is not connected with any directors, senior management or substantial shareholders or controlling shareholders of the Company.Mr. Peter Lok has been an Independent Non-Executive Director of the Company since JuneApril 16, 2001. He is also a veteran in the civil aviation industry. Mr. Lok 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. From 1997 to 2000, Mr. Lok was an advisor and president of Hong Kong Commercial Airlines Center. Mr. Lok has sat on various Committees 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 independent director of several listed airline companies. Mr. Lok is not connected with any directors, senior management or substantial shareholders or controlling shareholders of the Company.
42
Mr. Wei Ming Haihas been an Independent Non-Executive Director of the Company since JuneApril 16, 2001. He is a Professor and Dean of the School of Management of Zhongshan University. Professor Wei has worked in Jiangxi Provincial Accounting Association, and he started working in Zhongshan University from 1991. In 1993 he became the chairman of the Accounting Department in the School of Management of Zhongshan University. In 1996 he became the Deputy Dean of the School of Management in Zhongshan University. In January 2000, he became Dean of the School of Management in Zhongshan University. Since 1998, Professor Wei has been a doctorate advisor for Accounting Information and Investment Analysis. Professor Wei is also on the board of directors of China Accountants Association, Vice Chairman of Accountants Association of Guangdong Province, Vice Chairman of Auditors Association of Guangzhou , Executive Member of the Research Institute of Financial Costs for Young and Middle-aged Accountants, member of American Accounting Association. Professor Wei holds a Ph.D degree in economics and has an MBA degree from Tulane University in the United States of America. He has published over ten7 academic books or textbooks, and over 6080 academic papers. Mr. Wei is not connected with any directors, senior management or substantial shareholders or controlling shareholders of the Company.
51
Mr. Wang Zhihas been an Independent Non-Executive Director of the Company since May 2003. Mr. Wang graduated from the Aircraft Design Department of Harbin
instituteInstitute of Technology. Mr. Wang began his career in 1965, and has successively served as the Director and Senior Engineer of Aeronautics Research Institute of China, the Vice Director and Vice
Secretarysecretary of the First Research Institute of Civil Aviation, the Vice Director and Director of the Planning Bureau of CAAC and the Director of the Planning Technology System Reform Department and the Planning Technology Department of CAAC. Mr. Wang is also
a professor in several universities.
Mr. Wang is not connected with any directors, senior management or substantial shareholders or controlling shareholders of the Company. Mr. Sui Guang Junhas been an independentIndependent Non-Executive Director of the Company since May 2003. Mr. Sui graduated from the Economic Department of Jinan University and obtained a master degree. Mr. Sui obtained a doctor degree in the Management of Organizations of Jinan University. He has successively served as the Vice Director of the Research Institute of Hong Kong and Macao Economies, and the Dean of Corporate Administration Departmentcorporate administration department of Jinan University. Mr. Sui is currentlyUniversity and the Chief of the Post-doc Committee of Applied Economics and the Dean of Management College in Jinan University. Mr. Sui is not connected with any directors, senior management or substantial shareholders or controllingcurrently the Deputy Vice Chancellor of Guangdong University of Foreign Studies.
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. Supervisory Committee
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.
SUPERVISORY COMMITTEE
As required by the Company Law and the Articles of Association, the Company has a supervisory committee (the “Supervisory Committee”) which is primarily responsible for the supervision of senior management of the Company, including the Board of Directors, executive officers and other senior management personnel, to ensure that they act in the interests of the Company, its shareholders and employees, as well as in compliance with applicable law. The Supervisory Committee consists of three Supervisors. Two of the Supervisors are shareholder representatives appointed by shareholders, and one Supervisor is a representative of the Company’s employees. The Supervisors serve terms of three years and may serve consecutive terms.
Mr. Liang Hua FuSun Xiao Yiis
the Chairmana member of
the SupervisoryParty Committee
and head of
theDiscipline Supervision Team of China Southern Air Holding Company.
He became an employee ofMr. Sun graduated from the
Company since its establishment in March 1995. Mr. Liang held numerous positions in the Guangzhou Civil Aviation
University of China with a degree in Economics and Administration
including Chiefand is currently a postgraduate law student of
the Navigation Division,Central Communist Party College. Mr. Sun is a senior expert of Political Science and Economics with an associate degree. Mr. Sun has successively served as Vice Party Secretary of the
Transportation Department,Hubei branch of the Company, Party Secretary of the
DisciplinaryFlight Operations Department
and Director of Administration and Supervision. Mr. Liang attended Tianjin Aviation School and Guangzhou Political Science College. Mr. Liang is not connected with any directors, senior management or substantial shareholders or controlling shareholders of the
Company, and Vice Party Secretary of China Southern Air Holding Company.
Mr. Gan YuSun became a Supervisor on June 16, 2004.
Mr. Yang Guang Huais a Supervisorthe Vice Party Secretary and Discipline Supervision Secretary of the Company. He becameMr. Yang is an employeeengineer with university qualification. Mr. Yang has successively served as Deputy General Manager of the Hunan branch of the Company, since its establishment in March 1995. Mr. Gan held various positions in the Chinese commercial aviation industry, including Deputy DirectorGeneral Manager of Southern Airlines (Group) Zhuhai Helicopters Company Limited, General Manager of the Finance Department,Hunan branch of the Company, and Deputy Chief Accountant and DirectorGeneral Manager of the Company. Mr. Yang became a Supervisor on June 16, 2004.
Ms. Yang Yi Huais the General Manager of the Audit Department of the Company. Ms. Yang is an internationally qualified internal auditor. She has successively served as Deputy Manager of the Clearance and Settlement Office of the Financial Division of the Guangzhou Civil Aviation Administration. He holdsAdministration, Manager of the Financial Office of the Company’s Financial Division, and Deputy General Manager of the Company’s Audit Department. She has been the President of Xiamen Airlines since September 2005. Ms. Yang became a Senior Accountant Certificate and Supervisor on June 16, 2004.
52
SENIOR ADMINISTRATIVE OFFICERS
Mr. Yuan Xin Anis a
member of the International Auditors Association. Mr. Gan graduated from Shanghai Li Xin Accounting College in 1948. Mr. Gan is not connected with any directors, senior management or substantial shareholders or controlling shareholdersVice President of the Company.
He graduated from the Air Engineering College. Mr. Li Qi Hongis a SupervisorYuan has over 25 years of experience in the 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 Labour UnionCompany in 2000, and a Vice President of the Company in April 2002.
Mr. Hao Jian Huais currently the Vice President of the Company. He completed his pilot training at the CAAC Advanced Flying College. Mr. Hao has held positions as Captain, then Deputy Chief Captain, and subsequently Chief Captain of the Sixth Squadron of the Civil Aviation Administration during the period from 1989 to 1994. He then became a Deputy General Manager, from 1994 to 1998, and the General Manager, from 1998 to 1999, of the Flying Aviation Department of the Company. He became an employeea Vice President of the Company in July 2003.
Mr. Ren Ji Dongis a Vice President of the Company who graduated from the College of Energy and Power Engineering Department of Nanjing University of Aeronautics and Astronautics with a major degree in motor design, is a senior engineer. Mr. Ren assumed various offices in the aircraft maintenance workshop of Xinjiang Airlines Company, including Head of Workshop, Deputy Director of Workshop and President 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 in March 2005.
Mr. He Zong Kaiis a Vice President of the Company who graduated from Bejing Foreign Language Institute with a major degree in French, is a senior economist. Mr. He served as the Deputy Manager of the Operation Department of the Company, Manager of Passenger Transportation Department, Head of Seats Arrangement Department, Vice General Manager of the Marketing Department and General Manager of the Ground Services Department. He assumed the offices of the President and Deputy Party Secretary of Hubei branch of the Company since its establishment2003 and became a Vice President of the Company in March 1995. 2005.
Mr. LiLiu Qianis the Chief Pilot of the Company who graduated from China Civil Aviation Flying College with specialty in aircraft piloting. Mr. Liu served the Civil Aviation Administration of China as assistant researcher of the piloting skills supervision division of the piloting standards department, as assistant researcher of the operation supervision division of the piloting standards department, as assistant researcher of the freight transportation piloting standards division of the piloting standards department, and as the Deputy Head of the Piloting Standards Division of the Piloting Standards Department. He assumed the offices of the Deputy Chief Pilot and Chief Pilot of the Company in November 2004.
Mr. Su Liangis currently holding the position as Company Secretary. He was a graduate of the Cranfield College of Aeronautics, University of Cranfield, United Kingdom, specialising in Air Transport Management Engineering. Mr. Su is a holder of master degree. During the period from 1998 to 1999, Mr. Su held the position as Deputy Manager of the Flight Operations Department, China Southern Airlines Shenzhen Co. and from 1999 to 2000, he was the Manager of the Planning and Administration Department of China Southern Airlines Shenzhen Co.. Mr. Su was in charge of the international cargo project of the Company, responsible for the planning and development of the Company’s North American cargo business. Mr. Su became the Company Secretary on June 26, 2000.
Mr. Chen Wei Huais the Chief Legal Adviser to the Company. Mr. Chen graduated from the
CAACschool of law of Peking University. He is a qualified solicitor and a qualified corporate legal counsellor. Mr. Chen joined the Civil Aviation
CollegeAdministration of China in
1968,1998. He then joined the CSAHC in January 1991. From 1997 to 2003, he served as Vice Director and
held various administrative positions in the commercial aviation industry in China. Mr. Li is not connected with any directors, senior management or substantial shareholders or controlling shareholdersDirector of the
Company. All Directors and SupervisorsLegal Affairs Office of the Company have entered into service contracts with the Company for a term of three years commencing on April 16, 2001. The service contracts of 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 entered into on May 13, 2003 will expire at the endCompany. Currently, he is President of the termLegal Department of the current sessionCompany. Since December 2003, Mr. Chen has been the Chief Legal Adviser to the Company. He is also a Director of the Board. Except for such service contracts, none of the Directors or Supervisors of theXiamen Airlines Company has entered or proposed to enter into any other service contracts with the Company or its subsidiaries. None of the Directors or Supervisors has entered into any service contracts with the Company which is not determinable by the Company within one year without payment of compensation, other than statutory compensation.Limited.
53
Compensation RMB0.2 million
A total of RMB232,000 has been paid to independent non-executive directorsDirectors for the year ended December 31, 2003.2005. The aggregate compensation paid by the Company to all directorsDirectors (excluding non-executive directors)Directors), supervisorsSupervisors and senior managementSenior Management for 20032005 was RMB1.5RMB5.9 million. For the year ended December 31, 2003,2005, the Company accrued an aggregate of approximately RMB25,000RMB132,000 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 governments in which the Company participates.
Details of Directors’ and Supervisors’ emoluments for the year ended December 31, 2005 are set out below:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 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 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Executive directors | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Supervisors | | | | | | | | | | | | | | | | | | | | | | | | |
| Sun Xiao Yi | | | | | | | — | | | | 237 | | | | — | | | | 12 | | | | 249 | |
| Yang Guang Hua | | | | | | | — | | | | 225 | | | | — | | | | 12 | | | | 237 | |
| Yang Yi Hua | | | | | | | — | | | | 48 | | | | 70 | | | | 11 | | | | 129 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Independent non-executive directors | | | | | | | | | | | | | | | | | | | | | | | | |
| 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. |
Each Directors’ service
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.
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.
The audit committee is appointed by the Board of Directors and consists of
fivethree independent non-executive Directors. The current members of the audit committee are
Mr. Simon To, Mr. Peter Lok, Mr. Wei Ming Hai,
Mr. Wang Zhi and
Mr. 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.
The audit committee selects and engages, on behalf of the Company, external auditors to audit the Company’s annual financial statements and considers questions regarding the audit fees and the resignation or dismissal of the external auditors. The audit committee also reviews and approves the planned scope of the Company’s annual audit. In addition, the audit committee reviews the annual and interim financial statements, the preliminary announcement of results and any other announcement regarding the Company’s results or other financial information to be made public, before submission to the 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 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 external 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.
The Company has an internal audit department which reviews procedures in all major financial and operational activities. This department is led by the head of internal audit who is directly responsible to the Chairman of the Board and submits regular reports to the audit committee.
Remuneration Committee
The 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.
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 administered byalso responsible for assessing performance of executive Directors and approving the Boardterms of Directors.executive Directors’ service contracts.
As of December 31, 2003,2005, the Group had 17,56934,417 employees, including 1,9432,567 pilots, 2,9844,539 flight attendants, 2,3175,076 maintenance personnel, 4,14610,445 sales and marketing personnel, 3,243 administrative personnel and 3,873 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
54
three to five years. Temporary employees generally are hired by the Group pursuant to at-will employment contracts or employment contracts with a term of one year.
The Company’s employees are members of a trade union organized under the auspices of the All-China’s Federation of Trade Unions, which is established in accordance with the Trade Union Law of China. A representative of the Company labor union currently serves on the Supervisory Committee of the Company. Each of the Company’s subsidiaries has its own trade union. The Group has not experienced any strikes, slowdowns or labor disputes that have interfered with its operations, and the Group believes that its relations with its employees are good.
All employees of the Group receive cash remuneration and certain non-cash benefits. Cash remuneration consists of salaries, bonuses and cash subsidies provided by the Group. Salaries are determined in accordance with the national basic wage standards. The total amount of wages payable by the Group to its employees is subject to a maximum limit based on the profitability of the Group and other factors. Bonuses are based on the profitability of the Group. Cash subsidies are intended as a form of cost-of-living adjustment. In addition to cash compensation, the Group’s contract employees receive certain non-cash benefits, including housing, education and health services, and the Group’s temporary employees receive limited health services, but not housing or education. CSAHC provides certain services in respect of these benefits to the Group’s employees in consideration of certain fees and other charges.
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.
Retirement And Housing Benefits
Employees of the Group
participate in several defined contribution retirement schemes organised separately by PRC municipal governments in regions where the major operations of the Group are
currently covered by such schemes. Under such schemes, thelocated. The Group is required to
pay quarterly premiumscontribute to
these schemes at the
relevant municipal governments. The premiums rangerates ranging from
14%9% to
19%20% of salary costs including certain allowances. A member of the
total monthlyretirement schemes is entitled to pension benefits equal to a fixed proportion of the salary
bonusesat the retirement date. The retirement benefit obligations of all existing and
other benefits paid byfuture retired staff of the Group
to its employees.44
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%rates ranging from 3% to 5% of total salaries. The Group has no obligation for the payment of pension benefits beyond the contributions described above. Contributions
Furthermore, pursuant to the retirement schemescomprehensive services agreement (the “Services Agreement”) dated May 22, 1997 between the Company and CSAHC, CSAHC provided quarters to eligible employees of 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 2005.
Pursuant to an additional staff housing benefit scheme effective September 2002, the Group 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 subsidising their purchases of houses. 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. 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 income statement. As of December 31, 2005, the Company and the Group had made payments totalling RMB168 million under the scheme and recorded its remaining contractual liabilities totalling RMB92 million as accrued expenses on the balance sheets. Housing allowances are
charged to consolidated statement of operations as andpayable when
incurred.applications are received from eligible employees.
There is no workers’ compensation or other similar compensation scheme under the Chinese labor and employment system. As required by Chinese law, however, the Group, subject to certain conditions and limitations, pays for the medical expenses of any contract employee who suffers a work-related illness, injury or disability and continues to pay the full salary of, and provides all standard cash subsidies to, such employee during the term of such illness, injury or disability. The Group also pays for certain medical expenses of its temporary employees.
55
At no time during 2003 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.
Share Ownership Except as disclosed herein, as
As of the date of this Annual Report, no Director, Senior Management or Supervisor of the Company is a beneficial owner of any shares of the Company’s capital stock. As of the date of this Annual Report, no arrangement has been put in place involving issue or grant of options or shares or securities of the Company to any of the Director, Senior Management, Supervisor or employees of the Company.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | % to the | | % to the | | | | |
| | | | | | | | | | | | | total | | total | | % to the | | |
| | | | | | | | | | | | | issued | | issued | | total | | |
| | | The | | | | | | | | | | share | | domestic | | issued | | |
| | | Company/ | | | | | | Number | | capital | | shares | | H shares | | |
| | | associated | | Types of | | Type of | | of shares | | of the | | of the | | of the | | Short |
Name
| | corporation
| | interest
| | shares
| | held
| | Company
| | Company
| | Company
| | position
|
| Simon To | | the Company | | Interest of spouse (Note 1) | | H Shares | | | 100,0000 | | | | 0.002 | % | | — | | | 0.009 | % | | — |
Note 1: | | The spouse of Mr. Simon To is the owner of these 100,000 H Shares of the Company and accordingly, Mr. Simon To, is taken to be interested in these 100,000 H Shares by virtue of the SFO. |
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
As of
DecemberMay 31,
2003,2006, the total share capital of the Company was
divided into 4,374,178,000 shares, of which approximately 50.3% (2,200,000,000 domestic shares)
iswas held by CSAHC, approximately 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)
iswas held by domestic shareholders.
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.
As of DecemberMay 31, 2003,2006, the following shareholders had an interest of 5% or more in the Company’s shares:
| | | | | | | | |
| | | | | Approximate Percentage |
Name | | Approximate |
| | | | | | Percentage |
| | | | | | of the Total |
| Name | | Number of Shares | | of the Total Number of Shares |
| |
| |
|
| CSAHC | | 2,200,000,000 domestic shares | | | 50.30 | %50.30% |
| HKSCC Nominees Limited | | 1,149,955,9981,150,854,998 H shares | | | 26.29 | %26.31% |
The table below sets forth, as of
DecemberMay 31,
2003,2006, 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 |
| |
| |
|
| HKSCC Nominees Limited | | | 1,149,955,998 | | | | 97.94 | % |
45
| | | | | | | | | |
| | | | | | | Approximate |
| | | | | | | Percentage of |
| | | | | | | the Total |
| | | | | | | Number of H |
| Name | | Number of H Shares | | Shares |
| HKSCC Nominees Limited | | | 1,150,854,998 | | | | 98.01% |
Domestic shares and H shares have identical voting rights.
Related Party Transactions The Company enters into transactions from time to time with CSAHC and its affiliates. For a description of such transactions, see Note
2536 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 effectedhave been entered into by the Group in the
prevailing market ratesordinary course of business and
are commercially reasonable and on terms no less favorable than terms available from third parties.in accordance with the agreements governing such transactions.
Trademark License Agreement The Company and CSAHC have 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.
56
The Company as lessee and CSAHC as lessor have entered into the following lease agreements:
The Company and CSAHC
have entered into a land lease agreement dated May 22, 1997, in respect of the land used by the Company within
Guangzhou Baiyun International Airport. The
total rental payment is
RMB2.7 millionRMB2,651,000 per year. The term of the lease is five years commencing April 1, 1997,
and is renewable by
the Company thereafter.both parties thereafter (subject to mutual agreement with respect to rental terms).
The Company and CSAHC
have separately entered into four lease agreements dated May 22, 1997, in respect of office premises located at the east wing of the Guangzhou Railway Station on Guangzhou Huanshi Dong Road, office premises at Haikou Airport, office premises in Haikou City, and office premises at Tianhe Airport in Wuhan, Hubei Province. The aggregate rental payment under the four leases is
RMB12.6 millionRMB15,745,000 per year. The
original term of each lease is one year,
and is renewable
annually by the
Company thereafter.parties thereafter (subject to mutual agreement with respect to rental terms).
The Company and CSAHC
have entered into an indemnification agreement dated May 22, 1997 in which CSAHC has agreed to indemnify the Company against any loss or damage caused by or arising from any challenge of, or interference with, the Company’s right to use certain land and buildings.
Comprehensive Services and Employee Benefits
The Company and CSAHC have entered into a comprehensive serviceslease agreement dated May 22, 1997, pursuant toNovember 12, 2004, under which CSAHC agreesleases to provide adequate quartersthe Company certain lands by leasing the land use rights of such lands to eligible employeesthe Company. These lands had been administratively allocated to Xinjiang Airlines and Northern Airlines for the purposes of their civil aviation and related businesses. Subsequently, CSAHC was authorised to deal with the land use rights of such lands, including leasing, but not transferring, such land use rights. Total area of the Group aslands leased is 1,182,297 square metres, and when required. In return, the Group agrees to paylocations of such lands are in Urumqi, Shenyang, Dalian and Harbin. The lease is for a fixed term of three years, commencing from the effective date of the lease, and is renewable, subject to compliance with the relevant requirements of the Hong Kong Listing Rules by the Company, by an application in writing by the Company to the lessor three months before the end of the fixed term. The rent for the land use rights of the designated lands under lease agreement is RMB22,298,000 per year, payable in arrear by cheque, in cash or by bank transfer on or before the 10th day of each calendar month, and is determined after arm’s length negotiation between the parties. The maximum aggregate annual feelimit (“Cap”) for the lease agreement is set at RMB22,298,000 per year. The lease agreement was approved by the shareholders of RMB85 millionthe Company at the 2nd extraordinary general meeting on December 31, 2004.
Arrangements with CSAHC and CSAHC’s Affiliates
Leases
The Company, CSAHC and CNA entered into a lease agreement dated November 12, 2004, under which CSAHC and CNA lease to CSAHCthe Company certain buildings, facilities and other infrastructure related to the civil aviation businesses of CNA situated at various locations in Shenyang, Dalian, Jilin, Harbin, Chaoyang and Russia. The lease is for a ten-year periodfixed term of three years, commencing from the date of the lease, and is renewable, subject to compliance with the relevant requirements of the Hong Kong Listing Rules by the Company, by an application in writing by the Company to the lessor three months before the end of the fixed term. The consideration for lease agreement is RMB43,758,000 per year, payable in arrear by cheque, in cash or by bank transfer on or before the 10th day of each calendar month, and is determined after arm’s length negotiation between the parties. The Cap for the lease agreement is set at RMB43,758,000 per year. The lease agreement was approved by the shareholders of the Company at the 2nd extraordinary general meeting on December 31, 2004.
The Company, CSAHC and XJA entered into a lease agreement dated November 12, 2004, under which CSAHC and XJA lease to the Company certain buildings, facilities and other infrastructure related to the civil aviation businesses of XJA situated in Xinjiang and Russia. The lease is for a fixed term of three years, commencing from the effective January 1, 1995.date of the lease, and is renewable, subject to compliance with the relevant requirements of the Hong Kong Listing Rules by the Company, by an application in writing by the Company to the lessor three months before the end of the fixed term. The consideration for lease agreement is RMB5,798,000 per year, payable in arrear by cheque, in cash or by bank transfer on or before the 10th day of each calendar month, and is determined after arm’s length negotiation between the parties. The Cap for the lease agreement is set at RMB5,798,000 per year. The lease agreement was approved by the shareholders of the Company at the 2nd extraordinary general meeting on December 31, 2004.
57
Arrangements with CSAHC’s Affiliates
Southern Airlines (Group) Import and Export Trading Company (“SAIETC”), a wholly-ownedwholly owned subsidiary of CSAHC The Company and SAIETC
have entered into an agreement dated May 22, 1997 for the import and export of aircraft, flight equipment, special vehicles for airline use, communication and navigation facilities, and training facilities for a term
extending from May 22, 1997 to May 22, 2000 which was subsequently extended to May 22, 2006 by mutual agreement between the parties. The parties have
mutually agreed thatdetermined the
agreement can be extended automatically.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.
For the year ended December 31, 2003,2005, the amount incurred by the Group for the import and export of the above equipment was RMB1,155 million, inclusiveRMB31,714,000.
In order to comply with the requirements under Rule 14A.35 of
the Hong Kong Listing Rules so that SAIETC can continue to provide import and export services and custom clearing service after the expiry of the original agreement, the Company and SAIETC entered into a new import and export agency
commissionframework agreement (the “Import and Export Agency Framework Agreement”) on 1 January, 2006, which became effective on April 25, 2006, having been approved by the Board of
1.5% aboveDirectors of the
contract prices paidCompany. The Import and Export Agency Framework Agreement is valid for a term of three years, commencing from the date of the agreement, subject to
SAIETC.46
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.
Southern Airlines Advertising Company, (“SAAC”), which is 90%45% owned by the GroupCompany and 10%55% owned by CSAHC (“SAAC”) 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.
The Company and SAAC
have entered into an agreement dated May 22, 1997 for the provision of advertising services for a term extending from May 22, 1997 to May 22, 2000.
TheAfter extension of three years, the parties have mutually agreed to extend the agreement
has been extendedfor another three years to May 22, 2006.
In order to comply with the requirements under Rule 14A.35 of the Hong Kong Listing Rules, so that SAAC can continue to provide advertising service after the expiry of the original agreement, the Company and SAAC entered into a new advertising agency agreement (��Advertising Agency Agreement”) on January 1, 2006 for a term of three years commencing from the date of the agreement, which became effective on 25 April, 2006, having been approved by the Board of Directors of the Company.
Under the agreement, SAAC will produce advertisement script, graphic and music to the Company with the copyright of such products belonging to the Company products belonging to the Company, provided that the Company shall comply with all relevant provisions under the Hong Kong Listing Rules. Both parties agreed that the agency rate for advertising under the Advertising Agency Agreement shall be determined after arm’s length negotiation and shall not higher than the market rate. For the year ended
31 December
31, 2003,2005, the amount incurred by the Group to SAAC for advertising services was
RMB1.3 million.RMB3,062,000.
China Southern Airlines Group Finance Company Limited (“SA Finance”), which is 42% owned by CSAHC, 32% owned by the Company and 26% owned in aggregate by five subsidiaries of the Company The Company
has entered into a financial agreement dated May 22, 1997 with SA Finance for the provision of financial services such as deposit and loan facilities, credit facilities, financial guarantees and credit references for a term
extendingcommencing from May 22, 1997 to May
22,21, 2000. As agreed by the parties, the agreement
has beenwas extended for six years to May 22, 2006.
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.
As SA Finance is a connected person of the Company under the Hong Kong Listing Rules, the financial agreement constitutes a discloseable and non-exempt continuing connected transaction under Rule 14A.35 of the Hong Kong Listing Rules and requires the Company to comply with the reporting and announcement requirement and the independent shareholders’ approval requirement under Rule 14A.48 of the Hong Kong Listing Rules. The independent shareholders of the Company approved the financial agreement at the second extraordinary general meeting of the Company held on December 31, 2004.
Under such agreement, (a) all funds thatSA Finance agrees to accept deposit of money from the Company deposits withat interest rates not lower than those set by the People’s Bank of China for the same term of deposit. SA Finance will be depositedin turn deposit the whole of such sums of money with certain banks including Bank of Agriculture, Bank of Communications, China Construction Bank and Industrial and Commercial Bank of China; make loans to the Company subject to the entering into of separate loan agreements, which will set out the Cap, terms and conditions of the loans, upon application by the Company during the term of the financial agreement. The maximum limit for amount of money deposit under the financial agreement is RMB1 billion. The Company will comply with the Hong Kong Listing Rules when entering into such separate written agreements. SA Finance shall not charge interest rates higher than those set by the People’s Bank of China for similar loans. The total amount of outstanding loans extended by SA Finance with the Commercial and Industrial Bank of China, Bank of Communications, Bank of Agriculture, China Construction Bank, or other banks of similar creditworthiness; and (b) SA Finance will not at any time have outstanding loans in excess of the amount representing the aggregate of (i) deposits received from entities other thanto the Company (ii)must not exceed the sum of SA Finance’s shareholders’ equity, capital reserves and (iii) capital reserves.money deposit received from other parties (except the Company); and provide credit facilities, financial guarantees, credit references, and other financial services subject to the entering into of separate agreements, which will set out the cap, terms and conditions of such services, upon request by the Company during the term of the financial agreement. The Company will comply with the Hong Kong Listing Rules when entering into such separate written agreements.
58
As of December 31,
2003,2005, the
Group had short-termGroup’s deposits placed with SA Finance
amountingamounted to
RMB365.9 million,RMB543,825,000, which
earnedbore interest at the rate of
1.98% — 3.00%0.72% per
annum.annum; the balance of the loans extended to the Group by SA Finance amounted to RMB300,000,000.
Shenzhen Air Catering Company Limited, which is 33% owned by CSAHC, and 67% owned by two independent third parties The Company and Shenzhen Air Catering Company Limited
have entered into an agreement dated May 23, 1997 for the sale and purchase of in-flight meals for flights originating or stopping at the airport in Shenzhen. Pursuant to such agreement, Shenzhen Air Catering Company Limited
wouldwill supply in-flight meals to the Group from time to time during the term from May 23, 1997 to May 23, 1998. The parties have
mutually agreed that the agreement can be
extendedrenewed automatically.
For the year ended December 31,
2003,2005, the amount
paidincurred by the Group to Shenzhen Air Catering Company Limited for the provision of in-flight meals was approximately
RMB28.2 million.RMB60,542,000.
GAMECO, which is 50% owned by the Company and 50% owned by an independent third party 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 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 2003.
For the year ended December 31, 2003, the amount incurred by the Company for such repair and maintenance services was RMB587.3 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.CSAHC
CSAHC and the Australian Pilot College entered into an agreement dated October 7, 1993 for the provision of pilot training in Australia to the cadet pilots of CSAHC (the “Training Agreement”). The Training Agreement will remain in force unless terminated by either party upon 90 days’ prior written notice to the other party. Pursuant to the
DemergerDe-merger Agreement, the Company has assumed all the interests, rights and obligations of CSAHC under the Training Agreement.
For the year ended December 31,
2003,2005, the amount paid by the Group to the Australian Pilot College for training services was
RMB82.4 million.47
RMB81,471,000.
Southern Airlines (Group) Economic Development Company, (“SAGEDC”), which is 61% owned by CSAHC and 39% owned by an independent third party.party The Company and
SAGEDC haveSouthern Airlines (Group) Economic Development Company entered into an agreement dated May 22, 1997 for the provision of drinks, snacks, liquor, souvenirs and other products for a term extending from May 22, 1997 to May 22, 2007.
For the year ended December 31,
2003,2005, the amount paid by the Group to Southern Airlines (Group) Economic Development Company for the provision of drinks, snacks, liquor, souvenirs and other products was
RMB42.8 million.RMB87,521,000.
Ticket sales arrangements The
CompanyGroup has entered into ticket agency agreements for the sale of the Group’s air tickets with several subsidiaries of CSAHC (the “Agents”). The Agents charge
a commission
at a rate prescribedon the basis of the rates stipulated by the CAAC and
the International Air Transport Association
for each air ticket sold(“IATA”). The Agents charge a commission in the amount of 3% of the ticket price for domestic tickets and 5%
—to 12% of the ticket price for Hong Kong
and Macau regional/international
tickets, respectively. In addition to the Agents, the Companytickets. The Group has other air ticket sales agents in China who
also charge commission at the same rates. The Agents also act as air ticket sales agents for other Chinese airlines and charge the same rates of commission to such other airlines as those charged to the
Company.Group. The rates of commission are not higher than market rates for similar services.
For the year ended December 31, 2003,2005, the aggregate amount of ticket sales of the Group conducted through the Agents was RMB143.0 million.RMB451,121,000.
China Southern Airlines Group Air Catering Company Limited (the “Catering Company”), a wholly owned subsidiary of CSAHC
59
The Company and the Catering Company entered into a catering agreement dated November 12, 2004 under which the Catering Company would supply (1) in-flight meals in accordance with the menus of in-flight meals to be agreed with the Company from time to time, and in such quantity as the Company shall advise the Catering Company in advance; and (2) catering services for different flights of the Company (including normal, additional, chartered and temporary flights) originating or stopping at the domestic airports, mainly in northern China and the Xinjiang regions where the Catering Company provides catering services.
The catering agreement is for a fixed term of three years, commencing from the date of the agreement. The parties have agreed, after arm’s length negotiation, on the price of each type of in-flight meals and the service charges for each type of aircraft. The prices of in-flight meals and the service charges are not higher than the market rate of comparable in-flight meals and service charges. The Catering Company will issue an invoice listing out the quantity of in-flight meals supplied, the agreed unit price and the total price payable for each of the Company flight it provides service. The Cap for the Catering Agreement is set at RMB220,000,000 per year.
For the year ended December 31, 2005, the Company paid the in-flight meals charge of RMB112,136,000 pursuant to the catering agreement.
China Southern Airlines Group Passenger and Cargo Agent Company Limited (“PCACL”), a wholly owned subsidiary of CSAHC
In order to comply with the requirements under Rule 14A.35 of the Hong Kong Listing Rules so that PCACL can continue to provide ticket agency services, the Company and PCACL, a whollyowned subsidiary of CSAHC whose principal business activity is that of acting as an air ticket agent and airfreight forwarding agent, entered into a new ticket agency framework agreement (the “New Ticket Agreement”) and a new airfreight forwarding agency framework agreement (the “New Airfreight Agreement”, together with New Ticket Agreement, the “Two Sales Agency Framework Agreements”) on January 1, 2006, which became effective on April 25, 2006, having been approved by the Board of Directors of the Company.
The Two Sales Agency Framework Agreements are valid for a term of three years commencing from January 1, 2006, subject to the compliance of relevant requirements of the Hong Kong Listing Rules by the Company. The parties agreed that the agency fee shall be determined after arm’s length negotiation and shall not be higher than the market rate.
China Southern Airlines Group Travel Development Company Limited (“CSA Travel”), a wholly owned subsidiary of CSAHC
The Company and CSA Travel, whose principal business activity is that of operating tourism related business, entered into a framework agreement on Lease, Operation and Management (“Framework Agreement on Lease and Operation”) on January 1, 2006 in order to allow Company to lease certain hotels belonging to it to CSA Travel for it to operate, and to provide certain relevant services in compliance with the requirements under Rule 14A.35 of the Hong Kong Listing Rules for a term of three years, commencing from the date of the agreement. The Framework Agreement on Lease and Operation became effective on April 25, 2006, having been approved by the Board of Directors of the Company. Pursuant to the agreement, the Company shall lease Guangzhou Airlines Hotel, Zhuhai Pilot Mansion and certain portions of CSA Guangzhou Hotel and Beijing CSA Hotel to the CSA Travel for operation and management of such hotels. With regard to the amount of rent payable under the agreement, the annual cap for the Framework Agreement on Lease and Operation is set at RMB6,000,000 per annum for the entire term of the agreement.
Guangzhou China Southern Airlines Property Management Company Limited (the “GCSAPMC”), which is 90% owned by CSAHC and 10% owned by the Company’s Union
The Company and GCSAPMC, whose principal business activity is that of management of real property, entered into a framework agreement for the Engagement of Property Management (“Property Management Framework Agreement”) on January 1, 2006 in respect of engaging GCSAPMC to provide property management and improvement services in compliance with the requirements under Rule 14A.35 of the Hong Kong Listing Rules for a term of three years, commencing from the date of the agreement. The Property Management Framework Agreement became effective on April 25, 2006, having been approved by the Board of Directors of the Company. The Property Management Framework Agreement would become effective upon approval by the Board of Directors of the Company. Pursuant to the agreement, the Company has appointed GCSAPMC to provide management and maintenance services for the Company’s headquarters in Guangzhou and to provide maintenance and management services for the 110KV transformer substation at the new Baiyun International Airport to ensure the ideal working conditions of the Company’s production and office facilities and physical environment, and the normal operation of equipment. The fee charging schedule shall be determined at an arm’s length between both parties. The agency fee is payable within the time period set out in the invoice to be delivered to the Company. The Company will fund the agency fee wholly by its internal resources.
With regard to the approximate amount of agency fee payable for property management and improvement services under the agreement likely to be incurred each year during the term of the agreement, the annual cap for the Property Management Framework Agreement is set at RMB47,010,000 per annum for the entire term of the agreement.
CSAHC Hainan Co., Ltd., (“Hainan Co., Ltd.”), a subsidiary of CSAHC from Hainan Co., Ltd.
In order to expand the assets size and competitive advantage of the Company’s airline operations and completely remove competition with CSAHC in the airline industry, the Board of Directors reviewed and approved the acquisition (the “Acquisition”) by the Company of the assets (“Core Assets”) and liabilities (“Core Liabilities”) in relation to the airline operations of CSAHC Hainan Co., Ltd. (“Hainan Co., Ltd.”), a subsidiary of CSAHC from Hainan Co., Ltd., whose main business is that of civil aviation, on April 18, 2006.
As agreed by the parties, the value of the Core Assets to be acquired and the Core Liabilities to be assumed by the Company is determined in accordance with the valuation reports (Zhongqihuapingbaozi (2006) Report No. 024) on the transfer of business and assets of Hainan Co., Ltd. dated June 30, 2005 which was issued by China Enterprise Appraisal Co., Ltd., which sets out the estimated value of the Core Assets as RMB355,150,000, consisting mainly of RMB103,020,000 in cash, RMB55,110,000 for bill and trade receivables, RMB160,970,000 for airplanes, aviation equipment and productionrelated buildings and equipment, as well as RMB35,480,000 of land; and the Core Liabilities, which include airplane repair expenses, jet fuel and takeoff and landing fees, amount to RMB350,000,000. The Core Liabilities will be paid directly by the Company to the creditors in accordance with the terms and period as agreed by relevant parties. After deducting the above-mentioned liabilities, the Company shall pay RMB5,150,000 in cash, being the difference in the estimated values of the Core Assets and Core Liabilities, into the bank account designated by Hainan Co., Ltd. The Company will fund the consideration for the Acquisition wholly by its internal resources.
Nan Lung Travel & Express (Hong Kong) Ltd. (the “Nanlung”), a subsidiary wholly owned by CSAHC
As China Airlines (Hong Kong) Co., Ltd. has ceased to act as agent of the Company in respect of its ticket sales, account settlement and the ground operations of its flights in Hong Kong region, for the purpose of maintaining the sales and operations of the Company in Hong Kong region, the Company entered into a new General Agency Agreement for Sale of Freight and Passenger Services (the “Agency Agreement”) with Nanlung on May 16, 2006, having been approved by the Board of Directors of the Company.
The Agency Agreement is valid for a term of one year, commencing from January 1, 2006, subject to compliance with the relevant provisions of the Hong Kong Listing Rules by the Company. Both parties agreed that prior to the establishment of any relevant entity in Hong Kong region by the Company, the Company authorizes Nanlung to act as agent in its sales and account settlement and the ground operations of its flights in Hong Kong region, and that the rates of the various agency fees shall be determined after arm’s length negotiation and shall not exceed those of the same category that prevail in the market, with a ceiling set at 6% of the revenue of the Company that is derived from freight and passenger services sold through the agency of Nanlung (the total amount shall not exceed HK$60 million). The agency fee is payable within the time period set out in the invoice to be delivered to the Company. The Company will fund the agency fee wholly by its internal resources.
Interests of Experts and Counsel Not applicable.
ITEM 8. FINANCIAL INFORMATION.
Consolidated Statements and Other Financial Information See “Item 18. Financial Statements” for financial statements filed as part of this Annual Report.
48
No significant changes have occurred since the date of the financial statements provided in Item 18 below.
Legal Proceedings
The Company is currently involved in a civil litigation (Hong Kong High Court Action No. 515 of 2001) (“Litigation”). According to the writ of summons for the Litigation, New Link Consultants Limited, the plaintiff, claimed against the Company (as one of the defendants to the Litigation) on the basis of certain evidence proving that United Aero-Supplies System of China, Limited (“UASSC”) entered into an agreement with the defendants for exclusive purchase of aviation equipment consigned to UASSC for sale and, that as the defendants failed to perform the agreement, UASSC has the right to compensation. Since UASSC is in the course of its winding up proceedings, all the rights and benefits of UASSC in connection with the claim have been transferred to the plaintiff. The Company, as one of the defendants to the Litigation, has been claimed for unspecified damages for breach of the agreement. Given that the Litigation is still at its preliminary stage, it is pre-matured to predict the result of the court judgment. Based on the opinion given by its instructing solicitors, the Company’s directors consider that the Company has a reasonable chance of success in its defense to the claim. At present, the Company has filed an objection in respect of the jurisdiction of the court, and has requested the court to transfer the case to the PRC for trial. Accordingly, the Directors of the Company consider that a provision for such claim and/or the associated legal costs is not required.
Other than the above legal proceeding, the Company is not party to any material legal proceedings.
No interim dividend was paid during the year ended December 31, 2003.2005. The Board of Directors does not recommend the payment of a final dividend in respect of the year ended December 31, 2003.2005.
60
ITEM 9. THE OFFER AND LISTING. Offer and Listing Details
The principal trading market for the Company’s H Shares is the Hong Kong Stock Exchange, and the Company’s trading code is “1055”. The ADSs, each representing 50 H Shares, are evidenced by ADRs issued by The Bank of New York as the Depositary for the ADRs, and are listed on the New York Stock Exchange under the symbol
“ZNH.” As of May 31, 2004, approximately 104,740,000 of the Company’s H Shares in the form of 2,094,800 ADSs were held in the U.S. by approximately 42 record holders in the U.S., including the Depository Trust Company.“ZNH”.
In July 2003, the Company issued and listed 1,000,000,000 A shares on the Shanghai Stock Exchange with trading code of “600029”. The 2,200,000,000 Domestic Shares held by CSAHC are not listed on any stock exchange and are essentially not transferrable by CSAHC.
Set forth below for the periods indicated are the high and low sales prices of H Shares on the Hong Kong Stock Exchange, ADSs on the New York Stock Exchange and A Shares on the Shanghai Stock Exchange.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 |
| | |
| |
| |
| |
| |
| |
|
| Annual Market Prices | | | | | | | | | | | | |
| | Fiscal Year ended December 31, 1998 | | | 2.40 | | | | 0.50 | | | | 14.75 | | | | 3.06 | | | | N/A | | | | N/A | | |
| | Fiscal Year ended December 31, 1999 | | | 2.25 | | | | 0.61 | | | | 13.94 | | | | 3.88 | | | | N/A | | | | N/A | | |
| | Fiscal Year ended December 31, 2000 | | | 2.93 | | | | 1.02 | | | | 18.38 | | | | 6.06 | | | | N/A | | | | N/A | | |
| | Fiscal Year ended December 31, 2001 | | | 2.95 | | | | 1.35 | | | | 18.10 | | | | 8.00 | | | | N/A | | | | N/A | | |
| | Fiscal Year ended December 31, 2002 | | | 3.60 | | | | 1.50 | | | | 22.25 | | | | 10.35 | | | | N/A | | | | N/A | | |
| | Fiscal Year ended December 31, 2003 | | | 3.50 | | | | 1.46 | | | | 22.78 | | | | 9.53 | | | | 5.34 | | | | 3.75 | | |
Quarterly Market Prices | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year ended December 31, 2000 | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | | 1.86 | | | | 1.02 | | | | 11.19 | | | | 6.88 | | | | N/A | | | | N/A | | |
| | Second Quarter | | | 2.05 | | | | 1.06 | | | | 12.44 | | | | 6.06 | | | | N/A | | | | N/A | | |
| | Third Quarter | | | 2.93 | | | | 1.63 | | | | 18.38 | | | | 10.19 | | | | N/A | | | | N/A | | |
| | Fourth Quarter | | | 2.40 | | | | 1.46 | | | | 15.06 | | | | 9.56 | | | | N/A | | | | N/A | | |
| | Fiscal Year ended December 31, 2001 | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | | 2.70 | | | | 1.83 | | | | 17.38 | | | | 12.22 | | | | N/A | | | | N/A | | |
| | Second Quarter | | | 2.95 | | | | 1.89 | | | | 18.10 | | | | 12.00 | | | | N/A | | | | N/A | | |
| | Third Quarter | | | 2.53 | | | | 1.35 | | | | 16.50 | | | | 8.00 | | | | N/A | | | | N/A | | |
| | Fourth Quarter | | | 2.42 | | | | 1.66 | | | | 15.25 | | | | 9.8 | | | | N/A | | | | N/A | | |
| | Fiscal Year ended December 31, 2002 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 |
Annual Market Prices | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal Year ended December 31, 2000 | | | 2.93 | | | | 1.02 | | | | 18.38 | | | | 6.06 | | | | N/A | | | | N/A | |
Fiscal Year ended December 31, 2001 | | | 2.95 | | | | 1.35 | | | | 18.10 | | | | 8.00 | | | | N/A | | | | N/A | |
Fiscal Year ended December 31, 2002 | | | 3.60 | | | | 1.50 | | | | 22.25 | | | | 10.35 | | | | N/A | | | | N/A | |
Fiscal Year ended December 31, 2003 | | | 3.50 | | | | 1.46 | | | | 22.78 | | | | 9.53 | | | | 5.34 | | | | 3.75 | |
Fiscal Year ended December 31, 2004 | | | 4.68 | | | | 2.47 | | | | 29.73 | | | | 15.95 | | | | 6.87 | | | | 3.96 | |
Fiscal Year ended December 31, 2005 | | | 2.22 | | | | 2.17 | | | | 14.25 | | | | 14.20 | | | | 2.68 | | | | 2.62 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Quarterly Market Prices | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal Year ended December 31, 2002 | | | | | | | | | | | | | | | | | | | | | | | | |
First Quarter | | | 2.83 | | | | 2.22 | | | | 17.63 | | | | 14.80 | | | | N/A | | | | N/A | |
Second Quarter | | | 3.42 | | | | 2.33 | | | | 21.74 | | | | 14.95 | | | | N/A | | | | N/A | |
Third Quarter | | | 3.60 | | | | 1.89 | | | | 22.25 | | | | 12.00 | | | | N/A | | | | N/A | |
Fourth Quarter | | | 2.42 | | | | 1.50 | | | | 15.00 | | | | 10.35 | | | | N/A | | | | N/A | |
Fiscal Year ended December 31, 2003 | | | | | | | | | | | | | | | | | | | | | | | | |
First Quarter | | | 2.62 | | | | 1.71 | | | | 16.50 | | | | 11.75 | | | | N/A | | | | N/A | |
Second Quarter | | | 2.40 | | | | 1.46 | | | | 14.85 | | | | 9.53 | | | | N/A | | | | N/A | |
Third Quarter | | | 2.88 | | | | 2.03 | | | | 18.59 | | | | 13.25 | | | | 4.15 | | | | 3.75 | |
Fourth Quarter | | | 3.50 | | | | 2.50 | | | | 22.78 | | | | 16.76 | | | | 5.34 | | | | 3.86 | |
Fiscal Year ended December 31, 2004 | | | | | | | | | | | | | | | | | | | | | | | | |
First Quarter | | | 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 | |
Fiscal Year ended December 31, 2005 | | | | | | | | | | | | | | | | | | | | | | | | |
First Quarter | | | 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 | |
Plan of Distribution
Not applicable.
61
49
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 |
| | |
| |
| |
| |
| |
| |
|
| | First Quarter | | | 2.83 | | | | 2.22 | | | | 17.63 | | | | 14.80 | | | | NA | | | | NA | |
| | Second Quarter | | | 3.42 | | | | 2.33 | | | | 21.74 | | | | 14.95 | | | | NA | | | | NA | |
| | Third Quarter | | | 3.60 | | | | 1.89 | | | | 22.25 | | | | 12.00 | | | | NA | | | | NA | |
| | Fourth Quarter | | | 2.42 | | | | 1.50 | | | | 15.00 | | | | 10.35 | | | | NA | | | | NA | |
| Fiscal Year ended December 31, 2003 | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | | 2.62 | | | | 1.71 | | | | 16.50 | | | | 11.75 | | | | N/A | | | | N/A | |
| | Second Quarter | | | 2.40 | | | | 1.46 | | | | 14.85 | | | | 9.53 | | | | N/A | | | | N/A | |
| | Third Quarter | | | 2.88 | | | | 2.03 | | | | 18.59 | | | | 13.25 | | | | 4.15 | | | | 3.75 | |
| | Fourth Quarter | | | 3.50 | | | | 2.50 | | | | 22.78 | | | | 16.76 | | | | 5.34 | | | | 3.86 | |
Monthly Market Prices | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 2003 | | | 3.50 | | | | 2.92 | | | | 22.78 | | | | 19.00 | | | | 5.34 | | | | 4.46 | |
| | January 2004 | | | 3.95 | | | | 3.35 | | | | 25.18 | | | | 21.94 | | | | 6.30 | | | | 4.95 | |
| | February 2004 | | | 4.68 | | | | 3.20 | | | | 29.73 | | | | 20.91 | | | | 6.73 | | | | 5.70 | |
| | March 2004 | | | 4.47 | | | | 3.30 | | | | 28.60 | | | | 21.00 | | | | 6.57 | | | | 5.77 | |
| | April 2004 | | | 3.90 | | | | 3.20 | | | | 24.89 | | | | 21.07 | | | | 6.24 | | | | 5.49 | |
| | May 2004 | | | 3.53 | | | | 2.47 | | | | 22.62 | | | | 15.95 | | | | 6.10 | | | | 4.82 | |
OfferMarkets
See “Offer and Listing
detailsDetails” above.
Selling Shareholders
Not applicable.
Plan of Distribution
Dilution
Not applicable.
Markets
Not applicable.
Selling Shareholders
Not applicable.
Dilution
Not applicable.
Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION.
Not applicable.
Memorandum and Articles of Association The following is a summary of certain provisions of our articles of association. As this is a summary, it does not contain all the information that may be important to you. You and your advisors should read the text of our articles of association for further information.
The Company is registered with and has obtained a business license from the 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.
On March 13, 2003, the Company obtained an approval certificate from the Ministry of Commerce to change to a permanent limited company with foreign investments and obtained the business license (Qi Gu Guo Zi Di No. 000995) on October 17, 2003 issued by the State Administration of Industry and Commerce of the People’s Republic of China.
50
Director
Objects and Purpose
Pursuant to Article 13 of the Articles of Association, the business purposes of the Company are: (i) to absorb domestic and foreign capital; (ii) to assist in developing the aviation industry of China; (iii) to promote the development of the national economy of China; (iv) to utilize corporate incentive mechanisms of privatization; (v) to draw on the advanced management expertise of other domestic and foreign companies; (vi) to continuously improve the management of the Company; (vii) to enhance the market competitiveness of the Company; (viii) to generate economic and social benefits for the Company; and (ix) to generate steady income for the Company’s shareholders. Pursuant to Article 14 of the Articles of Association, the scope of business of the Company shall be consistent with and subject to the scope of business approved by the relevant supervisory department of the State. The scope of business of the Company includes: (i) provision of scheduled and non-scheduled domestic, regional and international air transportation services for passengers, cargo, mail and luggage; (ii) undertaking general aviation services; (iii) provision of aircraft repair and maintenance services; (iv) acting as agent for other domestic and international airlines; (v) provision of air catering services and (vi) engaging in other airline or airline-related business, including advertising for such services.
Directors
Pursuant to Article
154179 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.Directors.
Pursuant to Article 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.
62
Pursuant to Article
162187 of the Articles of Association, the Company shall, with the prior approval of shareholders in general meeting, enter into a contract in writing with a
directorDirector wherein his emoluments are stipulated. The aforesaid emoluments include, emoluments in respect of his service as
director, supervisorDirector, Supervisor or senior administrative officer of the Company or any subsidiary of the Company; emoluments in respect of the provision of other services in connection with the management of the affairs of the Company and any of its subsidiaries; and payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office.
Pursuant to Article
102(6)124(6) of the Articles of Association, the
boardBoard of
directorsDirectors has the power to formulate proposals for increases or reductions in the Company’s registered capital and the issue of debentures of the Company; such resolutions must be passed by more than two-thirds of all the
directors.Directors.
There is no mandatory retirement age for the
directorsDirectors of the Company. The
directorsDirectors of the Company are not required to hold shares of the Company.
Pursuant to Article 19 of the Articles of Association
,subject to the approval of the securities authority of the State Council, the Company may issue and offer shares to domestic investors or foreign investors for subscription. Foreign investors are those investors of foreign countries and regions of Hong Kong, Macau and Taiwan who subscribe for shares issued by the Company. Domestic investors are those investors within the territory of the PRC (excluding investors of the regions referred to in the preceding sentence) who subscribe for shares issued by the Company.
Pursuant to Article 20 of the Articles of Association
,Shares issued by the Company to domestic investors for subscription in Renminbi shall be referred to as “Domestic-Invested Shares”. Shares issued by the Company to foreign investors for subscription in foreign currencies shall be referred to as “Foreign-Invested Shares”. Foreign-Invested Shares which are listed overseas are called “Overseas-Listed Foreign-Invested Shares”. The foreign currencies mean the legal currencies (apart from Renminbi) of other countries or districts which are recognized by the foreign exchange control authority of the
Statestate and can be used to pay the Company for the share price.
Pursuant to Article 21 of the Articles of Association
,Domestic-Invested Shares issued by the Company shall be called “A Shares”. Overseas-Listed Foreign-Invested Shares issued by the Company and listed in Hong Kong shall be called “H Shares”. H Shares are shares which have been admitted for listing on The Stock Exchange of Hong Kong Limited, the par value of which is denominated in Renminbi and which are subscribed for and traded in Hong Kong dollars. H Shares can also be listed on a stock exchange in the United States of America in the form of American depositary receipts.
51
The Company has issued a total of 4,374,178,000 ordinary shares, of which (a) 2,200,000,000
domestic shares are
Domestic Shares held by CSAHC, (b) 1,174,178,000
are H
shares areShares held by Hong Kong and overseas shareholders and (c) 1,000,000,000
are A
shares areShares held by
the PRC shareholders.
Pursuant to Article 54 of the Articles of Association, the ordinary shareholders of the Company shall enjoy the following rights:
| (1) | | the right to attend or appoint a proxy to attend shareholders’ general meetings and to vote thereat; |
|
(2) | | the right to dividends and other distributions in proportion to the number of shares held; |
|
(2) the right to dividends and other distributions in proportion to the number of shares held;
| (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: |
(i) the right to obtain a copy of these articles of association, subject to payment of the cost of such copy;
63
| (i) | | the right to obtain a copy of these articles of association, subject to payment of the cost of such copy; |
|
| (ii) | | the right to inspect and copy, subject to payment of a reasonable charge: |
|
| | | (a) all parts of the register of shareholders; |
|
| | | (b) personal particulars of each of the Company’s directors, supervisors, president and other senior administrative officers, including: |
|
| | | (aa) present name and alias and any former name or alias; |
|
| | | (bb) principal address (residence); |
|
| | | (cc) nationality; |
|
| | | (dd) primary and all other part-time occupations and duties; |
|
| | | (ee) identification documents and their relevant numbers; |
|
| | | (c) state of the Company’s share capital; |
|
| | | (d) reports showing the aggregate par value, quantity, highest and lowest price paid in respect of each class of shares repurchased by the Company since the end of last accounting year and the aggregate amount paid by the Company for this purpose; |
|
| | | (e) minutes of shareholders’ general meetings; |
|
| | | (f) interim and annual reports of the Company. |
(ii) the right to inspect and copy, subject to payment of a reasonable charge:
(a) all parts of the register of shareholders;
(b) personal particulars of each of the Company’s directors, supervisors, president and other senior administrative officers, including:
(aa) present name and alias and any former name or alias;
(bb) principal address (residence);
(cc) nationality;
(dd) primary and all other part-time occupations and duties;
(ee) identification documents and their relevant numbers;
(c) state of the Company’s share capital;
(d) reports showing the aggregate par value, quantity, highest and lowest price paid in respect of each class of shares repurchased by the Company since the end of last accounting year and the aggregate amount paid by the Company for this purpose;
(e) minutes of shareholders’ general meetings;
(f) interim and annual reports of the Company.
| (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. |
Pursuant to Article 55 of the Articles of Association, the ordinary shareholders of the Company shall assume the following obligations:
52
| (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. |
Shareholders are not liable to make any further contribution to the share capital other than as agreed by the subscriber of the relevant shares on subscription.
Action necessary to change rights of shareholders
Pursuant to Article
92112 of the Articles of Association,
those shareholders who hold different classes of shares are shareholders of different classes.
The holders of the Domestic-Invested sharesShares and holders of Overseas-Listed Foreign-Invested Shares shall be deemed to be shareholders of different classes.
64
Pursuant to Article
93113 of the Articles of Association, rights conferred on any class of shareholders in the capacity of shareholders (“class rights”) may not be varied or abrogated unless approved by a special resolution of shareholders in general meeting and by holders of shares of that class at a separate meeting conducted in accordance with Articles
95115 to
99.119.
Pursuant to Article
95115 of the Articles of Association,
shareholders of the affected class, whether or not otherwise having the right to vote at shareholders’ general meetings, shall nevertheless have the right to vote at class meetings in respect of matters concerning sub-paragraphs (2) to (8), (11) and (12) of Article
94,114, but interested shareholder(s) shall not be entitled to vote at class meetings. “Interested shareholder(s)” is:
| (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; |
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| (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; |
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| (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. |
Pursuant to Article
96116 of the Articles of Association, resolutions of a class of shareholders shall be passed by votes representing more than two-thirds of the voting rights of shareholders of that class represented at the relevant meeting who, according to Article
95,115, are entitled to vote at class meetings.
Pursuant to Article
97117 of the Articles of Association, written notice of a class meeting shall be given forty-five (45) days before the date of the class meeting to notify all of the shareholders in the share register of the class of the matters to be considered, the date and the place of the class meeting. A shareholder who intends to attend the class meeting shall deliver his written reply concerning attendance at the class meeting to the Company twenty (20) days before the date of the class meeting.
If the number of shares carrying voting rights at the meeting represented by the shareholders who intend to attend the class meeting reaches more than one half of the voting shares at the class meeting, the Company may hold the class meeting; if not, the Company shall within five (5) days notify the shareholders again by public notice of the matters to be considered, the date and the place for the class meeting. The Company may then hold the class meeting after such publication of notice.
Pursuant to Article
98118 of the Articles of Association, notice of class meetings need only be served on shareholders entitled to vote thereat.
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Meeting of any class of shareholders shall be conducted in a manner as similar as possible to that of general meetings of shareholders. The provisions of these articles of association relating to the manner to conduct any shareholders’ general meeting shall apply to any meeting of a class of shareholders.
Pursuant to Article
99119 of the Articles of Association, the special procedures for voting at any meeting of a class of shareholders shall not apply to the following circumstances:
| (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; |
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| (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. |
Shareholders’ general meetings is the organ of authority of the Company and shall exercise its functions and powers, among other things, to decide on the Company’s operational policies and investment plans, to elect and replace directors and decide on matters relating to the remuneration of directors, to examine and approve reports of the board of directors, etc.
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There are two types of shareholders’ general meetings: annual general meetings and extraordinary general meetings. Shareholders’ general meetings shall be convened by the board of directors. Annual general meetings are held once every year and within six (6) months from the end of the preceding financial year.
Under any of the following circumstances, the
boardBoard of
directorsDirectors shall convene an extraordinary general meeting within two (2) months:
| (1) | | when the number of directorsDirectors is less than the number of directorsDirectors required by the Company Law or two thirds of the number of directorsDirectors specified in the Articles of Association; |
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| (2) | | when the unrecovered losses of the Company amount to one third of the total amount of its share capital; |
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| (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; |
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| (4) | | when deemed necessary by the boardBoard of directorsDirectors or as requested by the supervisory committee. |
When the Company convenes a shareholders’ general meeting, written notice of the meeting shall be given forty five (45) days before the date of the meeting to notify all of the shareholders in the share register of the matters to be considered and the date and the place of the meeting. A shareholder who intends to attend the meeting shall deliver his written reply concerning the attendance of the meeting to the Company twenty (20) days before the date of the meeting.
The Company shall, based on the written replies received twenty (20) days before the date of the shareholders’ general meeting from the shareholders, calculate the number of voting shares represented by the shareholders who intend to attend the meeting. If the number of voting shares represented by the shareholders who intend to attend the meeting reaches one half or more of the Company’s total voting shares, the Company may hold the meeting; if not, then the Company shall within five (5) days notify the shareholders again by public notice of the matters to be considered, the place and date for, the meeting. The Company may then hold the meeting after such publication of notice.
Limitation on right to own securities
The PRC Special Regulations on Overseas Offering and the Listing of Shares by Companies Limited by Share (the “Special Regulations”) and the Mandatory Provisions for Articles of Association of Companies to be Listed Overseas (the “Mandatory Provisions”) provide for different classes of shares to be subscribed for and traded by local and overseas investors respectively. Shares which can be traded by overseas investors must be in registered form and while denominated in Renminbi, they are traded in foreign currency with dividends payable in foreign currency. Local investors are prohibited from dealing in such shares.
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Merger, acquisition or corporate restructuring
Pursuant to Article
193221 of the Articles of Association, in the event of the merger or division of the Company, a plan shall be presented by the Company’s board of directors and shall be approved in shareholders’ general meeting and the relevant examining and approving formalities shall be processed as required by law. A shareholder who objects to the plan of merger or division shall have the right to demand the Company or the shareholders who consent to the plan of merger or division to acquire that dissenting shareholder’s shareholding at a fair price. The contents of the resolution of merger or division of the Company shall be made into special documents for shareholders’ inspection. Such special documents shall be sent by mail to holders of Overseas-Listed Foreign-Invested Shares.
The Articles of Association do not contain any provisions governing the ownership threshold above which shareholder ownership must be disclosed.
The Company has not entered into any material contracts other than in the ordinary course of business duringand 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. |
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| (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. |
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| (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. |
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| (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. |
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| (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. |
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| (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. |
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| (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. |
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| (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. |
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| (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. |
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| (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. |
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| (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. |
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Under current Chinese foreign exchange regulations, Renminbi is fully convertible for current account transactions, but is not freely convertible for capital account
transactions. Current account foreign exchange transactions can be undertaken without prior approval from the relevant Chinese Government agencies by producing commercial documents evidencing such transactions, provided that they are processed through Chinese banks licensed to engage in foreign exchange transactions. Conversion from Renminbi into a foreign currency or vice versa for purposes of capital account transactions requires prior approvals of relevant Chinese Government agencies.
This restriction on capital account transactions could affect the ability of the Company to acquire foreign currency for capital expenditures.
The Company is generally required by law to sell all its foreign exchange revenues to Chinese
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.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 exchange.
currency.
On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar so that the Renminbi is now permitted to fluctuate within a band against a basket of certain foreign currencies. As a result, the value of the Renminbi against the U.S. dollar has appreciated by approximately 2%. Under the new policy, the value of Renminbi against the U.S. dollar has fluctuated on a daily basis within narrow ranges, but overall has further strengthened against the U.S. dollar. The PRC government has stated publicly that it intends to further liberalize its currency policy, which could result in a further and more significant change in the value of the Renminbi against the U.S. dollar. Any significant revaluation of the Renminbi may have a material adverse effect on the Company’s financial performance, and the value of, and any dividends payable on, the Company’s H Shares and ADSs in foreign currency terms.
There are no limitations on the right of non-resident or foreign owners to hold or vote H Shares or ADSs imposed by Chinese law or by the Articles of Association or other constituent documents of the Company. However, under current Chinese law, foreign ownership of the Company may not exceed 49%.
Chinese Taxation
The following is a general summary of certain Chinese tax consequences of the acquisition, ownership and disposition of H Shares and ADSs. This summary is based upon tax laws of China as in effect on the date of this Annual Report, including the income tax treaty between the United States and China (the “U.S.-PRC Tax Treaty”), all of which are subject to change or different interpretation.
In general, for Chinese tax purposes, holders of ADSs will be treated as the owners of the H Shares represented by those ADSs, and exchanges of H Shares for ADSs, and ADSs for H Shares, will not be subject to taxation under the laws of China.
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This summary does not purport to address all material tax consequences for holders or prospective purchasers of H Shares or ADSs, and does not take into account the specific circumstances of such investors. Investors should consult their own tax advisors as to Chinese or other tax consequences of the acquisition, ownership and disposition of H Shares or ADSs.
Chinese tax law generally provides for the imposition of a withholding tax on dividends paid by a Chinese company to a non-Chinese shareholder at a rate of 20%. However, the Chinese tax authorities have temporarily suspended imposition of this withholding tax. Accordingly, dividends paid by the Company to holders of H Shares or ADSs who are foreign individuals not resident in China or which are foreign enterprises with no permanent establishment in China will currently not be subject to Chinese withholding tax. In the event that the suspension of the withholding tax is lifted, such payments will be subject to withholding tax at the 20% rate unless the holder is entitled to a tax waiver or a lower tax rate under an applicable double-taxation treaty.
China currently has double-taxation treaties with a number of countries, including Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States. Under the U.S.-PRC Tax Treaty, China may tax a dividend paid by the Company to a U.S. holder up to a maximum of 10% of the gross amount of such dividend.
Capital Gains from Transfer or Disposition of Shares
Chinese tax law generally provides that an individual who transfers or otherwise disposes of a company’s shares of capital stock is subject to a 20% capital gains tax. Currently, foreign enterprises and all individuals are temporarily exempt from capital gains tax on transfers of shares of capital stock of joint stock companies, such as the Company. Should such temporary exemption be discontinued, such holders may be
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subject to a 20% capital gains tax unless reduced by an applicable double-taxation treaty. Under the U.S.-PRC Tax Treaty, for example, China may only impose a 20% capital gains tax from the sale or other disposition by a U.S. holder of H Shares or ADSs representing an interest in the Company of 25% or more.
Transfers of shares of capital stock of a company are not subject to Chinese stamp duty if the transfer does not take place within China (excluding Hong Kong, Macau and Taiwan).
United States Federal Income Taxation
This discussion describes the material U.S. federal income tax consequences of the purchase, ownership and disposition of the Company’s ADSs. This discussion does not address any aspect of U.S. federal gift or estate tax, or the state, local or foreign tax consequences of an investment in the Company’s ADSs. This discussion applies to you only if you hold and beneficially own the Company’s ADSs as capital assets for tax purposes. This discussion does not apply to you if you are a member of a class of holders subject to special rules, such as:
| • | | dealers in securities or currencies; |
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| • | | traders in securities that elect to use a mark-to-market method of accounting for securities holdings; |
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| • | | banks or other financial institutions; |
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| • | | insurance companies; |
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| • | | tax-exempt organizations; |
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| • | | partnerships and other entities treated as partnerships for U.S. federal income tax purposes or persons holding ADSs through any such entities; |
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| • | | persons that hold ADSs as part of a hedge, straddle, constructive sale, conversion transaction or other integrated investment; |
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| • | | U.S. Holders (as defined below) whose functional currency for tax purposes is not the U.S. dollar; |
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| • | | persons liable for alternative minimum tax; or |
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| • | | 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. |
This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, which is referred to in this discussion as the Code, its legislative history, existing and proposed regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. In addition, this discussion relies on the assumptions regarding the value of the Company’s shares and the nature of its business over time. Finally, this discussion is based in part upon the representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms. For U.S. federal income tax purposes, as a holder of ADSs, you are treated as the owner of the underlying ordinary shares represented by such ADSs.
You should consult your own tax advisor concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of the Company’s ADSs, as well as the consequences to you arising under the laws of any other taxing jurisdiction.
For purposes of the U.S. federal income tax discussion below, you are a “U.S. Holder” if you beneficially own ADSs and are:
| • | | a citizen or resident of the United States for U.S. federal income tax purposes; |
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| • | | 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; |
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| • | | an estate the income of which is subject to U.S. federal income tax regardless of its source; or |
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| • | | 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. |
If you are not a U.S. person, please refer to the discussion below under “Non-U.S. Holders.”
For U.S. federal income tax purposes, income earned through a foreign or domestic partnership or other flow-through entity is attributed to its owners. Accordingly, if a partnership or other flow-through entity holds ADSs, the tax treatment of the holder will generally depend on the status of the partner or other owner and the activities of the partnership or other flow-through entity.
U.S. Holders
Dividends on ADSs
Subject to the “Passive Foreign Investment Company” discussion below, if the Company makes distributions and you are a U.S. Holder, the gross amount of any distributions you receive on your ADSs will generally be treated as dividend income if the distributions are made from the Company’s current or accumulated earnings and profits, calculated according to U.S. federal income tax principles. Dividends will generally be subject to U.S. federal income tax as ordinary income on the day you actually or constructively receive such income. However, if you are an individual and have held your ADSs for a sufficient period of time, dividend distributions on the Company’s ADSs will generally constitute qualified dividend income taxed at a preferential rate (generally 15% for dividend distributions before January 1, 2009) as long as the Company’s ADSs continue to be readily tradable on the New York Stock Exchange and certain other conditions apply. You should consult your own tax adviser as to the rate of tax that will apply to you with respect to dividend distributions, if any, you receive from us.
Distributions on the Company’s ADSs, if any, will generally be taxed to you as dividend distributions for U.S. tax purposes. Even if you are a corporation, you will not be entitled to claim a dividends-received deduction with respect to distributions you receive from the Company. Dividends generally will constitute foreign source passive income for U.S. foreign tax credit limitation purposes.
Sales and other dispositions of ADSs
Subject to the “Passive Foreign Investment Company” discussion below, when you sell or otherwise dispose of the Company’s ADSs, you will generally recognize capital gain or loss in an amount equal to the difference between the amount realized on the sale or other disposition and your adjusted tax basis in the ADSs, both as determined in U.S. dollars. Your adjusted tax basis will generally equal the amount you paid for the ADSs. Any gain or loss you recognize will be long-term capital gain or loss if your holding period in the Company’s ADSs is more than one year at the time of disposition. If you are an individual, any such long-term capital gain will be taxed at preferential rates. Your ability to deduct capital losses will be subject to various limitations.
Passive Foreign Investment Company
If the Company were a Passive Foreign Investment Company or “PFIC” in any taxable year in which you hold the Company’s ADSs, as a U.S. Holder, you would generally be subject to adverse U.S. tax consequences, in the form of increased tax liabilities and special U.S. tax reporting requirements.
The Company will be classified as a PFIC in any taxable year if either: (1) the average percentage value of its gross assets during the taxable year that produce passive income or are held for the production of passive income is at least 50% of the value of its total gross assets or (2) 75% or more of its gross income for the taxable year is passive income (such as certain dividends, interest or royalties). For purposes of the first test: (1) any cash, cash equivalents, and cash invested in short-term, interest bearing, debt instruments, or bank deposits that is readily convertible into cash, will generally count as producing passive income or held for the production of passive income and (2) the average value of the Company’s gross assets is calculated based on its market capitalization.
The Company believes that it was not a PFIC for the taxable year 2004. However, there can be no assurance that the Company will not be a PFIC for the taxable year 2005 and/or later taxable years, as PFIC status is re-tested each year and depends on the facts in such year. For example, the Company would be a PFIC for the taxable year 2005 if the sum of its average market capitalization, which is its share price multiplied by the total amount of its outstanding shares, and its liabilities over that taxable year is not more than twice the value of its cash, cash equivalents, and other assets that are readily converted into cash.
If the Company were a PFIC, you would generally be subject to additional taxes and interest charges on certain “excess” distributions the Company makes and on any gain realized on the disposition or deemed disposition of your ADSs, regardless of whether the Company continues to be a PFIC in the year in which you receive an “excess” distribution or dispose of or are deemed to dispose of your ADSs. Distributions in respect of your ADSs during a taxable year would generally constitute “excess” distributions if, in the aggregate, they exceed 125% of the average amount of distributions in respect of your ADSs over the three preceding taxable years or, if shorter, the portion of your holding period before such taxable year.
To compute the tax on “excess” distributions or any gain, (1) the “excess” distribution or the gain would be allocated ratably to each day in your holding period, (2) the amount allocated to the current year and any tax year before the Company became a PFIC would be taxed as ordinary income in the current year, (3) the amount allocated to other taxable years would be taxable at the highest applicable marginal rate in effect for that year, and (4) an interest charge at the rate for underpayment of taxes for any period described under (3) above would be imposed with respect to any portion of the “excess” distribution or gain that is allocated to such period. In addition, if the Company were a PFIC, no distribution that you receive from the Company would qualify for taxation at the preferential rate discussed in the “Dividends on ADSs” section above.
If the Company were a PFIC in any year, as a U.S. Holder, you would be required to make an annual return on IRS Form 8621 regarding your ADSs. However, the Company does not intend to generate, or share with you, information that you might need to properly complete IRS Form 8621. You should consult with your own tax adviser regarding reporting requirements with regard to your ADSs.
If the Company were a PFIC in any year, you would generally be able to avoid the “excess” distribution rules described above by making a timely so-called “mark-to-market” election with respect to your ADSs provided the Company’s ADSs are “marketable”. The Company’s ADSs will be “marketable” as long as they remain regularly traded on a national securities exchange, such as the New York Stock Exchange. If you made this election in a timely fashion, you would generally recognize as ordinary income or ordinary loss the difference between the fair market value of your ADSs on the first day of any taxable year and their value on the last day of that taxable year. Any ordinary income resulting from this election would generally be taxed at ordinary income rates and would not be eligible for the reduced rate of tax applicable to qualified dividend income. Any ordinary losses would be limited to the extent of the net amount of previously included income as a result of the mark-to-market election, if any. Your basis in the ADSs would be adjusted to reflect any such income or loss. You should consult with your own tax adviser regarding potential advantages and disadvantages to you of making a “mark-to-market” election with respect to your ADSs. Separately, if the Company were a PFIC in any year, you would be able to avoid the “excess” distribution rules by making a timely election to treat us as a so-called “Qualified Electing Fund” or “QEF.” You would then generally be required to include in gross income for any taxable year (1) as ordinary income, your pro rata share of the Company’s ordinary earnings for the taxable year, and (2) as long-term capital gain, your pro rata share of the Company’s net capital gain for the taxable year. However, the Company does not intend to provide you with the information you would need to make or maintain a “QEF” election and you will, therefore, not be able to make or maintain such an election with respect to your ADSs.
Non-U.S. Holders
If you beneficially own ADSs and are not a U.S. Holder for U.S. federal income tax purposes (a “Non-U.S. Holder”), you generally will not be subject to U.S. federal income tax or withholding on dividends received from the Company with respect to ADSs unless that income is considered effectively connected with your 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 dividends are attributable to a permanent establishment that you maintain in the United States. You generally will not be subject to U.S. federal income tax, including withholding tax, on any gain realized upon the sale or exchange of ADSs, unless:
| • | | 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 |
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| • | | 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. |
If you are engaged in a U.S. trade or business, unless an applicable tax treaty provides otherwise, the income from your ADSs, including dividends and the gain from the disposition of the Company’s ADSs, that is effectively connected with the conduct of that trade or business will generally be subject to the rules applicable to U.S. Holders discussed above. In addition, if you are a corporation, you may be subject to an additional branch profits tax at a rate of 30% or any lower rate under an applicable tax treaty.
U.S. information reporting and backup withholding rules
In general, dividend payments with respect to the ADSs and the proceeds received on the sale or other disposition of those ADSs may be subject to information reporting to the IRS and to backup withholding (currently imposed at a rate of 28%). Backup withholding will not apply, however, if you (1) are a corporation or come within certain other exempt categories and, when required, can demonstrate that fact or (2) provide a taxpayer identification number, certify as to no loss of exemption from backup withholding and otherwise comply with the applicable backup withholding rules. To establish your status as an exempt person, you will generally be required to provide certification on IRS Form W-9, W-8BEN or W-8ECI, as applicable. Any amounts withheld from payments to you under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability, provide that you furnish the required information to the IRS.
HOLDERS OF THE COMPANY’S ADSS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF THE ADSS, INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION AND INCLUDING ESTATE, GIFT, AND INHERITANCE LAWS.
Dividends and payingPaying Agents Not applicable.
Not applicable.
The Company has filed this Annual Report on Form 20-F with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Statements made in this
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.
The Company is subject to the informational requirements of the Exchange Act and file reports and other information with the Securities and Exchange Commission. Reports and other information which the Company filed with the Securities and Exchange Commission, including this Annual Report on Form 20-F, may be inspected and copied at the public reference room of the Securities and Exchange Commission at
56
450 Fifth Street N.W. Washington D.C. 20549
20549.
You can also obtain copies of this materialAnnual 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.
Not applicable.
Comparison of New York Stock Exchange Corporate Governance Rules and China Corporate Governance Rules for Listed Companies
Under the amended Corporate Governance Rules of New York Stock Exchange (NYSE), foreign issuers (including the Company) listed on the NYSE are required to disclose a summary of the significant differences between their domestic corporate governance rules and NYSE corporate governance rules that would apply to a U.S. domestic issuer. A summary of such differences is listed below:
| | |
NYSE corporate governance rules | | Corporate governance rules applicable to the domestically listed companies in China and the Company’s governance practices |
| | |
Director Independence
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. |
| | |
Nominating/Corporate Governance Committee
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. |
| | |
Compensation Committee
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. |
| | |
Audit Committee
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. |
| | |
Corporate Governance Guidelines
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. |
| | |
Code of Ethics for Directors, Officers and Employees
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. |
68
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Group is subject to market risks due to fluctuations in interest rates. The majority of the Group’s borrowings is in the form of long-term fixed- and variable-rate debts with original maturities ranging from two to
12fifteen years. Fluctuations in interest rates can lead to significant fluctuations in the fair value of such debt instruments. From time to time, the Group may enter into interest rate swaps designed to mitigate exposure relating to interest rate risks. No such contract was outstanding as of December 31,
2003.2005.
The Group is also exposed to foreign currency risk as a result of its aircraft and flight equipment being sourced from overseas suppliers. Specifically, the Group’s foreign currency exposure relates primarily to its foreign currency long-term debts used to finance such capital expenditures and its capital commitments. Subject to certain restrictive conditions imposed by the State Administration of Foreign Exchange, the Group may, from time to time, enter into forward foreign exchange contracts to mitigate its foreign currency exposures. No such contract was outstanding as of December 31,
2003.2005.
As of December 31,
2003,2005, the Group operated a total of
83151 aircraft under operating and capital leases at rates that are substantially fixed. Such leases expose the Group to market risks; however, in accordance with Item 305 of Regulation S-K, such leases have been excluded from the following market risk tables. Commitments under operating and capital leases are disclosed in Note
1728 to the Financial Statements.
The following table provides information regarding the Group’s material interest rate sensitive financial instruments as of December 31,
20032005 and
2002:57
2004:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2003
| | As of December 31, 2002
| | As of December 31, 2005 | | As of December 31, 2004 |
| | | Expected maturity date
| | | | | | | | Expected maturity date | | | | | | |
| | | Total | | Total | | | | Total | | Total | | |
| | | recorded | | recorded | | | | recorded | | recorded | | |
| | | 2004
| | 2005
| | 2006
| | 2007
| | 2008
| | Thereafter
| | amount
| | Fair value(2)
| | amount
| | Fair value(2)
| | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Thereafter | | amount | | Fair value(2) | | amount | | Fair value(2) |
| Debt | | |
| Fixed-rate notes payable | | |
| In US$ | | 624 | | 645 | | 402 | | 370 | | 217 | | 369 | | 2,627 | | 2,915 | | 3,429 | | 3,793 | | |
| Fixed-rate notes payable In US$ | | | 484 | | 449 | | 303 | | 266 | | 215 | | 697 | | 2,414 | | 2,440 | | 2,252 | | 2,464 | |
| Average interest rate | | | 6.81 | % | | | 6.78 | % | | | 6.78 | % | | | 6.78 | % | | | 6.78 | % | | | 6.79 | % | | | 6.79 | % | | — | | | 6.86 | % | | — | | | | 6.47 | % | | | 6.47 | % | | | 6.47 | % | | | 6.62 | % | | | 6.47 | % | | | 6.47 | % | | | 6.47 | % | | | 6.09 | % | |
| Variable-rate notes payable | | |
| In US$ | | 5,867 | | — | | — | | — | | 229 | | 2,276 | | 8,372 | | 8,372 | | 2,254 | | 2,254 | | |
| 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 | | | 1.91 | % | | — | | — | | — | | | 1.48 | % | | | 1.49 | % | | | 1.63 | % | | — | | | 2.10 | % | | — | | | | 4.11 | % | | 4.83 | | — | | — | | — | | — | | | 4.11 | % | | | 1.42 | % | |
| In RMB | | 606 | | 5 | | 2 | | 2 | | 2 | | 3 | | 620 | | 620 | | 5,393 | | 5,393 | | | 302 | | 52 | | 52 | | 122 | | 100 | | 552 | | 1,180 | | 1,180 | | 2,547 | | 2,547 | |
| Average interest rate | | | 4.16 | % | | | 3.43 | % | | | 5.14 | % | | | 5.14 | % | | | 5.14 | % | | | 5.14 | % | | | 4.46 | % | | — | | | 4.65 | % | | — | | | | 5.06 | % | | | 5.12 | % | | | 5.12 | % | | | 5.12 | % | | | 5.12 | % | | | 2.75 | % | | | 4.15 | % | | | 5.04 | % | |
| | |
| (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 as of December 31, 20032005 and 2002.2004. |
|
| (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. |
The following table provides information regarding the Group’s material foreign currency sensitive financial instruments and capital commitments as of December 31, 20032005 and 2002:2004:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2003
| | As of December 31, 2002
| | As of December 31, 2005 | | As of December 31, 2004 |
| | | Expected maturity date
| | | | | | | | Expected maturity date | | | | | | |
| | | Total | | Total | | | | Total | | Total | | |
| | | recorded | | recorded | | | | recorded | | recorded | | |
| | | 2004
| | 2005
| | 2006
| | 2007
| | 2008
| | Thereafter
| | amount
| | Fair value(2)
| | amount
| | Fair value(2)
| | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Thereafter | | amount | | Fair value(2) | | amount | | Fair value(2) |
| Debt | | |
| Fixed-rate notes payable | | |
| In US$ | | 624 | | 645 | | 402 | | 370 | | 217 | | 369 | | 2,627 | | 2,915 | | 3,429 | | 3,793 | | |
| Fixed-rate notes payable In US$ | | | 484 | | 449 | | 303 | | 266 | | 215 | | 697 | | 2,414 | | 2,440 | | 2,252 | | 2,464 | |
| Average interest rate | | | 6.81 | % | | | 6.78 | % | | | 6.78 | % | | | 6.78 | % | | | 6.78 | % | | | 6.79 | % | | | 6.79 | % | | — | | | 6.86 | % | | — | | | | 6.47 | % | | | 6.47 | % | | | 6.47 | % | | | 6.62 | % | | | 6.47 | % | | | 6.47 | % | | | 6.47 | % | | | 6.09 | % | |
| Variable-rate notes payable | | |
| In US$ | | 5,867 | | — | | — | | — | | 229 | | 2,276 | | 8,372 | | 8,372 | | 2,254 | | 2,254 | | |
| Variable-rate notes payable in US$(3) | | | 12,169 | | 5,188 | | 1,801 | | 1,047 | | 345 | | 2,924 | | 23,474 | | 23,474 | | 15,327 | | 15,327 | |
| Average interest rate | | | | 4.57 | % | | | 4.52 | % | | | 4.44 | % | | | 4.44 | % | | | 4.46 | % | | | 4.46 | % | | | 4.57 | % | | | 2.40 | % | |
| In HKD(3) | | | 657 | | 1,238 | | — | | — | | — | | — | | 1,895 | | 1,895 | | 3,327 | | 3,327 | |
| Average interest rate | | | 1.91 | % | | — | | — | | — | | | 1.48 | % | | | 1.49 | % | | | 1.63 | % | | — | | | 2.10 | % | | — | | | | 4.11 | % | | 4.83 | | — | | — | | — | | — | | | 4.11 | % | | | 1.42 | % | |
| Capital commitment in US$ | | 4,585 | | 6,030 | | — | | — | | — | | — | | 10,615 | | 10,615 | | 5,876 | | 5,876 | | | 7,341 | | 8,945 | | 14,354 | | 5,300 | | 9,688 | | — | | 45,628 | | 45,628 | | 11,776 | | 11,776 | |
69
| | |
| (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 as of December 31, 20022005 and 2003.2004. |
| (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. |
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES. None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS. There were no material modifications affecting the rights of securities holders made during the fiscal year ended December 31,
2003.2005.
| (1) | | Effective date of the Securities Act registration statement for which the use of proceeds information is being disclosed: |
58
|
| | | 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 | |
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. |
70
| | |
| (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) | | | | | | Aggregate | | | | | | AggregateThe amount does not include 322,677,000 H Shares referred to in note (1) above. |
| |
| (4) | | | | | priceThe amount does not include US$197,865,536 which represents the proceeds from the sale of | | | | | | offering |
Title of each | | | | | | offering | | | | | | price of |
class of | | Amount | | amount | | Amount | | amount |
securities registered | | registered(1) | | registered(2) | | sold(3) | | sold(4) |
| |
| |
| |
| |
|
Ordinary 322,677,000 H Shares referred to in note (1) above. If the latter amount is included, the aggregate amount of par value RMB 1.00proceeds 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 share represented by American Depositary Shares | | 861,823,000 shares | | US$528,469,864 | | 851,501,000 shares | | US$522,140,413H Share was HK$4.70. |
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$4.70.
(v)
| | | | | |
| Underwriting discounts and commissions | | US$ | 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. |
(vi) Net offering proceeds to the Company
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.total expenses in item (4)(v) above:
US$658,532,700
(vi) | | Net offering |
| Note: | | 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. |
59
Note: The amount is calculated on
(vii) As of December 31, 2005, the
basis 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) | | As of December 31, 2003, the net offering proceeds to the Company was used up as follows: |
was used up as follows: | | | |
| Construction of plant, building and facilities | | US$41.9 million |
| Purchase and installation of machinery and equipment | | US$394.6 million |
| Purchase of real estate | | — |
| Acquisition of other business(es) | | — |
| Repayment of indebtedness | | US$192.4 million |
| Working Capital | | US$29.6 million |
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.
(viii) | | The uses |
| Note: | | No direct or indirect payments were made to directors, officers, general partners of proceeds do not represent a material change in the useCompany or their associates, or to persons owning ten percent or more of proceeds described inany class of equity securities of the prospectus.Company, or to affiliates of the Company. All payments were made to third parties. |
(viii) The uses of proceeds do not represent a material change in the use of proceeds described in the prospectus.
PART III
ITEM 15. CONTROLS AND PROCEDURESPROCEDURES.
Our president and chief financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e)
), and concluded that, based on their evaluation, our disclosure controls and procedures are effective as of the end of the period covered by this Annual Report to ensure that material information required to be included in this Annual Report would be made known to them by others on a timely basis.
There has been no significant change in our internal controls over financial reporting during the period covered by this Annual Report that has materially affected, or in other factors that could significantlyis reasonably likely to materially affect, these controls subsequent to the Evaluation Date.our internal control over financial reporting.
71
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERTEXPERT.
The Board of Directors has determined that Mr. Wei Ming Hai qualifies as an audit committee financial expert in accordance with the terms of Item 16.A16. A of Form 20-F. See “Item 6 Directors, Senior Management and Employees — Directors and Senior Management”.
ITEM 16B. CODE OF ETHICSETHICS.
As of the date of this Annual Report, 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 such director shall engage in any activities in competition with the Company’s business or carry out 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.
ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICESSERVICES.
The following table sets forth the aggregate audit fees, audit-related fees, tax fees of the Company’s principal accountants and all other fees billed for products and services provided by the Company’s principal accountants other than the audit fees, audit-related fees and tax fees for each of the fiscal years 20022004 and 2003:2005:
| | | | | | | | | | | | | | | | |
| | | Audit Fees
| | Audit-Related Fees
| | Tax Fees
|
| 2004 | | Other Fees
|
2002
| | RMB8.2RMB8.9 million | | | RMB4.1RMB6.6 million | | RMB0.11 million |
| 2005 | | RMB0.14RMB13.9 million | | | | — | |
2003
| | RMB8.2RMB5.8 million | | | RMB7.0RMB0.11 million | | | | RMB0.17 million | | | | RMB1.1 million | |
Services provided primarily consist of the following:
| a) | | Review of the Group’s 20032005 interim financial report prepared under IFRS; and |
| b) | | Audits of the Group’s financial statements prepared under PRC Accounting Rules and Regulations inIn connection with the Company’s listingacquisition of its A shares in the PRC;airline operations and related assets of China Northern Airlines Company and Xinjiang Airlines Company; |
| |
c)– | | AuditsAudit of the financial statements of China Northern Airlines Company and Xinjiang Airlines Company in connection with the Company’s proposed acquisitionCompany; |
|
| – | | Issuance of these airlines.comfort letter on profit forecast; |
|
| – | | Issuance of comfort letter on working capital forecast; and |
|
| – | | Issuance of report on statement of indebtedness. |
Services provided primarily consist of tax compliance services.
73
Others
Services provided primarily consist of services to assist the Group in documenting its internal controls over financial reporting and provide observations and recommendations.
Before our principal accountants were engaged by the Company to render audit or non-audit services, the engagement has been approved by our audit committee.
ITEM 16D. Exemptions from the Listing Standards for Audit Committee Not applicable.
ITEM 16D.16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERSPURCHASERS.
The Company and its affiliated companies have not purchased any issued common shares of the Company during 20032005 and up to the date of this Annual Report.
PART IV
ITEM 17. FINANCIAL STATEMENTS. Not applicable.
ITEM 18. FINANCIAL STATEMENTS. Index to Financial Statements | | |
| | Page |
| |
|
CONSOLIDATED FINANCIAL STATEMENTS OF
CHINA SOUTHERN AIRLINES COMPANY LIMITED | | |
Report of Independent Registered Public Accounting Firm | | F-1 |
Consolidated Statements of Operations for the years ended December 31, 2001, 2002 and 2003 | | F-2 |
Consolidated Balance Sheets as of December 31, 2002 and 2003 | | F-3 |
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003 | | F-4 |
Consolidated Statements of Changes in Shareholders’ Equity for the years | | |
ended December 31, 2001, 2002 and 2003 | | F-5 |
Notes to Consolidated Financial Statements | | F-6 |
ITEM 19. EXHIBITS.
60
| | |
Exhibit No. | | Description of Exhibit |
| |
|
1 | | Articles of Association |
| | |
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 2003. |
| | |
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 2003. |
| | |
8 | | Subsidiaries of the Company |
| | |
12.1 | | 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 |
61
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
| | | | Page | |
PageCONSOLIDATED FINANCIAL STATEMENTS OF CHINA SOUTHERN AIRLINES COMPANY LIMITED
| | | | |
| Report of Independent Registered Public Accounting Firm | | | F-1 | |
Consolidated Statements of Operations for the years ended December 31, 2001, 20022003, 2004 and 20032005 | | | F-2 | |
Consolidated Balance Sheets as of December 31, 20022004 and 20032005 | | | F-3 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003 | | | F-4 | |
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2001, 20022003, 2004 and 20032005 | | | F-5 | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005 | | | F-7 | |
| Notes to Consolidated Financial Statements | | | F-6F-9 | |
74
ITEM 19. EXHIBITS.
| | |
| 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 |
| | |
| 12.1 | | 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
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| | | | |
| | CHINA SOUTHERN AIRLINES COMPANY LIMITED | | |
| | | | |
| | /s/ Liu Shao Yong | | |
| | | | |
| | Name: Liu Shao Yong | | |
| | Title: Chairman of the Board of Directors | | |
Date: June 30, 2006
76
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | |
| | | Page | |
| Report of Independent Registered Public Accounting Firm | | | F-1 | |
| Consolidated Statements of Operations for the years ended December 31, 2003, 2004 and 2005 | | | F-2 | |
| Consolidated Balance Sheets as of December 31, 2004 and 2005 | | | F-3 | |
| Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2003, 2004 and 2005 | | | F-5 | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005 | | | F-7 | |
| Notes to Consolidated Financial Statements | | | F-9 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of
China Southern Airlines Company Limited:
We have audited the accompanying consolidated balance sheets of China Southern Airlines Company Limited
(the “Company”) and its subsidiaries
(the “Group”) as of December 31,
20022004 and
2003,2005, and the related consolidated statements of operations, cash flows and changes in shareholders’ equity for each of the
three years in the
three-year period ended December 31,
2003,2005, 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.
We conducted our audits in accordance with the standards of the 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Southern Airlines Company Limited and its subsidiaries as of December 31,
20022004 and
2003,2005, and the results of their operations and their cash flows for each of the
three years in the
three-year period ended December 31,
20032005 in conformity with International Financial Reporting Standards promulgated by the International Accounting Standards Board.
As more fully described in Note 3 to the consolidated financial statements, the Group changed the presentation of share of affiliated companies’ and jointly controlled entities’ taxation in the consolidated statements of operations in order to comply with IAS 1, “Presentation of financial statements”. In addition, the Group changed the manner in which it presents minority interests in the consolidated balance sheets and consolidated statements of operations in order to comply with IAS 1 and IAS 27, “Consolidated and separate financial statements”.
International Financial Reporting Standards vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note
3351 to the consolidated financial statements.
The accompanying consolidated financial statements as of and for the year ended December 31,
20032005 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.
KPMG
Hong Kong, China
April 23, 200419, 2006, except as to Note 44, which is as of May 31, 2006.
F-1
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2001, 20022003, 2004 and 20032005 (Amounts in thousands,millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | |
| | | Note
| | 2001
| | 2002
| | 2003
| | 2003
|
| | | | | | | RMB | | RMB | | RMB | | U.S. dollars |
| Operating revenue: | | | | | | | | | | | | | | | | | | | | |
| Traffic revenue, net | | | 3 | | | | 16,461,532 | | | | 17,481,892 | | | | 16,964,800 | | | | 2,049,706 | |
| Other revenue | | | 4 | | | | 418,126 | | | | 536,728 | | | | 505,323 | | | | 61,053 | |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Total operating revenue | | | | | | | 16,879,658 | | | | 18,018,620 | | | | 17,470,123 | | | | 2,110,759 | |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | |
| Flight operations | | | 5 | | | | 6,905,628 | | | | 6,732,543 | | | | 7,070,031 | | | | 854,209 | |
| Maintenance | | | 6 | | | | 2,014,579 | | | | 2,333,419 | | | | 2,588,613 | | | | 312,759 | |
| Aircraft and traffic servicing | | | 7 | | | | 2,297,521 | | | | 2,511,284 | | | | 2,767,488 | | | | 334,371 | |
| Promotion and sales | | | 8 | | | | 1,540,780 | | | | 1,499,587 | | | | 1,480,168 | | | | 178,836 | |
| General and administrative | | | 9 | | | | 892,233 | | | | 1,060,010 | | | | 1,053,319 | | | | 127,263 | |
| Depreciation and amortization | | | | | | | 1,814,974 | | | | 1,839,871 | | | | 2,037,971 | | | | 246,230 | |
| Other | | | | | | | 13,270 | | | | 15,829 | | | | 16,804 | | | | 2,029 | |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Total operating expenses | | | | | | | 15,478,985 | | | | 15,992,543 | | | | 17,014,394 | | | | 2,055,697 | |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Operating income | | | | | | | 1,400,673 | | | | 2,026,077 | | | | 455,729 | | | | 55,062 | |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Non-operating income/(expenses): | | | | | | | | | | | | | | | | | | | | |
| Equity income of affiliated companies | | | | | | | 53,077 | | | | 36,988 | | | | 47,798 | | | | 5,775 | |
| Equity loss of jointly controlled entities | | | | | | | (4,034 | ) | | | (3,352 | ) | | | (39,495 | ) | | | (4,772 | ) |
| (Loss)/gain on sale of fixed assets | | | 13, 24 | | | | (55,889 | ) | | | 170,740 | | | | (22,217 | ) | | | (2,684 | ) |
| Interest income | | | | | | | 49,878 | | | | 52,618 | | | | 13,061 | | | | 1,578 | |
| Interest expense | | | 16 | | | | (933,717 | ) | | | (959,193 | ) | | | (823,725 | ) | | | (99,523 | ) |
| Exchange gain/(loss), net | | | | | | | 296,777 | | | | (175,451 | ) | | | (164,443 | ) | | | (19,868 | ) |
| Other, net | | | | | | | (11,509 | ) | | | (9,328 | ) | | | 21,682 | | | | 2,619 | |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Total non-operating expenses | | | | | | | (605,417 | ) | | | (886,978 | ) | | | (967,339 | ) | | | (116,875 | ) |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Income/(loss) before taxation and minority interests | | | | | | | 795,256 | | | | 1,139,099 | | | | (511,610 | ) | | | (61,813 | ) |
| Taxation (expense)/credit | | | 10 | | | | (320,519 | ) | | | (398,227 | ) | | | 324,277 | | | | 39,179 | |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Income/(loss) before minority interests | | | | | | | 474,737 | | | | 740,872 | | | | (187,333 | ) | | | (22,634 | ) |
| Minority interests | | | | | | | (134,512 | ) | | | (165,111 | ) | | | (170,934 | ) | | | (20,652 | ) |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Net income/(loss) | | | | | | | 340,225 | | | | 575,761 | | | | (358,267 | ) | | | (43,286 | ) |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Basic earnings/(loss) per share | | | 2(w) | | | | 0.10 | | | | 0.17 | | | | (0.09 | ) | | | (0.01 | ) |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | 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 | ) |
| | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statementsstatements.
F-2
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
As of December 31, 20022004 and 20032005 (Amounts in thousands)millions)
| | | | | | | | | | | | | | | | | |
| | | Note
| | 2002
| | 2003
| | 2003
|
| | | | | | | RMB | | RMB | | U.S. dollars |
ASSETS
| | | | | | | | | | | | | | | | |
| CURRENT ASSETS | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | 11 | | | | 3,771,043 | | | | 2,080,174 | | | | 251,329 | |
| Trade receivables | | | 12 | | | | 671,776 | | | | 833,604 | | | | 100,717 | |
| Other receivables | | | | | | | 372,586 | | | | 296,047 | | | | 35,769 | |
| Inventories | | | | | | | 545,700 | | | | 543,777 | | | | 65,700 | |
| Prepaid expenses and other current assets | | | | | | | 244,690 | | | | 247,926 | | | | 29,954 | |
| | | | | | | |
| | | |
| | | |
| |
| TOTAL CURRENT ASSETS | | | | | | | 5,605,795 | | | | 4,001,528 | | | | 483,469 | |
| FIXED ASSETS | | | 13 | | | | 26,920,829 | | | | 28,535,907 | | | | 3,447,739 | |
| CONSTRUCTION IN PROGRESS | | | 14 | | | | 661,352 | | | | 1,629,689 | | | | 196,901 | |
| LEASE PREPAYMENTS | | | | | | | 201,854 | | | | 348,652 | | | | 42,124 | |
| INVESTMENTS | | | 15 | | | | 1,355,842 | | | | 1,358,495 | | | | 164,135 | |
| LEASE AND EQUIPMENT DEPOSITS | | | | | | | 2,147,038 | | | | 2,932,591 | | | | 354,319 | |
| OTHER ASSETS | | | | | | | 295,337 | | | | 255,233 | | | | 30,838 | |
| | | | | | | |
| | | |
| | | |
| |
| TOTAL ASSETS | | | | | | | 37,188,047 | | | | 39,062,095 | | | | 4,719,525 | |
| | | | | | | |
| | | |
| | | |
| |
LIABILITIES AND SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | | | | | | | | | |
| Notes payable, including current installments of long-term notes payable | | | 16 | | | | 5,240,726 | | | | 7,096,846 | | | | 857,449 | |
| Current installments of obligations under capital leases | | | 17 | | | | 1,566,698 | | | | 1,297,855 | | | | 156,808 | |
| Accounts payable | | | | | | | 532,480 | | | | 928,093 | | | | 112,133 | |
| Bills payable | | | | | | | 1,299,680 | | | | 438,135 | | | | 52,936 | |
| Sales in advance of carriage | | | | | | | 390,531 | | | | 466,087 | | | | 56,313 | |
| Taxes payable | | | | | | | 78,145 | | | | 89,954 | | | | 10,868 | |
| Amounts due to related companies | | | | | | | 525,090 | | | | 929,003 | | | | 112,243 | |
| Accrued expenses | | | 18 | | | | 2,341,454 | | | | 2,527,794 | | | | 305,411 | |
| Other liabilities | | | | | | | 646,989 | | | | 1,019,811 | | | | 123,215 | |
| | | | | | | |
| | | |
| | | |
| |
| TOTAL CURRENT LIABILITIES | | | | | | | 12,621,793 | | | | 14,793,578 | | | | 1,787,376 | |
| NOTES PAYABLE, EXCLUDING CURRENT INSTALLMENTS | | | 16 | | | | 5,835,434 | | | | 4,521,735 | | | | 546,321 | |
| OBLIGATIONS UNDER CAPITAL LEASES, EXCLUDING CURRENT INSTALLMENTS | | | 17 | | | | 6,631,751 | | | | 5,543,084 | | | | 669,722 | |
| PROVISION FOR MAJOR OVERHAULS | | | 6 | | | | 141,887 | | | | 189,464 | | | | 22,891 | |
| DEFERRED CREDITS | | | 19 | | | | 48,095 | | | | 46,554 | | | | 5,625 | |
| DEFERRED TAXATION | | | 20 | | | | 779,234 | | | | 398,305 | | | | 48,124 | |
| | | | | | | |
| | | |
| | | |
| |
| TOTAL LIABILITIES | | | | | | | 26,058,194 | | | | 25,492,720 | | | | 3,080,059 | |
| MINORITY INTERESTS | | | | | | | 1,516,646 | | | | 1,673,668 | | | | 202,214 | |
| SHAREHOLDERS’ EQUITY | | | 21,22 | | | | 9,613,207 | | | | 11,895,707 | | | | 1,437,252 | |
| | | | | | | |
| | | |
| | | |
| |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | 37,188,047 | | | | 39,062,095 | | | | 4,719,525 | |
| | | | | | | |
| | | |
| | | |
| |
| | | | | | | | | | | | | | | | | |
| | | Note | | 2004 | | 2005 | | 2005 |
| | | | | | | RMB | | RMB | | U.S. dollars |
| | | | | | | (restated, | | | | | | | | |
| | | | | | | Note 3) | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-3
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2004 and 2005
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | | | | | | | | |
F-4
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS’ EQUITY
For the years ended December 31, 2003, 2004 and 2005
(Amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS’ EQUITY
For the years ended December 31, 2003, 2004 and 2005
(Amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
Notes:
(i) Other reserves represent statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve. Details are set out in Note 35.
(ii) Minority interests were presented separately from liabilities and equity at December 31, 2003 and 2004. Minority interests are presented within the equity with effect from January 1, 2005 and the presentation of minority interests for the comparative years has been restated accordingly. Details are set out in Note 3.
F-6
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 20022003, 2004 and 20032005 (Amounts in thousands)millions)
| | | | | | | | | | | | | | | | | | | | | |
| | | Note
| | 2001
| | 2002
| | 2003
| | 2003
|
| | | | | | | RMB | | RMB | | RMB | | U.S. dollars |
| Cash inflows from operations | | | 28 | (a) | | | 3,185,523 | | | | 4,762,923 | | | | 3,074,718 | | | | 371,491 | |
| Interest received | | | | | | | 49,878 | | | | 52,618 | | | | 13,061 | | | | 1,578 | |
| Interest paid | | | | | | | (970,734 | ) | | | (1,051,027 | ) | | | (923,901 | ) | | | (111,627 | ) |
| Income tax paid | | | | | | | (40,724 | ) | | | (66,970 | ) | | | (35,129 | ) | | | (4,244 | ) |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Net cash inflows from operating activities | | | | | | | 2,223,943 | | | | 3,697,544 | | | | 2,128,749 | | | | 257,198 | |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Investing activities: | | | | | | | | | | | | | | | | | | | | |
| Proceeds from sale of aircraft | | | | | | | 566,493 | | | | 778,047 | | | | 29,275 | | | | 3,537 | |
| Proceeds from sale of other fixed assets | | | | | | | 38,892 | | | | 47,150 | | | | 27,802 | | | | 3,359 | |
| Proceeds from sale of investments in equity securities | | | | | | | — | | | | 68 | | | | — | | | | — | |
| Dividends received from affiliated companies | | | | | | | 5,946 | | | | 3,093 | | | | — | | | | — | |
| (Increase)/decrease in other assets | | | | | | | (345 | ) | | | (943 | ) | | | 5,654 | | | | 683 | |
| Payment of lease and equipment deposits | | | | | | | (2,027,063 | ) | | | (1,999,233 | ) | | | (1,851,726 | ) | | | (223,727 | ) |
| Refund of lease and equipment deposits | | | | | | | 200,029 | | | | 2,117,386 | | | | 1,066,086 | | | | 128,806 | |
| Capital expenditures | | | | | | | (1,492,126 | ) | | | (6,351,030 | ) | | | (4,706,740 | ) | | | (568,674 | ) |
| Purchase of investments in equity securities | | | | | | | (1,241 | ) | | | (6,721 | ) | | | (1,065 | ) | | | (129 | ) |
| Investments in affiliated companies | | | | | | | (147,875 | ) | | | (136,500 | ) | | | — | | | | — | |
| Investments in jointly controlled entities | | | | | | | (178,372 | ) | | | (295,670 | ) | | | (2,999 | ) | | | (362 | ) |
| Governmental subsidy for safety related capital expenditures | | | | | | | — | | | | 40,240 | | | | — | | | | — | |
| Effect of acquisition of subsidiaries, net of cash and cash equivalents acquired | | | 28 | (c) | | | — | | | | (90,491 | ) | | | — | | | | — | |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Net cash used in investing activities | | | | | | | (3,035,662 | ) | | | (5,894,604 | ) | | | (5,433,713 | ) | | | (656,507 | ) |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Net cash outflows before financing activities | | | | | | | (811,719 | ) | | | (2,197,060 | ) | | | (3,304,964 | ) | | | (399,309 | ) |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Financing activities: | | | | | | | | | | | | | | | | | | | | |
| Proceeds from A share issue, net of issuance costs | | | | | | | — | | | | — | | | | 2,640,767 | | | | 319,060 | |
| Proceeds from bank notes payable | | | | | | | 2,123,613 | | | | 6,996,780 | | | | 8,913,992 | | | | 1,076,998 | |
| Repayment of bank notes payable | | | | | | | (890,228 | ) | | | (2,194,630 | ) | | | (8,371,362 | ) | | | (1,011,437 | ) |
| Repayment of principal under capital lease obligations | | | | | | | (1,756,098 | ) | | | (1,546,185 | ) | | | (1,555,390 | ) | | | (187,924 | ) |
| Minority shareholders’ contributions | | | | | | | 707 | | | | 10,625 | | | | 1,050 | | | | 127 | |
| Dividends paid to shareholders | | | | | | | — | | | | (67,484 | ) | | | — | | | | — | |
| Dividends paid to minority shareholders | | | | | | | (45,867 | ) | | | (48,866 | ) | | | (14,962 | ) | | | (1,807 | ) |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Net cash (outflows)/inflows from financing activities | | | | | | | (567,873 | ) | | | 3,150,240 | | | | 1,614,095 | | | | 195,017 | |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| (Decrease)/increase in cash and cash equivalents | | | | | | | (1,379,592 | ) | | | 953,180 | | | | (1,690,869 | ) | | | (204,292 | ) |
| Cash and cash equivalents at beginning of year | | | | | | | 4,197,455 | | | | 2,817,863 | | | | 3,771,043 | | | | 455,621 | |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Cash and cash equivalents at end of year | | | | | | | 2,817,863 | | | | 3,771,043 | | | | 2,080,174 | | | | 251,329 | |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-4F-7
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the years ended December 31, 2001, 2002 and 2003
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Share | | Share | | Other | | Retained | | |
| | | Note
| | capital
| | premium
| | reserves
| | profits
| | Total
|
| | | | | | | RMB | | RMB | | RMB | | RMB | | RMB |
| Shareholders’ equity at January 1, 2001 | | | | | | | 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 rights adjustment | | | 22 | (f) | | | — | | | | (129,703 | ) | | | — | | | | 12,970 | | | | (116,733 | ) |
| Adjustments from adoption of new PRC | | | | | | | | | | | | | | | | | | | | | | | | |
| accounting regulations | | | 22 | (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 | |
| Issue of A shares | | | 21 | | | | 1,000,000 | | | | 1,640,767 | | | | — | | | | — | | | | 2,640,767 | |
| Net loss | | | | | | | — | | | | — | | | | — | | | | (358,267 | ) | | | (358,267 | ) |
| Appropriations to reserves | | | | | | | — | | | | — | | | | 24,969 | | | | (24,969 | ) | | | — | |
| | | | | | | |
| | | |
| | | |
| | | |
| | | |
| |
| Shareholders’ equity at December 31, 2003 | | | | | | | 4,374,178 | | | | 5,324,723 | | | | 610,341 | | | | 1,586,465 | | | | 11,895,707 | |
| | | | | | | |
| | | |
| | | |
| | | |
| | | |
| |
| Shareholders’ equity at December 31, 2003 in U.S. dollars | | | | | | | 528,493 | | | | 643,339 | | | | 73,741 | | | | 191,679 | | | | 1,437,252 | |
| | | | | | | |
| | | |
| | | |
| | | |
| | | |
| |
See accompanying notes to consolidated financial statements.
F-5
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2003, 2004 and 2005
(Amounts in millions)
| | | | | | | | | | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-8
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands,millions, except share data) China Southern Airlines Company Limited (the “Company”) and its
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.
The Company was established in the People’s Republic of China (the “PRC”, “China” or the “State”) on March 25, 1995 as a joint stock limited company as part of the
Reorganizationreorganization (the “Reorganization”) of the Company’s holding company, China Southern Air Holding Company (“CSAHC”). CSAHC is a state-owned enterprise under the supervision of the PRC central government.
The Company’s H
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. In July 2003, the Company issued 1,000,000,000 A shares which are listed on the Shanghai Stock Exchange.
The Company acquired the airline operations and certain related assets of China Northern Airlines Company (“CNA”) and Xinjiang Airlines Company (“XJA”) from its parent company, CSAHC, on December 31, 2004 (the “CNA/XJA Acquisitions”) (Note 40).
The consolidated financial statements have been prepared in Renminbi (“RMB”), the national currency of
China. Solelythe PRC. Translation of amounts from RMB into United States dollar (“US$”) solely for the convenience of
the reader, the 2003 financial statements havereaders has been
translated into United States dollarsmade at the rate of US$1.00
= RMB 8.2767,to RMB8.0694, being the
rateaverage of the buying and selling rates as quoted by the People’s Bank of China
(the “PBOC”) at the close of business on December 31,
2003.2005. No representation is made that the RMB amounts could have been, or could be, converted into
United States dollars (“US$
”) at that rate or at any other certain rate on December 31,
20032005 or at any other certain date.
2. PRINCIPAL ACCOUNTING POLICIES (a) Statement of compliance The
These consolidated financial statements
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.
The IASB has issued a number of new and revised IFRSs that are effective for accounting periods beginning on or after January 1, 2005. Information on the changes in accounting policies resulting from initial application of these new and revised IFRSs for the current and prior accounting periods reflected in these financial statements is provided in Note 3.
Information relating to the nature and effect of the significant differences between IFRSIFRSs and accounting principles generally accepted in the United States of America (“U.S. GAAP”(''U.S. GAAP’’) are set forth in Note 33.51.
(b) Basis of preparation
The consolidated financial statements of the Group are prepared on the historical cost basis as modified by the revaluation of certain fixed assets (Note 13). The accounting policies have been consistently applied by the Group and except for a change in accounting policy for land use rights in 2002 (Note 22(f)), are consistent with those used in previous years.
F-6F-9
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)(c)
(b) Basis of consolidationpreparation
As of December 31, 2005, the Group’s current liabilities exceeded its current assets by RMB25,907, which includes current instalments of notes payable of RMB16,223. In preparing the consolidated financial statements, the directors have considered the Group’s sources of liquidity and believe that adequate funding is available to fulfil the Group’s short term obligations and capital expenditure requirements. Accordingly, the consolidated financial statements have been prepared on the basis that the Group will be able to continue as a going concern. Further details are set out in Note 41.
The consolidated financial statements includecomprise the Company and its subsidiaries and the Group’s interest in affiliated companies and jointly controlled entities.
The measurement basis used in the preparation of the consolidated financial statements is the historical cost basis except that the following assets are stated at their fair value as explained in the accounting policies set out below:
| – | | Certain property, plant and equipment (Note 2(d)); and |
|
| – | | Short term investments (Note 2(h)). |
The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Judgements made by management in the application of IFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the Company and allnext year are disclosed in Note 47.
(c) Basis of its subsidiaries (see Note 29 for details of the Company’s principal subsidiaries) made up to December 31, each year.consolidation
(i) Subsidiaries are those enterprises
F-10
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
A subsidiary is an entity controlled by the
Group.Company. Control exists when the
GroupCompany has the power, directly or indirectly, to govern the financial and operating policies of an
enterpriseentity so as to obtain benefits from its activities.
In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control effectively commences until the date that control
effectively ceases.
The results of subsidiary companies are included in the consolidated statements of operations, and the share attributable to minority shareholders is deducted from or added to the consolidated income after taxation. Losses attributable to minority shareholders of partly owned subsidiaries are accounted for based on the respective equity owned by the minority shareholders up to the amount of the capital contribution and reserves attributable to the minority shareholders. Thereafter, all further losses are assumed by the Company.
All significant intercompany
Intra-group balances and transactions,
have beenand any unrealized income arising from intra-group transactions, are eliminated
on consolidation.(d) Interest- bearing borrowings
Interest-bearing borrowingsin full in preparing the consolidated financial statements. Unrealized losses resulting from intra-group transactions 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 recognizedeliminated in the consolidated statementssame way as unrealized income, but only to the extent that there is no evidence of operations over the period of the borrowings 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 purposes of the consolidated statements of cash flows, the Group considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. None of the Group’s cash and cash equivalents is restricted as to withdrawal.
(f) Trade and other receivables
Trade and other receivables are stated at cost less allowance for doubtful accounts. Allowance for doubtful accounts are established based on evaluation of the recoverability of these accountsimpairment.
Minority interests at the balance sheet date. In establishing such allowance,date, being the portion of the net assets of subsidiaries attributable to equity interests that are not owned by the Company, whether directly or indirectly through subsidiaries, are prepared in the consolidated balance sheet and statement of changes in shareholders’ equity within equity, separately from, equity attributable to the equity shareholders of the Company. Minority interests in the results of the Group considers various factors includingare presented on the face of the consolidated statement of operations as an allocation of the total income or loss for the year between minority interest and the equity shareholders of the Company.
Where losses applicable to the minority exceed the minority’s interest in the equity of a subsidiary, the excess, and any further losses applicable to the minority, are charged against the Group’s interest except to the extent that the minority has a binding obligation to, and is able to, make additional investment to cover the losses. If the subsidiary subsequently reports income, the Group’s interest is allocated all such income until the minority’s share of losses previously absorbed by the Group has been recovered.
(ii) Affiliated companies and jointly controlled entities
An affiliated company is an entity in which the Group has significant influence, but not control or joint control, over the financial and operating policies. The consolidated financial statements include the Group’s share of the total recognized gains and losses of affiliated companies on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds its historical write-off experienceinterest in an affiliated company, the Group’s carrying amount is reduced to nil and industry economic trend. Past due balancesrecognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an affiliated company.
A jointly controlled entity is an entity over whose activities the Group has joint control, established by contractual agreement. The consolidated financial statements include the Group’s share of the total recognized gains and losses of jointly controlled entities on an equity accounted basis, from the date that joint control commences until the date that joint control ceases. When the Group’s share of losses exceeds its interest in a specific periodjointly controlled entity, the Group’s carrying amount is reduced to nil and balances overrecognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of a specific amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis.jointly controlled entity.
F-7F-11
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)
Unrealized income arising from transactions with affiliated companies and jointly controlled entities are eliminated to the extent of the Group’s interest in the entity. Unrealized losses are eliminated in the same way as unrealized income, but only to the extent that there is no evidence of impairment.
F-12
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(iii) Goodwill
Goodwill represents the excess of the cost of a business combination or an investment in an affiliated company or a jointly controlled entity over the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities.
Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment (Note 2(l)). In respect of affiliated companies or jointly controlled entities, the carrying amount of goodwill is included in the carrying amount of the interest in the affiliated company or jointly controlled entity.
Any excess of the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of a business combination or an investment in an affiliated company or a jointly controlled entity is recognized immediately in income or loss.
On disposal of a cash generating unit, an affiliated company or a jointly controlled entity during the year, any attributable amount of purchased goodwill is included in the calculation of the gain or loss on disposal.
(d) Property, plant and equipment and depreciation
(i) Owned assets
An item of property, plant and equipment is initially recorded at cost less accumulated depreciation (see (iv) below) and impairment losses (Note 2(l)). The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to working condition and location for its intended use and the initial estimate, where relevant, of the costs of dismantling and removing the item and restoring the site on which it is located. Subsequent to the revaluation (Note 21), which was based on depreciated replacement costs, property, plant and equipment are carried at revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses. Revaluations are performed with sufficient regularity to ensure that the carrying amount of these assets does not differ materially from that which would be determined using fair value at the balance sheet date.
Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the estimated net disposal proceeds and the carrying amount of the item and are recognized in the statement of operations on the date of retirement or disposal. Any related revaluation surplus is transferred from the revaluation reserve to retained earnings.
F-13
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(ii) Leased assets
Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as capital leases.
Flight equipment acquired by way of capital leases is stated at an amount equal to lower of its fair value and the present value of minimum lease payments at inception of the lease, less accumulated depreciation (see (iv) below) and impairment losses (Note 2(l)) and the corresponding liabilities, net of finance charges are recorded as obligations under capital leases. Subsequent to the revaluation (Note 21), which was based on depreciated replacement costs, leased assets are carried at revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses. Revaluations are performed with sufficient regularity to ensure that the carrying amount of these assets does not differ materially from that which would be determined using fair value at the balance sheet date.
The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rentals are written off as an expense of the period in which they are incurred.
Gains or losses on aircraft sale and leaseback transactions which result in capital leases are deferred and amortized over the terms of the related leases. Gains or losses on other aircraft sale and leaseback transactions are recognized immediately if the transactions are established at fair value. Any difference between the sales price over fair value is deferred and amortized over the period the assets are expected to be used.
Where the Group has the use of assets held under operating leases, payments made under operating leases are charged to the statement of operations in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognized in the statement of operations as an integral part of the aggregate net lease payments. Contingent rentals are charged to the consolidated statement of operations in the accounting period in which they are incurred.
(iii) Subsequent costs
The Group recognizes in the carrying amounts of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other costs are recognized in the statement of operations as an expense as incurred.
F-14
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(iv) Depreciation
Depreciation is calculated to write off the cost or revalued amount of items of property, plant and equipment, less their estimated residual value, if any, using the straight line method over their estimated useful lives as follows:
| | |
| 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 |
Depreciation for assets acquired under capital leases is calculated to write off the cost of the assets in equal annual amounts over the term of the relevant lease or, where it is likely the Group will obtain ownership of the asset, the life of the asset, as set out above.
Where parts of an item of property, plant and equipment have different useful lives, the cost or valuation of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually.
(e) Construction in progress
Construction in progress represents office buildings, various infrastructure projects under construction and equipment pending installation, and is stated at cost less impairment losses (Note 2(l)). Cost comprises direct costs of construction and the initial estimate, where relevant, of the costs of dismantling and removing the item and restoring the site on which it is located 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 property, plant and equipment when the asset is substantially ready for its intended use, notwithstanding any delay in the issue of the relevant commissioning certificates by the relevant PRC authorities.
No depreciation is provided in respect of construction in progress.
(f)Lease prepayments
Lease prepayments represent land use rights paid to the PRC’s governmental authorities. Land use rights are carried at cost less impairment losses (Note 2(l)) and are charged to the statement of operations on a straight-line basis over the respective periods of the rights which range from 30 to 50 years.
F-15
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(g) 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 benefit vesting period of the employees.
Deferred expenditure is carried at cost less impairment losses (Note 2(l)).
(h) Other investments in debt and equity securities
The Group’s policies for investments in debt and equity securities, other than investments in subsidiaries, affiliated companies and jointly controlled entities, are as follows:
Investments in securities held for trading are classified as current assets and are initially stated at fair value. At the balance sheet date the fair value is remeasured, with any resultant gain or loss recognized in the statement of operations.
Dated debt securities that the Group has the positive ability and intention to hold to maturity are classified as held-to-maturity securities. Held-to-maturity securities are initially recognized in the balance sheet at fair value plus transaction costs. Subsequently, they are stated in the balance sheet at amortized cost less impairment losses (Note 2(l)).
Other financial instruments are stated at cost less impairment losses (Note 2(l)). Other financial instruments 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 measured reliably.
Inventories, which consist primarily of expendable spare parts and supplies, are stated at cost less any applicable provision for obsolescence, and are expensed when used in operations. Cost represents the average unit cost. Inventories held for disposal
isare stated at the lower of cost and net realizable value. Net realizable value represents estimated resale price.
(h) Fixed assets
(j) Trade and depreciation Fixed assetsother receivables
Trade and other receivables are initially recognized at fair value and thereafter stated at amortized cost less impairment losses for bad and doubtful debts (Note 2(l)), except where the effect of discounting would be immaterial. In such cases, the receivables are stated at cost
or revalued amounts less
accumulated depreciation and impairment losses
(refer to accounting policy n). Revaluations are performed periodically to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date. 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:
| | | | | | | | |
| | Depreciable life
| | Residual value
|
Buildings | | | 15 to 40 years | | | | Nil | |
Owned and leased aircraft | | | 8 to 15 years | | | | 28.75% | |
Other flight equipment | | | | | | | | |
- Jet engines | | | 8 to 15 years | | | | 3% | |
- Others, including rotable spares | | | 8 to 15 years | | | | Nil | |
Machinery and equipment | | | 5 to 10 years | | | | 3% | |
Vehicles | | | 6 years | | | | 3% | |
No depreciation is provided in respect of construction in progress.
(i) Leased assets
Flight equipment under capital leases is stated at an amount equal to lower of its fair valuefor bad and the present value of minimum lease payments at inception of the lease, and is amortized on a straight line basis over the shorter 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.
doubtful debts (Note 2(l)). 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 statements of operations to provide a constant periodic rate of charge over the lease term.
F-8F-16
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data) Gains
(k) Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and on aircraft salehand, demand deposits with banks and leaseback transactions which result in capital leasesother financial institutions having been within three months of maturity at acquisition. Bank overdrafts that are deferredrepayable on demand and amortized over the termsform an integral part of the related leases. Gains on other aircraft saleGroup’s cash management are also included as a component of cash and leaseback transactions are recognized as income immediately ifcash equivalents for the transactions are established at fair value. Any excesspurposes of the sales price over fair value is deferredconsolidated statement of cash flows.
| (l) | | Impairment of assets |
|
| (i) | | Impairment of investments in debt and equity securities and other receivables |
Investments in debt and
amortized over the period the assets are expected to be used. Operating lease payments are charged to the consolidated statements of operations on a straight line basis over the terms of the related leases.
(j) Construction in progress
Construction in progress represents office buildings, various infrastructure projects under constructionequity securities and equipment pending installation,other current 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 22(f)).
(l) Investments
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 financial and operating policy decisions.
A jointly controlled entity is an entity over whose activities the Group has joint control, established by contractual agreement.
The consolidated statements of operations include the Group’s share of the results of its affiliated companies and jointly controlled entities for the year. In the consolidated balance sheets, the investments in affiliated companies and jointly controlled entities are stated at the Group’s attributable share of net assets. When the Group’s share of losses exceeds the carrying amount of the affiliated company or jointly controlled entity, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extentnon-current receivables that the Group has incurred obligations in respect of the affiliated company or jointly controlled entity.
Other investments are stated at cost lessor amortized cost are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, any impairment losses (referloss 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). |
If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to accounting policy n). Other investments represent unquoted available-for-sale equity securitiesan event occurring after the impairment loss was recognized, the impairment loss is reversed through the statement of companies establishedoperations. A reversal of an impairment loss shall not result in the PRC. There isasset’s carrying amount exceeding that which would have been determined had 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.impairment loss been recognized in prior years.
F-9F-17
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)(m) Deferred expenditure
Custom duties
(ii) Impairment of other assets
Internal and
other direct costs in relation to modifying, introducing and certifying certain operating leased aircraft are deferred and amortized over the termsexternal sources 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)information are reviewed periodically in orderat each balance sheet date to assess whetheridentify indications that the recoverable amountsfollowing assets may be impaired or an impairment loss previously recognized no longer exists or may have declined belowdecreased:
| – | | Property, plant and equipment; |
|
| – | | Construction in progress; |
|
| – | | Lease and equipment deposits; |
|
| – | | Lease prepayments; |
|
| – | | Deferred expenditure; and |
|
| – | | Interests in affiliated companies and jointly controlled entities. |
If any such indication exists, 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 carryingasset’s recoverable amount is reduced to the recoverable amount.estimated.
| – | | Calculation of recoverable amount |
The recoverable amount of an 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 |
An impairment loss is recognized in the statement of operations whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of the
reduction is recognized as an expenseother assets in the
consolidated statementsunit (or group of
operations. The Group assesses at each balance sheet date whether there is any indicationunits) on a pro rata basis, except that an impairment loss recognized forthe carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in prior years may no longer exist.use, if determinable.
| – | | Reversals of impairment losses |
F-18
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
An impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount.
A 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.
F-19
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(m) Interest- bearing borrowings
Interest-bearing borrowings are recognized initially at fair value, 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 in the consolidated statement of operations over the period of the borrowings using the effective interest method.
(n) Trade and other payables
Trade and other payables are initially recognized at fair value and thereafter stated at amortized cost unless the effect of discounting would be immaterial, in which case they are stated at cost.
(o) Provisions and contingent liabilities
Provisions are recognized for liabilities of uncertain timing or amount when the Group has a present legal or constructive obligation as depreciation hada result of a past event, and it is probable that an outflow of economic benefits will be required to settle the write-downobligations and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation.
Where it is not probable that an outflow of economic benefits will be required, or
write-off not occurred.(o)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.
(p) Defeasance of long-term liabilities
Where long-term liabilities have been defeased by the placement of security deposits, those liabilities and deposits (and income and charge arising therefrom) are netted off in order to reflect the overall commercial effect of the arrangements. Such netting off has been effected where a right is held by the Group to insist on net settlement of the liability and deposit including in all situations of default and where that right is assured beyond doubt.
(q) Deferred credits
F-20
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
In connection with the acquisition or operating lease of certain aircraft and engines, the Group receives various credits. Such credits are deferred until the aircraft and engines are delivered, at which time they are either applied as a reduction of the cost of acquiring the aircraft and engines, resulting in a reduction of future depreciation, or amortized as a reduction of rental expense for aircraft and engines under operating leases.
F-10F-21
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)
(r) Income tax
Income tax for the year comprises current and movement in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognized in the statement of operations except to the extent that they relate to items recognized directly in equity, in which case they are recognized in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.
Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable income will be available against which the asset can be utilized, are recognized. Future taxable income that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilized.
The limited exceptions to the recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investment in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the difference will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.
The amount of deferred tax recognized is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.
The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable income will be available to
F-22
(p)
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable income will be available.
Additional income taxes that arise from the distribution of dividends are recognized when the liability to pay the related dividends is recognized.
Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:
| – | | 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. |
(i) Passenger, cargo and mail revenues are recognized when the transportation is provided. Ticket sales for transportation not yet provided are included in current liabilities
of the consolidated balance sheets as sales in advance of carriage.
RevenueRevenues from airline-related business
isare recognized when services are rendered. Revenue is stated net of sales
tax and contributions to the Civil Aviation Administration of China (“CAAC”) Infrastructure Development Fund. 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.
(q)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. |
Traffic commissions are expensed when the transportation is provided and the related revenue is recognized. Traffic commissions for transportation not yet provided are recorded inon the consolidated balance sheetssheet as a prepaid expense.
F-23
(r)
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(u) Maintenance and overhaul costs Routine maintenance, and repairs and overhauls in respect of owned aircraft and aircraft held under capital leases are expensed in the consolidated statementsstatement of operations as and when incurred.
In respect of owned and capital leased aircraft, components within the aircraft subject to replacement during major overhauls are depreciated over the average expected life between major overhauls. When each major overhaul is performed, its cost is recognized in the carrying amount of property, plant and equipment and is depreciated over the estimated period between major overhauls. Any remaining carrying amount of cost of previous major overhaul is derecognized and charged to the statement of operations.
In respect of aircraft held under operating leases, a provision is made over the lease term for the estimated cost of
scheduled overhauls required to be performed on the related aircraft prior to their return to the lessors.
(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 statements of operations.
(t)
Borrowing costs are expensed in the
consolidated statementsstatement of operations as and when incurred, except to the extent that they are capitalized as being directly attributable to the acquisition or construction of an asset which necessarily takes a substantial period of time to get ready for its intended use.
F-11
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)
(u) Deferred taxation
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
Contributions to retirement schemes and additional retirement benefits paid to retired employees are
charged toaccrued in the
consolidated statements of operations as and when incurred (Note 24).(w)Basic earnings/(loss) per share
Basic earnings/(loss) per share foryear in which the years ended December 31, 2001, 2002 and 2003 have been computedassociated services are rendered by dividing net income/(loss) of RMB340,225, RMB575,761 and RMB(358,267), respectively, by the weighted average number of shares in issue of 3,374,178,000 in 2001 and 2002, and 3,831,712,000 in 2003, respectively.
The amount of diluted earnings/(loss) per share is not presented, as there were no dilutive potential ordinary shares in existence during the years ended December 31, 2001, 2002 and 2003.
employees.
(x) Frequent flyer award programs The Group maintains two frequent flyer award programs, namely, the China Southern Airlines Sky Pearl Club and
the Egret Mileage Plus, which provide travel awards to members based on accumulated mileage. The estimated incremental cost to provide free travel is recognized as an expense and accrued as a current liability as members accumulate mileage. As members redeem awards or their entitlements expire, the incremental cost liability is reduced accordingly to reflect the acquittal of the outstanding obligations.
Revenue from mileage sales to third parties under the frequent flyer award programs is recognized when the related transportation services are provided.
F-12F-24
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data) (y) Provisions A provision isTranslation of foreign currencies
Transactions in foreign currencies are translated into Renminbi at the applicable rates of exchange quoted by the PBOC prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into Renminbi at the PBOC exchange rates at the balance sheet date. Foreign exchange differences arising on translation are recognized in the
consolidated balance sheets whenstatement of operations. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated into Renminbi at the
Group has a legal or constructive obligation as a result of a past event,PBOC exchange rates prevailing on the transaction dates. Non-monetary assets and
it is probableliabilities denominated in foreign currencies that
an outflow of economic benefits will be required to settleare stated at fair value are translated into Renminbi at the
obligations. IfPBOC exchange rates at the
effect is material, provisions are determined by discountingdates the
expected future cash flows at a pre-tax rate that reflects current market assessments of the timefair value
of money and, where appropriate, the risks specific to the liability.was determined.
For the purposes of these consolidated financial statements, parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence. Related parties may be individuals
(being members of key management personnel, significant shareholders and/ or
entities.(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:
(i) | | Traffic revenue from domestic services within the PRC (excluding Hong Kong) is attributed to the domestic operation. Traffic revenue from inbound/outbound services between the PRC and Hong Kong, and the PRC and overseas destinations is attributed to the Hong Kong regional 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. |
(ab) Use of estimates
The preparation of the 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.
(aa) Segmental reporting
A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and the reported amounts of revenues and expenses during the reporting periods. Actual results could differrewards that are different from those estimates.of other segments.
3. NEW AND REVISED IFRSs
The IASB has issued a number of new and revised IFRSs that are effective for accounting periods beginning on or after January 1, 2005.
The accounting policies of the Group after the adoption of these new and revised IFRSs have been summarized in Note 2. The following sets out information on the significant changes in accounting policies for the current and prior accounting periods reflected in these financial statements.
F-13F-25
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)
The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period (Note 48).
F-26
3. TRAFFIC REVENUE
Traffic revenue
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(a) Changes in presentation of share of affiliated companies’ and jointly controlled entities’ taxation (IAS 1, Presentation of Financial Statements)
In prior years, 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 statement of operations. With effect from January 1, 2005, in accordance with the implementation guidance in IAS 1, 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 statement of operations before arriving at the Group’s income or loss before tax. These changes in presentation have been applied retrospectively with comparatives restated.
As a result of these changes in presentation, the Group’s share of results of affiliated companies and jointly controlled entities and income tax expense/benefit have been adjusted. Share of income of affiliated companies for the years ended December 31, 2003 and 2004 decreased by RMB3 and RMB2, respectively. Share of losses of affiliated companies for the year ended December 31, 2005 decreased by RMB15. Share of losses of jointly controlled entities increased by RMB7 and RMB11 for the years ended December 31, 2003 and 2004, respectively, and decreased by RMB3 for the year ended December 31, 2005. The Group’s income tax expense has decreased by RMB10 and RMB13 during the years ended December 31, 2003 and 2004, respectively and income tax benefit has decreased by RMB18 during the year ended December 31, 2005. Accordingly, there is no effect on the net results and net assets of the Group in periods presented.
| (b) | | Changes in presentation of minority interests (IAS 1, Presentation of financial statements and IAS 27, Consolidated and separate financial statements) |
In prior years, minority interests at the balance sheet date were presented separately from liabilities and equity in the consolidated balance sheet. Minority interests in the results of the Group for the year were also separately presented in the consolidated statement of operations as a deduction before arriving at the results attributable to shareholders (the equity shareholders of the Company).
With effect from January 1, 2005, in order to comply with IAS 1 and IAS 27, the Group has changed its accounting policy relating to presentation of minority interests. Under the new policy, minority interests are presented as part of equity, separately from interests attributable to the equity shareholders of the Company. Further details of the new policy are set out in Note 2(c). These changes in presentation have been applied retrospectively with comparatives restated.
F-27
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
As a result of these changes in presentation, the Group’s loss for the years ended December 31, 2003, 2004 and 2005 have decreased by RMB171, RMB203 and RMB2, respectively and the Group’s total equity as of December 31, 2004 and 2005 have increased by RMB2,055 and RMB1,936, respectively.
F-28
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(c) Scope of related parties (IAS 24, Related party disclosures)
As a result of the adoption of revised IAS 24, the definition of related parties as disclosed in Note 2(z) has been expanded such that state-controlled entities are included. The revised IAS 24 also requires the compensation of key management personnel to be disclosed. The Group has included these additional disclosures in these consolidated financial statements.
4. TURNOVER
Turnover comprises revenues from airline and airline-related business and is stated net of sales tax and levies paid to PRC authorities and consists of:tax. An analysis of turnover is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31,
| | Year ended December 31, | |
| | | 2001
| | 2002
| | 2003
| | 2003 | | 2004 | | 2005 | |
| | | RMB | | RMB | | RMB | | RMB | | RMB | | RMB | |
| Traffic revenue | | |
| Passenger | | 15,055,496 | | 15,695,622 | | 15,009,885 | | | 15,010 | | 21,100 | | 34,328 | |
| Cargo and mail | | 1,406,036 | | 1,786,270 | | 1,954,915 | | | 1,955 | | 2,244 | | 3,091 | |
| | |
| |
| |
| | | | | | | | |
| | | 16,461,532 | | 17,481,892 | | 16,964,800 | | | 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 | |
| | | | | | | | | |
Pursuant to various PRC revenuesales tax rules and regulations, the Group is required to pay sales tax to national and local tax authorities at the rate of approximately 3% of the ticket valuetraffic revenue in respect of domestic flights originated in the PRC during the years ended December 31, 2001, 2002 and 2003, except for the period from May 1, 2003 to December 31, 2003 during which passenger revenue was exempted from sales tax.outbound international/Hong Kong and Macau flights. Sales tax incurred by the Group for the years ended December 31, 2001, 20022003, 2004 and 20032005, netted off against revenue, amounted to RMB535,473, RMB557,784RMB206, RMB716, and RMB205,925,RMB1,111, respectively.
F-29
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
In addition, the Group is required to pay contributions to the CAAC Infrastructure Development
Fund. Prior to May 1, 2003, contributions to CAAC Infrastructure Development Fund
which were
calculatedpayable at
the rates of 5% and 2%, respectively, of the domestic and international/Hong Kong
regionaland Macau traffic
revenue during the years ended December 31, 2001, 2002 and 2003, except forrevenue. For the period from May 1, 2003 to
DecemberMarch 31,
2003 during which2004, the Group was exempted from paying
theany contributions.
ContributionsEffective from April 1, 2004, contributions to the CAAC Infrastructure Development Fund
are payable
based on the traffic capacity deployed by the Group
on its routes. The contributions now form part of the flight operations expenses and amounted to RMB466 and RMB978 for the years ended December 31,
2001, 20022004 and
2003 totaled RMB759,385, RMB798,386 and RMB250,802, respectively. Pursuant to approval documents issued by2005, respectively (Note 5). The contributions for the CAAC, the Group imposes a fuel surcharge on passengers carried by its domestic and Hong Kong regional flights at certain prescribed rates on ticket fares. The fuel surcharge forms part of the traffic revenue of the Group. For the yearsyear ended December 31, 2001, 2002 and 2003 the fuel surcharge revenue totaled RMB1,001,000, RMB554,000 and RMB740,000, respectively.
amounted to RMB251 were netted off against traffic revenue.F-14F-30
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)4. OTHER OPERATING REVENUE
| | | | | | | | | | | | | |
| | | Year ended December 31,
|
| | | 2001
| | 2002
| | 2003
|
| | | RMB | | RMB | | RMB |
| Commission income | | | 129,157 | | | | 137,928 | | | | 140,180 | |
| General aviation income | | | 61,292 | | | | 68,225 | | | | 40,309 | |
| Ground services income | | | 55,388 | | | | 78,616 | | | | 99,130 | |
| Air catering income | | | 29,523 | | | | 38,077 | | | | 30,756 | |
| Net income from lease arrangements (Note 13) | | | — | | | | 51,682 | | | | 69,121 | |
| Rental income | | | — | | | | — | | | | 40,307 | |
| Aircraft lease income | | | 65,486 | | | | 46,640 | | | | — | |
| Other | | | 77,280 | | | | 115,560 | | | | 85,520 | |
| | | |
| | | |
| | | |
| |
| | | | 418,126 | | | | 536,728 | | | | 505,323 | |
| | | |
| | | |
| | | |
| |
5. FLIGHT OPERATIONS EXPENSES
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31,
| | Year ended December 31, | |
| | | 2001
| | 2002
| | 2003
| | 2003 | | 2004 | | 2005 | |
| | | RMB | | RMB | | RMB | | RMB | | RMB | | RMB | |
| Fuel costs | | 3,548,860 | | 3,519,005 | | 3,866,932 | | |
| Jet fuel costs | | | 3,867 | | 6,050 | | 11,929 | |
| Operating lease rentals | | 1,912,832 | | 1,416,524 | | 1,536,466 | | |
| - Aircraft and flight equipment | | | 1,536 | | 1,665 | | 2,497 | |
| - Land and buildings | | | 136 | | 109 | | 302 | |
| Air catering expenses | | 554,165 | | 625,489 | | 509,839 | | | 474 | | 705 | | 1,196 | |
| Aircraft insurance | | 123,439 | | 256,238 | | 195,700 | | | 196 | | 185 | | 105 | |
| Flight personnel payroll and welfare | | 657,193 | | 781,223 | | 728,175 | | | 728 | | 1,026 | | 1,619 | |
| Training expenses | | 24,374 | | 38,908 | | 123,438 | | | 123 | | 183 | | 373 | |
| Other | | 84,765 | | 95,156 | | 109,481 | | |
| CAAC Infrastructure Development Fund contributions (Note 4) | | | — | | 466 | | 978 | |
| Others | | | 10 | | 29 | | 395 | |
| | |
| |
| |
| | | | | | | | |
| | | 6,905,628 | | 6,732,543 | | 7,070,031 | | | 7,070 | | 10,418 | | 19,394 | |
| | |
| |
| |
| | | | | | | | |
6. MAINTENANCE EXPENSES
| | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | |
F-15F-31
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data) 6. MAINTENANCE7. AIRCRAFT AND TRAFFIC SERVICING EXPENSES
| | | | | | | | | | | | | |
| | | Year ended December 31,
|
| | | 2001
| | 2002
| | 2003
|
| | | RMB | | RMB | | RMB |
| Repairing and maintenance charges | | | 1,558,331 | | | | 1,842,213 | | | | 2,076,916 | |
| Maintenance materials | | | 286,505 | | | | 292,492 | | | | 299,719 | |
| Labor costs | | | 104,949 | | | | 130,254 | | | | 139,355 | |
| Other | | | 64,794 | | | | 68,460 | | | | 72,623 | |
| | | |
| | | |
| | | |
| |
| | | | 2,014,579 | | | | 2,333,419 | | | | 2,588,613 | |
| | | |
| | | |
| | | |
| |
| | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | |
8. PROMOTION AND SALES EXPENSES
| | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | |
9. GENERAL AND ADMINISTRATIVE EXPENSES
| | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | |
An analysis of provision for major overhauls in respect of aircraft held under operating leases is as follows:
| | | | | | | | | | | | | |
| | | Year ended December 31,
|
| | | 2001
| | 2002
| | 2003
|
| | | RMB | | RMB | | RMB |
| Balance at beginning of year | | | 241,895 | | | | 187,125 | | | | 193,887 | |
| Additional amount provided | | | 12,889 | | | | 49,051 | | | | 68,620 | |
| Amount utilized | | | (67,659 | ) | | | (42,289 | ) | | | (62,326 | ) |
| | | |
| | | |
| | | |
| |
| Balance at end of year | | | 187,125 | | | | 193,887 | | | | 200,181 | |
| | | |
| | | |
| | | |
| |
Balance of provision for major overhauls at December 31, 2002 and 2003 consisted of:
| | | | | | | | | |
| | | December 31,
|
| | | 2002
| | 2003
|
| | | RMB | | RMB |
| Current portion (included in accrued expenses) (Note 18) | | | 52,000 | | | | 10,717 | |
| Non-current portion | | | 141,887 | | | | 189,464 | |
| | | |
| | | |
| |
| | | | 193,887 | | | | 200,181 | |
| | | |
| | | |
| |
F-16F-32
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data) 7. AIRCRAFT10. DEPRECIATION AND TRAFFIC SERVICING EXPENSESAMORTIZATION
| | | | | | | | | | | | | |
| | | Year ended December 31,
|
| | | 2001
| | 2002
| | 2003
|
| | | RMB | | RMB | | RMB |
| Landing and navigation fees | | | 2,157,392 | | | | 2,353,412 | | | | 2,562,488 | |
| Ground service charges | | | 140,129 | | | | 157,872 | | | | 205,000 | |
| | | |
| | | |
| | | |
| |
| | | | 2,297,521 | | | | 2,511,284 | | | | 2,767,488 | |
| | | |
| | | |
| | | |
| |
| | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | |
Depreciation of property, plant and equipment leased out under operating leases amounted to RMB55, RMB55 and RMB35 for the years ended December 31, 2003, 2004 and 2005, respectively.
11. STAFF COSTS
| | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | |
Staff costs relating to flight operations, maintenance, aircraft and traffic servicing, promotion and sales and general and administrative expenses are also included in the respective total amounts disclosed separately in Notes 5 to 9 above.
8. PROMOTION AND SALES EXPENSES
| | | | | | | | | | | | | |
| | | Year ended December 31,
|
| | | 2001
| | 2002
| | 2003
|
| | | RMB | | RMB | | RMB |
| Sales commissions | | | 891,646 | | | | 749,953 | | | | 757,423 | |
| Ticket office expenses | | | 440,445 | | | | 515,648 | | | | 503,623 | |
| Computer reservation services | | | 153,409 | | | | 174,547 | | | | 175,197 | |
| Advertising and promotion | | | 26,434 | | | | 31,513 | | | | 23,756 | |
| Other | | | 28,846 | | | | 27,926 | | | | 20,169 | |
| | | |
| | | |
| | | |
| |
| | | | 1,540,780 | | | | 1,499,587 | | | | 1,480,168 | |
| | | |
| | | |
| | | |
| �� |
9. GENERAL AND ADMINISTRATIVE EXPENSES
| | | | | | | | | | | | | |
| | | Year ended December 31,
|
| | | 2001
| | 2002
| | 2003
|
| | | RMB | | RMB | | RMB |
| General corporate expenses | | | 557,083 | | | | 658,833 | | | | 680,141 | |
| Salaries and welfare | | | 312,396 | | | | 379,406 | | | | 339,343 | |
| Provision for doubtful accounts (Note 32) | | | 1,729 | | | | 1,304 | | | | 12,031 | |
| Other taxes and levies | | | 21,025 | | | | 20,467 | | | | 21,804 | |
| | | |
| | | |
| | | |
| |
| | | | 892,233 | | | | 1,060,010 | | | | 1,053,319 | |
| | | |
| | | |
| | | |
| |
F-17F-33
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)10. TAXATION EXPENSE/(CREDIT)
12. INTEREST EXPENSE
| | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | |
The borrowing costs have been capitalized at rates ranging from 1.62% to 5.46% per annum, 1.51% to 3.48% per annum, and 4.14% to 5.27% per annum for the years ended December 31, 2003, 2004 and 2005, respectively.
13. INCOME TAX (BENEFIT)/EXPENSE
a) Income tax (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 | ) |
| | | | | | | | | | |
On October 17, 2003, the Company’s registered address was moved to Guangzhou Economic & Technology Development Zone. In accordance with the Rules and Regulations 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 Company is entitled to enjoy 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% from 33% beginning from that date.
F-34
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
As a result of the reduction in income tax rate, the Company’s net deferred
taxationtax liability balance
brought forward from December 31, 2002at January 1, 2003 of
RMB507,077RMB507 was reduced by
RMB392,137 andRMB392. Accordingly, a net deferred tax credit of
RMB392,137RMB392 was recognized
for such reduction in income tax rate in the consolidated statement of operations for the year ended December 31, 2003.
In respect of the Group’s overseas airline activities, the Group has either obtained exemptions from overseas taxation pursuant to the bilateral aviation agreements between the overseas governments and the PRC governments,government, or has sustained tax losses in these overseas jurisdictions. Accordingly, no provision for overseas tax has been made for the years ended December 31, 2001, 20022003, 2004 and 2003.2005.
b) Reconciliation between tax (benefit)/expense and accounting (loss)/income at applicable tax rates
| | | | | | | | | | | | | |
| | | 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 | ) |
| | | | | | | | | | |
All but an insignificant amount of (loss)/income before taxation is from domestic sources.
Taxation expense/(credit) consisted of:
| | | | | | | | | | | | | |
| | | Year ended December 31,
|
| | | 2001
| | 2002
| | 2003
|
| | | RMB | | RMB | | RMB |
| Provision for PRC income tax: | | | | | | | | | | | | |
| Company and subsidiaries | | | 37,032 | | | | 71,651 | | | | 46,938 | |
| Affiliated companies | | | 8,085 | | | | 9,424 | | | | 3,342 | |
| Jointly controlled entities | | | — | | | | — | | | | 6,372 | |
| | | |
| | | |
| | | |
| |
| | | | 45,117 | | | | 81,075 | | | | 56,652 | |
| Deferred taxation (Note 20) | | | | | | | | | | | | |
| - current year | | | 275,402 | | | | 317,152 | | | | 11,208 | |
| - adjustment for change in income tax rate | | | — | | | | — | | | | (392,137 | ) |
| | | |
| | | |
| | | |
| |
| | | | 320,519 | | | | 398,227 | | | | (324,277 | ) |
| | | |
| | | |
| | | |
| |
F-18F-35
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data) Actual taxation amount in the consolidated statements of operations for the years ended December 31, 2001, 2002 and 2003 differed from the amounts computed by applying the PRC income tax rate of 33%, 33% and 15%, respectively, to income/(loss) before taxation and minority interests as a result of the following:
| | | | | | | | | | | | | |
| | | Year ended December 31,
|
| | | 2001
| | 2002
| | 2003
|
| | | RMB | | RMB | | RMB |
| Expected PRC taxation expense/(credit) | | | 262,434 | | | | 375,903 | | | | (76,742 | ) |
| Adjustments: | | | | | | | | | | | | |
| Gains on sale and leaseback transactions and their amortization | | | (5,075 | ) | | | (851 | ) | | | — | |
| Effect on change in income tax rate on deferred taxation | | | — | | | | — | | | | (392,137 | ) |
| Rate differential on subsidiaries | | | (51,245 | ) | | | (60,530 | ) | | | 5,140 | |
| Non-deductible expenses | | | 154,152 | | | | 61,454 | | | | 79,907 | |
| Unrecognized tax losses | | | — | | | | — | | | | 21,894 | |
| Expired tax losses | | | — | | | | — | | | | 34,218 | |
| Other, net | | | (39,747 | ) | | | 22,251 | | | | 3,443 | |
| | | |
| | | |
| | | |
| |
| | | | 320,519 | | | | 398,227 | | | | (324,277 | ) |
| | | |
| | | |
| | | |
| |
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 TaxationTax Bureau, lease arrangements executed prior to September 1, 1999 arewere exempted from PRC withholding tax.
The PRC withholding tax payable
by the Group for the years ended December 31, 2003, 2004 and 2005 of RMB8, RMB23 and RMB55, respectively, in respect of the operating leases executed after September 1, 1999
of RMB11,962, RMB14,305 and RMB7,706, respectively, during 2001, 2002 and 2003 has been included as part of the operating lease rentals.
11.
14. DIVIDENDS
No interim dividend was paid during the years ended December 31, 2003, 2004 and 2005.
The board of directors of the Company does not recommend the payment of a final dividend in respect of the year ended December 31, 2005. No final dividend was paid in respect of the years ended December 31, 2003 and 2004.
15. BASIC LOSS PER SHARE
The calculation of basic loss per share for the years ended December 31, 2003, 2004 and 2005 is based on the loss attributable to equity shareholders of the Company of RMB358, RMB48, and RMB1,848, respectively, and the weighted average number of shares in issue of 3,831,712,000, 4,374,178,000, and 4,374,178,000, respectively.
The amount of diluted loss per share is not presented as there were no dilutive potential ordinary shares in existence during the years ended December 31, 2003, 2004 and 2005.
16. CASH AND CASH EQUIVALENTS As of December 31, 20022004 and 2003,2005, cash and cash equivalents comprise cash at bank and in hand and deposits with China Southern Airlines Group Finance Company Limited (“SA Finance”), a PRC authorized financial institution controlled by CSAHC and an affiliated company of the Group. In accordance with the financial agreement dated May 22, 1997 and subsequently revised on December 31, 2004 between the Company and SA Finance, all the Group’s deposits accepted by SA Finance as of December 31, 2002 and 2003 were simultaneously placed with several designated major PRC banks by SA Finance. As of December 31, 20022004 and 2003,2005, the Group’s deposits with SA Finance totaled RMB900,979amounted to RMB406 and RMB365,906, respectively (Note 25).RMB544, respectively.
F-19F-36
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)
Included in cash and cash equivalents are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:
| | | | | | | | | |
| | | December 31, | |
| | | 2004 | | | 2005 | |
| United States Dollars | | US$ 37 | | | US$ 24 | |
| Japanese Yen | | JPY1, 272 | | | JPY1, 161 | |
F-37
12.CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
17. TRADE RECEIVABLES
| | | | | | | | | | | | | | | | | |
| | | December 31,
| | December 31, |
| | | 2002
| | 2003
| | 2004 | | 2005 |
| | | RMB | | RMB | | RMB | | RMB |
| Trade receivables, principally traffic | | 731,894 | | 903,601 | | | 1,295 | | 1,562 | |
| Less: Allowance for doubtful accounts (Note 32) | | 60,118 | | 69,997 | | |
| Less: Impairment losses for bad and doubtful accounts | | | | (92 | ) | | | (44 | ) |
| | |
| |
| | | | | | |
| | | 671,776 | | 833,604 | | | 1,203 | | 1,518 | |
| | |
| |
| | | | | | |
Credit terms granted by the Group to sales agents and other customers generally range from one to three months. An ageing analysis of trade receivables, net of impairment losses for bad and doubtful accounts, is set out below:
| | | | | | | | | |
| | | 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 | |
| | | | | | | | | |
As of December 31, 2004 and 2005, the Group had an amount due from a fellow subsidiary of RMB52 and RMB42, respectively, which was included in trade receivables.
All of the trade receivables are expected to be recovered within one year.
Included in trade receivables are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:
| | | | | | | | | |
| | | December 31, | |
| | | 2004 | | | 2005 | |
| United States Dollars | | US$ | 11 | | | US$ | 15 | |
| | | | | | | |
F-38
13.CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
FIXED ASSETSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
| | | | | | | | | |
| | | December 31,
|
| | | 2002
| | 2003
|
| | | RMB | | RMB |
| Buildings | | | 3,160,073 | | | | 3,287,593 | |
| Aircraft | | | 24,970,695 | | | | 27,684,935 | |
| Flight equipment, including rotable spares | | | 6,283,470 | | | | 6,842,064 | |
| Machinery, equipment and vehicles | | | 1,782,400 | | | | 1,930,273 | |
| | | |
| | | |
| |
| | | | 36,196,638 | | | | 39,744,865 | |
| Less: Accumulated depreciation and amortization | | | 9,275,809 | | | | 11,208,958 | |
| | | |
| | | |
| |
| | | | 26,920,829 | | | | 28,535,907 | |
| | | |
| | | |
| |
| | | | | | | | | |
| | | 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 | |
| | | | | | | | | |
18. INVENTORIES
| | | | | | | | | |
| | | December 31, |
| | | 2004 | | 2005 |
| | | RMB | | RMB |
| Expendable spare parts and maintenance materials | | | 1,175 | | | | 1,241 | |
| Other supplies | | | 127 | | | | 141 | |
| | | | | | | | | |
| | | | 1,302 | | | | 1,382 | |
| | | | | | | | | |
The analysis of the amount of inventories recognized as an expense is as follows:
| | | | | | | | | |
| | | December 31, |
| | | 2004 | | 2005 |
| | | RMB | | RMB |
| Consumption | | | 596 | | | | 720 | |
| Write-down of inventories | | | — | | | | 209 | |
| | | | | | | | | |
| | | | 596 | | | | 929 | |
| | | | | | | | | |
As a result of fleet adjustment, inventories have been written down by RMB209 at December 31, 2005.
F-39
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
19. OTHER INVESTMENTS
| | | | | | | | | |
| | | 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 | | | | — | |
| | | | | | | | | |
The current investments at December 31, 2004 were listed outside Hong Kong.
Net realized and unrealized gain on trading securities of the Group amounted to RMBNil, RMB15 and RMB6 during the years ended December 31, 2003, 2004 and 2005, respectively.
Dividend income from unlisted securities of the Group amounted to RMBNil, RMB14 and RMB4 during the years ended December 31, 2003, 2004 and 2005, respectively.
The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value of debt security held-to-maturity as of December 31, 2004 and 2005 were as follows:
| | | | | | | | | | | | | | | | | |
| | | | | | | 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
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
20. OTHER RECEIVABLES
As of December 31, 2004 and 2005, other receivables of the Group included an amount due from Zhongyuan Airlines Company Limited (“Zhongyuan Airlines”) of RMB104 and RMB98, respectively. As of December 31, 2005 and up to date of approval of these consolidated financial statements, the Group is in the process of applying for transfer of certain properties held by Zhongyuan Airlines for settlement of the balance.
21. PROPERTY, PLANT AND EQUIPMENT, NET
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
(a) Substantially all of the Group’s buildings are located in the PRC. The Group was formally granted the rights to use the twenty one parcels of land in Guangzhou, Shenzhen, Zhuhai, Beihai, Changsha, Shantou, Haikou, Zhengzhou, Guiyang and Wuhan by the relevant PRC authorities for
a periodperiods of 30 to 70 years, which expire between 2020 and 2068. For other land in the PRC on which the Group’s buildings are erected, the Group was formally granted the rights to use such land for periods of one to five years
commencing in the second quarter of 1997 pursuant to various lease agreements between the
GroupCompany and CSAHC.
The leases with initial one-year term are automatically renewable for another one-year period unless the Group gives appropriate notice of termination. In this connection, rental payments totaling
RMB15,224RMB2, RMB2 and RMB24 were paid to CSAHC for each of the years ended December 31,
2001, 20022003, 2004 and
20032005, respectively in respect of these leases (Note
23)36).
The Group is obligated under various capital leases for aircraft that expire at various dates during the next six years. The gross amount of aircraft and related accumulated amortization recorded under capital leases are as follows:
F-20
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)
| | | | | | | | | |
| | | December 31,
|
| | | 2002
| | 2003
|
| | | RMB | | RMB |
| Aircraft | | | 11,459,978 | | | | 10,462,575 | |
| Less: Accumulated amortization | | | 2,499,495 | | | | 2,605,406 | |
| | | |
| | | |
| |
| | | | 8,960,483 | | | | 7,857,169 | |
| | | |
| | | |
| |
As of December 31, 2002 and 2003, certain aircraft of the Group with an aggregate carrying amount of approximately RMB5,822,076 and RMB6,718,737, respectively, were pledged as security under certain loan agreements (Note 16).
(b) In compliance with the PRC rules and regulations governing initial public offering of shares by PRC joint stock limited companies, the fixed assetsproperty, plant and equipment of the Group as of December 31, 1996 were revalued. This revaluation was conducted by Guangzhou Assets Appraisal Corp., a firm of independent valuers registered in the PRC, on a depreciated replacement cost basis, and approved by the China State-owned Assets Administration Bureau.
F-42
In accordance with IAS 16 “Property, Plant and Equipment”, subsequent
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Subsequent to the 1996 revaluation,
which was based on replacement costs, the
fixed assetsproperty, plant and equipment of the Group are carried at revalued
amounts,amount, being the fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses. Revaluation is performed
periodicallywith sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date.
In accordance with theBased on a revaluation performed
by the directors in respect of fixed assets held by the Group as of
December 31, 2000,September 30, 2005, by Savills Valuation & Professional Services Limited, a firm of independent valuers, on a depreciated replacement cost basis, the carrying
amountsvalue of
fixed assetsproperty, plant and equipment did not differ materially from their
respective fair value.
The effect Consequently, no additional fair value adjustment was recorded during the year ended December 31, 2005.
At December 31, 2005, the carrying amount of such revalued property, plant and equipment approximated the historical carrying value of such assets had they been stated at cost less accumulated depreciation and impairment losses.
(c) As of December 31, 2004 and 2005, certain aircraft of the
above revaluations was to increase annual depreciation charges byGroup with an aggregate carrying amount of approximately
RMB65,000, RMB33,000RMB23,562 and
RMB 33,000,RMB30,408, respectively,
for 2001, 2002were mortgaged under certain notes payable and
2003. During 2003, the Group incurred a loss of RMB20,405 on early retirement of two old Boeing 737-200 aircraft. During 2001lease agreements (Notes 27 and 2002, pursuant to certain sale and leaseback arrangements, the Group sold two Airbus 320-200 aircraft and four Boeing 757-200 aircraft, respectively, to independent third parties and then entered into operating leases with such parties to lease back the aircraft for a period of eight to nine years. The Group recognized a gain of RMB59,855 and RMB199,394, respectively, in 2001 and 2002, being the excess of the sale proceeds which approximated the aircraft’s fair value on the date of disposal over the aircraft’s net book value and related disposal costs. Such loss/gain was included under the sub-item “(Loss)/gain on sale of fixed assets” under “Non-operating income/(expenses)” in the consolidated statements of operations.
During28).
(d) In 2003, the Group entered into operating lease arrangements to lease certain flight training facilities and buildings to Zhuhai Xiang Yi Aviation Technology Company Limited (“Zhuhai Xiang Yi”), a jointly controlled entity of the Group. The leases with initial one-year term are automatically renewable for anotheradditional subsequent one year unless either party gives appropriate notice of termination. In this connection, rental income totaling RMB31, RMB31 and RMB31 was received by the Group for each of the years ended December 31, 2003, 2004 and 2005 in respect of the leases (Note 36). The carrying amount and accumulated depreciation of the relevant property, plant and equipment totaled RMB787 and RMB514 at December 31, 2004, and RMB862 and RMB664 at December 31, 2005, respectively. Depreciation of relevant property, plant and equipment recognized for each of the years ended December 31, 2003, 2004 and 2005 amounted to RMB55, RMB55 and RMB35, respectively. As of December 31, 2005, the Group’s total future minimum lease payments under non-cancellable operating leases were receivable within one year and amounted to RMB31.
F-21F-43
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)termination. In this connection, rental income totaling RMB34,175 was received by the Group during 2003 in respect of the leases. As of December 31, 2003, the cost and accumulated amortization of the relevant fixed assets totaled RMB787,432 and RMB462,281, respectively. As of December 31, 2003, the Group’s rental receivable in respect of the leases due in 2004 amounted to RMB34,175.
During 2001 and 2002, the Group entered into arrangements to lease several of its aircraft to independent third parties. The terms of such leases generally range from one to twelve months.
(e) The Group entered into two separate arrangements (the “Arrangements”) with certain independent third parties during each of 2002 and 2003. Under each of the Arrangements, the Group sold an aircraft and then immediately leased back the aircraft for an agreed period. As agreed, theThe lease payment obligations, with pre-determined net present value, are 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 favourfavor of the lessors.lessor. The Group has an option to purchase the aircraft at a pre-determined date and an agreed purchase price 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 agreements, the Group is entitled to the continued possession and 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 their use as before the Arrangements, no adjustment has been made to the fixed assets.property, plant and equipment. As of December 31, 20022004 and 2003,2005, the net present value of the lease commitments and the corresponding defeased deposits and debt securities amounted to RMB1,322,843RMB2,462 and RMB2,409,252,RMB2,376, respectively. As a result of the Arrangements, the Group received net cash benefitsbenefit of RMB51,682 and RMB69,121RMB69 in 2002 and 2003, respectively, which have beenwas recognized as income for 2003.
(f) As of December 31, 2005 and up to the respective years.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.
22. CONSTRUCTION IN PROGRESS
| | | | | | | | | |
| | | 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 | |
| | | | | | | | | |
The construction in progress as of December 31, 2005 mainly related to projects at the Guangzhou, Jilin and Fuzhou airports, Shenzhen cargo centre and Beijing branch.
F-22F-44
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data) 14.CONSTRUCTION23. INTEREST IN PROGRESSAFFILIATED COMPANIES As of December 31, 2002 and 2003, included in construction in progress was an amount of RMB432,580 and RMB1,445,760, respectively, in relation to the construction of Guangzhou New Airport.
15.INVESTMENTS
| | | | | | | | | |
| | | December 31,
|
| | | 2002
| | 2003
|
| | | RMB | | RMB |
| Share of net assets in affiliated companies | | | 692,026 | | | | 422,201 | |
| Share of net assets in jointly controlled entities | | | 461,962 | | | | 731,323 | |
| Other investments, at cost | | | 201,854 | | | | 204,971 | |
| | | |
| | | |
| |
| | | | 1,355,842 | | | | 1,358,495 | |
| | | |
| | | |
| |
| | | | | | | | | |
| | | December 31, |
| | | 2004 | | 2005 |
| | | RMB | | RMB |
| Share of net assets | | | 429 | | | | 142 | |
| | | | | | | | | |
Details of the Group’s principal affiliated companies andare set out in Note 50, all of which are unlisted corporate entities.
Summary financial information on affiliated companies:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
24. INTEREST IN JOINTLY CONTROLLED ENTITIES
| | | | | | | | | |
| | | December 31, | |
| | | 2004 | | | 2005 | |
| | | RMB | | | RMB | |
| Share of net assets | | | 782 | | | | 805 | |
| | | | | | | |
Details of the Group’s principal jointly controlled entities are set out in Note 29.50, all of which are unlisted corporate entities.
F-45
16.DEBT
Short-term notes payable
| | | | | | | | | |
| | | December 31,
|
| | | 2002
| | 2003
|
| | | RMB | | RMB |
| Short-term notes payable | | | 4,422,926 | | | | 6,408,806 | |
| | | |
| | | |
| |
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Summary financial information on jointly controlled entities:
| | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | | | | |
25. DEFERRED TAX ASSETS/LIABILITIES
Movements of net deferred tax (liabilities)/assets are as follows:
| | | | | | | | | |
| | | 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 | ) |
| | | | | | | | | |
F-46
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
The deferred tax (liabilities)/assets as of December 31, 2004 and 2005 were made up of the following tax effects:
| | | | | | | | | |
| | | 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 | ) |
| | | | | | | | | |
F-47
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
As of December 31, 20022004 and 2003, borrowings under short-term notes payable of2005, the Group had tax losses for PRC income tax purposes totaling RMB1,450,000approximately RMB260 and RMB130,500, respectively, were guaranteed by CSAHC.RMB1,601. Such tax losses are available for carry forward to set off against future PRC assessable income for a maximum period of five years and will expire in 2011. In addition,accordance with accounting policy set out in Note 2(r), as of December 31, 2003, borrowings2004 and 2005, the Group has not recognized deferred tax assets in respect of tax losses to the extent of approximately Nil and RMB710 as it was determined by management that it is not probable that future taxable income against which the losses can be utilized will be available before they expire.
As of December 31, 2004 and 2005, the Group has also not recognized deferred tax assets in respect of cumulative tax 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 short-term notes payablecurrent tax legislation.
26. OTHER ASSETS
As of December 31, 2004 and 2005, other assets of the Group
totaling RMB63,000include lump sum housing benefits of RMB197 and
RMB21,000 were guaranteed by Guangzhou Baiyun International Airport Company Limited and Shenzhen Yingshun Investment Development Company Limited,RMB171, respectively.
Further details are set out in Note 37.
Movements of lump sum housing benefits are as follows:
| | | | | | | | | |
| | | 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 | |
| | | | | | | | | |
Borrowings under short-term notes payable are used primarily to finance working capital needs and are repayable in full on the respective due dates with interest rates ranging from 1.42%3.15% to 5.31%.5.34% per annum. The Group’s weighted average interest rate on short-term notes payable was 3.11%1.60% and 1.76%,4.83% per annum, respectively, as of December 31, 20022004 and 2003.2005.
Short-term notes payable include certain notes payable of RMB2,611 which were renewed subsequent to December 31, 2005. The renewed notes payable 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 within one year from their respective renewal dates.
In addition, the Group entered into new notes payable agreements totalling RMB2,671 subsequent to December 31, 2005. These new notes payable are unsecured and bear interest at floating rates ranging from 6-month LIBOR + 0.55% to 0.70% per annum with maturities through 2008.
F-23F-48
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data) Long-term notes payable
| | | | | | | | | | | |
| | | | | December 31,
|
| | | Interest rate and final maturity
| | 2002
| | 2003
|
| | | | | RMB | | RMB |
| Renminbi denominated notes payable: | | | | | | | | | | |
| Loans for construction projects | | Floating interest rates ranging from 4.94% | | | | | | | | |
| | | to 5.25% per annum as of December 31, 2003, | | | | | | | | |
| | | with maturities through 2009. | | | 893,838 | | | | 12,357 | |
| | | Non-interest bearing loan from a municipal | | | | | | | | |
| | | government authority, repayable in 2005 | | | 3,000 | | | | 3,000 | |
| Loans for purchase of aircraft | | Floating interest rate of 5.49% per annum | | | | | | | | |
| | | as of December 31, 2003, with maturities | | | | | | | | |
| | | through 2004 | | | 2,310,268 | | | | 63,500 | |
| 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, 2003, | | | | | | | | |
| | | with maturities through 2011. | | | 3,426,038 | | | | 2,612,687 | |
| | | Floating interest rates ranging from 1.48% to | | | | | | | | |
| | | 1.50% per annum as of December 31, 2003 | | | | | | | | |
| | | with maturities through 2013 | | | — | | | | 2,505,134 | |
| Loan for purchase of flight equipment | | Fixed interest rate of 8.35% per annum | | | | | | | | |
| | | as of December 31, 2003, with maturity | | | | | | | | |
| | | in 2004 | | | 20,090 | | | | 13,097 | |
| | | | | |
| | | |
| |
| | | | | | 6,653,234 | | | | 5,209,775 | |
| Less: current installments | | | | | (817,800 | ) | | | (688,040 | ) |
| | | | | |
| | | |
| |
| | | | | | 5,835,434 | | | | 4,521,735 | |
| | | | | |
| | | |
| |
| | | | | | | | | |
| | | December 31, |
| Interest rate and final maturity | | 2004 | | 2005 |
| | | RMB | | RMB |
Renminbi denominated notes payable | | | | | | | | |
| | | | | | | | | |
| 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 | |
| | | | | | | | | |
United States Dollars denominated notes payable | | | | | | | | |
| | | | | | | | | |
| 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 | |
| | | | | | | | | |
As of December 31, 20022004 and 2003, borrowings under long-term2005, bank and other notes payable of the Group totaling RMB3,360,945RMB8,620 and RMB2,564,586,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, 2002RMB11,927 and 2003, borrowings under long-term notes payable of the Group totaling RMB1,890,118 and RMB228,800, respectively, were guaranteed by CSAHC and RMB561,531 and RMB10,052, respectively, were guaranteed by SA Finance.RMB11,735, respectively.
F-49
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
As of December 31, 2003,2004 and 2005, certain bank and other notes payable were guaranteed by the following parties:
| | | | | | | | | |
| | | 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 | |
| | | | | | | | | |
As of December 31, 2005, the Group had banking facilities with several PRC commercial banks for providing loan finance up to an approximate amount of RMB9,860,000.RMB39,294. As of December 31, 2003,2005, an approximate amount of approximately RMB4,412,000RMB28,242 was utilized.
As of December 31, 2004 and 2005, loans to the Group from SA Finance amounted to RMB256 and RMB300, respectively (Note 36(b)).
F-24F-50
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data) The aggregate annual maturities of long-term notes payable for each of the five years subsequent to December 31, 20032005 and thereafter are as follows:
| | | | | | | | | |
| | | RMB | | RMB |
Year ending December 31, | | |
| 2004 | | 688,040 | | |
| 2005 | | 649,492 | | |
| 2006 | | 403,994 | | | 1,877 | |
| 2007 | | 372,251 | | | 4,316 | |
| 2008 | | 447,465 | | | 2,156 | |
| 2009 | | | 1,435 | |
| 2010 | | | 660 | |
| Thereafter | | 2,648,533 | | | 4,173 | |
| | |
| | | | |
| | | 5,209,775 | | | 14,617 | |
| | |
| | | | |
Interest expense, net
Included in bank and other loans are the following amounts denominated in a currency other than the functional currency of the
amounts capitalized, represents:| | | | | | | | | | | | | |
| | | Year ended December 31,
|
| | | 2001
| | 2002
| | 2003
|
| | | RMB | | RMB | | RMB |
| Interest incurred | | | 938,944 | | | | 1,023,379 | | | | 906,802 | |
| Interest capitalized | | | (5,227 | ) | | | (64,186 | ) | | | (83,077 | ) |
| | | |
| | | |
| | | |
| |
| Interest expense | | | 933,717 | | | | 959,193 | | | | 823,725 | |
| | | |
| | | |
| | | |
| |
Interest rates per annum atentity to which borrowing costs were capitalized were 5.70%, 5.70% and 1.62% to 5.46%, respectively, for the years ended December 31, 2001, 2002 and 2003.
they related: | | | | | | | | | |
| | | December 31, |
| | | 2004 | | 2005 |
| United States Dollars | | US$1,969 | | US$3,208 |
| Hong Kong Dollars | | HK$2,678 | | HK$1,821 |
| | | | | | |
F-25F-51
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)17.
Capital leases As of December 31, 2003, the
The Group
leased 29 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 2004 through 2009.expiring during the years 2006 to 2017.
As of December 31, 2003,2005, future scheduled minimum lease payments under these capital leases which were 74% and 26%, respectively, denominated in U.S. dollars and Japanese yen, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments | | *Interest | | Obligations | | Payments | | *Interest | | Obligations |
| | | RMB | | RMB | | RMB | | RMB | | RMB | | RMB |
Year ending December 31, | | |
| 2004 | | 1,648,141 | | 350,286 | | 1,297,855 | | |
| 2005 | | 1,356,614 | | 290,163 | | 1,066,451 | | |
| 2006 | | 1,405,424 | | 208,566 | | 1,196,858 | | | 4,030 | | 657 | | 3,373 | |
| 2007 | | 1,445,207 | | 157,349 | | 1,287,858 | | | 3,423 | | 493 | | 2,930 | |
| 2008 | | 1,497,604 | | 73,503 | | 1,424,101 | | | 3,016 | | 408 | | 2,608 | |
| 2009 | | | 1,684 | | 307 | | 1,377 | |
| 2010 | | | 1,050 | | 238 | | 812 | |
| Thereafter | | 608,124 | | 40,308 | | 567,816 | | | 5,412 | | 680 | | 4,732 | |
| | |
| |
| |
| | | | | | | | |
| | | 7,961,114 | | 1,120,175 | | 6,840,939 | | | 18,615 | | 2,783 | | 15,832 | |
| | |
| |
| | | | | | |
| Less: current instalments of obligations under capital leases | | | (1,297,855 | ) | |
| | | |
| Less: current installments of obligations under capital leases | | | | (3,373 | ) |
| | |
| | | | |
| | | 5,543,084 | | | 12,459 | |
| | |
| | | | |
| | |
| * | | Interest rates ranging from 1.44% to 8.01% per annum |
As of December 31, 2004, future payments under these capital leases are as follows:
| | | | | | | | | | | | | |
| | | Payments | | *Interest | | Obligations |
| | | RMB | | RMB | | RMB |
Year ending December 31, | | | | | | | | | | | | |
| 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 |
F-52
*Interest rates ranged from 2.23% to 9.36%.
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Under the terms of the leases, the Group has
thean option to purchase, at or near the end of the lease term, certain aircraft
at fair market value and
othersflight equipment at either fair market value or a percentage of the respective lessor’s defined cost of the aircraft.
Security, including charges over the assets concerned and relevant insurance policies, is provided to the lessors.
In addition to the assets mortgaged as security under certain loan agreements (Note 13), As of December 31, 2004 and 2005, certain of the Group’s aircraft with an aggregate carrying amount of RMB8,960,483RMB11,635 and RMB7,857,169,RMB18,673, respectively as of December 31, 2002 and 2003 were mortgaged to secure facilities with financial institutions grantedfinance lease obligations RMB11,743 and RMB15,832, respectively.
Included in obligations under capital leases are the following amounts denominated in a currency other than the functional currency of the entity to
lessors totaling RMB8,198,449 and RMB6,840,939, respectively, on these dates.F-26
which they relate:
| | | | | | | | | |
| | | December 31, |
| | | 2004 | | 2005 |
| United States Dollars | | US$958 | | US$1,556 |
| Japanese Yen | | JPY47,840 | | JPY47,795 |
| | | | | |
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)
Operating leases
As of December 31, 2003,2005, future minimum lease payments under non-cancellable aircraft and flight equipment operating leases were as follows (principally denominated in U.S. dollars):
| | | | | | | | | |
| | | RMB | | RMB |
Year ending December 31, | | |
| 2004 | | 1,482,888 | | |
| 2005 | | 1,411,520 | | |
| 2006 | | 1,143,745 | | | 3,340 | |
| 2007 | | 921,456 | | | 2,881 | |
| 2008 | | 771,374 | | | 2,785 | |
| 2009 | | | 2,609 | |
| 2010 | | | 2,523 | |
| Thereafter | | 2,388,874 | | | 10,456 | |
| | | | | |
| | |
| |
| Total minimum lease payments | | 8,119,857 | | | 24,594 | |
| | |
| | | | |
Amounts charged to rental expenses for operating leases for the years ended December 31, 2001, 2002 and 2003 totaled RMB1,723,338, RMB1,348,277 and RMB1,408,574, respectively.
All of the Group’s obligations under capital and operating leases are guaranteed by financial institutions.
18. ACCRUED EXPENSES
| | | | | | | | | |
| | | December 31,
|
| | | 2002
| | 2003
|
| | | RMB | | RMB |
| Landing and navigation fees | | | 497,372 | | | | 825,811 | |
| Duties and levies | | | 360,827 | | | | 336,839 | |
| Fuel | | | 297,626 | | | | 254,801 | |
| Interest | | | 174,626 | | | | 157,527 | |
| Lease charges | | | 40,900 | | | | 18,144 | |
| Accrued salaries, wages and benefits | | | 245,124 | | | | 197,332 | |
| Repairs and maintenance | | | 198,465 | | | | 286,636 | |
| Current portion of provision for major overhauls (Note 6) | | | 52,000 | | | | 10,717 | |
| Lump sum housing benefits payable (Note 24) | | | 213,675 | | | | 129,521 | |
| Other | | | 260,839 | | | | 310,466 | |
| | | |
| | | |
| |
| | | | 2,341,454 | | | | 2,527,794 | |
| | | |
| | | |
| |
F-27F-53
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)19. DEFERRED CREDITS
| | | | | | | | | |
| | | December 31,
|
| | | 2002
| | 2003
|
| | | RMB | | RMB |
| Operating lease rebates | | | 7,857 | | | | 6,316 | |
| Governmental subsidy for safety related capital expenditures | | | 40,238 | | | | 40,238 | |
| | | |
| | | |
| |
| | | | 48,095 | | | | 46,554 | |
| | | |
| | | |
| |
| Movements during the year are as follows: | | | | | | | | |
| Balance at beginning of year | | | 15,072 | | | | 48,095 | |
| Additions during the year | | | 40,238 | | | | — | |
| Transferred to consolidated statement of operations | | | (7,215 | ) | | | (1,541 | ) |
| | | |
| | | |
| |
| Balance at end of year | | | 48,095 | | | | 46,554 | |
| | | |
| | | |
| |
Operating As of December 31, 2004, future minimum lease rebates
Pursuant to severalpayments under non-cancellable aircraft and flight equipment operating lease arrangements for aircraft commencedleases were as follows (principally denominated in January 1998,U.S. dollars):
| | | | | |
| | | RMB |
Year ending December 31, | | | | |
| 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 | |
| | | | | | | | | |
The following is the ageing analysis of trade 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 | |
| | | | | | | | | |
As of December 31, 2004 and 2005, the Group received cash rebates totaling RMB24,838 fromhad an operating lessoramount due to a fellow subsidiary of RMB838 and RMB859, respectively, which was included in 1998. Such rebates have been deferredtrade and amortized over the termsbills payables.
All 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 protectiontrade 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. F-28F-54
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)20. DEFERRED TAXATION
Movements
Included in
net deferred tax liabilitiestrade and bills payables are
as follows:| | | | | | | | | |
| | | December 31,
|
| | | 2002
| | 2003
|
| | | RMB | | RMB |
| Balance at beginning of year | | | (519,577 | ) | | | (779,234 | ) |
| Land use rights adjustment (Note 22(f)) | | | 57,495 | | | | — | |
| Transferred to consolidated statement of operations (Note 10) | | | | | | | | |
| - current year | | | (317,152 | ) | | | (11,208 | ) |
| - adjustment for change in income tax rate | | | — | | | | 392,137 | |
| | | |
| | | |
| |
| Balance at end of year | | | (779,234 | ) | | | (398,305 | ) |
| | | |
| | | |
| |
The net deferred tax liabilities were made upthe following amounts denominated in a currency other than the functional currency of the following taxation effects:entity to which they relate:
| | | | | | | | | |
| | | December 31,
|
| | | 2002
| | 2003
|
| | | RMB | | RMB |
| Deferred tax assets: | | | | | | | | |
| Tax losses carried forward | | | 149,338 | | | | 222,936 | |
| Fixed assets, principally due to repair charges capitalized | | | 319,697 | | | | 261,312 | |
| Accrued expenses | | | 375,789 | | | | 106,491 | |
| Other | | | 129,423 | | | | 8,989 | |
| | | |
| | | |
| |
| Total deferred tax assets | | | 974,247 | | | | 599,728 | |
| | | |
| | | |
| |
| Deferred tax liabilities: | | | | | | | | |
| Undistributed profits of subsidiaries | | | 254,210 | | | | — | |
| Accrued expenses | | | 78,083 | | | | 80,545 | |
| Fixed assets, principally due to difference in depreciation | | | 1,403,278 | | | | 847,781 | |
| Other | | | 17,910 | | | | 69,707 | |
| | | |
| | | |
| |
| Total deferred tax liabilities | | | 1,753,481 | | | | 998,033 | |
| | | |
| | | |
| |
| Net deferred tax liabilities | | | (779,234 | ) | | | (398,305 | ) |
| | | |
| | | |
| |
| | | | | | | | | |
| | | 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 |
The amounts 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 | |
| | | | | | | | | |
The amounts due to related companies were unsecured, interest free and have no fixed terms of repayment.
F-29F-55
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)
| | | | | | | | | |
| | | 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 | |
| | | | | | | | | |
| | | | | | | | | |
| | | 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 | |
| | | | | | | | | |
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable profits during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable profits in making this assessment. Based upon the projections for future taxable profits over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Group will realize the benefits of these deductible differences. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable profits during the carryforward period are reduced.
As of December 31, 2003, the Group had tax losses for PRC income tax purposes totaling approximately RMB1,486,240. Such tax losses are available for carry forward to set-off against future PRC assessable income for a maximum period of five years. Of these tax losses, approximately RMB262,957, RMB106,156 and RMB1,117,127 will expire after December 31, 2004, 2007 and 2008, respectively. As of December 31, 2003, the Group recorded a deferred tax asset of RMB222,936 for such tax losses.
As of December 31, 2003, the Group had tax losses of approximately RMB303,000 available for offset against future assessable profits arising from Hong Kong profits, if any, over an indefinite period. The Group has not recognized a deferred tax asset in respect of such tax losses as it would not be probable that future taxable profits will be available against which the taxable losses can be utilized.
21. SHARE CAPITAL
| | | | | | | | | |
| | | December 31,
|
| | | 2002
| | 2003
|
| | | 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 | |
| 1,000,000,000 A share of RMB1.00 each | | | — | | | | 1,000,000 | |
| | | |
| | | |
| |
| | | | 3,374,178 | | | | 4,374,178 | |
| | | |
| | | |
| |
| 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 | |
| 1,000,000,000 A share of RMB1.00 each | | | — | | | | 1,000,000 | |
| | | |
| | | |
| |
| | | | 3,374,178 | | | | 4,374,178 | |
| | | |
| | | |
| |
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 share premium received by the Company, net of the issuance costs of RMB59,233, amounted to RMB1,640,767 and was credited to share premium account.
F-30F-56
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data) | 33. | | 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 | |
| | | | | | | | | |
| | | | | | | | | |
| | | 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 | |
| | | | | | | | | |
All the domestic
state-owned, H and A shares rank pari passu in all material respects.
As of December 31, 20022004 and 2003,2005, the retained earningsearnings/accumulated loss of the Group included RMB135,010RMB81 and RMB112,985,RMB(200), respectively, of undistributed earningsearnings/losses of companies which are 50% or less owned by the Group and accounted for under the equity method.
22. RESERVES
Movements of reserves are as follows:
| | | | | | | | | |
| | | December 31,
|
| | | 2002
| | 2003
|
| | | RMB | | RMB |
Statutory surplus reserve (Note (a)) | | | | | | | | |
| Balance at beginning of year | | | 391,867 | | | | 337,195 | |
| Adjustments from adoption of PRC accounting regulations (Note (c)) | | | (106,007 | ) | | | — | |
| Transferred from consolidated statement of operations | | | 51,335 | | | | 23,856 | |
| | | |
| | | |
| |
| Balance at end of year | | | 337,195 | | | | 361,051 | |
| | | |
| | | |
| |
Statutory public welfare fund (Note (b)) | | | | | | | | |
| Balance at beginning of year | | | 225,440 | | | | 171,574 | |
| Adjustments from adoption of PRC accounting regulations (Note (c)) | | | (79,533 | ) | | | — | |
| Transferred from consolidated statement of operations | | | 25,667 | | | | 1,113 | |
| | | |
| | | |
| |
| Balance at end of year | | | 171,574 | | | | 172,687 | |
| | | |
| | | |
| |
Discretionary surplus reserve (Note (d)) | | | | | | | | |
| Balance at beginning of year | | | 69,867 | | | | 76,603 | |
| Transferred from consolidated statement of operations | | | 6,736 | | | | — | |
| | | |
| | | |
| |
| Balance at end of year | | | 76,603 | | | | 76,603 | |
| | | |
| | | |
| |
| | | | 585,372 | | | | 610,341 | |
| | | |
| | | |
| |
F-31F-57
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)Notes:
35. RESERVES
| | | | | | | | | |
| | | December 31, | |
| | | 2004 | | | 2005 | |
| | | RMB | | RMB |
Share premium | | | | | | | | |
| At January 1 and December 31 | | | 5,325 | | | | 5,325 | |
| | | | | | | |
| | | | | | | | | |
Statutory surplus reserve (Note (a)) | | | | | | | | |
| At 1 January | | | 361 | | | | 402 | |
| Transfer from retained earnings | | | 41 | | | | 8 | |
| | | | | | | |
| At December 31 | | | 402 | | | | 410 | |
| | | | | | | |
| | | | | | | | | |
Statutory public welfare fund (Note (b)) | | | | | | | | |
| At 1 January | | | 173 | | | | 193 | |
| Transfer from retained earnings | | | 20 | | | | 5 | |
| | | | | | | |
| At December 31 | | | 193 | | | | 198 | |
| | | | | | | |
| | | | | | | | | |
Discretionary surplus reserve (Note (c)) | | | | | | | | |
| At 1 January | | | 77 | | | | 77 | |
| Transfer from retained earnings | | | — | | | | 6 | |
| | | | | | | |
| At December 31 | | | 77 | | | | 83 | |
| | | | | | | |
| | | | | | | | | |
Retained earnings/(accumulated loss) | | | | | | | | |
| 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 | ) |
| | | | | | | |
| | | | | | | | | |
Total | | | 7,474 | | | | 5,626 | |
| | | | | | | |
(a) According to the PRC Company Law and the Articles of Association of the Company and certain of its subsidiaries, the Company and the relevant subsidiaries are required to transfer 10% of their annual net income after taxation, as determined under relevant PRC accounting
rules and regulations, to a statutory surplus reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before distribution of a dividend to shareholders.
Statutory surplus reserve can be used to offset prior years’ losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholding or by increasing the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital.
F-58
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(b) According to the PRC Company Law and the Articles of Association of the Company and certain of its subsidiaries, the Company and the relevant subsidiaries are required to transfer between 5% to 10% of their annual net income after taxation, as determined under PRC accounting
rules and regulations, to the statutory public welfare fund. This fund can only be utilized on capital items for the collective benefits of the Company’s and the relevant subsidiaries’ employees such as the construction of dormitories, canteen and other staff welfare facilities. This fund is non-distributable other than in liquidation. The transfer to this
reservefund must be made before distribution of a dividend to
shareholders.shareholders and is subject to respective shareholders’ approval.
(c)
During 2002, the Group adopted certain new PRC accounting regulations which resulted in adjustmentsThe appropriation of this reserve is subject to
the amounts of the Group’s income determined under PRC accounting regulations in respect of prior years and corresponding adjustments to amounts appropriated to the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve for the prior years. (d)shareholders’ approval. The usage of this reserve is similar to that of statutory surplus reserve.
(e)
(d) Dividend distributions may be proposed at the discretion of the Company’s
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 (Note 27). (f) The Group adopted IAS 40 “Investment Property” in 2002. According to IAS 40,listed. As of December 31, 2005, 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 IAS 40 was adopted prospectively in 2002 as the effect of this changeCompany did not have aany distributable reserves.
36. RELATED PARTY TRANSACTIONS
In addition to the balances discussed in Notes 16, 17, 21, 27, 29 and 30 to these consolidated financial statements, the Group entered into the following material impact onrelated party transactions.
(a) Significant transactions with related companies
The Group obtained various operational and financial services provided by CSAHC and its affiliates, and the Group’s 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.China State-owned Assets Administration Bureau since early 2003. Consequently, transactions with the CAAC and its affiliates beginning from 2003 are no longer presented as related party transactions of the Group.
F-32F-59
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)23.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 (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 Group may not be registered with the relevant authorities. Lack of registration may affect the validity of such lease agreements.
With respect to the facilities in Guangzhou, CSAHC has received written assurance from the CAAC to the effect that CSAHC is entitled to continued use and occupancy
Details of the land in Guangzhou. The Group understands that the CAAC is basing its conclusion on an agreement among certain government authorities relating to such land. Such assurance does not constitute formal evidence 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.significant transactions carried out are as follows:
| | | | | | | | | | | | | | | |
| | | | | 2003 | | 2004 | | 2005 |
| | | Note | | RMB | | RMB | | RMB |
Expenses paid to CSAHC and its affiliates | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 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 | | | | — | |
| | | | | | | | | | | | | | | |
Expenses paid to affiliated companies and jointly controlled entities | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | |
Income received from affiliated companies and jointly controlled entities | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Rental income | | (xii) | | | 31 | | | | 31 | | | | 31 | |
| Interest income | | (xiii) | | | 3 | | | | 4 | | | | 3 | |
| | | | | | | | | | | | | | | |
Others | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 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. |
The Group is currently involved in a civil litigation ( the “Litigation”). According to the writ of summons for the Litigation, the plaintiff, claimed against the Group for unspecified damages for breach of certain agreement. Given that the Litigation is still at its preliminary stage, it is pre-matured to predict the outcome. Based on the opinion given by the Company’s instructing solicitors, the directors of the Company consider that the Group has a reasonable chance of success in its defense to the claim. Accordingly, the directors of the Company consider that a provision for such claim and/or the associated legal costs is not required.
As of December 31, 2003, the Group had on order two Boeing 757-200 aircraft, thirteen Boeing 737-700 aircraft, four Airbus 330-200 aircraft, six Embraer ERJ-145 aircraft and certain flight equipment, scheduled for deliveries in 2004 to 2005. Deposits of RMB2,494,853 have been made towards the purchase of these aircraft and related equipment. As of December 31, 2003, the aggregate future payments, including estimated amounts for price escalation through anticipated delivery dates for these aircraft and related equipment totaled approximately RMB10,615,079.
As of December 31, 2003, additional capital expenditures of approximately RMB3,012,607 have been authorized, of which approximately RMB849,847 have been committed, for the Group’s principal facilities. Such expenditures comprised mainly RMB2,071,938 for facilities and equipment at the Guangzhou New Airport and RMB940,669 for other airport and office facilities and equipment, overhaul and maintenance bases and training centers.
F-33F-60
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)
| | |
| (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
As
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
| | |
| (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. |
In addition to the above, certain subsidiaries of December 31, 2003,CSAHC also provided hotel and other services to the Group was committedduring the year. The total amount involved is not material to make a capital contributionthe results of approximately RMB446,000 to jointly controlled entities.the Group for the year.
F-62
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
| (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 | |
| | | | | | | |
Total remuneration is included in “staff costs” (Note 11).
| (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
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(e) Transactions with other state-owned enterprises
The Group
has taken steps towardsis a state-owned entity and operates in an economic regime currently predominated by state-owned entities. Apart from transactions with CSAHC and its affiliates, the
Group conducts a majority of its business activities with entities directly or indirectly owned or controlled by the PRC government and numerous government authorities and agencies (collectively referred to as “state-owned entities”) in the ordinary course of business. These transactions, which include sales and purchase of
the airline businessgoods and ancillary materials, rendering and receiving services, lease of
China Northern Airlines Companyassets, purchase of property, plant and
Xinjiang Airlines Company. No contractual obligations existed as of December 31, 2003equipment and
upobtaining finance, are carried out at terms similar to
the date of approval ofthose that would be entered into with non-state-owned entities and have been reflected in these
consolidated financial statements. The
purchase pricemanagement believes that it has
not yet been determined.provided meaningful disclosure of related party transactions as summarized above.
24.37. RETIREMENT AND POST-RETIREMENT MEDICALHOUSING 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 14% to
17% for 2001, 14%20% during the year ended December 31, 2004 and 9% to
19% for 2002 and 200320% during the year ended December 31, 2005, respectively, 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.
Contributions to the retirement schemes are charged to consolidated statements of operations as and when incurred. Contributions to the retirement schemes amounted to RMB62,833, RMB112,285 and RMB131,327, respectively, during 2001, 2002 and 2003. 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%rates ranging from 3% to 5% of total salaries. The Group has no obligation for the payment of pension benefits beyond the contributions described above.
Contributions to the retirement schemes are charged to consolidated statements of operations as and when incurred. Contributions to the retirement schemes amounted to RMB15,000, RMB19,337 and RMB19,120, respectively, during 2001, 2002 and 2003. Furthermore, pursuant to the comprehensive services agreement (the “Services Agreement”) dated May 22, 1997 between the Company and CSAHC, CSAHC
agrees to provide adequateprovided quarters to eligible employees of the
Group as and when required.Group. In return, the Group
agrees to paypaid a fixed annual fee of
RMB85,000RMB85 to CSAHC for a ten-year period
effective January 1, 1995. During 2001from 1995 to 2004. The agreement expired by December 31, 2004 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 employeesno further payment was made 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 the sub-item “(Loss)/gain on sale of fixed assets” under “Non-operating income/(expenses)” in the consolidated statements of operations.
2005.F-34F-64
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data) Subsequently, pursuant
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.houses. 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
benefit vesting
benefit period remained.period. 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 statements of operations. As
ofat December 31,
2003,2004 and 2005, the Group
alreadyhad made payments totaling
RMB130,479RMB152 and RMB168, respectively, under the scheme and recorded its remaining contractual liabilities totaling
RMB129,521RMB108 and RMB92, respectively, as accrued
liabilitiesexpenses on the consolidated balance
sheets (Note 18).sheets. Housing allowances are payable when applications are received from eligible employees.
25.38. SEGMENTAL INFORMATIONRELATED PARTY TRANSACTIONS The Group obtained various operationaloperates principally as a single business segment for the provision of air transportation services. The analysis of turnover and financial services providedoperating income/(loss) by CSAHC and its affiliates, andgeographical segment is based on the Group’s affiliated companies and jointly controlled entities during the normal course of its business. In the past, CSAHC was under the direct control of the CAAC. However, such control has been shifted to the State Assets Administration Committee since early 2003. Consequently, transactions with the CAAC and its affiliates beginning from 2003 are no longer presented as related party transactions of the Group. The principal related party transactions are described as follows:following criteria:
| (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 | |
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.
International air fares are subject to bilateral agreements between the CAAC, acting on behalf of the PRC government, and other governments. Domestic air fares are regulated jointly by the CAAC and the PRC Price Administrative Bureau.
Procurement of aircraft, flight equipment and other airline-related facilities
Certain PRC airlines, including the Group, were granted permission to acquire aircraft, flight equipment and other airline-related facilities directly from manufacturers subject to the approval of their fleet expansion plans by the relevant PRC government authorities.
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. Total purchases amounted to RMB324,998, RMB583,548 and RMB1,154,553, respectively, for 2001, 2002 and 2003. Handling fees totaling RMB16,161, RMB 36,306 and RMB27,051, respectively, were paid to SAIETC for 2001, 2002 and 2003.
F-35F-65
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)Jet fuel supplies
Jet fuel is subject to allocation
| | | | | | | | | | | | | | | | | |
| | | | | | | 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. |
The major revenue-earning assets of the Group are its aircraft fleet, all are registered in the PRC.
The GroupSince the Group’s aircraft fleet is
requiredemployed flexibly across its route network, there is no suitable basis of allocating such assets 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 purchased by the Group in accordance with such allocation was RMB2,586,688 and RMB2,373,956, respectively, during 2001 and 2002. The remaindergeographic segments. Most of the Group’s
jet fuel was purchased from domestic markets and, to a lesser extent, from international markets.Aircraft insurance
Aviation insurance covering hull, war and passenger liability risk is arranged bynon-aircraft assets are located in 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 RMB123,439 and RMB256,238, respectively, were incurred byPRC.
39. MATERIAL NON-CASH TRANSACTIONS
During 2004, the Group
during 2001acquired the airline operation and
2002.Financial arrangements
The Group’s obligationsrelated assets of CNA and XJA at a total consideration of RMB15,522, which was partially satisfied by assumption of debts and liabilities of CNA and XJA totalling RMB13,563 outstanding as of December 31, 2004. Details are set out in Note 40.
During 2005, aircraft acquired 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 RMB1,490 and RMB1,025, respectively, were paid to these financial institutions during 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 RMB13,771, RMB10,530 and RMB3,100, respectively, was earned by the Group on such deposits during 2001, 2002 and 2003 (Note 11).
During 2003, CSAHC made short-term advances to the Group. These advances are unsecured, non-interest bearing and repayable on demand. As of 31 December, 2003, the advancescapital leases amounted to RMB165,995.
RMB6,938. F-36F-66
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)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
40. EFFECT OF THE CNA/XJA ACQUISITIONS
(a) Supplementary information for consolidated statements of the system. Service fees paid by the Group to the CAAC during 2001 and 2002 totaled RMB110,134 and RMB107,234, respectively.cash flows
| | | | | | | | | | | | | |
| | | 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 | | | | — | |
| | | | | | | | | | |
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 RMB57,424 and RMB62,111, respectively, were paid by the Group to the CAAC during 2001 and 2002.
The Group is required to pay landing and navigation 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. Landing and navigation fees totaling RMB1,527,600 and RMB1,667,706, respectively, were paid to various PRC airports during 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 RMB22,707, RMB29,058 and RMB28,199, respectively, during 2001, 2002 and 2003.
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. Commission expenses incurred by the Group in respect of tickets sold by certain subsidiaries of CSAHC totaled RMB37,017, RMB16,725 and RMB4,896, respectively, during 2001, 2002 and 2003.
Commission is earned by the CAAC’s sales offices and various PRC airlines 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 and various PRC airlines totaled RMB510,169 and RMB464,721, respectively, during 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 RMB89,842 and RMB81,931, respectively, during 2001 and 2002.
Ground service fees are received from other PRC 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 RMB23,513 and RMB39,735, respectively, during 2001 and 2002.
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. Maintenance fees totaling RMB534,828, RMB592,311 and RMB693,303, respectively, were incurred by the Group for services provided by GAMECO and MTU Zhuhai during 2001, 2002 and 2003.
F-37F-67
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data) Certain aircraft sundry supplies are purchased from Southern Airlines (Group) Economic Development Company (“SAGEDC”), a subsidiary
(b) Had the CNA/XJA Acquisitions been effected on January 1, 2004, results of
CSAHC. Supplies totaling RMB86,386, RMB101,350 and RMB42,389, respectively, were purchased by the Group from SAGEDC during 2001, 2002 and 2003. The Group has a 51% equity interest in Zhuhai Xiang Yi, which provides flight simulation services to the Group. Flight simulation service charges totaling RMB101,355 were incurred byoperations of the Group for services provided by Zhuhai Xiang Yi during 2003. In addition, the Group entered into operating lease agreements to lease certain flight training facilities and buildings to Zhuhai Xiang Yi. Rental income received by the Group amounted to RMB34,175 during 2003 (Note 13).
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 RMB9,940 and RMB3,275, respectively, were incurred by the Group for services provided by SA Advertising during 2001 and 2002.
Wet lease rentals
Pursuant to certain wet lease arrangements effected in August and November 2000, the Group incurred RMB300,000 during 2001 in respect of five Boeing 737-300/37K aircraft leased from Zhongyuan Airlines, a subsidiary of CSAHC. Such lease arrangements were terminated in January 2002.
During 2002 and 2003, wet lease rentals totaling RMB26,164 and RMB35,751, respectively, were paid to Xinjiang Airlines Company, a subsidiary of CSAHC, 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.
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.
Refund of medical benefit payments
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. During 2003, CSAHC refunded RMB58,120 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 arrangement.
F-38
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)
Acquisition of aircraft and related spare parts and vehicles
During 2002, 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 toyear ended 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 acquisitions2004 are not considered significant in the context of the Group.
Amounts due to related companies
Amounts due to related companies, which represent balance with CSAHC and its affiliates, and the Group’s affiliated companies and jointly controlled entities, are unsecured, non-interest bearing and repayable within one year. The balance as of December 31, 2002 also included balances with the CAAC and its affiliates. Balances with other State-owned enterprises are excluded from this caption, as other State-owned enterprises are not considered related parties of the Group.
In addition to the above, certain business undertakings of CSAHC also provided hotel and other services to the Group. The total amount involved is not material to the results of the Group.
The directors of the Company are of the opinion that the above transactions with related parties were entered into in the normal course of business and on normal commercial terms or in accordance with the agreements governing such transactions.
F-39
follows:
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)
26.FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK
| | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | |
Financial assets of the Group include cash and cash equivalents,
other investments, trade receivables,
other receivables, other current assets and
other receivables.amounts due from related companies. Financial liabilities of the Group include notes payable,
accounts payable,obligations under capital leases, trade and bills
payable, sales in advance of carriage,payables, amounts due to related companies,
accrual expenses,taxes payable and other
liabilities and obligations under capital leases.liabilities.
As
ofat December 31,
2002 and 2003,2005, the Group’s
net current liabilities
amounted to RMB7,015,998 and RMB10,792,050, respectively.exceeded its current assets by RMB25,907. For the
yearsyear ended December 31,
2001, 2002 and 2003,2005, the Group recorded a net cash inflow from operating activities of
RMB2,223,943, RMB3,697,544 and RMB2,128,749, respectively,RMB3,835, a net cash outflow from investing activities and financing activities of
RMB3,603,535, RMB2,744,364 and RMB3,819,618, respectively,RMB4,017, and a
(decrease)/increasedecrease in cash and cash equivalents of
RMB(1,379,592), RMB953,180 and RMB(1,690,869), respectively. With regard to 2004RMB182.
In 2006 and thereafter, the liquidity of the Group is primarily dependent on its ability to maintain adequate cash inflow from operations to meet its debt obligations as they fall due, and on its ability to obtain adequate external finance to meet its committed future capital expenditures.
With regard to its short-term notes payable outstanding as of December 31, 2003, theThe Group has obtained firm commitments from its principal bankers to renew
relevant loans asits short-term notes payable outstanding at December 31, 2005 when they fall due during
2004. With regard2006. Subsequent to
its future capital commitments and other financing requirements,December 31, 2005, the Group
has already entered into loan financing agreements with several PRC banks to provide loan finance up to an approximate amountrenewed short-term notes payable outstanding of
RMB8,450,000 during 2004 and thereafter.RMB2,611 (Notes 27). The directors of the Company believe that
suchsufficient financing will be available to the Group.
The directors of the Company have carried out a detailed review of the cash flow forecast of the Group for the twelve months ending December 31, 2004.2006. Based on such forecast, the directors have determined that adequate liquidity exists to finance the working capital and capital expenditure requirements of the Group during that period. In preparing the cash flow forecast, the directors have considered historical cash requirements of the Group as well as other key factors, including the availability of the above-mentioned loan finance which may impact the operations of the Group during the next twelve-month period. The directors are of the opinion that the assumptions and sensitivities which are included in the cash flow forecast are reasonable. However, as with all assumptions in regard to future events, these are subject to inherent limitations and uncertainties and some or all of these assumptions may not be realized.
F-40F-68
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)Business risk
The Group conducts its principal operations in PRC and accordingly is subject 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.
The interest rates and
termsmaturity information of
repayment of the
Group’s notes payable, and
obligations under capital leases of the Group are disclosed in Notes 16 and 17, respectively.Foreign currency risk
The Group has significant exposure to foreign currency as substantially all of the Group’s lease obligations and notes payable are denominated in foreign currencies, principally US dollars, and to a lesser extent, Japanese yen. 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 (“SAFE”), or subject to certain restrictive conditions, entering into forward foreign exchange contracts with authorized PRC banks.
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 of December 31, 2002 and 2003, the balance due from BSP amounted to RMB353,246 and RMB446,399, respectively.
Self insurance risk
The Group maintains a limited amount of property insurance in respect of certain personal and real property.
F-41
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)
Fair value
The carrying amounts and estimated fair values of significant financial assets and liabilities as of December 31, 2002 and 2003 are set out below.
| | | | | | | | | | | | | | | | | |
| | | December 31,
|
| | | 2002
| | 2003
|
| | | Carrying | | Fair | | Carrying | | Fair |
| | | amount
| | value
| | amount
| | value
|
| | | RMB | | RMB | | RMB | | RMB |
| Cash and cash equivalents | | | 3,771,043 | | | | 3,771,043 | | | | 2,080,174 | | | | 2,080,174 | |
| Trade receivables | | | 671,776 | | | | 671,776 | | | | 833,604 | | | | 833,604 | |
| Other receivables | | | 372,586 | | | | 372,586 | | | | 296,047 | | | | 296,047 | |
| Notes payable, including current installments of long-term notes payable | | | 5,240,726 | | | | 5,326,511 | | | | 7,096,846 | | | | 7,164,216 | |
| Accounts payable | | | 532,480 | | | | 532,480 | | | | 928,093 | | | | 928,093 | |
| Bills payable | | | 1,299,680 | | | | 1,299,680 | | | | 438,135 | | | | 438,135 | |
| Sales in advance of carriage | | | 390,531 | | | | 390,531 | | | | 466,087 | | | | 466,087 | |
| Amounts due to related companies | | | 525,090 | | | | 525,090 | | | | 929,003 | | | | 929,003 | |
| Accrued expenses | | | 2,341,454 | | | | 2,341,454 | | | | 2,527,794 | | | | 2,527,794 | |
| Other liabilities | | | 646,989 | | | | 646,989 | | | | 1,019,811 | | | | 1,019,811 | |
| Notes payable, excluding current installments | | | 5,835,434 | | | | 6,111,052 | | | | 4,521,735 | | | | 4,743,128 | |
The following methods and assumptions were used to estimate the fair value for each class of financial instrument:
(i) | | Cash and cash equivalents, trade receivables, other receivables, short-term notes payable, accounts payable, bills payable, sales in advance of carriage, amounts due to related companies, accrued expenses and other liabilities |
The carrying amounts approximate fair value because of the short maturities of these instruments.
(ii) | | Long-term 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 characteristicsmaturity 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 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.
F-42
28, respectively.
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIESForeign currency risk
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)
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.
27. FOREIGN CURRENCY EXCHANGE
The Renminbi is not freely convertible into foreign currencies. All foreign exchange transactions involving Renminbi must take place either through the
People’s Bank of ChinaPBOC or other institutions authorized to buy and sell foreign exchange or at a swap center.
The Group currently maintains bank accounts in currencies other than the Renminbi to engage in foreign exchange transactions. The amount of foreign exchange that can be retained by the Group under this system is determined by the
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.
The 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.
On July 21, 2005, the PBOC announced that the PRC government reformed the exchange rate 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.
Credit risk
Substantially all of the 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-43F-69
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)28. RECONCILIATION AND SUPPLEMENTARY STATEMENTS OF CASH FLOWS INFORMATION
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 which has insignificant credit risk to the Group. As of December 31, 2004 and 2005, the balance due from BSP agents amounted to RMB411 and RMB782, respectively. The credit risk exposure to BSP and the remaining trade receivables balance has been monitored by the Group on an ongoing basis and the impairment losses for bad and doubtful accounts have been within management’s expectations.
Fair value
(a) All financial instruments are carried at amounts not materially different from their fair values as of December 31, 2004 and 2005 except the following:
| | | | | | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | | | | |
The reconciliationfollowing methods and assumptions were used to estimate the fair value for each class of income/(loss) before taxation and minority interests to cash inflows from operations is as follows:financial instrument:
| | | | | | | | | | | | | |
| | | Year ended December 31,
|
| | | 2001
| | 2002
| | 2003
|
| | | RMB | | RMB | | RMB |
| Income/(loss) before taxation and minority interests | | | 795,256 | | | | 1,139,099 | | | | (511,610 | ) |
| Adjustments to reconcile income/(loss) before taxation and minority interests to cash inflows from operations: | | | | | | | | | | | | |
| Depreciation and amortization of fixed assets | | | 1,802,462 | | | | 1,839,293 | | | | 1,997,882 | |
| Other amortization | | | 12,512 | | | | 9,816 | | | | 40,089 | |
| Amortization of deferred credits | | | (18,483 | ) | | | (7,217 | ) | | | (1,541 | ) |
| Equity income of affiliated companies | | | (53,077 | ) | | | (36,988 | ) | | | (47,798 | ) |
| Equity loss of jointly controlled entities | | | 4,034 | | | | 3,352 | | | | 39,495 | |
| (Gain)/loss on sale of aircraft | | | (59,855 | ) | | | (199,394 | ) | | | 20,405 | |
| Loss on sale of other fixed assets | | | 115,744 | | | | 28,654 | | | | 1,812 | |
| Interest income | | | (49,878 | ) | | | (52,618 | ) | | | (13,061 | ) |
| Interest expense | | | 933,717 | | | | 959,193 | | | | 823,725 | |
| Non-cash exchange (gain)/loss, net | | | (292,630 | ) | | | 174,978 | | | | 177,356 | |
| Decrease/(increase) in trade receivables | | | 232,228 | | | | (110,749 | ) | | | (161,828 | ) |
| Decrease/(increase) in other receivables | | | 42,938 | | | | (166,004 | ) | | | 76,539 | |
| (Increase)/decrease in inventories | | | (2,033 | ) | | | (76,472 | ) | | | 1,923 | |
| (Increase)/decrease in prepaid expenses and other current assets | | | (136,600 | ) | | | 123,924 | | | | (6,045 | ) |
| (Decrease)/increase in accounts payable | | | (167,599 | ) | | | (61,843 | ) | | | 395,613 | |
| Increase/(decrease) in bills payable | | | — | | | | 1,299,680 | | | | (861,545 | ) |
| Increase in sales in advance of carriage | | | 31,036 | | | | 19,985 | | | | 75,556 | |
| Increase/(decrease) in amounts due to related companies | | | 98,040 | | | | (193,175 | ) | | | 403,913 | |
| (Decrease)/increase in accrued expenses | | | (132,121 | ) | | | 86,215 | | | | 203,439 | |
| Increase/(decrease) in other liabilities | | | 70,254 | | | | (33,032 | ) | | | 372,822 | |
| (Decrease)/increase in provision for major overhauls | | | (40,422 | ) | | | 16,226 | | | | 47,577 | |
| | | |
| | | |
| | | |
| |
| Cash inflows from operations | | | 3,185,523 | | | | 4,762,923 | | | | 3,074,718 | |
| | | |
| | | |
| | | |
| |
(b)(i) | | Disclosure of non-cash investingCash and financing activities: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. |
During 2002,
The carrying values approximate their fair values because of the short maturities of these instruments.
(ii) Notes payable
The fair value has been estimated by applying a discounted cash flow approach using interest rates available to the Group assumed from Zhongyuan Airlines debts totaling RMB964,736for similar indebtedness.
(iii)Fair value estimates are made at a specific point in partial satisfactiontime 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.
(b) The economic characteristics of the consideration payableGroup’s capital leases vary from lease to lease. It is impractical to compare such leases with those prevailing in the market within the constraints of timeliness and cost for acquisitionthe purpose of five Boeing 737-300/37K aircraft and other assets from Zhongyuan Airlines (Note 25).estimating the fair value of such leases.
F-44F-70
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)
| 42. | | COMMITMENTS |
|
| (a) | | Capital commitments |
At December 31, 2005, the Group 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 | |
| | | | | | | |
F-71
(c) Effect
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
At December 31, 2005, the Group had on order 82 aircraft and certain flight equipment, scheduled for deliveries in 2006 to 2010. Deposits of acquisitionRMB6,351 million have been made towards the purchase of subsidiaries:these aircraft and related equipment. As of December 31, 2005, the approximate total future payments, including estimated amounts for price escalation through anticipated delivery dates for these aircraft and flight equipment are as follows:
| | | | | | | | | |
| | | 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 | |
| | | | | | | |
At December 31, 2005, the Group’s attributable share of the capital commitments of jointly controlled entities was as follows:
| | | | | | | | | |
| | | 2004 | | | 2005 | |
| | | RMB | | | RMB | |
| Authorized and contracted for | | | — | | | | — | |
| Authorized but not contracted for | | | 156 | | | | 74 | |
| | | | | | | |
| | | | 156 | | | | 74 | |
| | | | | | | |
(b) Investing commitments
At December 31, 2005, the Group committed to make capital contributions in respect of:
| | | | | | | | | |
| | | 2004 | | | 2005 | |
| | | RMB | | | RMB | |
| Subsidiaries | | | 181 | | | | — | |
| Jointly controlled entities | | | 83 | | | | 83 | |
| | | | | | | |
| | | | 264 | | | | 83 | |
| | | | | | | |
F-72
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(a) Pursuant to the Reorganization of CSAHC effected in 1995 (Note 1), the Company assumed the airline and airline-related businesses together with the relevant assets and liabilities from CSAHC. The Company has been advised by its PRC lawyers that, except for liabilities constituting or arising out of or relating to the businesses assumed by the Company in the Reorganization, 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. There are not, however, any definitive PRC regulations or other pronouncements confirming such conclusion.
(b) The Group leases 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.
The Group cannot predict the magnitude of the effect on its financial condition or results of operations to the extent that their uses of one or more of the above parcels of land or the related facilities were successfully challenged. Pursuant to an indemnification agreement dated May 22, 1997 entered into between the Company and CSAHC, 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.
From April 20, 2006 to May 31, 2006, the Group entered into additional new notes payable agreements totalling RMB3,808. These additional new notes payable are unsecured, bear interest at floating rates ranging from 6-month LIBOR + 53% to 55% per annum and repayable one year from their respective origination dates.
Certain comparative figures have been adjusted or re-classified as a result of the changes in accounting policies. Further details are disclosed in Note 3.
| 46. | | PARENT AND ULTIMATE HOLDING COMPANY |
As of December 31, 2005, the directors of the Company consider the parent and ultimate holding company of the Group to be CSAHC, a state-owned enterprise established in the PRC. This entity does not produce financial statements available for public use.
F-73
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
| 47. | | ACCOUNTING ESTIMATES AND JUDGMENTS |
The Groups’ financial position and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the financial statements. The Group bases the assumptions and estimates on historical experience and on various other assumptions that the Group believes to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. On an on-going basis, management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.
The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in condition and assumptions are factors to be considered when reviewing the financial statements. The principal accounting policies are set forth in Note 2. The Group believes the following critical accounting policies involve the most significant judgments and estimates used in the preparation of the financial statements.
Impairments
If circumstances indicate that the net book value of a long-lived asset 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 carrying amounts of long-lived assets 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 recoverable amount. The recoverable amount is the greater of the net selling price and the value in use. In determining the value in use, expected cash flows generated by the asset are discounted to their present value, which requires significant judgment relating to level of traffic revenue and amount of operating costs. The Group uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on a reasonable and supportable assumptions and projections of traffic revenue and amount of operating costs.
Depreciation
Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives, after taking into account the estimated residual value. The Group reviews the estimated useful lives of the assets regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on the Group’s historical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.
F-74
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Impairment loss for doubtful accounts
The Group maintains an impairment loss for doubtful accounts for estimated losses resulting from the inability of the debtors to make required payments. The Group bases the estimates of future cash flows on the ageing of the trade receivables balance, debtors’ credit-worthiness, and historical write-off experience. If the financial condition of the debtors were to deteriorate, actual write-offs would be higher than estimated.
| 48. | | RECENTLY ISSUED ACCOUNTING STANDARDS |
New standards and interpretations which are not yet effective for the accounting period ending December 31, 2005 and which have not been adopted in these consolidated financial statements are as follows:
| | |
| | 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
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
| | |
| | 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
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
The Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. So far it has concluded that the adoption of these amendments and new standards and new interpretations in future periods is unlikely to have a significant impact on the Group’s results of operations and financial position.
F-77
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
49. SUBSIDIARIES
The particulars of the Group’s principal subsidiaries as of December 31, 2005 are as follows:
| | | | | | | | | | | | | |
| | | Year ended December 31,
| | | | | | Proportion of | | |
| | | 2001
Place of | | 2002
| | 2003
| | ownership | | |
| | | RMBestablishment | | RMB | | RMB | | interest held by | | Principal |
Net assets acquired:Name of company | | /operation | | Registered capital | | the Company | | activities |
| Guangxi Airlines Company Limited (a) | | PRC | | RMB170,900,000 | | | 95 | % | | Airline |
| | | | | | | | | | | | |
Fixed assetsSouthern Airlines (Group) Shantou Airlines Company Limited (a) | | PRC | | RMB280,000,000 | | | —60 | % | | | | 96,636 | | | | — | Airline |
Cash and cash equivalents | | | | | | | 17,355 | | | | | |
Trade receivables and other current assetsZhuhai Airlines Company Limited (a) | | PRC | | RMB250,000,000 | | | —60 | % | | | | 20,681 | | | | — | Airline |
| | | |
| | | |
| | | |
| |
| | | — | | | | 134,672 | | | | — | |
| | |
| | | |
| | | |
| |
Accounts payable | | | | | | | 3,623 | | | | | |
Accrued expenses and other liabilitiesXiamen Airlines Company Limited (a) | | PRC | | RMB700,000,000 | | | —60 | % | | | | 11,220 | | | | — | Airline |
| | | |
| | | |
| | | |
| |
| Guizhou Airlines Company Limited (a) | | PRC | | RMB80,000,000 | | | 60 | % | | Airline |
| | | | — | | | | 14,843 | | | | — | |
| Guangzhou Air Cargo Company Limited (a) | | PRC | | RMB238,000,000 | | | 70 | % | | Cargo services |
| | | |
| | | |
| | | |
| |
Net assets valueGuangzhou Baiyun International Logistic Company Limited (a) | | PRC | | RMB50,000,000 | | | —61 | % | | | | 119,829 | | | | — | |
Minority interests’ share of net assets value | | | — | | | | 11,983 | | | | — | Logistics operations |
| | | |
| | | |
| | | |
| |
Net assets value acquired by the GroupGuangzhou Nanland Air Catering Company Limited (b) | | PRC | | RMB120,000,000 | | | —75 | % | | | | 107,846 | | | | — | Air catering |
| | | |
| | | |
| | | |
| |
Consideration paidChina Southern West Australian Flying College Pty Limited | | Australia | | AUD100,000 | | | —65 | % | | | | 107,846 | | | | — | |
Cash and cash equivalents acquired | | | — | | | | 17,355 | | | | — | Pilot training services |
| | | |
| | | |
| | | |
| |
Net cash outflow from acquisition of subsidiariesXinjiang Civil Aviation Property Management
Limited (a) | | PRC | | RMB251,332,832 | | | —51.8 | % | | Property management |
| | |
| (a) | | 90,491These 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-45F-78
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)29. PRINCIPAL SUBSIDIARIES,
50. AFFILIATED COMPANIES AND JOINTLY CONTROLLED ENTITIES Details
The particulars of the Company’sGroup’s principal subsidiaries, affiliated companies and jointly controlled entities as of December 31, 20032005 are as follows:
| | | | | | | | | | | | | |
| | | | | Attributable | | |
| | | Place of | | equity interest
| | |
| | | establishment | | Direct | | Indirect | | Principal |
Name of company
| | /operation
| | %
| | %
| | activities
|
Subsidiaries | | | | | | | | | | | | |
| 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 |
Affiliated companies | | | | | | | | | | | | |
| Southern Airlines Group Finance Company Limited | | PRC | | | 32 | | | | 15.42 | | | Provision of financial services |
| Sichuan Airlines Corporation Limited | | PRC | | | 39 | | | | — | | | Airline |
Jointly controlled entities | | | | | | | | | | | | |
| Guangzhou Aircraft Maintenance Engineering Company Limited (Note) | | PRC | | | 50 | | | | — | | | Provision of aircraft repair and maintenance services |
| MTU Maintenance Zhuhai Co. Ltd. | | PRC | | | 50 | | | | — | | | Provision of engine repair and maintenance services |
| China Postal Airlines Limited | | PRC | | | 49 | | | | — | | | Airline |
| Zhuhai Xiang Yi Aviation Technology Company Limited | | PRC | | | 51 | | | | — | | | Provision of flight simulation services |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 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) | | Note: Guangzhou Aircraft Maintenance Engineering Company Limited has been reclassified from an affiliated company to aThese are jointly controlled entity since 2003 dueentities. |
|
| (b) | | Certain of the Group’s jointly controlled entities are PRC joint ventures which have limited lives pursuant to a change in the composition of its shareholders in 2003.PRC law. |
Certain of the Company’s subsidiaries, affiliated companies and jointly controlled entities are PRC joint ventures which have limited lives pursuant to PRC law.
F-46F-79
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)30. SEGMENTAL INFORMATION
The Group operates primarily as a single business segment for the provision of air transportation services. Geographic information about the Group’s operating revenue and income are as follows:
| | | | | | | | | | | | | | | | | |
| | | Domestic
| | Hong Kong
| | International*
| | Total
|
| | | RMB | | RMB | | RMB | | RMB |
Year ended December 31, 2001 | | | | | | | | | | | | | | | | |
| 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 | |
| | | |
| | | |
| | | |
| | | |
| |
Year ended December 31, 2002 | | | | | | | | | | | | | | | | |
| 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 | |
| | | |
| | | |
| | | |
| | | |
| |
Year ended December 31, 2003 | | | | | | | | | | | | | | | | |
| Traffic revenue | | | 13,086,939 | | | | 807,677 | | | | 3,070,184 | | | | 16,964,800 | |
| Other revenue | | | 436,122 | | | | — | | | | 69,201 | | | | 505,323 | |
| | | |
| | | |
| | | |
| | | |
| |
| | | | 13,523,061 | | | | 807,677 | | | | 3,139,385 | | | | 17,470,123 | |
| | | |
| | | |
| | | |
| | | |
| |
| Operating income / (loss) | | | 440,158 | | | | (29,210 | ) | | | 44,781 | | | | 455,729 | |
| | | |
| | | |
| | | |
| | | |
| |
| * | | Asian market accounted for approximately 75%, 70% and 70%, respectively, of the Group’s total international traffic revenue for the years ended December 31, 2001, 2002 and 2003. The remaining portion was mainly derived from the Group’s flights to/from European and North American regions. |
The major revenue-earning assets of the Group are its aircraft fleet, most of which are registered 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.
F-47
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)
31. SUBSEQUENT EVENTS
In April 2004, the Company entered into a purchase agreement with Airbus SNC for the acquisition of fifteen Airbus 320-200 aircraft and six Airbus 319-100 aircraft, scheduled for deliveries in 2005 and 2006.
32. SUPPLEMENTARY INFORMATION
Movements in allowance for doubtful accounts comprise:
| | | | | | | | | | | | | |
| | | Year ended December 31,
|
| | | 2001
| | 2002
| | 2003
|
| | | RMB | | RMB | | RMB |
| Balance at beginning of year | | | 72,644 | | | | 59,019 | | | | 60,118 | |
| Provision for doubtful accounts (Note 9) | | | 1,729 | | | | 1,304 | | | | 12,031 | |
| Doubtful accounts written-off | | | (15,354 | ) | | | (205 | ) | | | (2,152 | ) |
| | | |
| | | |
| | | |
| |
| Balance at end of year (Note 12) | | | 59,019 | | | | 60,118 | | | | 69,997 | |
| | | |
| | | |
| | | |
| |
33.51. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP
The Group’s accounting policies conform with
IFRSIFRSs which differ in certain
materialsignificant respects from U.S. GAAP. Information relating to the nature and effect of such differences
areis set out below.
(a) CNA/XJA Acquisitions
As disclosed in Note 1 to the consolidated financial statements prepared under IFRSs, the Group acquired the airline operations and certain related assets and liabilities of CNA and XJA with effect from December 31, 2004. Under IFRSs, the purchase method of accounting was applied to such business combination such that at December 31, 2004 only the acquired assets and assumed liabilities are included in the consolidated financial statements of the Group. The results of the acquired operations and their related cash flows were included in the consolidated financial statement 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 historical net asset carrying values and the U.S. GAAP consolidated financial statements of the Group are restated to include the historical carrying values of assets and liabilities of CNA and XJA, and their results of operations and cash flows for all the periods presented.
(b) Sale and leaseback accounting Under
IFRS,IFRSs, gains on sale and leaseback transactions where the subsequent lease is an operating lease are recognized as income immediately, if the transactions are established at fair value. Differences between the sale price and fair value are deferred and amortized over the period for which the assets are expected to be used. Under U.S. GAAP, such gains are deferred and amortized over the term of the lease.
(b)
As disclosed in Note 1321 to the consolidated financial statements, during 2002 and 2003, the Group entered into two separate arrangements with certain independent third parties under which the Group sold aircraft and then immediately leased back the aircraft for a pre-determined period.
As a result of the
arrangements,Arrangements, the Group received a net cash benefit of
RMB51,682RMB52 and
RMB69,121RMB69 in 2002 and 2003, respectively, which
has beenwere recognized as income under
IFRS.IFRSs. Under U.S. GAAP, such benefits are deferred and amortized over the minimum lease period.
F-48
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)
In addition, under the lease arrangements, the commitments by the Group to make long-term lease payments have beenare defeased by the placement of security deposits. As such, under IFRS,IFRSs, such commitments and deposits are not recognized on the consolidated balance sheets. Under U.S. GAAP, such commitments and deposits amounting to RMB1,322,843RMB2,462 and RMB2,409,252RMB2,376 as of December 31, 20022004 and 2003,2005, respectively, would be recognized on the consolidated balance sheets, as such commitments are not deemed as extinguished by the placement of security deposits.
F-80
(c)
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Under
IFRS,IFRSs, the Group capitalizes interest costs to the extent the related borrowings are directly attributable to the acquisition or construction of an asset.
Under U.S. GAAP, interest costs capitalized are determined based on specific borrowings related to the acquisition or construction of an asset, if an entity’s financing plans associate a specific new borrowing with a qualifying asset. If average accumulated expenditures for the asset exceed the amounts of specific new borrowings associated with the asset, additional interest costs capitalized are based on the weighted average interest rate applicable to other borrowings of the entity.
(d)
(e) Revaluation of fixed assetsproperty, plant and equipment
In connection with the Reorganization in 1996, the
fixed assetsproperty, plant and equipment of the Group were revalued as of December 31, 1996 (see Notes 1 and
1321 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 operations 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.
Under U.S. GAAP,
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
sevennine years ended December 31,
2003,2005, as a result of the Reorganization are reversed for U.S. GAAP purposes.
However, as a result of the tax deductibility of the net revaluation reserve, a deferred tax asset related to the reversal of the net revaluation reserve is created under U.S. GAAP with a corresponding increase in shareholders’ equity as of December 31, 1996. Such deferred tax asset will be reversed upon depreciation of the net revaluation surplus included in the fixed assetsproperty, plant and equipment beginning 1997.
F-49F-81
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)(e)
(f) Investments in affiliated company and jointly controlled entity During 2002, the Group invested in an affiliated company and a jointly controlled entity, which were PRC state-owned enterprises. Under
IFRS,IFRSs, such investments are initially recorded on a fair value basis at the cost of purchases borne by the Group. In the consolidated statements of operations, the equity share of results of the investees are measured based on the fair value of underlying net assets determined on the
datedates of acquisitions.
Under U.S. GAAP, such transactions
would beare considered to be “combinations of businesses under common control”.
Under U.S. GAAP,Consequently, such investments are initially recorded at the Group’s equity share of net assets of the investees determined on a historical cost basis. The differences between such amounts and the cost of purchases are reflected as movements in the shareholders’ equity. In the consolidated statements of operations, the equity share of results of the investees are measured based on the historical cost basis.
(f) Acquisition of subsidiaries from CSAHC
During 2002, the Group acquired 90% equity interest in certain subsidiaries from CSAHC. Under IFRS, the purchase method of accounting was applied to such business combination such that as from the date of combination, the results of the acquired subsidiaries and their assets and liabilities are included in the consolidated financial statements of the Group.
Under U.S. GAAP, such transaction would be considered to be “a combination of entities under common control”. Under U.S. GAAP, combination of entities under common control are accounted for under the “as if pooling-of-interests method” where assets and liabilities are accounted for at historical cost and financial statements of previously separate entities for periods prior to the combination generally are restated on a combined basis. The effect of this difference was not material to the years presented.
(g) Provision for major overhauls As disclosed in Notes
2(r)2(u) and
633 to the consolidated financial statements prepared under IFRS, in respect of aircraft held under operating leases, a provision is made over the lease term for the estimated cost of
scheduled overhauls required to be performed on the related aircraft prior to their return to the lessors.
Under U.S. GAAP, a liability
would beis recorded at the outset of the operating leases for the fair value of contractual obligations to perform the overhauls and a deferred asset
would beis recorded for the corresponding amount, which
would beis amortized over the term of the operating
leases.lease. The carrying amounts of such liability and asset
would amountamounted to approximately
RMB486,660RMB749 and
RMB292,773RMB390 respectively as of December 31,
20022004 and
RMB569,860RMB941 and
RMB369,679RMB489 respectively as of December 31,
2003.2005.
The effect of above difference on the net income/(loss) and shareholders’ equity reported under U.S. GAAP was not material tofor the years presented.
(h) Classification of short-term obligations expected to be refinanced
As described in Note 27 to the consolidated financial statements prepared under IFRSs, the short-term notes payable included certain notes payable of RMB2,611 which were renewed subsequent to December 31, 2005. The maturity dates of these notes payable are extended for twelve months to after December 31, 2006.
Under U.S. GAAP, such short-term obligations which were refinanced on a long-term basis after the balance sheet date but before issuance of financial statements are classified as non-current liabilities. Consequently, under U.S. GAAP, short-term notes payable and consolidated current liabilities would be RMB18,834 and RMB35,739, respectively, at December 31, 2005.
F-82
(h)
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
(i) Financial statements presentation and disclosure (i) Gain/(loss) on sale of property, plant and equipment
In the consolidated statements of operations presented under
IFRS, IFRSs, gain/(loss)
/gain on sale of
fixed assetsproperty, plant and equipment is classified under “Non-operating income/(expenses)”. Under U.S. GAAP, such
gain/(loss)
/gain would be is classified under “Operating income/(expenses)
—– General and administrative”.
(ii) Presentation of dividends received in the consolidated statements of cash flows
In the consolidated statements of cash flows presented under IFRSs, dividends received are classified within investing activities. Under U.S. GAAP, such dividends received are classified within operating activities.
(iii) Deferred tax assets/liabilities
As disclosed in Note 2025 to the consolidated financial statements, deferred tax assets are presented on a net basis under IFRS.IFRSs. Under U.S. GAAP, the gross amounts of such deferred tax assets and any applicable valuation allowances wouldare separately disclosed.
In addition, deferred tax liabilities and assets should be separately disclosed. Asclassified 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 classification of the related asset or liability for financial reporting.
The U.S. GAAP presentation of deferred tax assets/(liabilities) as of December 31, 20022004 and 2005 are as follows:
| | | | | | | | | |
| | | 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 | ) |
| | | | | | | |
The valuation allowance was RMB48 as of January 1, 2003. During the years ended December 31, 2003, 2004 and 2005, the amountvaluation allowance increased by RMB5, RMBNil and RMB135, respectively.
(iv) Minority interests
Under IFRS, minority interests at the balance sheet date are presented in the consolidated balance sheet within equity, separately from the equity attributable to the equity shareholders of valuation allowances which have been netted off with deferred tax assets amounted to approximately RMB48,480the Company, and RMB53,000, respectively.minority interests in the results of the Group for the year are presented in the consolidated statement of operations as an allocation of the total net income for the year between the minority interests and the equity shareholders of the Company. Under US GAAP, minority interests at the balance sheet date are presented in the consolidated balance sheet either as liabilities or separately from liabilities and equity. Minority interests in the results of the Group for the year are also separately presented in the consolidated statement of operations as a component of net income.
F-50F-83
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -— (Continued)
(Amounts in thousands,millions, except share data)(i) New accounting pronouncements
FIN 46R
In
(v) Share of taxation of affiliated companies and jointly controlled entities
During the years ended December
2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) “Consolidation of Variable Interest Entities” which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 “Consolidation of Variable Interest Entities” which was issued in January 2003. The Group will be required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the consolidated balance sheets and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The Group is evaluating the impact of applying FIN 46R to existing VIEs in which it has variable interests and has not yet completed this evaluation.FASB No. 150
FASB Statement No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” was issued in May 2003. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For the Group, the Statement was effective for instruments entered into or modified after May 31, 2003 and otherwise will be 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, 2004, except2005, the Group has changed the presentation and includes the share of taxation of affiliated companies and jointly controlled entities accounted for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments,using the Statement will be effectiveequity method in the respective shares of income or loss reported in the consolidated statements of operations before arriving at the Group’s income or loss before tax. These changes in presentation have been applied retrospectively with comparatives restated for both IFRS and U.S. GAAP.
Income tax (benefit)/expense under U.S. GAAP for the
Group on January 1, 2005. The effective date hasyears ended December 31, 2003 and 2004 have been
deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The Group currently does not have any financial instruments that are within the scope of this Statement.F-51
restated as follows:
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES 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 | |
| | | | | | | | | |
Effect on net income/(loss) of significant differences between IFRS and U.S. GAAP is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Reference | | Year ended December 31,
|
| | | in Note | | | | | | | | |
| | | above
| | 2001
| | 2002
| | 2003
| | 2003
|
| | | | | | | RMB | | RMB | | RMB | | U.S. dollars |
| Net income/(loss) under IFRS | | | | | | | 340,225 | | | | 575,761 | | | | (358,267 | ) | | | (43,286 | ) |
| U.S. GAAP adjustments: | | | | | | | | | | | | | | | | | | | | |
| Sale and leaseback accounting | | | (a | ) | | | 54,254 | | | | (100,664 | ) | | | 114,635 | | | | 13,850 | |
| Lease arrangements | | | (b | ) | | | — | | | | (49,960 | ) | | | (64,140 | ) | | | (7,749 | ) |
| Capitalized interest | | | (c | ) | | | 18,000 | | | | (31,473 | ) | | | (32,961 | ) | | | (3,982 | ) |
| Reversal of additional depreciation arising from revaluation of fixed assets | | | (d | ) | | | 65,000 | | | | 33,000 | | | | 33,000 | | | | 3,987 | |
| Investments in affiliated company and jointly controlled entity | | | (e | ) | | | 3,546 | | | | (541 | ) | | | 7,044 | | | | 851 | |
| Deferred tax effects | | | | | | | | | | | | | | | | | | | | |
| - current year | | | | | | | (50,369 | ) | | | 47,849 | | | | (7,580 | ) | | | (916 | ) |
| - effect on change in income tax rate on deferred taxation | | | | | | | — | | | | — | | | | (51,368 | ) | | | (6,206 | ) |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Net income/(loss) under U.S. GAAP | | | | | | | 430,656 | | | | 473,972 | | | | (359,637 | ) | | | (43,451 | ) |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Basic earnings/(loss) per share under U.S. GAAP | | | | | | | 0.13 | | | | 0.14 | | | | (0.09 | ) | | | (0.01 | ) |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| Basic earnings/(loss) per ADS under U.S. GAAP* | | | | | | | 6.38 | | | | 7.02 | | | | (4.69 | ) | | | (0.57 | ) |
| | | | | | | |
| | | |
| | | |
| | | |
| |
| | | | | | | | | | | | | | | | | | | |
| | | 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. |
F - 84
*Basic earnings/(loss) per ADS is calculated on the basis that one ADS is equivalent to 50 H shares.
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Effect on shareholders’ equity of significant differences between IFRSIFRSs and U.S. GAAP is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Reference | | December 31,
| | Reference | | December 31, |
| | | in Note | | | | | | | | in Note | | 2004 | | 2005 | | 2005 |
| | | above
| | 2002
| | 2003
| | 2003
| | above | | RMB | | RMB | | U.S. Dollars |
| | | RMB | | RMB | | U.S. Dollars | |
| Shareholders’ equity under IFRS | | 9,613,207 | | 11,895,707 | | 1,437,252 | | |
| 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 | | | (a | ) | | | (586,989 | ) | | | (472,354 | ) | | | (57,070 | ) | | (b) | | | (357 | ) | | | (242 | ) | | | (30 | ) |
| Lease arrangements | | | (b | ) | | | (49,960 | ) | | | (114,100 | ) | | | (13,786 | ) | | (c) | | | (107 | ) | | | (100 | ) | | | (13 | ) |
| Capitalized interest | | | (c | ) | | 381,021 | | 348,060 | | 42,053 | | | (d) | | 335 | | 326 | | 41 | |
| Revaluation of fixed assets, net of depreciation | | | (d | ) | | | (46,120 | ) | | | (13,120 | ) | | | (1,585 | ) | |
| Investments in affiliated company and jointly controlled entity | | | (e | ) | | | (118,003 | ) | | | (110,959 | ) | | | (13,406 | ) | | (f) | | | (104 | ) | | | (97 | ) | | | (12 | ) |
| Deferred tax effect on airline operations of CNA and XJA | | | | | 66 | | 122 | | 15 | |
| Deferred tax effects | | 94,175 | | 35,227 | | 4,256 | | | | | 19 | | 2 | | — | |
| Minority interests | | | (h) | | | (2,055 | ) | | | (1,936 | ) | | | (240 | ) |
| | |
| |
| |
| | | | | | | | | | |
| Shareholders’ equity under U.S. GAAP | | 9,287,331 | | 11,568,461 | | 1,397,714 | | |
| | |
| |
| |
| |
| Net shareholders’ equity under US GAAP | | | | | 11,169 | | 9,639 | | 1,194 | |
| | | | | | | | | | | |
F-52F - 85
SIGNATURES
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
The registrant hereby certifies that it meets allfollowing are condensed consolidated statements of operations, cash flows and changes in total shareholders’ equity under U.S. GAAP for each of the requirementstwo years ended December 31, 2003 and 2004, and additional financial information restated to reflect the impact of the effects of the combination of CNA and XJA and the Group in a manner similar to a pooling of interests prepared on a U.S. GAAP basis. As the CNA/XJA Acquisitions were completed on December 31, 2004, condensed consolidated balance sheets under U.S. GAAP at December 31, 2004 and 2005 and condensed consolidated statements of operations, cash flows and changes in total shareholders’ equity under U.S. GAAP for filing on Form 20-Fthe year ended December 31, 2005 are not presented in these consolidated financial statements.
Condensed consolidated statements of operations
| | | | | | | | | |
| | | 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
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
The Group has changed the presentation and that it has duly causedincludes the share of taxation of affiliated companies and authorizedjointly controlled entities accounted for using the undersignedequity method in the respective shares of income or loss reported in the consolidated statements of operations before arriving at the Group’s income or loss before tax. These changes in presentation have been applied retrospectively with comparatives restated for both IFRS and U.S. GAAP. Further details are set out in Note 3 and Note 51(i).
Condensed consolidated statements of cash flows
The Group applies IAS 7 “Cash Flow Statements”. Its objectives and principles are similar to sign this annual report on its behalf.
those set out in Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows” (“SFAS 95”) for U.S. GAAP. The principal differences between the standards relate to classification. Dividend received classified as investing activities under IAS 7 are classified as operating activities under SFAS 95. Summarized cash flows data by operating, investing and financing activities in accordance with SFAS 95 are as follows:| | | | | | | | | |
| | | 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 | |
| | | | | | | | | |
Condensed consolidated statements of changes in total shareholders’ equity
| | |
| | CHINA SOUTHERN AIRLINES COMPANY LIMITED
(Registrant) |
| | |
| | | Total |
| | /s/ Yan Zhi Qing
Name: Yan Zhi Qing
Title: Chairman | RMB |
| Shareholders’ equity at December 31, 2002 | | | 6,796 | |
| | | | |
Issue of the BoardA shares | | | 2,641 | |
| Net loss | | | (1,140 | ) |
| Net liabilities assumed by CSAHC (note a) | | | 4,552 | |
Recognition of Directorsdeferred 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
Date: June 30, 2004
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Notes:
| (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
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
The following additional financial statement disclosures are required under U.S. GAAP and are presented on a U.S. GAAP basis.
Operating revenue
| | | | | | | | | |
| | | 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 | |
| | | | | | | | | |
Income tax
The Company was subject to PRC income tax at 33% for the period from January 1 to September 30, 2003. The Company is subject to PRC income tax at 15% beginning October 1, 2003.
The airline operations of CNA and XJA were subject to PRC income tax at 33% during 2003 and up to December 30, 2004. As a result of the CNA/XJA Acquisitions having been effective December 31, 2004, the airline operations of CNA and XJA have become divisions of the Company and are subject to PRC income tax at the applicable rate of 15% at December 31, 2004.
F-89
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Taxation (expense)/benefit consisted of:
| | | | | | | | | |
| | | 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
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Actual taxation amount in the consolidated statements of operations for the years ended December 31, 2003 and 2004 differed from the amounts computed by applying the PRC income tax rate of 15% to income/(loss) before taxation and minority interests as a result of the following:
| | | | | | | | | |
| | | 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 | ) |
| | | | | | | | | |
All but an insignificant amount of income/(loss) before taxation is from domestic sources.
F-91
CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in millions, except share data)
Related party transactions
In addition to the related party transactions disclosed in Note 36, the Group and the airline operations of CNA and XJA had entered into the following material related party transactions.
| (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. |
Post-retirement benefit
Employees of the Group and the airline operations of CNA and XJA participate in several defined contribution retirement schemes organized separately by PRC municipal governments in regions where the major operations of the Group and the airline operations of CNA and XJA are located. The Group and the airline operations of CNA and XJA are required to contribute to these schemes at the rates ranging from 14% to 20% 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 the existing and future retired staff are assumed by these schemes. Contributions to the retirement schemes are charged to consolidated statements of operations as and when incurred. Contributions to the retirement schemes amounted to RMB231 and RMB243, respectively, during 2003 and 2004.
F-92
EXHIBIT INDEX
| | | |
| Exhibit No. | | Description of Exhibit |
| |
|
1 | | Articles of Association |
| | |
| 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 |
| | | |
| 12.1 | | 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 |
