SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of November, 2004
CHINA SOUTHERN AIRLINES COMPANY LIMITED
(Translation of registrant's name into English)
Baiyun International Airport
Guangzhou, People's Republic of China
(Address of principal executive offices)
(Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.)
Form 20-F. [X] Form 40-F.[ ]
(Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.)
Yes . [ ] No.[X]
(If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b):82-________.)
China Southern Airlines Company Limited (the "Company") on November 15,
2004 published in two local newspapers in Hong Kong an announcement in Chinese
and English, respectively, concerning the very substantial acquisition and
connected transactions of the Company. A copy of the English announcement is
included in this Form 6-K of the Company.
The Stock Exchange of Hong Kong Limited takes no responsibility for the contents
of this announcement, makes no representation as to its accuracy or completeness
and expressly disclaims any liability whatsoever for any loss howsoever arising
from or in reliance upon the whole or any part of the contents of this
announcement.
[CHINA SOUTHERN AIRLINES COMPANY LIMITED LOGO]
(a joint stock limited company incorporated in the People's Republic
of China with limited liability)
(STOCK CODE: 1055)
VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTIONS
SUMMARY
THE SALE AND PURCHASE AGREEMENT
The Directors are pleased to announce that on 12 November, 2004, the Sale and
Purchase Agreement was entered into by the Company as the purchaser and CSAHC,
Northern Airlines and Xinjiang Airlines as the vendors, whereby the Company will
acquire the Business and Assets and assume the Debts from the Vendors.
CSAHC is the controlling shareholder of the Company holding approximately 50.30%
equity interest in the Company as of the Latest Practicable Date. Both Northern
Airlines and Xinjiang Airlines are wholly owned subsidiaries of CSAHC, and are
engaged in the civil aviation business. The Business and Assets to be acquired
consist of certain Airline Operations, assets and properties of Northern
Airlines Group and Xinjiang Airlines Group, including aircraft, engines, spare
parts, aviation equipment and facilities, properties, office facilities, and
other fixed, current and intangible assets. The Debts to be assumed consist of
all indebtedness in the aggregate sum of RMB15,090,109,000 owed by Xinjiang
Airlines Group or Northern Airlines Group in connection with their civil
aviation business.
CONSIDERATION FOR THE SALE AND PURCHASE AGREEMENT
The provisional amount of the consideration of the Acquisition, and of the Debts
to be assumed under the Sale and Purchase Agreement are set at RMB16,912,244,600
and RMB15,090,109,000 respectively. These amounts are arrived at after arm's
length negotiations between the Vendors and the Company, with reference to the
valuation of the Business and Assets, and Debts set out in the Zhong Qi Hua
Valuation Reports.
The provisional amount of the consideration of the Acquisition, and of the Debts
to be assumed by the Company will be subject to adjustment and finalisation
based on the book value of the Business and Assets, and of the Debts as of the
Effective Date, as determined in the financial statements of the Business and
Assets of the Target Group prepared under the PRC Accounting Rules and
Regulations and audited by KPMG Huazhen. A portion of the final adjusted
consideration of the Acquisition will be settled by way of assumption of the
final adjusted Debts, with the remaining balance to be payable by the Company to
the bank account designated by the Vendors in cash.
The Company shall make repayments of the Debts directly to the creditors of such
Debts in accordance with the terms and conditions of the relevant agreements
between the Vendors and the creditors in relation to the Debts.
VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTIONS
The Acquisition constitutes a very substantial acquisition of the Company under
the Listing Rules. Since CSAHC is the direct controlling shareholder of the
Company, the Acquisition also constitutes a connected transaction for the
Company under the Listing Rules and is therefore subject to the approval by the
Independent Shareholders at the EGM. CSAHC and its associates are required to
abstain from voting in respect of the proposed resolution to approve the Sale
and Purchase Agreement and the Acquisition which will be conducted by poll.
1
REASONS FOR AND BENEFITS OF THE ACQUISITION
The Directors believe that the Acquisition represents an attractive opportunity
for the Company to consolidate its strong market position and improve its
financial performance. Both Northern Airlines and Xinjiang Airlines are leading
airlines in their respective operating regions. The Acquisition will bring
various commercial benefits to the Company in terms of broadening its flight
service network, increasing its fleet size and transportation capacity, reducing
its costs and boosting its overall efficiency, ultimately strengthening the
Listed Group's position as one of China's largest airlines and enhancing value
for its investors. The Board, including the independent non-executive Directors,
believes that the terms of the Sale and Purchase Agreement and the Acquisition
are fair and reasonable and are in the interests of the Listed Group and its
shareholders as a whole.
FINANCIAL EFFECT OF THE ACQUISITION
Based on the pro forma financial information of the Combined Group outlined in
Appendix V of the circular to be dispatched by the Company to its shareholders,
assuming that the Acquisition had taken place on 30 June, 2004, there would not
be any impact on the net assets of the Listed Group following the Acquisition as
of 30 June, 2004. On the same basis, the total assets of the Listed Group would
increase by 35%, or RMB15,179 million, which would be offset by an increase of
RMB15,083 million in liabilities and RMB96 million in minority interest.
Based on the pro forma financial information of the Combined Group outlined in
Appendix V of the circular to be dispatched by the Company to its shareholders,
assuming that the Acquisition had taken place on 1 January, 2004, net profit of
the Listed Group for the first six months ended 30 June, 2004, would increase by
36%, or RMB95 million to RMB361 million following the Acquisition. On the same
basis, basic earnings per share would increase from RMB0.06 to RMB0.08,
representing an accretion of 33%.
ON-GOING CONNECTED TRANSACTIONS
Certain transactions will be entered into between the Company and connected
persons of the Company within the meaning of the Listing Rules, which will
constitute On-going Connected Transactions of the Company under the Listing
Rules upon completion of the Acquisition. Further details of such transactions
are set out in section 2 of this announcement. The Board, including the
independent non-executive Directors, considers the On-going Connected
Transactions to be on normal commercial terms, in the ordinary and usual course
of business, fair and reasonable and in the interests of the Listed Group and
its shareholders as a whole.
Each percentage ratio (other than the profits ratio) for (i) the Lease
Agreements and (ii) the Catering Agreement is on an annual basis less than 2.5%
and therefore each of them falls under continuing connected transactions exempt
from the Independent Shareholders' approval requirement. Pursuant to the
relevant rules and regulations of the PRC, however, each of the Lease Agreement
1, Lease Agreement 2, Lease Agreement 3 and Catering Agreement is conditional
upon approval by the Independent Shareholders.
FINANCIAL SERVICES AGREEMENT
The Company and the Finance Company entered into the Financial Services
Agreement on 12 November, 2004. The Provision of Deposit Service constitutes a
non-exempt continuing connected transaction under Rule 14A.35 of the Listing
Rules and requires the Company to comply with the reporting, announcement and
the independent shareholders' approval requirements. The first financial
services agreement, first signed on 22 May, 1997 for a term of three years, was
extended for six years in 2000 to 22 May, 2006. The Stock Exchange is looking
into the matter of whether the Company had complied with the requirements of the
Listing Rules during the extended period of the first financial services
agreement and the Company will publish further announcement in this respect.
Further details of the Financial Services Agreement are set out in section 3 of
this announcement. The Board, including the independent non-executive Directors,
believes that the terms of the Financial Services Agreement and the Provision of
Deposit Service to be on normal commercial terms, in the ordinary and usual
course of business, fair and reasonable and in the interests of the Listed Group
and its shareholders as a whole.
INDEPENDENT SHAREHOLDERS' APPROVAL AND INDEPENDENT FINANCIAL ADVISER
An Independent Board Committee has been formed to advise the Independent
Shareholders with respect to the Sale and Purchase Agreement, the Financial
Services Agreement and the transactions contemplated thereunder. ICEA has been
appointed as the independent financial adviser to advise the Independent Board
Committee and the Independent Shareholders in respect of the Sale and Purchase
Agreement, the Financial Services Agreement and the transactions contemplated
thereunder.
2
DISPATCH OF SHAREHOLDERS' CIRCULAR AND CLOSURE OF THE REGISTER OF MEMBERS
A circular containing, amongst other things, details of the terms of the Sale
and Purchase Agreement, the On-going Connected Transactions, the Financial
Services Agreement, letters from the Independent Board Committee and from ICEA,
further financial and other information of Northern Airlines Group and Xinjiang
Airlines Group and a notice to shareholders of the Company convening an EGM to
approve, amongst other things, the Sale and Purchase Agreement, the Financial
Services Agreement, the resignation of a director of the Company and the
election of a new director of the Company will be dispatched to the shareholders
of the Company as soon as practicable.
This announcement has also been previously published on 13 November, 2004, where
under the paragraph "Consideration and payment terms" of Section 1(a) "The sale
and purchase agreement", the remaining balance payable by the Company in cash to
the bank account designated by the Vendors, on the assumption that the
Acquisition had taken place on 30 June, 2004 was mistakenly stated as RMB897
million due to inadvertent printing mistake, instead of the correct figure of
RMB1,897 million which is stated herein.
The register of members of the Company will be closed from 1 December, 2004 to
30 December, 2004 (both days inclusive).
1. THE ACQUISITION
(a) THE SALE AND PURCHASE AGREEMENT
On 12 November, 2004, a Sale and Purchase Agreement was entered into
by the Company as the purchaser and CSAHC, Northern Airlines and
Xinjiang Airlines as the vendors for the purpose of acquiring the
Business and Assets by the Company from the Vendors. The principal
business activity of each of the Company, Northern Airlines and
Xinjiang Airlines is that of civil aviation. The principal business
activity of CSAHC, based on its business licence, is that of
operating and managing, on behalf of the PRC government, certain
state-owned assets, including properties, and state-owned
shareholdings in various PRC companies. CSAHC is the controlling
shareholder of the Company holding approximately 50.30% equity
interest in the Company as of the Latest Practicable Date. Both
Northern Airlines and Xinjiang Airlines are wholly owned
subsidiaries of CSAHC.
The Company has agreed, subject to certain conditions, to acquire
from the Vendors the Business and Assets and to assume the Debts.
The Business and Assets consist of certain Airline Operations,
assets and properties of Northern Airlines Group and Xinjiang
Airlines Group, including aircraft, engines, spare parts, aviation
equipment and facilities, properties, office facilities, and other
fixed, current and intangible assets. The Debts consist of all
indebtedness and operating liabilities in the aggregate sum of
RMB15,090,109,000 owed by Xinjiang Airlines Group or Northern
Airlines Group in connection with their civil aviation business.
Conditions precedent
The Sale and Purchase Agreement is subject to the following
conditions precedent:
(a) the Vendors obtaining all approvals of the Sale and Purchase
Agreement by the working meeting of the president of CSAHC and
the SASAC; and
(b) the Independent Shareholders approving the Sale and Purchase
Agreement and the transactions contemplated thereunder.
Consideration and payment terms
The provisional amount of the consideration of the Acquisition, and
of the Debts to be assumed under the Sale and Purchase Agreement are
set at RMB16,912,244,600 and RMB15,090,109,000 respectively. These
amounts are arrived at after arm's length negotiations between the
Vendors and the Company, with reference to the valuation of the
Business and Assets, and Debts set out in the Zhong Qi Hua Valuation
Reports. The Zhong Qi Hua Valuation Reports value the Business and
Assets, Debts and net asset value of the Target Group at
RMB16,912,244,600, RMB15,090,109,000 and RMB1,822,135,600
respectively as of 31 December, 2003.
3
The provisional amount of the consideration of the Acquisition, and
of the Debts to be assumed by the Company will be subject to
adjustment and finalisation based on the book value of the Business
and Assets, and of the Debts as of the Effective Date, as determined
in the financial statements of the Business and Assets of the Target
Group prepared under the PRC Accounting Rules and Regulations and
audited by KPMG Huazhen. A portion of the final adjusted
consideration of the Acquisition will be settled by way of
assumption of the final adjusted Debts, with the remaining balance
to be payable by the Company to the bank account designated by the
Vendors in cash. On the assumption that the Acquisition had taken
place on 30 June, 2004, and based on the financial statements of the
Business and Assets of the Target Group prepared under the PRC
Accounting Rules and Regulations and audited by KPMG Huazhen on the
same date, the remaining balance payable by the Company in cash to
the bank account designated by the Vendors on that date would have
been RMB1,897 million (this announcement has also been previously
published on 13 November, 2004, where this figure was mistakenly
stated as RMB897 million due to inadvertent printing mistake. The
figure of RMB1,897 million stated herein is the correct figure and
replaces the mistaken figure of RMB897 million).
The Company shall make repayments of the Debts directly to the
creditors of such Debts in accordance with the terms and conditions
of the relevant agreements between the Vendors and the creditors in
relation to the Debts.
Funding
The Company will finance the Acquisition and the assumption of the
Debts through its internal resources, and short term U.S. dollar
commercial loans from commercial banks amounting to RMB1,000
million. Such commercial banks are not and will not be connected
persons (as defined in the Listing Rules) of the Company. The
Company will make use of its unutilised banking facilities to draw
down the required commercial loans.
Transition period
The terms of the Sale and Purchase Agreement provide for a
transition period commencing from 31 December, 2003 and ending on
the Effective Date, during which if a material change occurs such
that any of the Business and Assets is damaged, lost, or the
ownership of which no longer belongs to the Vendors, the Vendors
shall give notice to the Company immediately. The Vendors must
obtain the prior consent of the Company before disposing of any
Business and Assets during the transition period.
All profits and losses arising from the Business and Assets during
the transition period belong to the Vendors. All profits and losses
from the Effective Date thereon shall belong to the Company.
Delivery terms and ownership
The Vendors shall deliver all the Business and Assets, together with
all documents evidencing or constituting ownership of such Business
and Assets, to the Company within five days of the Effective Date.
(b) REASONS FOR AND BENEFITS OF THE ACQUISITION
The Directors believe that the Acquisition represents an attractive
opportunity for the Company to consolidate its strong market
position and improve its financial performance. Both Northern
Airlines and Xinjiang Airlines are leading airlines in their
respective operating regions. The Acquisition will bring various
commercial benefits to the Company in terms of broadening its flight
service network, increasing its fleet size and transportation
capacity, reducing costs and boosting its overall efficiency,
ultimately strengthening the Listed Group's position as one of
China's largest airlines and enhancing value for its investors.
(1) Broaden flight network
(a) The Listed Group is headquartered in Guangzhou with 12
operational bases in central and southern China,
offering regular flights on 248 domestic routes to over
69 cities in China, 18 routes to Hong Kong, and 45
international routes to 24 cities in east and Southeast
Asia, Australia, North America and Europe, as of 30
June, 2004. However, due to the lack of operational
bases, the Company is only capable of offering very
limited flight services in Northern China and
Northwestern China.
4
(b) Northern Airlines Group is headquartered in Shenyang
with operational bases in Dalian, Changchun and Harbin.
Northern Airlines Group's operating region is
predominantly in northeastern China. It is also the
dominant Chinese airline serving flight routes to Korea
and Japan due to the proximity of its operating region
to those countries.
(c) Xinjiang Airlines Group is headquartered in Urumqi, with
operational bases and operating region in the Xinjiang
autonomous region. It also commands a strong market
position on domestic routes between Xinjiang and other
parts of China, and on international routes to Russia,
Middle East and West Asia.
As the flight networks of the Listed Group, Northern Airlines
Group and Xinjiang Airlines Group are disparate and
complementary to each other, the Acquisition will
significantly broaden the Company's flight network. After the
Acquisition, the Company will have a strong presence in
additional key markets in the Western and Northeastern parts
of China, enabling it to provide more comprehensive civil
aviation service to customers.
The Directors believe that the Acquisition provides
significant growth potential for the Listed Group,
particularly in light of the "Go West" and "Redevelop the
Northeast" campaigns initiated by the PRC government. The
Directors also believe that the huge investment made by the
PRC government in Western and Northeastern China will lead to
rapid economic growth in those regions over the next decade or
more, which, in turn, will result in rapid increase in air
traffic volume to and from those regions.
In addition, the Acquisition will also significantly enhance
the Company's international air transportation business. The
Company will be able to offer flight services between its
bases in Southern, Northeastern and Northwestern China and
other international cities in North America, Southeast Asia,
North Asia, the Middle East as well as Europe.
(2) Increase fleet size and transportation capacity
The Acquisition will substantially increase the fleet size of
the Listed Group. As of 30 June, 2004, the Listed Group owned
and operated a fleet of 139 medium and large size commercial
passenger and cargo aircraft. The Acquisition will bring in 75
commercial aircraft from Northern Airlines Group and Xinjiang
Airlines Group thereby increasing the Listed Group's fleet
size by 54% to 214 commercial aircraft. The increased
economies of scale will contribute to greater transportation
capacity, higher operating efficiency, lower operating and
maintenance cost, more flexible flight scheduling, greater
bargaining power in aircraft acquisitions, better financing
terms for purchases and improved aircraft allocation for the
flight routes.
The tables below set out fleet and selected operating data of
the Target Group and the Listed Group individually, and on a
combined basis, for the year 2003 and the first half of 2004:
FIRST SIX MONTHS OF 2004
NORTHERN XINJIANG
LISTED AIRLINES AIRLINES
GROUP GROUP GROUP COMBINED
Number of aircraft(1) 139 55 20 214
Passenger capacity
(ASK) (million) 25,928 7,693 3,722 37,343
Passenger traffic
(RPK) (million) 17,242 5,190 2,416 24,848
Passenger volume (thousand) 13,315 3,621 1,264 18,200
Cargo and mail carried
(thousand tonne) 267 55 12 334
(1 )As of 30 June, 2004 including owned and leased (on both finance and
operating lease basis) aircraft
5
2003
NORTHERN XINJIANG
LISTED AIRLINES AIRLINES
GROUP GROUP GROUP COMBINED
Number of aircraft(1) 132 50 20 202
Passenger capacity
(ASK) (million) 40,867 13,940 6,297 61,104
Passenger traffic
(RPK) (million) 26,387 9,147 4,092 39,626
Passenger volume (thousand) 20,470 6,474 2,148 29,092
Cargo and mail carried
(thousand tonne) 464 111 21 596
(1)As of 31 December, 2003 including owned and leased (on both finance and
operating lease basis) aircraft
(3) Minimize route overlap and optimize flight schedules
The Directors believe that the Acquisition will yield
significant benefits to the Listed Group through optimization
of flight routes and schedules.
Most of the major flight routes in the PRC are served by more
than one airline, and therefore the competition on most major
flight routes is intense. Although offering discounts on air
ticket prices is still regulated by the CAAC, many PRC
airlines rely heavily on such measures to attract passengers.
As a result, the Listed Group faces significant pressure on
air ticket prices.
Prior to the Acquisition, the routes that the Listed Group
shares with Northern Airlines Group and Xinjiang Airlines
Group account for approximately 8.2% of the Listed Group's
total routes. After the Acquisition, the Listed Group will
become the sole or main operator on many of such shared flight
routes. This reduction in market segmentation will allow the
Listed Group to gain advantageous air ticket pricing power and
improve its financial performance.
Moreover, the Listed Group could reduce the number of flights
on those shared routes without sacrificing sufficient coverage
and service quality. The Listed Group will then have
additional capacity to support other more profitable flight
routes and thus generate additional revenue.
(4) Enhance air ticket sales network and reduce overhead
Northern Airlines Group, Xinjiang Airlines Group and the
Listed Group each maintains an extensive air ticket sales
network in major cities and large ground services teams at
major airports in China. The Listed Group can achieve
significant cost savings by rationalizing the sales network
and consolidating the ground service operations of the three
airlines. After the Acquisition, the Company plans to close a
total of 14 geographically overlapping domestic air ticket
sales offices (eight belong to Northern Airlines Group, four
belong to Xinjiang Airlines Group and two to the Company) and
four overseas air ticket sales offices (all belong to Northern
Airlines Group).
(5) Improve allocation of aircraft, engines, spare parts and crews
The Directors believe the expanded fleet will provide the
Listed Group greater flexibility in allocating aircraft
between the combined routes of the Listed Group, Northern
Airlines Group and Xinjiang Airlines Group.
For each of the three airlines, there is excess capacity in
low seasons, but limited or inadequate capacity during peak
seasons. As most of the flight routes served by them are
different, each of the Listed Group, Northern Airlines Group
and Xinjiang Airlines Group has relatively staggered peak and
low seasons. After the Acquisition, the Company will be able
to re-deploy an enlarged team of aircraft, pilots and flight
personnel to the highest traffic routes and better ensure a
balance of demand and supply for capacity throughout the year.
6
Furthermore, since the Listed Group has already been operating
Boeing 737, 757 and Airbus 319, 320 aircraft that Xinjiang
Airlines Group and Northern Airlines Group are either
currently operating or will be acquiring according to their
aircraft replacement schedules, the Listed Group will be able
to improve the internal allocation of engines and high-value
aircraft spare parts. For instance, the Directors believe that
after the Acquisition, the Listed Group may be able to
purchase fewer aircraft engines and spare parts.
Through redeployment of aircraft, pilots and crew, and better
allocation of spare parts, the Directors believe the Listed
Group can improve its operating efficiency and reduce
operating costs and capital expenditures.
(6) Reduce maintenance costs
The Directors believe significant reduction in maintenance
cost can be achieved through more centralized maintenance
functions and sharing of maintenance personnel and equipment.
The Company plans to centralize fleet maintenance functions at
five national maintenance bases which are Guangzhou, Shenyang,
Urumqi, Zhengzhou (or Wuhan) and Xiamen in the next few years.
These maintenance bases will be responsible for major
overhauls on all aircraft while the local bases will be
responsible for minor maintenance tasks on their own aircraft.
The Directors believe that this initiative will significantly
improve efficiency and reduce the cost of fleet maintenance.
(7) Strengthen marketing efforts
Since its listing on the Stock Exchange, the Company has
implemented many changes to its remuneration policies in order
to improve the effectiveness of marketing efforts by its
business units. Under the Company's current performance credit
policy, its branch office located in the city that a
particular flight originates from (including both non-stop and
connecting flights) receives performance credit for the
flights to the immediate next destination. Previously, all
performance credit earned by a particular aircraft was given
to the office in which that aircraft was based in, which did
not provide incentive for the offices in intermediate cities
to market the air ticket of that particular flight. After the
Acquisition, the Company plans to implement this remuneration
policy to the marketing units newly acquired from the Target
Group. The Directors believe that this will lead to a more
effective and concerted marketing effort by all the offices,
and therefore result in higher sales revenue.
(c) INFORMATION REGARDING THE TARGET GROUP
(1) Overview of the Target Group
Northern Airlines was established on 19 October, 1990
following its separation from the Shenyang Bureau of the CAAC.
Xinjiang Airlines, which began operations on 1 January, 1985,
was formally separated in 2001 from the Urumqi Regional Bureau
of the CAAC.
As part of the reorganisation initiative of the PRC civil
aviation industry in late 2002, Southern Airlines (Group),
Northern Airlines and Xinjiang Airlines were restructured and
consolidated into CSAHC.
Both Northern Airlines Group and Xinjiang Airlines Group are
the leading airlines in their respective regions, offering
passenger and cargo air transportation and other related
services.
(a) Key operating data
Passenger and cargo air transportation are Northern
Airlines Group's principal businesses. However, due to
its lack of freight aircraft, Northern Airlines Group
relies heavily on its passenger air transportation
business. In 2003, revenues generated from passenger air
transportation business accounted for approximately 93%
of the total revenues while those from cargo services
accounted for approximately 7%. Northern Airlines Group
also provides aircraft maintenance and repair, and other
aviation related services.
7
In the past three and a half years, Northern Airlines
Group's passenger air transportation business continued
to improve with overall passenger load factor increasing
from 60% for 2001 to 67% for the first six months of
2004 and passenger yield per RPK rising from RMB0.58 for
2001 to RMB0.61 for the first six months of 2004. The
cargo transportation business also showed material
improvement with cargo yield per RFTK increasing 12%
from RMB1.90 for year 2001 to RMB2.13 for the first six
months of 2004. Key operating benchmarks of Northern
Airlines Group from 2001 to the first half of 2004 are
summarized as follows:
NORTHERN AIRLINES GROUP'S KEY OPERATING BENCHMARKS
FIRST SIX
MONTHS ENDED
30 JUNE,2004 2003 2002 2001
PASSENGER TRAFFIC
(RPK) (million)
Domestic 4,652 8,234 7,800 6,914
International 538 913 986 1,334
Total 5,190 9,147 8,786 8,248
REVENUE TONNE KILOMETRES
(RTK) (million)
Domestic 504 904 707 619
International 57 101 90 72
Total 561 1,005 797 691
PASSENGER VOLUME (thousand)
Domestic 3,258 5,831 5,501 4,849
International 363 643 652 864
Total 3,621 6,474 6,153 5,713
CARGO AND MAIL CARRIED
(thousand tonne)
Domestic 47 94 74 62
International 8 17 13 9
Total 55 111 87 71
CARGO TRAFFIC
(RFTK) (million)
Domestic 87 168 166 162
International 9 19 15 13
Total 96 187 181 175
PASSENGER CAPACITY
(ASK) (million)
Domestic 6,722 12,226 12,232 11,412
International 971 1,714 1,800 2,334
Total 7,693 13,940 14,032 13,746
8
AVAILABLE TONNE KILOMETRES
(ATK) (million)
Domestic 805 1,451 1,193 1,035
International 115 205 186 131
Total 920 1,656 1,379 1,166
PASSENGER LOAD FACTOR
Domestic 69% 67% 64% 61%
International 55% 53% 55% 57%
Total 67% 66% 63% 60%
OVERALL LOAD FACTOR
(RTK/ATK)
Domestic 63% 62% 59% 60%
International 50% 49% 48% 55%
Overall 61% 61% 58% 59%
PASSENGER YIELD PER RPK
(RMB)
Domestic 0.57 0.55 0.50 0.55
International 0.98 0.97 0.87 0.71
Total 0.61 0.60 0.54 0.58
CARGO YIELD PER RFTK
(RMB)
Domestic 1.51 1.56 1.59 1.55
International 7.77 7.89 8.25 8.54
Total 2.13 2.20 2.16 1.90
YIELD PER RTK
(RMB)
Domestic 5.53 5.33 5.90 6.53
International 10.53 10.27 10.90 14.75
Overall 6.04 5.82 6.47 7.38
FLEET
Airbus 17 12 10 8
McDonald Douglas 35 35 36 37
Others 3 3 19 27
Total 55 50 65 72
OVERALL UTILISATION RATE
(hours per day)
Airbus 8.8 7.8 8.3 7.5
McDonald Douglas 9.1 7.8 8.2 8.4
Overall 9.0 7.8 8.3 7.8
Passenger and cargo air transportation are Xinjiang Airlines Group's principal
businesses. In 2003, passenger air transportation business generated 96% of
total revenues with freight transportation business accounting for 4%.
9
Xinjiang Airlines Group has managed to improve its domestic passenger load
factor to 66% in the first half of 2004 from 59% in 2001. Passenger traffic as
measured by RPK has also increased over the past three years. However, passenger
yields suffered in 2003 and first half 2004 due to increased competition. Key
operating benchmarks from 2001 to the first half 2004 are summarized as follows:
XINJIANG AIRLINES GROUP'S KEY OPERATING BENCHMARKS
FIRST SIX
MONTHS ENDED
30 JUNE, 2004 2003 2002 2001
PASSENGER TRAFFIC
(RPK) (million)
Domestic 2,324 3,941 3,768 3,400
International 92 151 148 148
Total 2,416 4,092 3,916 3,548
REVENUE TONNE KILOMETRES
(RTK) (million)
Domestic 241 415 417 365
International 9 14 14 13
Total 250 429 431 378
PASSENGER VOLUME (thousand)
Domestic 1,209 2,062 1,753 1,510
International 55 86 75 61
Total 1,264 2,148 1,828 1,571
CARGO AND MAIL CARRIED
(thousand tonne)
Domestic 12 21 27 20
International - - - -
Total 12 21 27 20
CARGO TRAFFIC
(RFTK) (million)
Domestic 33 62 81 62
International 1 1 1 1
Total 34 63 82 63
PASSENGER CAPACITY
(ASK) (million)
Domestic 3,527 5,995 6,105 5,771
International 195 302 331 326
Total 3,722 6,297 6,436 6,097
AVAILABLE TONNE KILOMETRES
(ATK) (million)
Domestic 378 597 674 637
International 20 32 35 33
Total 398 629 709 670
10
PASSENGER LOAD FACTOR
Domestic 66% 66% 62% 59%
International 47% 50% 45% 45%
Total 65% 65% 61% 58%
OVERALL LOAD FACTOR
(RTK/ATK)
Domestic 64% 70% 62% 57%
International 45% 44% 40% 39%
Overall 63% 68% 61% 56%
PASSENGER YIELD PER RPK
(RMB)
Domestic 0.46 0.48 0.53 0.55
International 0.72 0.69 0.69 0.60
Overall 0.47 0.48 0.54 0.55
CARGO YIELD PER RFTK
(RMB)
Domestic 1.44 1.44 1.33 1.49
International 2.09 4.43 5.00 5.00
Total 1.45 1.48 1.36 1.54
YIELD PER RTK
(RMB)
Domestic 4.75 4.70 5.51 5.83
International 8.12 7.74 8.25 7.74
Overall 4.87 4.80 5.56 5.86
FLEET
Boeing 15 15 15 14
ATR 72 and IL86 5 5 8 8
Total 20 20 23 22
OVERALL UTILISATION RATE
(hours per day)
Boeing 10.0 8.8 8.9 10.1
ATR 72 and IL86 7.8 7.4 7.1 8.2
Overall 8.9 8.3 7.7 8.4
(b) Operational bases
Shenyang, Dalian, Harbin, and Changchun are the primary bases for
Northern Airlines Group. Urumqi is the principal base for Xinjiang
Airlines Group.
SHENYANG:
Taoxian Airport, located 22 kilometres south of Shenyang, was opened
on 10 April, 1989. In the first half of 2004, Northern Airlines
Group's passenger and cargo turnover at Taoxian Airport accounted
for 25% and 28% of its total passenger and cargo turnover
respectively.
11
The airport has a 3,200 metre runway, and is equipped with modern
communication and navigation systems. Taoxian Airport is owned and
operated by Shenyang Taoxian Airport Limited, which estimates that
Taoxian Airport handled approximately 31,400 landings, three million
passengers and 88,000 tonnes cargo for the year 2003, making it one
of the busiest airports in northeastern China.
DALIAN:
Dalian Zhoushuizi Airport is located 10 kilometres northwest of
Dalian. The airport handled 26% of the passenger turnover and 29% of
the cargo turnover of Northern Airlines Group in the first half of
2004.
Opened on 6 April, 1973, Zhoushuizi Airport is the busiest airport
in northeastern China. The airport is owned and operated by Dalian
Zhoushuizi International Airport Limited. Zhoushuizi Airport has a
3,300 metre runway, and is capable of handling commercial air planes
of all types. According to Dalian Zhoushuizi International Airport
Limited, the airport handled 35,248 landings, 3 million passengers
and 74,784 tonnes of cargo in 2003.
HARBIN:
Harbin Taiping Airport is located 33 kilometres southwest of Harbin.
In the first half of 2004, the airport handled 16% of passenger
turnover and 15% of cargo turnover of Northern Airlines Group.
Opened on 1 September, 1997, Taping Airport is one of the largest
airports in northeastern China. Taiping Airport has a 3,200 metre
runway, and is capable of handling Boeing 767 or equivalent
aircraft. According to the airport, it handled 22,093 landings in
2003. Passenger and cargo turnover was two million and 31,300 tonnes
respectively for the year.
CHANGCHUN:
Dafangshen Airport is Northern Airlines Group's operational base in
Jilin province. Located 11 kilometres west of Changchun, the airport
handled 15% of Northern Airlines Group's passenger turnover and 11%
of cargo turnover in the first half of 2004.
Dafangshen Airport is the only international airport in Jilin
province. It has a 2,600 metre runway and is capable of handling
Boeing 707 or equivalent aircraft. According to the airport, it
handled 13,880 landings in 2003. Passenger and cargo turnover was
one million and 15,700 tonnes respectively for the year.
In light of the rapid growth of passenger and cargo turnover at the
Dafangshen Airport, CAAC and Jilin provincial government began
construction of Longjiabao Airport in May 2003. The new airport is
located 28 kilometres northeast of Changchun, and has commenced
operations in October 2004. Dafangshen Airport will cease operations
when the new airport comes into operations.
URUMQI:
Urumqi Diwo Airport is located 17 kilometres northwest of Urumqi. In
2003, it handled 82% of Xinjiang Airlines Group's total passenger
and cargo turnover.
12
Opened in 1973, Diwo Airport is currently one of the largest
airports in northwestern China. Equipped with a 3,600 metre runway
and modern navigation systems, the airport is capable of handling
commercial air planes of all types. According to the airport, it
handled 33,440 landings in 2003. Passenger and cargo turnover was
three million and 47,900 tonnes respectively for the year.
(c) Routes network
From the four bases in northeastern China, Northern Airlines Group
currently offers regular flights on 106 domestic routes to over 46
cities in China and 29 international routes to North Asia and
Russia.
Headquartered in Urumqi, Xinjiang Airlines Group is the leading air
traffic service provider in northwestern China. It offers regular
flight services on 42 domestic routes. It also offers regular flight
services on seven international routes to major cities in the Middle
East, Russia and West Asia.
TOP 10 ROUTES OF NORTHERN AIRLINES GROUP BY REVENUE
FIRST SIX MONTHS ENDED
30 JUNE, 2004 2003
1. Changchun-Beijing Changchun-Beijing
2. Shenyang-Beijing Harbin-Shenyang-Shenzhen
3. Dalian-Beijing Harbin-Dalian-Guangzhou
4. Harbin-Beijing Harbin-Beijing
5. Dalian-Shanghai Pudong Dalian-Beijing
6. Harbin-Shenyang-Shenzhen Shenyang-Beijing
7. Harbin-Dalian-Guangzhou Shenyang-Wenzhou-Guangzhou
8. Shenyang-Shanghai Pudong Shenyang-Shanghai Pudong
9. Shenyang-Wenzhou-Guangzhou Dalian-Shanghai Pudong
10. Dalian-Hangzhou-Shenzhen Dalian-Hangzhou-Shenzhen
TOP 10 ROUTES OF XINJIANG AIRLINES GROUP BY REVENUE
FIRST SIX MONTHS ENDED
30 JUNE, 2004 2003
1. Urumqi-Beijing Urumqi-Beijing
2. Urumqi-Shanghai Urumqi-Shanghai
3. Urumqi-Changsha-Shenzhen Urumqi-Kashi
4. Urumqi-Chengdu Urumqi-Changsha-Shenzhen
5. Urumqi-Guangzhou Urumqi-Guangzhou
6. Urumqi-Kashi Urumqi-Chengdu
7. Urumqi-Lanzhou-Hangzhou Urumqi-Lanzhou-Hangzhou
8. Urumqi-Zhengzhou-Qingdao Urumqi-Zhengzhou-Qingdao
9. Urumqi-Yili Urumqi-Xian
10. Urumqi-Xian Urumqi-Zhengzhou-Fuzhou
13
(d) Fleet
As of June 30, 2004, Northern Airlines Group owned and operated 55
medium to large size aircraft with an average fleet age of 8.08
years. The table below sets out details of its fleet:
NORTHERN AIRLINES GROUP'S FLEET DETAILS (AS OF 30 JUNE, 2004)
FINANCE OPERATING
SELF-OWNED LEASE LEASE TOTAL
MD82 10 1 11 22
MD90 3 10 - 13
A300 - 6 - 6
A321 4 4 - 8
A319 - - 3 3
Cessna 208B 3 - - 3
TOTAL 20 21 14 55
Xinjiang Airlines Group has gradually phased out the Soviet-made
TU-154 and IL-86 for commercial flights. The airline has recently
purchased and leased a large number of Boeing and ATR commercial
aircraft. As of June 30, 2004, the average age of the 20 aircraft
owned or operated by Xinjiang Airlines Group was 5.90 years. Details
of the fleet are set out in the table below:
XINJIANG AIRLINES GROUP'S FLEET DETAILS (AS OF 30 JUNE, 2004)
OPERATING
SELF-OWNED LEASE TOTAL
B757-200 6 3 9
B737-300 2 - 2
B737-700 - 4 4
ATR-72 5 - 5
TOTAL 13 7 20
(e) Aircraft acquisition and disposal program
Northern Airlines entered into an aircraft sale and lease back
agreement on 4 November, 2003 with ILFC. Under the agreement,
Northern Airlines Group agreed to sell the 22 MD82 aircraft owned,
or to be owned to ILFC in four phases according to the schedule
listed below:
MD82 AIRCRAFT TO BE SOLD UNDER
THE AIRCRAFT SALE AND LEASEBACK AGREEMENT
NUMBER OF MD82
PHASE DATE TO BE SOLD
I 14 November, 2003 4
II 1 March, 2004 7
III 1 July, 2005 & 1 June, 2006 6
IV 1 June, 2006 & 15 January, 2007 5
14
Under the same agreement, Northern Airlines Group also agreed to
lease back the above-mentioned MD82 aircraft from ILFC immediately
after the sale. The average term of the lease back agreements is 15
months. In addition, Northern Airlines Group also agreed to replace
each of the 22 MD82 aircraft with one new Airbus 319-100 aircraft or
one new Airbus 320-200 aircraft from ILFC upon the termination of
the lease back agreements. The table below sets out the replacement
schedule:
AIRCRAFT REPLACEMENT SCHEDULE
AIRCRAFT TYPE SCHEDULED DELIVERY DATE
Phase I 1. A319-100 May 2004 (delivered)
2. A319-100 May 2004 (delivered)
3. A319-100 June 2004 (delivered)
4. A319-100 September 2004 (delivered)
Phase II 5. A319-100 January 2005
6. A319-100 February 2005
7. A319-100 March 2005
8. A319-100 April 2005
9. A319-100 May 2005
10. A319-100 October 2005
11. A319-100 November 2005
Phase III 12. A319-100/A320-200 January 2006
13. A319-100/A320-200 June 2006
14. A319-100/A320-200 October 2006
15. A319-100/A320-200 November 2006
16. A319-100/A320-200 November 2006
17. A319-100/A320-200 December 2006
Phase IV 18. A319-100/A320-200 February 2007
19. A319-100/A320-200 June 2007
20. A319-100/A320-200 October 2007
21. A319-100/A320-200 October 2007
22. A319-100/A320-200 November 2007
In addition to the above agreement, Northern Airlines has also
committed to the addition of two more A321s from Airbus by the end
of 2005.
(f) Sales and marketing
Northern Airlines Group and Xinjiang Airlines Group have
historically marketed their services under their own brands.
FREQUENT FLYER PROGRAM
Both Northern Airlines Group and Xinjiang Airlines Group operated
their respective frequent flyer programs prior to consolidation into
CSAHC. Following the consolidation of Northern Airlines Group and
Xinjiang Airlines Group into CSAHC, the two frequent flyer programs
merged with the Company's frequent flyer program, namely, the China
Southern Airlines Sky Pearl Club.
15
TICKET SALES CHANNELS AND RESERVATION SYSTEM
Northern Airlines Group and Xinjiang Airlines Group conduct ticket
sales through a variety of sales channels, including the airlines'
own network of exclusive sales offices, websites and general sales
agents. As of 30 June, 2004, Northern Airlines Group has sales
offices in nine cities in China. Xinjiang Airlines Group has sales
offices in seven cities in China and six outside China.
(g) Safety
Aircraft safety involves three major operational areas: flight
operations, aircraft maintenance and ground operations. Both
Northern Airlines Group and Xinjiang Airlines Group place great
importance on safety in each of the three areas, and comply with
applicable safety and security standards and regulations required by
CAAC and other aviation industry regulators in the jurisdictions
they serve.
Xinjiang Airlines Group has established a reputation for safety. To
date, it maintains a record of transport flight safety since its
founding and is perceived to be one of the safest airline operators
in China. On 7 May, 2002, a MD82 aircraft of the Northern Airlines
crashed into the ocean near Dalian, resulting in 112 passenger and
crew fatalities. The aircraft was fully insured and compensated
under the insurance arrangement.
(h) Employees
The table below sets forth information regarding the employees of
Northern Airlines Group and Xinjiang Airlines Group as at the end of
2003:
NORTHERN AIRLINES GROUP AND XINJIANG AIRLINES GROUP
EMPLOYEE INFORMATION
(31 DECEMBER, 2003)
NORTHERN XINJIANG
AIRLINES AIRLINES
GROUP GROUP TOTAL
Flight personnel 1,864 726 2,590
Ground personnel 4,129 758 4,887
Sales, administration and
back office personnel 4,650 1,120 5,770
Total headcount 10,643 2,604 13,247
(i) Properties
Both Northern Airlines Group and Xinjiang Airlines Group own certain
buildings and real estate properties, which are used for offices,
retail outlets, warehouses, aircraft maintenance workshops, ground
services and airport services.
16
(2) Financial information of the Target Group
NORTHERN AIRLINES GROUP
The following is a summary of the financial information relating to the
airline and airline related operations of Northern Airlines Group,
including the combined balance sheets as at 31 December, 2001, 2002 and
2003 and 30 June, 2004, and the combined statements of operations for each
of the years in the three-year period ended 31 December, 2003 and the
six-month periods ended 30 June, 2003 and 2004, as extracted from the
accountants' report to be included in the circular to be issued by the
Company to its shareholders.
COMBINED STATEMENTS OF OPERATIONS
SIX-MONTH PERIODS
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
------------------------------------ ------------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
OPERATING REVENUE
Traffic revenue 5,105,225 5,156,574 5,856,970 2,128,941 3,391,448
Other operating revenue 98,122 87,343 71,765 37,685 73,232
--------- --------- --------- --------- ---------
TOTAL OPERATING REVENUE 5,203,347 5,243,917 5,928,735 2,166,626 3,464,680
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Flight operations 2,123,890 2,194,336 2,338,641 1,119,920 1,480,465
Maintenance 751,542 993,629 1,039,448 541,618 412,118
Aircraft and traffic servicing 667,950 717,332 759,704 319,939 464,035
Promotion and sales 408,994 415,806 425,466 166,296 219,471
General and administrative 162,719 218,594 225,464 99,245 114,849
Depreciation and amortisation 678,435 662,040 645,506 319,023 404,419
Others 535,321 349,856 555,349 - -
--------- --------- --------- --------- ---------
TOTAL OPERATING EXPENSES 5,328,851 5,551,593 5,989,578 2,566,041 3,095,357
OPERATING (LOSS)/PROFIT (125,504) (307,676) (60,843) (399,415) 369,323
--------- --------- --------- --------- ---------
NON-OPERATING INCOME/(EXPENSES)
Interest income 59,903 28,583 12,943 6,921 4,257
Interest expense (724,605) (700,752) (627,190) (312,183) (195,027)
Exchange gain/(loss), net 232,409 (151,196) (217,539) (1,820) 23,567
Gain/(loss) on disposal of
property, plant and equipment 14,634 22,873 729 3,224 (439)
Deficit on revaluation of property,
plant and equipment - - (492,369) - -
Others, net 3,589 (42,666) 15,540 13,540 -
--------- --------- --------- --------- ---------
TOTAL NON-OPERATING EXPENSES, NET (414,070) (843,158) (1,307,886) (290,318) (167,642)
--------- --------- --------- --------- ---------
(LOSS)/PROFIT BEFORE INCOME TAX
AND MINORITY INTERESTS (539,574) (1,150,834) (1,368,729) (689,733) 201,681
INCOME TAX (572) (451) 117,262 - (67,300)
--------- --------- --------- --------- ---------
(LOSS)/PROFIT BEFORE MINORITY INTERESTS (540,146) (1,151,285) (1,251,467) (689,733) 134,381
MINORITY INTERESTS 38,477 10,228 17,846 4,690 661
--------- --------- --------- --------- ---------
NET (LOSS)/PROFIT (501,669) (1,141,057) (1,233,621) (685,043) 135,042
========= ========= ========= ========= =========
17
COMBINED BALANCE SHEETS
31 DECEMBER, 30 JUNE,
-------------------------------------- ---------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
NON-CURRENT ASSETS
Property, plant and equipment, net 8,843,881 8,766,726 8,844,541 9,141,267
Construction in progress 210,191 258,505 54,446 38,930
Lease prepayments 13,345 13,060 - -
Other investments - 68,209 68,209 68,209
Lease and equipment deposits 778,182 640,286 1,334,818 437,117
Deferred expenditure 8,329 7,266 18,001 122,093
Deferred tax assets - - 24,743 20,313
--------- --------- ---------- ---------
TOTAL NON-CURRENT ASSETS 9,853,928 9,754,052 10,344,758 9,827,929
--------- --------- ---------- ---------
CURRENT ASSETS
Inventories 625,704 693,960 534,968 544,093
Trade receivables 165,274 240,674 242,543 398,158
Other receivables and
prepaid expenses 359,587 207,054 141,634 566,110
Cash and cash equivalents 1,308,902 755,218 542,046 234,733
--------- --------- ---------- ---------
TOTAL CURRENT ASSETS 2,459,467 1,896,906 1,461,191 1,743,094
--------- --------- ---------- ---------
CURRENT LIABILITIES
Bank and other loans 2,488,875 4,171,785 569,547 767,257
Obligations under finance leases 976,593 1,023,660 1,070,169 1,063,047
Other liabilities and accrued
expenses 1,840,530 1,679,034 1,135,292 1,403,363
Accounts payable 255,771 206,659 122,259 140,026
Sales in advance of carriage 49,830 98,066 5,525 -
Tax payable 297 33 - -
--------- --------- ---------- ---------
TOTAL CURRENT LIABILITIES 5,611,896 7,179,237 2,902,792 3,373,693
--------- --------- ---------- ---------
NET CURRENT LIABILITIES (3,152,429) (5,282,331) (1,441,601) (1,630,599)
--------- --------- ---------- ---------
TOTAL ASSETS LESS CURRENT LIABILITIES 6,701,499 4,471,721 8,903,157 8,197,330
--------- --------- ---------- ---------
NON-CURRENT LIABILITIES AND
DEFERRED ITEMS
Bank and other loans 2,842,763 1,293,183 2,152,067 1,811,371
Obligations under finance leases 6,475,202 6,700,765 5,897,242 5,402,143
Deferred credit 47,815 38,989 30,163 25,750
--------- --------- ---------- ---------
TOTAL NON-CURRENT LIABILITIES 9,365,780 8,032,937 8,079,472 7,239,264
--------- --------- ---------- ---------
MINORITY INTERESTS 77,309 67,081 3,033 2,372
--------- --------- ---------- ---------
(2,741,590) (3,628,297) 820,652 955,694
========= ========= ========== =========
Representing:
OWNER'S FUND - (DEFICIT)/SURPLUS (2,741,590) (3,628,297) 820,652 955,694
========= ========= ========== =========
18
XINJIANG AIRLINES GROUP
The following is a summary of the financial information relating to the airline
and airline related operations of Xinjiang Airlines Group, including the
combined balance sheets as at 31 December, 2001, 2002 and 2003 and 30 June,
2004, and the combined statements of operations for each of the years in the
three-year period ended 31 December, 2003 and the six-month periods ended 30
June, 2003 and 2004, as extracted from the accountants' report to be included in
the circular to be issued by the Company to its shareholders.
COMBINED STATEMENTS OF OPERATIONS
SIX-MONTHS PERIOD
YEARS ENDED 31 DECEMBER, ENDED 30 JUNE,
---------------------------------------- ----------------------
2001 2002 2003 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(unaudited)
OPERATING REVENUE
Traffic revenue 2,048,009 2,215,380 2,075,074 717,310 1,176,300
Other operating revenue 126,231 137,732 76,559 55,840 38,776
--------- --------- --------- -------- ---------
TOTAL OPERATING REVENUE 2,174,240 2,353,112 2,151,633 773,150 1,215,076
--------- --------- --------- -------- ---------
OPERATING EXPENSES
Flight operations 1,001,641 1,036,133 1,061,919 486,999 639,339
Maintenance 200,572 203,311 250,380 108,795 126,536
Aircraft and traffic servicing 201,941 205,208 275,658 111,190 134,088
Promotion and sales 99,966 117,333 137,562 54,577 80,877
General and administrative 86,380 98,247 119,052 51,434 61,279
Depreciation and amortisation 314,991 352,150 346,304 166,247 173,177
Others - 143,717 - - -
--------- --------- --------- -------- ---------
TOTAL OPERATING EXPENSES 1,905,491 2,156,099 2,190,875 979,242 1,215,296
--------- --------- --------- -------- ---------
OPERATING PROFIT/ (LOSS) 268,749 197,013 (39,242) (206,092) (220)
--------- --------- --------- -------- ---------
NON-OPERATING INCOME/(EXPENSES)
Interest income 2,530 1,347 1,776 347 746
Interest expense (189,165) (184,018) (201,415) (81,352) (69,417)
Exchange gain/(loss), net 3,198 (345) 792 534 (64)
Loss on disposal of property,
plant and equipment (8,581) (2,219) (7,943) (3,893) (800)
Deficit on revaluation of property,
plant and equipment - - (234,835) - -
--------- --------- --------- -------- ---------
TOTAL NON-OPERATING EXPENSES, NET (192,018) (185,235) (441,625) (84,364) (69,535)
--------- --------- --------- -------- ---------
PROFIT/(LOSS) BEFORE INCOME TAX
AND MINORITY INTERESTS 76,731 11,778 (480,867) (290,456) (69,755)
Income tax (35,782) (9,492) 155,808 95,258 24,048
--------- --------- --------- -------- ---------
PROFIT/(LOSS) BEFORE MINORITY INTERESTS 40,949 2,286 (325,059) (195,198) (45,707)
Minority interests - 522 25,957 824 1,396
--------- --------- --------- -------- ---------
NET PROFIT/(LOSS) 40,949 2,808 (299,102) (194,374) (44,311)
========= ========= ========= ======== =========
19
COMBINED BALANCE SHEETS
31 DECEMBER, 30 JUNE,
---------------------------------------- ----------
2001 2002 2003 2004
RMB'000 RMB'000 RMB'000 RMB'000
NON-CURRENT ASSETS
Property, plant and equipment, net 4,127,530 4,387,744 4,140,976 4,043,708
Construction in progress 61,450 66,144 32,223 13,404
Other investments 890 890 - -
Lease and equipment deposits 243,256 53,715 53,715 53,620
Deferred tax assets - - - 19,195
---------- ---------- ---------- ----------
TOTAL NON-CURRENT ASSETS 4,433,126 4,508,493 4,226,914 4,129,927
---------- ---------- ---------- ----------
CURRENT ASSETS
Inventories 73,117 60,056 59,231 71,311
Trade receivables 162,634 183,623 96,288 125,212
Other receivables and
prepaid expenses 117,134 168,737 130,234 169,295
Cash and cash equivalents 256,685 246,387 376,781 286,998
---------- ---------- ---------- ----------
TOTAL CURRENT ASSETS 609,570 658,803 662,534 652,816
---------- ---------- ---------- ----------
CURRENT LIABILITIES
Bank and other loans 693,027 890,271 932,780 1,056,639
Other liabilities and accrued
expenses 521,511 637,228 702,481 718,783
Accounts payable 71,643 92,603 93,987 128,638
Sales in advance of carriage 36,947 19,488 3,268 -
Tax payable 17,267 14,267 1,857 -
---------- ---------- ---------- ----------
TOTAL CURRENT LIABILITIES 1,340,395 1,653,857 1,734,373 1,904,060
---------- ---------- ---------- ----------
NET CURRENT LIABILITIES (730,825) (995,054) (1,071,839) (1,251,244)
---------- ---------- ---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 3,702,301 3,513,439 3,155,075 2,878,683
---------- ---------- ---------- ----------
NON-CURRENT LIABILITIES AND
DEFERRED ITEMS
Bank and other loans 2,384,972 2,051,386 1,960,461 1,735,037
Provision for major overhauls 150,708 161,594 182,727 182,319
Deferred taxation 122,691 132,183 4,853 -
---------- ---------- ---------- ----------
TOTAL NON-CURRENT LIABILITIES 2,658,371 2,345,163 2,148,041 1,917,356
---------- ---------- ---------- ----------
MINORITY INTERESTS - 94,735 78,173 76,777
---------- ---------- ---------- ----------
1,043,930 1,073,541 928,861 884,550
========== ========== ========== ==========
Representing:
OWNER'S FUND 1,043,930 1,073,541 928,861 884,550
========== ========== ========== ==========
20
(d) PROSPECTIVE FINANCIAL INFORMATION
The Target Group has prepared certain prospective financial
information in respect of the Airline Operations of Northern
Airlines Group and the Airline Operations of Xinjiang Airlines Group
for the year ending 31 December, 2004 in compliance with Rule
14A.56(8) and Rule 14.62 of the Listing Rules. Neither the Target
Group nor the Company intends to update this information during the
remainder of the year or to update such information in future years,
although the Directors are aware of the requirements of Rule 13.09
notes 9 and 10 of the Listing Rules. This information is necessarily
based upon a number of assumptions that, while presented with
numerical specificity and considered reasonable by the Target Group,
are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are
beyond the control of the Company or the Target Group, and upon
assumptions with respect to future business decisions which are
subject to change. Accordingly, there can be no assurance that these
results will be realized. The prospective financial information
presented may vary from actual results, and these variations may be
material.
The Company and the Target Group believe that, on the bases and the
assumptions discussed in the shareholder's circular to be issued by
the Company and in the absence of unforeseen circumstances, the
Target Group' forecast combined profit after taxation and minority
interests but before the extraordinary items for the year ending 31
December, 2004 under IFRS is unlikely to be less than RMB148
million. Such forecast has been prepared based on the following
principal assumptions:
(a) there will be no material changes in existing government
policies or political, legal, including changes in
legislations or rules, regulatory, fiscal, economic or market
conditions in the PRC or any of the countries in which the
Target Group carry out business;
(b) the Target Group will continue to be authorised to operate
services to other countries and cities of which its current
scheduled services are covered pursuant to the bilateral
aviation agreements between the PRC and overseas governments;
(c) the Target Group will be able to maintain all of its
certificates and licenses required from the CAAC to enable it
to operate its forecast services;
(d) there will be no material changes in the bases or rates of
taxation or duties in the PRC or any of the countries in which
the Target Group operates;
(e) there will be no material changes in inflation, interest rates
or foreign currency exchange rates from those currently
prevailing; and
(f) the Target Group's operation and business will not be severely
interrupted by any force majeure events or unforeseeable
factors of any unforeseeable reasons that are beyond the
control of the Target Group, including but not limited to the
occurrence of natural disasters or catastrophes, epidemics or
serious accidents.
The texts of the letters from the reporting accountants and the
financial adviser in respect of the profit forecast are set out in
the shareholders' circular to be issued by the Company.
(e) IMPLICATIONS UNDER THE LISTING RULES
The Acquisition exceeds 100% of the relevant percentage ratios under
Rule 14.07 of the Listing Rules and therefore constitutes a very
substantial acquisition of the Company under the Listing Rules.
Since CSAHC is the direct controlling shareholder of the Company,
the Acquisition also constitutes a connected transaction for the
Company under the Listing Rules and is therefore subject to the
approval by the Independent Shareholders at the EGM. The Board,
including the independent non-executive Directors, believes that the
terms of the Sale and Purchase Agreement and the Acquisition are
fair and reasonable and are in the interests of the Listed Group and
its shareholders as a whole.
An Independent Board Committee has been formed to advise the
Independent Shareholders in respect of the Sale and Purchase
Agreement and the Acquisition. ICEA has been appointed as the
independent financial adviser to advise the Independent Board
Committee and the Independent Shareholders in respect of the Sale
and Purchase Agreement and the Acquisition.
CSAHC and its associates are required to abstain from voting in
respect of the proposed resolution to approve the Sale and Purchase
Agreement and the Acquisition which will be conducted by poll.
21
(f) FINANCIAL EFFECT OF THE ACQUISITION
Based on the pro forma financial information of the Combined Group
outlined in Appendix V of the circular to be dispatched by the
Company to its shareholders, assuming that the Acquisition had taken
place on 30 June, 2004, there would not be any impact on the net
assets of the Listed Group following the Acquisition as of 30 June,
2004. On the same basis, the total assets of the Listed Group would
increase by 35%, or RMB15,179 million, which would be offset by an
increase of RMB15,083 million in liabilities and RMB96 million in
minority interest.
Based on the pro forma financial information of the Combined Group
outlined in Appendix V of the circular to be dispatched by the
Company to its shareholders, assuming that the Acquisition had taken
place on 1 January, 2004, for the first six months ended 30th June,
2004, net profit of the Listed Group would increase by 36%, or RMB95
million to RMB361 million following the Acquisition. On the same
basis, basic earnings per share would increase from RMB0.06 to
RMB0.08, representing an accretion of 33%.
2. ON-GOING CONNECTED TRANSACTIONS
The Lease Agreements and the Catering Agreement will be entered into
between the Company and connected persons of the Company within the
meaning of the Listing Rules, which will constitute On-going Connected
Transactions of the Company under the Listing Rules upon completion of the
Acquisition.
(a) LEASE AGREEMENTS
(1) Lease Agreement 1
DATE
12 November, 2004
PARTIES
(a) CSAHC, as the lessor.
(b) Northern Airlines, as the lessor.
(c) The Company, as the lessee.
THE PROPERTY TO BE LEASED
CSAHC and Northern Airlines lease to the Company certain
buildings, facilities and other infrastructure related to the
civil aviation businesses of Northern Airlines situated at
various locations in Shenyang, Dalian, Jilin, Harbin, Chaoyang
and Russia.
TERM OF LEASE AGREEMENT 1
Lease Agreement 1 is for a fixed term of three years,
commencing from the date of the lease, and is renewable,
subject to compliance with the relevant requirements of the
Listing Rules by the Company, by an application in writing by
the Company to the lessors three months before the end of the
fixed term.
CONSIDERATION AND PAYMENT TERMS
The consideration for Lease Agreement 1 is RMB41,993,318.44
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. Chesterton, an independent qualified valuer in Hong
Kong, has given its opinion that the consideration for Lease
Agreement 1 is not higher than the current market prices of
comparable properties. The consideration will be funded wholly
by the Company's internal resources.
22
THE CAP
As the consideration has been determined after arm's length
negotiation between the parties and with regard to the current
market prices, the Cap for the Lease Agreement 1 is set at
RMB41,993,318.44 per year.
REASONS AND BENEFITS OF THE LEASE AGREEMENT 1
Following the Acquisition, the Company will expand its civil
aviation business to locations where the buildings, facilities and
infrastructure under the Lease Agreement 1 are situated at. The
purchase of such buildings, facilities and infrastructure by the
Company will involve the more time-consuming and costly process of
transferring to the Company the relevant titles, ownership or land
use rights relating thereto; whereas the entering into of the Lease
Agreement 1 allows the Company to use those buildings, facilities
and infrastructure to operate its expanded civil aviation business
from the commencement date of the Lease Agreement 1 at rents not
higher than the market rates for similar buildings, facilities and
infrastructure.
(2) Lease Agreement 2
DATE
12 November, 2004
PARTIES
(a) CSAHC, as the lessor.
(b) Xinjiang Airlines, as the lessor.
(c) The Company, as the lessee.
THE PROPERTY TO BE LEASED
CSAHC and Xinjiang Airlines lease to the Company certain
buildings, facilities and other infrastructure related to the
civil aviation businesses of Xinjiang Airlines situated in
Xinjiang and Russia.
TERM OF LEASE AGREEMENT 2
Lease Agreement 2 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 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.
CONSIDERATION AND PAYMENT TERMS
The consideration for Lease Agreement 2 is RMB5,797,908.61 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.
Chesterton, an independent qualified valuer in Hong Kong, has
given its opinion that the consideration for Lease Agreement 2
is not higher than the current market prices of comparable
properties. The consideration will be funded wholly by the
Company's internal resources.
THE CAP
As the consideration has been determined after arm's length
negotiation between the parties and with regard to the current
market prices, the Cap for the Lease Agreement 2 is set at
RMB5,797,908.61 per year.
23
REASONS AND BENEFITS OF THE LEASE AGREEMENT 2
Following the Acquisition, the Company will expand its civil
aviation business to locations where the buildings, facilities
and infrastructure under the Lease Agreement 2 are situated
at. The purchase of such buildings, facilities and
infrastructure by the Company will involve the more
time-consuming and costly process of transferring to the
Company the relevant titles, ownership or land use rights
relating thereto; whereas the entering into of the Lease
Agreement 2 allows the Company to use those buildings,
facilities and infrastructure to operate its expanded civil
aviation business from the commencement date of Lease
Agreement 2 at rents not higher than the market rates for
similar buildings, facilities and infrastructure.
(3) Lease Agreement 3
DATE
12 November, 2004
PARTIES
(a) CSAHC, as the lessor.
(b) The Company, as the lessee.
THE PROPERTY TO BE LEASED
CSAHC leases to the Company certain lands by leasing the land
use rights of such lands to the 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 lands
leased is 1,182,297 square metres, and the locations of such
lands are situated in Urumqi, Shenyang, Dalian and Harbin.
TERM OF LEASE AGREEMENT 3
Lease Agreement 3 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 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.
CONSIDERATION AND PAYMENT TERMS
The rent for the land use rights of the designated lands under
Lease Agreement 3 is RMB22,298,033 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. Chesterton, an
independent qualified valuer in Hong Kong, has given its
opinion that the consideration for Lease Agreement 3 is not
higher than the current market prices of comparable
properties. The consideration will be funded wholly by the
Company's internal resources.
THE CAP
As the consideration has been determined after arm's length
negotiation between the parties and with regard to the current
market prices, the Cap for the Lease Agreement 3 is set at
RMB22,298,033 per year.
BENEFITS OF THE LEASE AGREEMENT 3
Following the Acquisition, the Company will expand its civil
aviation business to locations where the lands under the Lease
Agreement 3 are situated at. As CSAHC is prohibited from
transferring the land use rights of such lands to the Company,
the Company could only lease the land use rights of such lands
from CSAHC. The Lease Agreement 3 allows the Company to use
those lands to operate its expanded civil aviation business at
rents not higher than the market rates for similar lands.
24
(b) CATERING AGREEMENT
DATE
12 November, 2004
PARTIES
(a) The Company.
(b) The Catering Company, which is wholly owned by CSAHC. The
principal business activity of the Catering Company is the
provision of in-flight meals to airlines.
CATERING SERVICE
The Catering Company will supply (1) in-flight meals in accordance
with the menus of in-flight meals 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 Combined Group will also
obtain catering services and in-flight meals from other catering
companies.
TERM OF THE CATERING AGREEMENT
The Catering Agreement is for a fixed term of three years from the
date of the Catering Agreement.
CONSIDERATION AND PAYMENT TERMS
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 invoice shall be verified
and signed by the captain flight attendant of that flight. At the
end of each month, the Catering Company shall deliver to the Company
for its verification all the invoices issued during that month. The
Company will make payment to the Catering Company within 60 days of
the receipt of the invoices.
THE CAP
There are no historical figures available for the Catering Agreement
as it will only be entered into on 12 November, 2004. The Cap for
the Catering Agreement is set at RMB220 million per year. As
discussed above, the flight network of the Company will broaden
following the Acquisition. The Cap for the Catering Agreement is
therefore determined on the basis of the estimated number of
passengers to be carried and the number of flights per year mainly
under the enlarged flight network in northern China and the Xinjiang
regions of the Company during the term of the Catering Agreement,
the prices of the in-flight meals and the service charges of the
catering services under the Catering Agreement.
REASONS AND BENEFITS OF THE CATERING AGREEMENT
The Company can secure in-flight meals and catering services at
prices no higher than the market price for its flights originating
or stopping at domestic airports mainly in northern China and the
Xinjiang regions where the Catering Company provides catering
services. The Company is not precluded from procuring in-flight
meals and catering services from other catering companies where the
terms and conditions are favourable.
25
(c) IMPLICATIONS UNDER THE LISTING RULES
As each of CSAHC, Xinjiang Airlines, Northern Airlines and the
Catering Company is a connected person of the Company under the
Listing Rules, each of the Lease Agreements and Catering Agreement
constitutes a discloseable and continuing connected transaction for
the Company under the Listing Rules. The Board, including the
independent non-executive Directors, considers the On-going
Connected Transactions to be on normal commercial terms, in the
ordinary and usual course of business, fair and reasonable and in
the interests of the Listed Group and its shareholders as a whole.
Pursuant to the Listing Rules, each percentage ratio (other than the
profits ratio) for (i) the Lease Agreements, and (ii) the Catering
Agreement is on an annual basis less than 2.5%. Therefore, each of
(i) the Lease Agreements and (ii) the Catering Agreement falls under
Rule 14A.34 and is only subject to the reporting and announcement
requirements set out in Rules 14A.45 to 14A.47 and is exempt from
the Independent Shareholders' approval requirements. The Company
undertakes to comply with the rules in relation to annual review of
continuing connected transactions set out in Rule 14A.37 to Rule
14A.41 of the Listing Rules.
Pursuant to the relevant rules and regulations of the PRC, each of
Lease Agreement 1, Lease Agreement 2, Lease Agreement 3 and Catering
Agreement is conditional upon approval by the Independent
Shareholders. In accordance with the relevant rules and regulations
of Shanghai Stock Exchange, China Galaxy Securities Co., Limited has
been appointed by the Company as the independent financial adviser
in China to prepare an independent financial report in relation to
each of Lease Agreement 1, Lease Agreement 2, Lease Agreement 3 and
Catering Agreement which is required to be published in the
newspaper in the PRC.
3. FINANCIAL SERVICES AGREEMENT
The first financial services agreement between the Company and the Finance
Company was entered into on 22 May, 1997 for a term of three years. The
Stock Exchange had, in a letter dated 24 April, 1998, granted the Company
waiver from strict compliance with Chapter 14 under the then applicable
Listing Rules in relation to, among other transactions, the first
financial services agreement and the transactions contemplated thereunder.
The first financial services agreement was extended in 2000 for six years
to 22 May, 2006. The Stock Exchange is looking into the matter of whether
the Company had complied with the requirements of the Listing Rules during
the extended term of the first financial services agreement and the
Company will publish further announcement in this respect. In order to
comply with the new requirements under the Listing Rules, the Company and
the Finance Company are now entering into the Financial Services Agreement
so that the Finance Company could continue to provide deposit of money
service and, subject to the execution of separate agreements with the
Company and further compliance with the Listing Rules, other financial
services to the Company. The Provision of Deposit Service constitutes a
discloseable and non-exempt continuing connected transaction, and is
conditional upon approval by the Independent Shareholders.
DATE
12 November, 2004
26
PARTIES
(a) The Company.
(b) The Finance Company, a subsidiary of CSAHC which is owned as to 42%
by CSAHC, 32% by the Company and 26% in aggregate by five
subsidiaries of the Company, namely 8% by Xiamen Airlines Company
Limited, 8% by Southern Airlines Group Shantou Airlines Company
Limited, 4% by Guangxi Airlines Company Limited, 4% by Zhuhai
Airlines Company Limited and 2% by Guangzhou Nanland Air Catering
Company Limited. The principal business activity of the Finance
Company is that of providing financial services, which it is
authorised to carry out under the applicable rules and regulations
of the PRC.
FINANCIAL SERVICES
The Finance Company agrees to provide to the Company the following
financial services:
(1) Accept deposit of money from the Company at interest rates not lower
than those set by the PBOC for the same term of deposit. The Finance
Company will in 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.
(2) 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 Services Agreement. The Company will comply with the
Listing Rules when entering into such separate written agreements.
The Finance Company shall not charge interest rates higher than
those set by the PBOC for similar loans. The total amount of
outstanding loans extended by the Finance Company to the Company
must not exceed the sum of the Finance Company's shareholders'
equity, capital reserves and money deposit received from other
parties (except the Company).
(3) 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 Services Agreement. The Company will comply
with the Listing Rules when entering into such separate written
agreements.
TERM OF THE FINANCIAL SERVICES AGREEMENT
The Financial Services Agreement is for a fixed term of 3 years,
commencing from the date of the agreement, and is renewable, subject to
compliance with the requirements of the relevant 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.
CONSIDERATION AND PAYMENT TERMS
The Company is not subject to any extra charges for depositing money with
the Finance Company. For the other financial services provided by the
Finance Company under the Financial Services Agreement, the Company is
liable to pay the Finance Company the standard charging rates set by the
PBOC. The PRC commercial banks also charge similar charging rates set by
the PBOC.
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 the Finance Company.
27
THE CAP
The Cap for the Provision of Deposit Service under the Financial Services
Agreement is set at RMB1 billion per year, based on the past figures on
deposit of money with the Finance Company, and on the estimated amount of
money to be deposited with the Finance Company by the Company each year
for the term of the Financial Services Agreement. The Company's deposit of
money with the Finance Company was of the amount of RMB1,316,709,000,
RMB877,449,000 and RMB346,357,000 as of 31 December, 2001, 31 December,
2002 and 31 December, 2003 respectively. The Company believes that the
demand for air transportation will continue to increase following the
growth trend in the aviation transportation market, thus the Company
expects that it will substantially increase its deposits with the Finance
Company for the next three years, as compared to the year ended 31
December, 2003 when the business of the Company was badly affected by the
outbreak of severe acute respiratory symptom. Taking into account the
historical amount of the deposit of money with the Finance Company by the
Company, the proposed Cap will sufficiently cover the proposed amount of
deposit of money with the Finance Company by the Company.
REASONS AND BENEFITS OF THE FINANCIAL SERVICES AGREEMENT
The Finance Company is a non-bank finance company established under the
direction of the PBOC with the main business scope of providing various
financial services, including deposit and loan facilities, credit
facilities, guarantee, remittance of money and credit references, to CSAHC
and its subsidiaries. The first financial services agreement between the
Company and the Finance Company was entered into on 22 May, 1997. As the
transactions under the first financial services agreement constituted
connected transactions of the Company, details of which had been disclosed
in the annual reports of the Company. In order to comply with the new
requirements under the Listing Rules, the Company and the Finance Company
are now entering into the Financial Services Agreement so that the Finance
Company could continue to provide deposit of money service and, subject to
the execution of separate agreements with the Company and further
compliance with the Listing Rules, other financial services to the
Company.
The Company usually receives interest on its money deposited with the
Finance Company at rates which are more favourable than the benchmark
interest rates set by the PBOC, usually in the range between the benchmark
interest rates set by the PBOC and the inter-bank offer rates of interest.
This arrangement allows the Company to achieve a more efficient use of its
current capital, since the Company can enjoy better interest rates on
depositing its current capital with the Finance Company than the benchmark
rates of interest set by PBOC that the PRC commercial banks can offer to
the Company.
Subject to the entering into of further separate agreements, the Company
can borrow from the Finance Company at interest rates not higher than
those set by the PBOC for similar loans. In addition, the Company is not
precluded under the Financial Services Agreement to borrow money from
other PRC commercial banks where the terms and conditions are favourable.
The Company can also enjoy the convenience of other financial services at
the rates of fees and commissions set by the PBOC, which are comparable to
the rates charged by PRC commercial banks for similar services.
IMPLICATIONS UNDER THE LISTING RULES
As the Finance Company is a connected person of the Company under the
Listing Rules, the Provision of Deposit Service constitutes a non-exempt
continuing connected transaction under Rule 14A.35 of the 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 Listing Rules. The Board, including the independent
non-executive Directors, believes that the terms of the Financial Services
Agreement and the Provision of Deposit Service to be on normal commercial
terms, in the ordinary and usual course of business, fair and reasonable
and in the interests of the Listed Group and its shareholders as a whole.
28
An Independent Board Committee has been formed to advise the Independent
Shareholders in respect of the Financial Services Agreement and the Provision of
Deposit Service. ICEA has been appointed as the independent financial adviser to
advise the Independent Board Committee and the Independent Shareholders in
respect of the Financial Services Agreement and the Provision of Deposit
Service.
CSAHC and its associates are required to abstain from voting in respect of the
proposed resolution to approve the Financial Services Agreement and the
Provision of Deposit Service which will be conducted by poll.
The Company will comply with the Listing Rules when it enters into further
separate agreements with the Finance Company in connection with the provision of
loan facilities and other financial services by the Finance Company.
4. FURTHER INFORMATION
A circular containing, amongst other things, details of the terms of the
Sale and Purchase Agreement, the On-going Connected Transactions, the
Financial Services Agreement, letters from the Independent Board Committee
and from ICEA, further financial and other information of Northern Airlines
Group and Xinjiang Airlines Group and a notice to shareholders of the
Company convening an EGM to approve, amongst other things, the Sale and
Purchase Agreement, the Financial Services Agreement, the Lease Agreements,
the Catering Agreement, the resignation of a director of the Company and
the election of a new director of the Company will be dispatched to the
shareholders of the Company as soon as practicable.
The register of members of the Company will be closed from 1 December, 2004
to 30 December, 2004 (both days inclusive).
5. DEFINITIONS
In this announcement, the following expressions have the following
meanings, unless the context requires otherwise:
"Acquisition" the acquisition of the Business and Assets by the
Company pursuant to the Sale and Purchase
Agreement and all transactions contemplated
thereunder
"Airline Operations" the airlines and airlines-related operations
"available seat the number of seats made available for sale
kilometres" multiplied by the kilometres flown
or "ASKs"
"available tonne the tonnes of capacity available for the
kilometres" transportation of revenue load (passengers and
or "ATKs" cargo) multiplied by the kilometres flown
"Board" the board of Directors
"Business and Assets" certain Airline Operations, assets and properties
of Northern Airlines Group and Xinjiang Airlines
Group to be acquired by the Company from the
Vendors pursuant to the Sale and Purchase
Agreement, including aircraft, engines, spare
parts, aviation equipment and facilities,
properties, office facilities, and other fixed,
current and intangible assets
"CAAC" Civil Aviation Administration of China
29
"Cap" the maximum aggregate annual value for each of
the continuing connected transactions under the
Listing Rules
"cargo yield" revenue from cargo operations divided by cargo
tonne kilometres
"Catering Agreement" the catering agreement dated 12 November, 2004
between the Company and the Catering Company
"Catering Company" China Southern Airlines Group Air Catering
Company Limited, a company incorporated in the
PRC with limited liability
"Chesterton" Chesterton Petty Limited, a chartered surveyor
and independent property valuer incorporated in
Hong Kong
"Combined Group" the Listed Group together with the Airline
Operations of Northern Airlines Group and the
Airline Operations of Xinjiang Airlines Group
"Company" China Southern Airlines Company Limited, a joint
stock company incorporated in the PRC with
limited liability
"CSAHC" China Southern Air Holding Company, a state-owned
enterprise established under the laws of the PRC
and the controlling shareholder of the Company
"Debts" the debts and liabilities to be assumed by the
Company from the Vendors pursuant to the Sale and
Purchase Agreement
"Directors" directors of the Company
"Effective Date" the date when the Independent Shareholders
approve the Sale and Purchase Agreement and the
Acquisition
"EGM" an extraordinary general meeting of the Company
to be held to approve, amongst other things, the
Sale and Purchase Agreement, the Financial
Services Agreement, the resignation of a director
of the Company and the election of a new director
of the Company
"Finance Company" Southern Airlines Group Finance Company Limited,
a company incorporated in the PRC with limited
liability
"Financial Services the financial services agreement dated 12
Agreement" November, 2004 between the Company and the
Finance Company
"ICEA" ICEA Capital Limited, a deemed licensed
corporation carrying out regulated activity of
Type 1 (dealing in securities), Type 4 (advising
on securities), Type 6 (advising on corporate
finance) and Type 9 (asset management), which has
been appointed as the independent financial
adviser to the Independent Board Committee in
respect of the Sale and Purchase Agreement, the
Financial Services Agreement and the transactions
contemplated thereunder
30
"IFRS" International Financial Reporting Standards
promulgated by the International Accounting
Standards Board
"ILFC" International Lease Finance Corporation, an
independent third party which is not connected to
the Company
"Independent Board the independent committee of the Board, the
Committee" members of which consist of Simon To, Peter Lok,
Wei Ming Hai, Wang Zhi and Sui Guang Jun, who are
the independent non-executive Directors of the
Company, formed to advise the Independent
Shareholders with respect to the Sale and
Purchase Agreement, the Financial Services
Agreement and the transaction contemplated
thereunder
"Independent shareholders of the Company other than CSAHC and
Shareholders" its associates
"JPMorgan" J.P. Morgan Securities (Asia Pacific) Limited,
which is licensed by the Securities and Futures
Commission for Types 1, 4, 6 and 7 regulated
activities under the Securities and Futures
Ordinance, being the financial adviser to the
Company in respect of the Acquisition
"KPMG" KPMG, Certified Public Accountants registered in
Hong Kong
"KPMG Huazhen" KPMG Huazhen Certified Public Accountants
registered in the PRC
"Latest Practicable 5 November, 2004, being the latest practicable
Date" date prior to the printing for ascertaining
certain information contained herein
"Lease Agreement 1" the lease agreement dated 12 November, 2004
between the Company, CSAHC and Northern Airlines
"Lease Agreement 2" the lease agreement dated 12 November, 2004
between the Company, CSAHC and Xinjiang Airlines
"Lease Agreement 3" the lease agreement dated 12 November, 2004
between the Company and CSAHC
"Lease Agreements" Lease Agreement 1, Lease Agreement 2 and Lease
Agreement 3
"Listing Rules" the Rules Governing the Listing of Securities on
the Stock Exchange
"Listed Group" the Company and its existing subsidiaries
"Northern Airlines" China Northern Airlines Company, a company
incorporated in the PRC with limited liability
"Northern Airlines Northern Airlines and its subsidiaries
Group"
31
"On-going Connected the Lease Agreements and the Catering Agreement
Transactions" which will be entered into between the Company
and connected persons of the Company within the
meaning of the Listing Rules, which will
constitute continuing connected transactions of
the Company under the Listing Rules upon
completion of the Acquisition, details of which
are set out in section 2 of this announcement
"overall load factor" RTKs expressed as a percentage of ATKs
"Parties" the Company and the Vendors
"passenger load RPKs expressed as a percentage of ASKs
factor"
"passenger yield" revenue from passenger operations divided by RPKs
"PBOC" the People's Bank of China, the central bank of
the PRC
"Provision of Deposit the provision of deposit of money service by the
Service" Finance Company to the Company pursuant to the
Financial Services Agreement
"PRC" or "China" the People's Republic of China (other than, for
the purpose of this circular only, Hong Kong,
Macau and Taiwan)
"revenue freight the load of cargo in tonnes multiplied by the
tonne kilometres" kilometres flown
or "RFTKs"
"revenue passenger the number of passengers carried multiplied by
kilometres" the kilometres flown
or "RPKs"
"revenue tonne the load (passengers and cargo) in tonnes
kilometres" multiplied by the kilometres flown
or "RTKs"
"Sale and Purchase the sale and purchase agreement dated 12
Agreement" November, 2004 between the Company, CSAHC,
Northern Airlines and Xinjiang Airlines pursuant
to which the Company agreed to acquire and CSAHC,
Northern Airlines and Xinjiang Airlines agreed to
sell the Business and Assets
"SASAC" State-owned Assets Supervision and Administration
Commission of the State Council
"Stock Exchange" The Stock Exchange of Hong Kong Limited
"Target Group" Northern Airlines Group and Xinjiang Airlines
Group
"tonne" a metric tonne, equivalent to 2,204.6 pounds
"utilisation rates" the actual number of flight and taxi hours per
aircraft per operating day
"Vendors" CSAHC, Northern Airlines and Xinjiang Airlines
"Xinjiang Airlines" Xinjiang Airlines Company, a company incorporated
in the PRC with limited liability
32
"Xinjiang Airlines Xinjiang Airlines and its subsidiaries
Group"
"Zhong Qi Hua the Valuation Report on the Transfer of Business
Valuation Reports" and Assets of Northern Airlines as of 31
December, 2003, (Zhongqihuapingbaozi (2004)
Report No. 149-1) and Valuation Report on the
Transfer of Business and Assets of Xinjiang
Airlines as of 31 December, 2003
(Zhongqihuapingbaozi (2004) Report No. 149-2),
prepared by China Enterprise Appraisal Co., Ltd.,
independent qualified valuers jointly appointed
by CSAHC and the Company, and approved by the
SASAC on 14 October, 2004
By order of the Board
CHINA SOUTHERN AIRLINES COMPANY LIMITED
YAN ZHI QING
Director
Guangzhou, the People's Republic of China
12 November, 2004
As at the date of this announcement, the Directors of the Company are Yan Zhi
Qing, Liu Ming Qi, Wang Chang Shun, Peng An Fa, Wang Quan Hua, Zhao Liu An, Zhou
Yong Qian, Zhou Yong Jin, Xu Jie Bo and Wu Rong Nan as executive Directors and
Simon To, Peter Lok, Wei Ming Hai, Wang Zhi and Sui Guang Jun as independent
non-executive Directors.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHINA SOUTHERN AIRLINES COMPANY LIMITED
By /s/ Su Liang
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Name: Su Liang
Title: Company Secretary
Date: November 16, 2004