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 April, 2005
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 or around April
29, 2005 distributed its Annual Report, together with the Notice of Annual
General Meeting, Form of Proxy for Annual General Meeting, and Reply Slip, in
English and Chinese to its shareholders. A copy of each of the documents is
included in this Form 6-K of the Company.
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
[LOGO] [CHINESE CHARACTERS] 40
CHINA SOUTHERN
Contents
2 Company Profile
3 Corporate Information
4 Financial Highlights
6 Chairman's Statement
8 Management Discussion and Analysis
17 Report of the Directors
36 Report of the Supervisory Committee
39 Corporate Governance Report
Financial Statements Prepared under
International Financial Reporting Standards
43 - Report of the International Auditors
44 - Consolidated Income Statement
45 - Consolidated Balance Sheet
47 - Balance Sheet
49 - Consolidated Statement of Changes in Shareholders' Equity
50 - Consolidated Cash Flow Statement
51 - Notes to the Financial Statements
Financial Statements Prepared under
PRC Accounting Rules and Regulations
100 - Report of the PRC Auditors
101 - Consolidated Balance Sheet
104 - Balance Sheet
107 - Consolidated Income Statement and
Profit Appropriation Statement
109 - Income Statement and Profit Appropriation Statement
111 - Consolidated Cash Flow Statement
115 - Cash Flow Statement
119 - Notes to the Financial Statements
183 Supplementary Information for PRC Shareholders
185 Five Year Summary
187 The Board of Directors, Supervisory Committee and
Senior Administrative Officers
192 Glossary
2 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
COMPANY PROFILE
China Southern Airlines Company Limited (the "Company") together with its
subsidiaries (collectively, the "Group") is one of the largest airlines in the
People's Republic of China ("China" or "the PRC"). In 2004, the Group continued
to rank first among all Chinese airlines in terms of volume of passenger
traffic, number of scheduled flights per week, number of hours flown, number of
routes and size of aircraft fleet.
As of the year end of 2004, the Group operated 542 routes, of which 434 were
domestic, 85 were international and 23 were Hong Kong regional. The Group
operates the most extensive domestic route network among all Chinese airlines.
In 2004, the Group operated an average of 5,280 landings and take-offs per week,
serving 143 destinations. Its route network covers commercial centres or rapidly
developing economic regions in Mainland China. The Group's headquarters is
located in Guangzhou, one of the gateway cities of China. Located in the rapidly
developing Pearl River Delta region, Guangzhou is the transportation hub of
southern China.
In addition to its main route base in Guangzhou, the Group maintains 18 regional
route bases in Zhengzhou, Wuhan, Changsha, Shenzhen, Shenyang, Changchun,
Dalian, Harbin, Urumqi, Haikou, Zhuhai, Xiamen, Fuzhou, Guilin, Shantou,
Guiyang, Sanya and Beihai. Most of its regional route bases are located in
provincial capitals or major commercial centres in the PRC.
The Group operates a portion of its air transportation business through its
subsidiaries, namely Xiamen Airlines Company Limited ("Xiamen Airlines"),
Southern Airlines Group Shantou Airlines Company Limited, Guangxi Airlines
Company Limited, Zhuhai Airlines Company Limited and Guizhou Airlines Company
Limited (collectively, the "Airline Subsidiaries"). Each of the Airline
Subsidiaries is 60%-owned by the Company. Apart from the above, the Company has
also acquired equity interests in Sichuan Airlines Corporation Limited and China
Postal Airlines Limited.
As of 31 December, 2004, the Group operated a fleet of 231 aircraft, consisting
primarily of Boeing 737-300, 737-500, 737-700, 737-800, 747-400, 757-200,
777-200, Airbus 320-200 and 319-100, McDonnell Douglas 82 and 90, Cessna 208B,
ATR-72 and Embraer 145 aircraft. The average age of the Group's fleet was 7.47
years as of the year end of 2004.
[LOGO] [CHINESE CHARACTERS] 3
CHINA SOUTHERN
CORPORATE INFORMATION
DIRECTORS
EXECUTIVE DIRECTORS
Liu Shao Yong
(Chairman of the Board of Directors)
Liu Ming Qi (Vice Chairman of the Board of Directors)
Peng An Fa (Director)
Wang Quan Hua (Director)
Zhao Liu An (Director)
Zhou Yong Qian (Director)
Si Xian Min (Director, President)
Zhou Yong Jin (Director)
Xu Jie Bo (Director, Chief Financial Officer, Vice President)
Wu Rong Nan (Director)
INDEPENDENT NON-EXECUTIVE DIRECTORS
Simon To
Peter Lok
Wei Ming Hai
Wang Zhi
Sui Guang Jun
SUPERVISORS
Sun Xiao Yi
(Chairman of the Supervisory Committee)
Yang Guang Hua (Supervisor)
Yang Yi Hua (Supervisor)
COMPANY SECRETARY
Su Liang
AUTHORISED REPRESENTATIVES
Xu Jie Bo
Su Liang
PRINCIPAL BANKERS
The Industrial & Commercial Bank of China
Bank of China
China Construction Bank
Agricultural Bank of China
LEGAL ADVISERS TO THE COMPANY
O'Melveny & Myers LLP
Z&T Law Firm
SHARE REGISTRAR
Hong Kong Registrars Limited
46th Floor
Hopewell Centre
183 Queen's Road East
Hong Kong
The Bank of New York
Investor Relations
P.O. Box 11258
Church Street Station
New York, NY 10286-1258, U.S.A.
China Securities Depository and Clearing Corporation
Limited Shanghai Branch
727 Pu Jian Road, Shanghai
PRC
CORPORATE HEADQUARTERS
278 Ji Chang Road
Guangzhou
PRC, 510405
Website: www.cs-air.com
PLACE OF BUSINESS IN HONG KONG
Unit B1, 9th Floor
United Centre
95 Queensway
Hong Kong
INTERNATIONAL AUDITORS
KPMG
Certified Public Accountants
8th Floor, Prince's Building
10 Chater Road
Hong Kong
PRC AUDITORS
KPMG Huazhen
8/F, Office Tower E2
Oriental Plaza
No. 1 East Chang An Avenue
Beijing
PRC
Postcode 100738
4 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Financial Highlights
[PIE CHART]
The board (the "Board") of directors (the "Directors") of the Company hereby
presents below the consolidated results of the Group for the year ended 31
December, 2004, prepared in accordance with International Financial Reporting
Standards ("IFRS"), together with the comparative figures for the corresponding
period in 2003. The following consolidated results should be read in conjunction
with the financial statements and the Report of the International Auditors
contained in this annual report (the "Annual Report").
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER,
---------------------------------------------------- 2004 vs 2003
2004 2003 2004 2004 Increase/
RMB MILLION RMB million HK$ MILLION US$ MILLION (decrease)%
----------- ------------- ----------- ----------- ------------
Traffic revenue:
Passenger 21,100 15,010 19,889 2,550 40.6
Cargo and mail 2,244 1,955 2,115 271 14.8
------ ------ ------ ----- ----
23,344 16,965 22,004 2,821 37.6
Other operating revenue 630 505 594 76 24.8
------ ------ ------ ----- ----
Total operating revenue 23,974 17,470 22,598 2,897 37.2
------ ------ ------ ----- ----
Operating expenses:
Flight operations 10,418 7,070 9,820 1,259 47.4
Maintenance 3,459 2,589 3,261 418 33.6
Aircraft and traffic servicing 3,503 2,767 3,302 423 26.6
Promotion and sales 1,940 1,480 1,829 234 31.1
General and administrative 1,323 1,053 1,247 160 25.6
Depreciation and amortisation 2,413 2,038 2,274 292 18.4
Other 9 17 8 1 (47.1)
------ ------ ------ ----- ----
Total operating expenses 23,065 17,014 21,741 2,787 35.6
------ ------ ------ ----- ----
Operating profit 909 456 857 110 99.3
------ ------ ------ ----- ----
[LOGO] [CHINESE CHARACTERS] 5
CHINA SOUTHERN
Financial Highlights (Cont'd)
[PIE CHARTS]
FOR THE YEAR ENDED 31 DECEMBER, 2004 vs 2003
---------------------------------------------------- Increase/
2004 2003 2004 2004 (decrease)
RMB MILLION RMB million HK$ MILLION US$ MILLION %
----------- ----------- ------------ ------------ --------------
Non-operating
income/(expenses):
Interest income 22 13 21 3 69.2
Interest expense (691) (824) (651) (84) (16.1)
Share of associates'
results 12 48 11 1 (75.0)
Share of jointly controlled
entities' results (5) (39) (5) (1) (87.2)
Loss on disposal of property,
plant and equipment (1) (22) (1) - (95.5)
Exchange loss, net (59) (164) (56) (7) (64.0)
Other, net 46 21 44 6 119.0
-------- -------- -------- --------- ------
Total net non-operating
expenses (676) (967) (637) (82) (30.1)
-------- -------- -------- --------- ------
Profit/(loss) before taxation
and minority interests 233 (511) 220 28 (145.6)
Income tax (expense)/credit (78) 324 (74) (9) (124.1)
-------- -------- -------- --------- ------
Profit/(loss) before minority
interests 155 (187) 146 19 (182.9)
Minority interests (203) (171) (191) (25) 18.7
-------- -------- -------- --------- ------
Loss attributable to
shareholders (48) (358) (45) (6) (86.6)
======== ======== ======== ========= ======
Basic loss per share RMB(0.01) RMB(0.09) HK$(0.01) US$(0.001) (88.9)
======== ======== ======== ========= ======
Note: The above consolidated income statement has been prepared in Renminbi
("RMB"), the national currency of the PRC. Translations of amounts from
RMB into Hong Kong dollars ("HK$") and United States dollars ("US$")
solely for the convenience of readers have been made at the rates of
HK$1.00 to RMB1.0609 and US$1.00 to RMB8.2765 respectively, being the
average of the buying and selling rates as quoted by the People's Bank of
China at the close of business on 31 December, 2004. No representation is
made that the RMB amounts could have been or could be converted into HK$
or US$ at these rates or at any other certain rates on 31 December, 2004
or on any other date.
6 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Chairman's Statement
[PICTURE]
Dear Shareholders:
In 2004, the demand in the PRC civil aviation market sustained the growth second
half of 2003. As a result, the Group recorded a year-on-year growth of more than
37% in total operating revenue, marking achievement in the Group's history.
However, due to the persistent high price of aviation fuel and relatively more
major overhauls of performed, which aircraft having been increased maintenance
costs, the Group still recorded a net loss of RMB48 million for 2004.
Instabilities in the world economy and in global politics continued to drive up
the prices of aviation fuel in the international market. As a result, fuel costs
rose substantially accounting for more than 30% of the operating costs of the
group The Group, without compromising flight safety, adopted various technical
measures, including the preparation of precise flight plans and minimisation of
turnaround time, so as to reduce fuel consumption. However, as an airline in the
PRC, the options available to the Group were limited in this respect. As such,
the high aviation fuel price exerted immense pressure on the operating expenses
of the Group.
The Group has revamped its marketing management by designating an accountability
system to each of its sales managers. These measures have encouraged the
operating and marketing team of the Group to be more pro-active and vigilant of
the difficulties faced by the Group, thereby maximising the total revenue of the
Group to the greatest possible extent. In addition, the commencement of
operation of the new Guangzhou Baiyun International Airport, the main hub of the
Group, provides a wider platform of development for the operations of the
Company. Moreover, the Group has successfully secured the exclusive right to use
Terminal No. 1 of the Beijing Capital International Airport, marking a
substantial step in carrying out the strategy of the Group to improve its flight
routes network.
Flight safety is a perennial concern to airlines. In this regard, the Group is
committed to flight safety by strengthening internal safety checks, pilot
training and aircraft maintenance. As a result, the Group was awarded the Golden
Roc Cup, the highest award for flight safety in the PRC civil aviation industry,
for the fourth time in 2004.
The acquisition of the airline operations of China Northern Airlines Company and
Xinjiang Airlines Company was approved at the general meeting of the Company
held on 31 December, 2004. Such acquisition provides a robust platform for the
Group to consolidate its market leadership and financial results. It also
brought in various benefits to the Group by expanding its flight service
network, fleet size and transport capacity, as well as lowering costs and
improving overall efficiency. Given the investment incentive policies such as
"Go West" and "Revitalising the Old Industrial Bases in the North-eastern
Region" promulgated by the PRC government, the economy in the western and
north-eastern regions of the PRC is expected to grow at a rapid pace in the
coming decades, which in turn provides substantial growth potential for the
Group. Ultimately, the acquisition will strengthen the Group's position as the
largest airline in the PRC and will create positive value to its investors. At
present, the management of the Group focuses on harnessing the expanded business
capacity and operation scale of the Group, and on enhancing its overall
management standards through an integration of corporate cultures, innovation
and development, thereby realising the ultimate goal of the Group's
reorganisation.
[LOGO] [CHINESE CHARACTERS] 7
CHINA SOUTHERN
Chairman's Statement (Cont'd)
2005 is expected to be a year of challenge for the Group. While managing the
integrated post-acquisition operations of the Group, the Group will also face
increasing competition due to increasing supply in capacity in the PRC aviation
market. In anticipation of this, the Group is adopting the following measures to
enhance its competitiveness and to maintain its market share and operating
results of the expanded business:
[PICTURES]
1. optimise its service offerings, flight schedules and route networks by
improving the integrated management and resources allocation, thereby
capitalising on the advantages as a result of the tripartite combination;
2. enhance pilot training and further strengthen flight supervision to ensure
flight safety;
3. optimise the performance-oriented marketing incentive system; reinforce
the sales by building an integrated route network and improving the
revenue sharing scheme; providing e-commerce services; and continue to
optimise the existing offerings with a focus on personalised and
value-added services and sales services, thereby enhancing the general
operating efficiency;
4. strengthen the cargo operation to further penetrate the international and
regional markets;
5. exercise stringent cost controls by decentralising budget management and
integrating purchasing and maintenance operations, and try all possible
means to minimise the impact of fuel costs; and
6. establish a comprehensive internal control system to improve risk
resistance.
2005 will be a brand new start for the new China Southern Airlines. On behalf of
the board, I would like to express our gratitude to our staff and to the
shareholders and friends for their caring and thoughtfulness. We also look
forward to the continued support of our staff, shareholders and friends, working
hand-in-hand with them for a healthy, sustainable growth at China Southern
Airlines.
LIU SHAO YONG
Chairman
Guangzhou, the PRC
25 April, 2005
8 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Management Discussion and Analysis
[PICTURE]
The following discussion and analysis should be read in conjunction with the
financial statements of the Group prepared under IFRS as set out on Pages 43 to
99. The Group also prepares financial statements in accordance with PRC
Accounting Rules and Regulations as set out on pages 100 to 182. IFRS differs in
certain material respects from PRC Accounting Rules and Regulations. For a
discussion of the material differences between IFRS and PRC Accounting Rules and
Regulations relating to the Group, see supplementary information on pages 183 to
184 of this Annual Report.
OVERVIEW
From the fast growing economy in the PRC, growth in airline market has been
carried on which was commenced in second half of 2003. The Group's business was
benefited from the increasing traffic demand in which both the passenger volume
and passenger load factor were improved. Nevertheless, the Group is facing
pressure on its operation was due to the seasonal effect and the increase in jet
fuel cost.
The continuing political tension in the Middle East led to high fuel prices
which in turn caused an increase in the Group's jet fuel cost. The Group has
implemented various measures to control the increase in operating expenses.
Pursuant to "Pricing Reform of Domestic Civil Aviation" as approved by the State
Council of the PRC effective on 20 April, 2004, prices on domestic routes now
fluctuate freely within a predetermined range. Instead of direct supervision by
setting prices of air tickets through local price bureau, the government now
provides guidance on domestic flights and domestic civil aviation is controlled
by the government indirectly. Market-oriented pricing policy was introduced and
pricing system has been adjusted as a result of the above pricing reform.
CERTAIN FINANCIAL INFORMATION AND OPERATING DATA BY GEOGRAPHIC REGION
The following table sets forth certain financial information and operating data
by geographic region for the years ended 31 December, 2003 and 2004:
FOR THE YEAR
ENDED 2004 VS 2003
31 DECEMBER, % INCREASE/
2004 2003 (DECREASE)
------ ------ -------------
TRAFFIC
Revenue passenger kilometres (RPK) (million)
- Domestic 29,121 21,294 36.8
- Hong Kong regional 1,203 778 54.6
- International 6,872 4,315 59.3
------ ------ ----
Total 37,196 26,387 41.0
====== ====== ====
Revenue tonne kilometres (RTK) (million)
- Domestic 3,206 2,424 32.3
- Hong Kong regional 120 78 53.8
- International 1,337 1,059 26.3
------ ------ ----
Total 4,663 3,561 30.9
====== ====== ====
Passengers carried (thousand)
- Domestic 25,002 18,259 36.9
- Hong Kong regional 1,394 1,019 36.8
- International 1,811 1,192 51.9
------ ------ ----
Total 28,207 20,470 37.8
====== ====== ====
[LOGO] [CHINESE CHARACTERS] 9
CHINA SOUTHERN
Management Discussion and Analysis (Cont'd)
FOR THE YEAR ENDED 2004 VS 2003
31 DECEMBER, % INCREASE/
2004 2003 (DECREASE)
------ ------ --------------
Cargo and mail carried (thousand tonnes)
- Domestic 442 379 16.6
- Hong Kong regional 15 12 25.0
- International 88 73 20.5
------ ------ ----
Total 545 464 17.5
====== ====== ====
CAPACITY
Available seat kilometres (ASK) (million)
- Domestic 41,330 32,590 26.8
- Hong Kong regional 1,896 1,347 40.8
- International 10,543 6,930 52.1
------ ------ ----
Total 53,769 40,867 31.6
====== ====== ====
Available seat kilometres (ATK) (million)
- Domestic 4,773 3,772 26.5
- Hong Kong regional 211 150 40.7
- International 2,462 1,999 23.2
------ ------ ----
Total 7,446 5,921 25.8
====== ====== ====
LOAD FACTORS
Passenger load factor (RPK/ASK) (%)
- Domestic 70.5 65.3 8.0
- Hong Kong regional 63.4 57.8 9.7
- International 65.2 62.3 4.7
Overall 69.2 64.6 7.1
====== ====== ====
Overall load factor (RTK/ATK) (%)
- Domestic 67.2 64.2 4.7
- Hong Kong regional 56.9 52.2 9.0
- International 54.3 53.0 2.5
Overall 62.6 60.1 4.2
====== ====== ====
10 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Management Discussion and Analysis (Cont'd)
FOR THE YEAR ENDED 2004 VS 2003
31 DECEMBER, % INCREASE/
2004 2003 (DECREASE)
------ ------ ------------
YIELD
Yield per RPK (RMB)
- Domestic 0.58 0.57 1.8
- Hong Kong regional 0.92 0.96 (4.2)
- International 0.46 0.47 (2.1)
Overall 0.57 0.57 -
==== ==== ====
Yield per RTK (RMB)
- Domestic 5.53 5.40 2.4
- Hong Kong regional 9.83 10.35 (5.0)
- International 3.31 2.90 14.1
Overall 5.01 4.76 5.3
==== ==== ====
FLEET
Total number of aircraft in service at year end (Note)
- Boeing 137 108 26.9
- Airbus 46 24 91.7
- McDonnell Douglas 35 - N/A
- Others 13 - N/A
---- ---- ----
Total 231 132 75.0
==== ==== ====
Overall utilisation rate (hours per day)
- Boeing 10.0 8.6 16.3
- Airbus 9.2 7.9 16.5
- Others 8.4 - N/A
Overall 9.9 8.5 16.5
==== ==== ====
Cost
- Operating cost per ASK (RMB) 0.43 0.42 2.4
==== ==== ====
- Operating cost per ATK (RMB) 3.10 2.87 8.0
==== ==== ====
Note: As approved by the Company's shareholders in an extraordinary
general meeting on 31 December, 2004, the Company acquired the
airline operations and certain related assets of China Northern
Airlines Company and Xinjiang Airlines Company. Accordingly, a total
of 78 aircraft were added at 31 December, 2004.
[LOGO] [CHINESE CHARACTERS] 11
CHINA SOUTHERN
[PICTURES] Management Discussion and Analysis (Cont'd)
2004 COMPARED WITH 2003
The Group recorded a net loss of RMB48 million for 2004, as compared to a net
loss of RMB358 million for 2003. The Group's operating revenue increased by
RMB6,504 million or 37.2% from RMB17,470 million in 2003 to RMB23,974 million in
2004. Passenger load factor increased by 4.6 percentage point from 64.6% in 2003
to 69.2% in 2004. Passenger yield (in passenger revenue per RPK) remain steady
and at RMB 0.57 in both years. Average yield (in traffic revenue per RTK)
increased by 5.3% from RMB4.76 in 2003 to RMB5.01 in 2004. Operating expenses
increased by RMB6,051 million or 35.6% from RMB17,014 million in 2003 to
RMB23,065 million in 2004. As operating revenue increased more than operating
expenses, operating profit increased by 99.3% from RMB456 million in 2003 to
RMB909 million in 2004. The Group's net non-operating expenses decreased by
30.1%, from RMB967 million in 2003 to RMB676 million in 2004, mainly
attributable to a decrease in unfavourable movement in foreign exchange
differences of RMB105 million and a decrease in interest expense of RMB133
million. Overall, the Group recorded a net loss of RMB48 million in 2004, as
compared to a net loss of RMB358 million in 2003.
OPERATING REVENUE
Substantially all of the Group's operating revenue is attributable to airline
and airline related operations. Traffic revenue in 2004 and 2003 accounted for
97.4% and 97.1% respectively of total operating revenue. Passenger revenue and,
cargo and mail revenue accounted for 90.4% and 9.6% respectively of total
traffic revenue in 2004. The balance of the Group's operating revenue is derived
from commission income, income from general aviation operations, fees charged
for ground services rendered to other Chinese airlines and air catering
services.
[PICTURE]
Operating revenue increased by 37.2% from RMB17,470 million in 2003 to RMB23,974
million in 2004. This increase was primarily due to a 40.6% rise in passenger
revenue from RMB15,010 million in 2003 to RMB21,100 million in 2004 resulting
from increased traffic volume. The total number of passengers carried increased
by 37.8% to 28.2 million passengers in 2004. RPKs increased by 41.0% from 26,387
million in 2003 to RMB37,196 million in 2004, primarily as a result of an
increase in passengers carried. Passenger yield remained constant at RMB0.57.
12 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Management Discussion and Analysis (Cont'd)
Domestic passenger revenue, which accounted for 79.9% of the total passenger
revenue in 2004, increased by 37.8% from RMB12,242 million in 2003 to RMB16,869
million in 2004. Domestic passenger traffic in RPKs increased by 36.8%, mainly
due to an increase in passengers carried. Passenger yield remained steady in
2004 and at RMB0.58.
Hong Kong passenger revenue, which accounted for 5.3% of total passenger
revenue, increased by 47.2% from RMB750 million in 2003 to RMB1,104 million in
2004. For Hong Kong regional flights, passenger traffic in RPKs increased by
54.6%, while passenger capacity in ASKs increased by 40.8%, resulting in a 5.6
percentage point increase in passenger load factor from 2003. Passenger yield
decreased from RMB0.96 in 2003 to RMB0.92 in 2004 mainly due to intensified
competition among airlines.
International passenger revenue, which accounted for 14.8% of total passenger
revenue, increased by 55.0% from RMB2,018 million in 2003 to RMB3,127 million in
2004. For international flights, passenger traffic in RPKs increased by 59.3%,
while passenger capacity in ASKs increased by 52.1%, resulting in a 2.9
percentage point rise in passenger load factor from 2003. Passenger yield
decreased by 2.1% from RMB0.47 in 2003 to RMB0.46 in 2004 mainly resulted from
the increases in traffic derived from long haul routes which generally had a
lower yield than short haul routes.
Cargo and mail revenue, which accounted for 9.6% of the Group's total traffic
revenue and 9.4% of total operating revenue, increased by 14.8% from RMB1,955
million in 2003 to RMB2,244 million in 2004. The increase was attributable to
the increasing traffic demand.
Other operating revenue increased by 24.8% from RMB505 million in 2003 to RMB630
million in 2004. The increase was primarily due to the general growth in income
from various auxiliary operations.
[LOGO] [CHINESE CHARACTERS] 13
CHINA SOUTHERN
Management Discussion and Analysis (Cont'd)
[PICTURE]
OPERATING EXPENSES
Substantially all of the Group's operating expenses result from its airline
operations. The vast majority of such expenses relate directly to flight
operations, aircraft and traffic servicing, aircraft repair and maintenance
and to depreciation and amortisation in respect of aircraft and flight
equipment. Expenses associated directly with the Group's flight operations
(collectively, "flight operations expenses") include fuel costs, operating lease
payments, catering expenses, aircraft insurance, flight personnel payroll and
welfare and training expenses. Expenses associated directly with repairs and
maintenance in respect of the Group's aircraft (collectively, "repairs and
maintenance expenses") include repairs and maintenance and overhaul charges, the
costs of consumables and other maintenance materials and labour costs for
maintenance personnel. Expenses associated directly with the Group's aircraft
and traffic servicing operations (collectively "aircraft and traffic servicing
expenses") include landing and navigation fees, rental payments and charges in
respect of terminal and other ground facilities and labour costs for ground
personnel. The balance of the Group's operating expenses result from promotional
and marketing activities (collectively, "promotional and marketing expenses")
such as sales commissions, fees for use of the CAAC's reservation system,
ticket-printing and sales office expenses, advertising and promotional expenses,
and from general and administrative expenses, such as administrative salaries
and welfare and other personnel benefits and office expenses.
Total operating expenses in 2004 amounted to RMB23,065 million, representing an
increase of 35.6% or RMB6,051 million over 2003, primarily due to the combined
effect of increases in jet fuel costs, maintenance expenses and aircraft and
traffic servicing expenses. Total operating expenses as a percentage of total
operating revenue decreased from 97.4% in 2003 to 96.2% in 2004.
Flight operations expenses, which accounted for 45.2% of total operating
expenses, increased by 47.4% from RMB7,070 million in 2003 to RMB10,418 million
in 2004, primarily as a result of increases in jet fuel costs, operating lease
payments, catering expenses, labour costs for flight personnel and inclusion of
CAAC Infrastructure Development Fund of RMB466 million in operating expenses
which is an usage charge since 2004 but was a turnover-based levy and deducted
against the traffic revenue in 2003. Jet fuel costs, which accounted for 58.1%
of flight operations expenses, increased by 56.5% from RMB3,867 million in 2003
to RMB6,050 million in 2004 mainly as a result of increased fuel prices and fuel
consumption. Operating lease payments increased by 8.4% from RMB1,536 million in
2003 to RMB1,665 million in 2004, primarily due to the additional rental
payments for new aircraft under operating leases. Catering expenses increased by
38.2% from RMB510 million in 2003 to RMB705 million in 2004, primarily due to
increased passenger carried. Aircraft insurance costs decreased by 5.6% from
RMB196 million in 2003 to RMB185 million in 2004, primarily because of a
decrease in insurance premiums prescribed by the PRC insurance company. Labour
costs for flight personnel increased by 40.9% from RMB728 million in 2003 to
RMB1,026 million in 2004, largely due to the increase in flying hours.
Maintenance expenses which accounted for 15.0% of total operating expenses,
increased by 33.6% from RMB2,589 million in 2003 to RMB3,459 million in 2004.
The increase was primarily attributable to an 32.9% increase in aircraft
overhaul charges from RMB2,377 million in 2003 to RMB3,158 million in 2004, as
resulted from fleet expansion in recent years.
14 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Management Discussion and Analysis (Cont'd)
Aircraft and traffic servicing expenses, which accounted for 15.2% of total
operating expenses, increased by 26.6% from RMB2,767 million in 2003 to RMB3,503
million in 2004. The increase primarily resulted from an 25.7% rise in landing
and navigation fees from RMB2,563 million in 2003 to RMB3,222 million in 2004,
due to an increase in number of landing and takeoffs.
Promotional and marketing expenses, which accounted for 8.4% of total operating
expenses, increased by 31.1% from RMB1,480 million in 2003 to RMB1,940 million
in 2004. The increase was due to 44.4% increase in labour costs from RMB225
million in 2003 to RMB325 million in 2004, as more payments of performance bonus
were made because of the increased traffic volume.
General and administrative expenses, which accounted for 5.7% of the total
operating expenses, increased by 25.6% from RMB1,053 million in 2003 to RMB1,323
million in 2004. This was mainly attributable to increased scale of operations.
Depreciation and amortisation, which accounted for 10.5% of total operating
expenses, increased by 18.4% from RMB2,038 million in 2003 to RMB2,413 million
in 2004. This increase was primarily as a result of the additions of aircraft
during 2004.
OPERATING PROFIT
Operating profit increased by 99.3% from RMB456 million in 2003 to RMB909
million in 2004. This was mainly because operating revenue increased by RMB6,504
million or 37.2% from 2003 and operating expenses increased by RMB6,051 million
or 35.6% over the same period.
NON-OPERATING INCOME/(EXPENSES)
Interest expense decreased by 16.1% from RMB824 million in 2003 to RMB691
million in 2004, mainly reflecting the combined effect of scheduled debt
repayments and the replacement of certain RMB denominated bank loans of higher
interest rates with US$ denominated bank loans of lower interest rates.
Interest income increased by 69.2% from RMB13 million in 2003 to RMB22 million
in 2004. This was mainly attributable to an increase in average cash balances.
During 2004, the Group recorded a net exchange loss of RMB59 million (2003:
RMB164 million) mainly from its Japanese yen denominated borrowings as a result
of the Japanese yen appreciation. Such amount comprised mostly unrealised
translational exchange loss.
[PHOTO]
[LOGO] [CHINESE CHARACTERS] 15
CHINA SOUTHERN
Management Discussion and Analysis (Cont'd)
TAXATION
On 17 October, 2003, the Company's registered address was moved to Guangzhou
Economic & Technology Development Zone, Guangzhou, China. 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 from 1 October, 2003. As a
result, the Company's income tax rate has been changed from 33% to 15% beginning
from that date.
In 2003, the Group recorded an income tax credit of RMB324 million resulting
from reduction in net deferred taxation liability balance of RMB392 million. In
2004, income tax expense of RMB78 million was recorded.
MINORITY INTERESTS
Minority interests increased by 18.7% from RMB171 million in 2003 to RMB203
million in 2004, primarily reflecting the increased net profits earned by
certain of the Group's airline subsidiaries for the year.
LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE
As at 31 December, 2004, the Group's borrowings totalled RMB35,072 million,
representing an increase of RMB16,612 million from RMB18,460 million last year.
Such borrowings were denominated, to a larger extent, in United States dollars
and, to a smaller extent, in Japanese yen, Hong Kong dollars and Renminbi, with
a significant portion being fixed interest rate borrowings. Of such borrowings,
RMB13,599 million, RMB4,455 million, RMB6,699 million, RMB3,595 million and
RMB6,724 million will be repayable in 2005, 2006, 2007, 2008, 2009 and
thereafter respectively. As at 31 December, 2004, cash and cash equivalents of
the Group totalling RMB3,083 million, of which 24.2% were denominated in foreign
currencies, increased by 48.2% from RMB2,080 million last year.
Net debts (total borrowings net of cash and cash equivalents) increased by 95.3%
to RMB31,989 million.
As at 31 December, 2004, the Group's shareholders' equity amounted to RMB11,848
million, representing a decrease of RMB48 million from RMB11,896 million last
year.
Net debt/equity ratio of the Group at 31 December, 2004 was 2.70 times, as
compared to 1.38 times last year.
FINANCIAL RISK MANAGEMENT POLICY
In the normal course of business, the Group is exposed to fluctuations in
foreign currencies and jet fuel prices. The Group's exposure to fluctuations in
foreign currencies is a result of its debts which are denominated in foreign
currencies. Depreciation or appreciation of the RMB against foreign currencies
affects the Group's results significantly because the Group's foreign currency
payments generally exceed its foreign currency receipts. The Group is not able
to hedge its foreign currency exposure effectively other than by retaining its
foreign currency denominated earnings and receipts to the extent permitted by
the State Administration of Foreign Exchange, or subject to certain restrictive
conditions, by entering into forward foreign exchange contracts with certain
authorised PRC banks. The Group is required to procure a majority of its jet
fuel domestically at PRC spot market prices. There are currently no effective
means available to manage the Group's exposure to the fluctuations in domestic
jet fuel prices.
16 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Management Discussion and Analysis (Cont'd)
CHARGES ON ASSETS
As at 31 December, 2004, certain aircraft of the Group with an aggregate
carrying value of approximately RMB23,438 million (2003: RMB14,576 million) were
mortgaged under certain loan and lease agreements.
COMMITMENTS AND CONTINGENCIES
At 31 December, 2004, the Group had capital commitments of approximately
RMB26,871 million. Of such amounts, RMB25,347 million related to the acquisition
of aircraft and related flight equipment and RMB824 million related to the
Group's facilities and equipment to be constructed and installed at the new
Guangzhou Baiyun International Airport. The remaining amount of RMB700 million
was related to the Group's other airports and office facilities and equipment,
overhaul and maintenance bases and training facilities.
As at 31 December, 2004, the Group committed to make a capital contribution of
approximately RMB181 million and RMB83 million to its subsidiaries and to its
jointly controlled entities respectively.
Details of the capital and investing commitments are set out in note 30 to the
financial statements prepared under IFRS.
Major contingent liabilities of the Group at 31 December, 2004 are set out in
note 31 to the financial statements prepared under IFRS.
[LOGO] [CHINESE CHARACTERS] 17
CHINA SOUTHERN
Report of the Directors
The Board of Directors of the Company hereby presents this Annual Report and the
audited financial statements for the year ended 31 December, 2004.
PRINCIPAL ACTIVITIES, OPERATING RESULTS AND FINANCIAL POSITION
The Group is principally engaged in airline operations. The Group also operates
certain airline related businesses, including aircraft maintenance and air
catering operations. The Group is one of the largest airlines in China. In 2004,
the Group ranked first among all Chinese airlines in terms of passenger traffic
volume, number of scheduled flights per week, number of hours flown, number of
routes and size of aircraft fleet. The Group has prepared the results of
operations for the year ended 31 December, 2004 and the financial position of
the Company and the Group as of that date in accordance with IFRS and PRC
Accounting Rules and Regulations. See pages 183 to 184 of this Annual Report.
FIVE-YEAR SUMMARY
A summary of the results and the assets and liabilities of the Group prepared
under IFRS for the five-year period ended 31 December, 2004 are set out on pages
185 and 186 of this Annual Report.
DIVIDENDS
No interim dividend was paid during the year ended 31 December, 2004 (2003:
Nil).
The Board of Directors of the Company does not recommend the payment of a final
dividend in respect of the year ended 31 December, 2004 (2003: Nil).
BANK LOANS AND OTHER BORROWINGS
Details of the bank loans and other borrowings of the Company and the Group are
set out in notes 21 and 22 to the financial statements prepared under IFRS.
INTEREST CAPITALISATION
For the year ended 31 December, 2004, RMB34 million (2003: RMB83 million) was
capitalised as the cost of construction in progress and fixed assets.
FIXED ASSETS
Fixed assets of the Company and the Group and movements of fixed assets during
the year ended 31 December, 2004 are set out in note 10 to the financial
statements prepared under IFRS.
MAJOR CUSTOMERS AND SUPPLIERS
The percentage of turnover attributable to the Group's five largest customers in
aggregate was less than 30% of the Group's total operating revenue (i.e.
turnover) for the year ended 31 December, 2004.
The percentage of purchases attributable to the largest supplier and the five
largest suppliers in aggregate represented approximately 80% and 89%
respectively of the Group's total purchases (not including purchases of items
which are of a capital nature) for the year ended 31 December, 2004.
18 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Report of the Directors (Cont'd)
At no time during the year have the Directors, their associates or any
shareholder of the Company (which to the knowledge of the Directors owns more
than 5% of the Company's share capital) had any interest in the Group's five
largest customers or suppliers.
TAXATION
Details of taxation of the Company and the Group are set out in note 7 to the
financial statements prepared under IFRS.
RESERVES
Movements in the reserves of the Company and the Group during the year are set
out in note 27 to the financial statements prepared under IFRS.
EMPLOYEES AND EMPLOYEES' PENSION SCHEME
As at 31 December, 2004, the Group had an aggregate of 18,221 employees (2003:
17,569). Details of the employees' pension schemes and other welfare are set out
in note 29 to the financial statements prepared under IFRS.
SUBSIDIARIES
Details of the principal subsidiaries of the Company are set out in note 37 to
the financial statements prepared under IFRS.
SHARE CAPITAL STRUCTURE
CHANGE IN SHARE CAPITAL
There was no change in the share capital of the Company for the year ended 31
December, 2004.
SHARE CAPITAL STRUCTURE
APPROXIMATE
PERCENTAGE OF
TOTAL SHARE CAPITAL
TYPE OF SHARES NUMBER OF SHARES (%)
------------------------------------- -------------------- -------------------
1. Unlisted shares
State-owned shares 2,200,000,000 shares 50.30
2. Listed shares
(a) Overseas listed foreign shares 1,174,178,000 shares 26.84
(H Shares)
(b) Domestic listed ordinary shares
(A Shares) 1,000,000,000 shares 22.86
-------------------- ------
Total share capital 4,374,178,000 shares 100.00
==================== ======
[LOGO] [CHINESE CHARACTERS] 19
CHINA SOUTHERN
Report of the Directors (Cont'd)
SUBSTANTIAL SHAREHOLDERS
As at 31 December, 2004 so far as was known to the Directors and supervisors
(the "Supervisors") of the Company, the interests and short positions of the
following persons other than the Directors or Supervisors of the Company in the
shares and underlying shares of the Company which would fall to be disclosed to
the Company under the provisions of Divisions 2 and 3 of Part XV of the
Securities and Futures Ordinance (the "SFO") or who were, directly or
indirectly, interested in 10% or more of the nominal value of any class of share
capital carrying rights to vote in all circumstances at general meeting of any
other members of the Group, or had any option in respect of such capital are set
out below:
% OF THE % OF THE % OF THE TOTAL
TOTAL ISSUED H TOTAL ISSUED ISSUED SHARE
NAME OF TYPE OF TYPE OF NUMBER OF SHARES OF THE DOMESTIC SHARES CAPITAL OF
SHAREHOLDERS SHAREHOLDING SHARES SHARES HELD COMPANY OF THE COMPANY THE COMPANY SHORT POSITION
-------------- -------------- ----------------- ------------- -------------- --------------- -------------- --------------
CSAHC Direct holding State-owned 2,200,000,000 - 68.75% 50.30% -
shares (A Shares)
HKSCC Nominees Direct holding H Shares 1,151,953,998 98.11% - 26.34% -
Limited
Notes:
Based on the information available to the Directors and Supervisors of the
Company (including such information as was available on the website of The Stock
Exchange of Hong Kong Limited (the "Hong Kong Stock Exchange") and so far as the
Directors and Supervisors are aware, as at 31 December, 2004:
1. Among the 1,151,953,998 H Shares held by HKSCC Nominees Limited, Li
Ka-Shing Unity Trustcorp Limited had an interest in an aggregate of
193,877,000 H Shares of the Company (representing approximately 16.51% of
its then total issued H Shares) in the capacity as beneficiary of a trust.
2. Among the 1,151,953,998 H Shares held by HKSCC Nominees Limited, JPMorgan
Chase & Co. had an interest in an aggregate of 95,788,800 H Shares of the
Company (representing approximately 8.16% of its then total issued H
Shares). Out of the 95,788,800 H Shares, JPMorgan Chase & Co. had an
interest in a lending pool comprising 8,038,000 H Shares of the Company
(representing approximately 0.68% of its then total issued H Shares).
According to the information as disclosed in the website of the Hong Kong
Stock Exchange and so far as the Directors and Supervisors are aware,
JPMorgan Chase & Co. held its interest in the Company in the following
manners:
(a) 8,038,000 H Shares in a lending pool, representing approximately
0.68% of the Company's then total issued H Shares, were held by J.P.
Morgan Chase Bank, N.A. which was 100% held by JPMorgan Chase & Co.;
(b) 1,064,800 H Shares, representing approximately 0.09% of the
Company's then total issued H Shares, were held in the capacity as
beneficial owner by J.P. Morgan Whitefriars Inc., which was
ultimately 100% held by JPMorgan Chase & Co.;
(c) 84,536,000 H Shares, representing approximately 7.20% of the
Company's then total issued H Shares, were held in the capacity as
investment manager by JF Asset Management Limited, which was
approximately 99.99% held by J.P. Morgan Fleming Asset Management
(Asia) Inc., which was ultimately 100% held by JPMorgan Chase & Co.;
and
20 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Report of the Directors (Cont'd)
(d) 2,150,000 H Shares, representing approximately 0.18% of the
Company's then total issued H Shares, were held in the capacity as
beneficial owner by JF International Management Inc., which was
ultimately 100% held by JPMorgan Chase & Co.
3. Among the 1,151,953,998 H Shares held by HKSCC Nominees Limited, Morgan
Stanley International Incorporated had an interest in an aggregate of
111,121,932 H Shares of the Company (representing approximately 9.46% of
its then total issued H Shares). According to the information as disclosed
on the website of the Hong Kong Stock Exchange and so far as the Directors
and Supervisors are aware, Morgan Stanley International Incorporated which
was (or its directors were) accustomed to act in accordance with the
directors of Morgan Stanley, held its indirect interest in the Company as
at 31 December, 2004 in the manner as follows:
(a) 743,322 H Shares, representing approximately 0.06% of the Company's
then total issued H Shares, were held by Morgan Stanley Dean Witter
Hong Kong Securities Limited, which was ultimately 100% held by
Morgan Stanley Asia Pacific (Holdings) Limited, which, in turn, was
90% held by Morgan Stanley International Incorporated;
(b) 108,670,000 H Shares, representing approximately 9.25% of the
Company's then total issued H Shares, were held by Morgan Stanley
Investment Management Company, which was ultimately 100% held by
Morgan Stanley Asia Pacific (Holdings) Limited, which, in turn, was
90% held by Morgan Stanley International Incorporated;
(c) 292,600 H Shares, representing approximately 0.02% of the Company's
then total issued H Shares, were held by Morgan Stanley Asset &
Investment Trust Management Co. Limited, which was 100% held by
Morgan Stanley International Incorporated;
(d) 714,000 H Shares, representing approximately 0.06% of the Company's
then total issue H Shares, were held by Morgan Stanley & Co
International Limited, which was ultimately 100% held by Morgan
Stanley Group (Europe), which, in turn, was approximately 98.30%
held by Morgan Stanley International Limited, in which Morgan
Stanley International Incorporated held 100% control; and
(e) 702,000 H Shares, representing approximately 0.06% of the Company's
then total issued H Shares, were held by Morgan Stanley Capital
(Luxembourg) S.A., which was approximately 93.75% held by Morgan
Stanley International Incorporated.
According to the information as disclosed on the website of the Hong Kong
Stock Exchange and so far as the Directors and Supervisors are aware, as
at 31 December, 2004, Morgan Stanley Dean Witter Hong Kong Securities
Limited also had a short position in 616,000 H Shares of the Company
(representing approximately 0.05% of its then total issued H Shares).
4. Among the 1,151,953,998 H Shares held by HKSCC Nominees Limited,
96,938,500 H Shares, representing approximately 8.26% of the Company's
then total issued H Shares, were held by Space Dragon Limited as
beneficial owner, which was 100% held by Cheung Kong Investment Company
Limited.
5. Among the 1,151,953,998 H Shares held by HKSCC Nominees Limited,
96,938,500 H Shares, representing approximately 8.26% of the Company's
then total issued H Shares, were held by Choicewell Limited as beneficial
owner, which was ultimately 100% held by Hutchison Whampoa Limited.
Save as disclosed above, as at 31 December, 2004, so for as was known to the
Directors and Supervisors of the Company, no other person (other than the
Directors or Supervisors) had an interest or short position in the shares or
underlying shares of the Company under the provisions of Divisions 2 and 3 of
Part XV of the SFO or who were, directly or indirectly, interested in 10% or
more of the nominal value of any class of share capital carrying rights to vote
in all circumstances at general meeting of any other members of the Group.
[LOGO] [CHINESE CHARACTERS] 21
CHINA SOUTHERN
Report of the Directors (Cont'd)
PARTICULARS OF SHAREHOLDERS
The total number of shareholders of the Company as at 31 December, 2004 was
115,847, of which 113,618 were shareholders of A Shares and 2,229 were
shareholders of H Shares.
Particulars of shareholdings of the Company's ten largest shareholders as at the
end of the reporting period are as follows:
SHAREHOLDINGS OF THE TEN LARGEST SHAREHOLDERS
MOVEMENT SHAREHOLDINGS
DURING AT THE END OF PLEDGED OR
NAME OF THE YEAR THE YEAR PERCENTAGE TYPE OF FROZEN NATURE OF
NO. SHAREHOLDERS (SHARE) (SHARE) % SHARES SHARES SHARES HELD
--- ------------ ------------ ------------- ---------- -------- ---------- -----------
1. CSAHC 0 2,200,000,000 50.30 Unlisted Unknown State-owned
shares
2. HKSCC NOMINEES LIMITED 1,998,000 1,151,953,998 26.34 Listed Unknown H Shares
3. Bank of China - Huaxia
Return Securities
Investment Fund (21,126,482) 35,739,259 0.82 Listed Unknown A Shares
4. Huaxia Growth Securities
Investment Fund (28,447,027) 30,552,973 0.70 Listed Unknown A Shares
5. China Merchant Bank
Co., Ltd. - Zhong Xin
Jing Dian Pei Zhi Securities
Investment Fund 30,530,870 30,530,879 0.70 Listed Unknown A Shares
6. The Industrial and
Commercial Bank of
China - Galaxy Yin Tai Li
Cai Fen Hong Securities
Investment Fund 24,291,931 24,291,931 0.56 Listed Unknown A Shares
7. Bank of China - Jiashi Service
Value-added Industry
Securities Investment Fund 23,861,475 23,861,475 0.55 Listed Unknown A Shares
8. Yinfeng Securities
Investment Fund (2,386,412) 23,310,956 0.53 Listed Unknown A Shares
9. Bank of Communications
- Yi Fang Da 50 Index
Securities Investment Fund 22,024,754 22,024,754 0.50 Listed Unknown A Shares
10. Xinghua Securities
Investment Fund (10,284,269) 19,875,921 0.45 Listed Unknown A Shares
22 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Report of the Directors (Cont'd)
PURCHASE, SALE OR REDEMPTION OF SHARES
Neither the Company nor any of its subsidiaries purchased, sold or redeemed any
shares of the Company during the year ended 31 December, 2004.
PRE-EMPTIVE RIGHTS
Neither the Articles of Association of the Company nor the laws of the PRC
provide for any pre-emptive rights requiring the Company to offer new shares to
existing shareholders in proportion to their existing shareholdings.
AUDIT COMMITTEE
The audit committee of the Company has reviewed and confirmed this Annual
Report.
THE MODEL CODE
Having made specific enquiries with all the Directors of the Company, the
Directors have for the year ended 31 December, 2004 complied with the Model Code
for Securities Transactions by Directors of Listed Issuers as set out in
Appendix 10 of the Rules Governing the Listing of Securities on the Hong Kong
Stock Exchange (the "Listing Rules"). The Company has not adopted a code of
conduct less stringent than the Model Code for Securities Transactions by
Directors of Listed Issuers regarding securities transactions of the Directors.
COMPLIANCE WITH THE CODE OF BEST PRACTICE
In the opinion of the Directors of the Company, the Group has complied with the
Code of Best Practice set out in Appendix 14 of the Listing Rules issued by the
Hong Kong Stock Exchange throughout the year ended 31 December, 2004.
[LOGO] [CHINESE CHARACTERS] 23
CHINA SOUTHERN
Report of the Directors (Cont'd)
DIRECTORS, SUPERVISORS AND SENIOR ADMINISTRATIVE OFFICERS
Directors, Supervisors and senior administrative officers of the Company in 2004
were as follows:
NAME POSITION GENDER AGE
---- -------- ------ ---
Liu Shao Yong Chairman of the Board of Directors Male 46
Liu Ming Qi Vice Chairman of the Board of Directors Male 61
Peng An Fa Director Male 57
Wang Quan Hua Director Male 51
Zhao Liu An Director Male 57
Zhou Yong Qian Director Male 60
Si Xian Min Director, President Male 47
Zhou Yong Jin Director Male 62
Xu Jie Bo Director, Chief Financial Officer, Vice President Male 40
Wu Rong Nan Director Male 63
Simon To Independent Non-executive Director Male 54
Peter Lok Independent Non-executive Director Male 69
Wei Ming Hai Independent Non-executive Director Male 41
Wang Zhi Independent Non-executive Director Male 63
Sui Guang Jun Independent Non-executive Director Male 44
Sun Xiao Yi Chairman of the Supervisory Committee Male 51
Yang Guang Hua Supervisor Male 52
Yang Yi Hua Supervisor Female 45
Li Kun Vice President Male 45
Yuan Xin An Vice President, Chief Engineer Male 48
Zheng En Ren Vice President Male 60
Hao Jian Hua Vice President Male 55
Ren Ji Dong Vice President Male 40
He Zong Kai Vice President Male 53
Liu Qian Chief Pilot Male 40
Su Liang Company Secretary Male 43
Chen Wei Hua General Counsel Male 38
On 16 June, 2004, the appointment of Sun Xiao Yi, Yang Guang Hua and Yang Yi Hua
as Supervisors, and the resignation of Liang Hua Fu, Gan Yu Hua and Li Qi Hong
as Supervisors were approved at the annual general meeting of the shareholders
of the Company. On the same date, the Supervisory Committee of the Company
elected Sun Xiao Yi as the chairman of the Supervisory Committee of the Company.
On 8 October, 2004, the resignation of Yan Zhi Qing as the chairman of the Board
of Directors of the Company was approved by the Board of Directors.
24 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Report of the Directors (Cont'd)
On 28 October, 2004, the appointment of Si Xian Min as the president of the
Company, and the resignation of Wang Chang Shun as the president of the Company
were approved by the Board of Directors.
On 29 November, 2004, the appointment of Liu Shao Yong as a Director, and the
resignation of Yan Zhi Qing as a Director for age reason were approved at the
first extraordinary general meeting of the shareholders of the Company. On the
same date, the Board of Directors of the Company elected Liu Shao Yong as the
chairman of the Company.
On 31 December, 2004, the appointment of Si Xian Min as a Director, and the
resignation of Wang Chang Shun as a Director were approved at the second
extraordinary general meeting of the shareholders of the Company.
On 29 March, 2005, the appointment of Ren Ji Dong and He Zong Kai as the vice
presidents of the Company, and the removal of Jiang Ping as a vice president of
the Company were approved by the Board of Directors.
Biographical details of the Board of Directors, senior administrative officers
and members of the Supervisory Committee are set out on pages 187 to 191 of this
Annual Report.
INTERESTS AND SHORT POSITION OF DIRECTORS AND SUPERVISORS IN THE COMPANY AND
ASSOCIATED CORPORATIONS
As at 31 December, 2004, the interests and short positions of the Directors and
Supervisors of the Company and their respective associates in the shares,
underlying shares and debentures (as the case may be) of the Company or its
associated corporations (within the meaning of Part XV of the SFO) which were
notified to the Company and the Hong Kong Stock Exchange pursuant to Divisions 7
and 8 of Part XV of SFO (including interests or short positions which are taken
or deemed to have under such provisions of the SFO), or recorded in the register
maintained by the Company pursuant to Section 352 of the SFO or which were
notified to the Company and the Hong Kong Stock Exchange pursuant to the Model
Code for Securities Transactions by Directors of the Listed Issuers in Appendix
10 of the Listing Rules are as follows:
% TO THE % TO THE
% TO THE TOTAL TOTAL
TOTAL ISSUED ISSUED
THE ISSUED DOMESTIC SHARE
COMPANY/ NUMBER H SHARES SHARES CAPITAL
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 H Shares 100,000 0.009% - 0.002% -
spouse
(note 1)
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.
[LOGO] [CHINESE CHARACTERS] 25
CHINA SOUTHERN
Report of the Directors (Cont'd)
Save as disclosed above, as at 31 December, 2004, none of the Directors or
Supervisors of the Company and their respective associates had interests or
short positions in the shares, underlying shares and/or debentures (as the case
may be) of the Company or its associated corporations (within the meaning of
Part XV of the SFO) which were notified to the Company and the Hong Kong Stock
Exchange pursuant to Divisions 7 and 8 of Part XV of SFO (including interests or
short positions which he was taken or deemed to have under such provisions of
the SFO), or recorded in the register maintained by the Company pursuant to
Section 352 of the SFO or which were notified to the Company and the Hong Kong
Stock Exchange pursuant to the Model Code for Securities Transactions by
Directors of the Listed Issuers in Appendix 10 of the Listing Rules.
The Company has received from each independent non-executive Director an annual
confirmation of his independence pursuant to Rule 3.13 of the Listing Rules and
the Company still considers such independent non-executive Directors to be
independent.
SERVICE CONTRACTS OF THE DIRECTORS AND SUPERVISORS
All Directors and Supervisors of the Company have entered into service contracts
with the Company for a term of three years commencing on 16 June, 2004 (except
that the service contract of Mr. Liu Shao Yong and Mr. Si Xian Min which
commenced from 29 November, 2004 and 31 December, 2004 respectively will expire
at the end of the term for the current session of the Board). Except for such
service contracts, none of the Directors or Supervisors of the Company has
entered or proposed to enter into any 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.
SUFFICIENT PUBLIC SHAREHOLDERS
According to the information obtained by the Company through public channels,
and so far as the Directors are aware of as at the latest practicable date
before the publishing of this Annual Report, the Company has been maintaining
sufficient public shareholders to comply with the Listing Rules during the year.
INTERESTS OF DIRECTORS AND SUPERVISORS IN CONTRACTS
In the year ended 31 December, 2004, none of the Directors or Supervisors of the
Company had a material interest in any contract of significance to which the
Company or any of its subsidiaries was a party.
CONNECTED TRANSACTIONS
The Company enters into certain connected transactions with CSAHC and other
connected persons from time to time. Such transactions fall within the
definition of connected transactions set out in Chapter 14A of the Listing Rules
of the Hong Kong Stock Exchange. Details of such transactions conducted during
the year and/or the related agreements entered into between the Company and such
parties are disclosed as follows:
(A) DE-MERGER AGREEMENT
The De-merger Agreement dated 25 March, 1995 (such Agreement was amended
by Amendment No.1 dated 22 May, 1997) was entered into between the CSAHC
and the Company for the purpose of defining and allocating the assets and
liabilities between CSAHC and the Company. Under the De-merger Agreement,
CSAHC and the Company have agreed to indemnify the other party against
claims, liabilities and expenses incurred by such other party relating to
the businesses, assets and liabilities held or assumed by CSAHC or the
Company (as the case may be) pursuant to the De-merger Agreement.
Neither the Company nor CSAHC has made any payments in respect of such
indemnification obligations from the date of the De-merger Agreement up to
the date of this report.
26 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Report of the Directors (Cont'd)
(B) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION
The Company, CSAHC, China Northern Airlines Company ("Northern Airlines"),
a wholly owned subsidiary of CSAHC, and Xinjiang Airlines Company
("Xinjiang Airlines"), a wholly owned subsidiary of CSAHC, entered into a
sale and purchase agreement (the "VSA Sale and Purchase Agreement") dated
12 November, 2004 pursuant to which the Company agreed to acquire, and
CSAHC, Northern Airlines and Xinjiang Airlines agreed to sell certain
airlines and airlines-related operations, assets and properties of
Northern Airlines, Xinjiang Airlines 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 Xinjiang
Airlines, Northern Airlines and their respective subsidiaries in
connection with their civil aviation business.
The total consideration, including the assumption of the debts under the
VSA Sale and Purchase Agreement was RMB15,397,524,000.
The purposes of entering into the VSA Sale and Purchase Agreement and the
transactions thereunder were to 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 Group's position as one
of PRC's largest airlines and enhancing its value for its investors.
(C) CONTINUING CONNECTED TRANSACTIONS BETWEEN THE COMPANY, CSAHC AND THEIR
RESPECTIVE ASSOCIATES
The Company and CSAHC and their respective subsidiaries were a single
group prior to the restructuring of CSAHC in 1995 in anticipation of the
Company's global offering ("Restructuring"). As a result, certain
arrangements between them have continued after the Restructuring and the
listing of the Company's shares on the Hong Kong Stock Exchange, New York
Stock Exchange and Shanghai Stock Exchange. At present, the Company and
CSAHC (or their respective subsidiaries) have entered into the following
agreements:
(a) SOUTHERN AIRLINES (GROUP) IMPORT AND EXPORT TRADING COMPANY
("SAIETC"), A WHOLLY OWNED SUBSIDIARY OF CSAHC
The Company and SAIETC entered into an agreement dated 22 May, 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 from 22 May, 1997 to 22 May, 2000
which was subsequently extended to 2006 by mutual agreement between
the parties. The parties have mutually agreed that the agreement can
be extended automatically.
For the year ended 31 December, 2004, the amount incurred by the
Group for the import and export of the above equipment was
RMB1,117,289,000, inclusive of agency commission of 1.5% above the
contract prices paid to SAIETC.
[LOGO] [CHINESE CHARACTERS] 27
CHINA SOUTHERN
Report of the Directors (Cont'd)
(b) SOUTHERN AIRLINES ADVERTISING COMPANY, WHICH IS 45% OWNED BY THE
COMPANY AND 55% OWNED BY CSAHC ("CSAHC")
On 26 August, 2002, the Company had entered into a takeover
agreement with CSAHC. As a result, the Company owns 90% and CSAHC
owns 10% of Southern Airlines Advertising Company.
On 3 September, 2004, CSAHC increased its shareholdings from 10% to
55% by the creation of RMB3 million authorised share capital from
RMB2 million. Such capital injection from CSAHC diluted the
Company's shareholdings of Southern Airlines Advertising Company
from 90% to 45%.
The Company and Southern Airlines Advertising Company have entered
into an agreement dated 22 May, 1997 for the provision of
advertising services for a term extending from 22 May, 1997 to 22
May, 2000. After extension of three years, the parties have mutually
agreed to extend the agreement for another three years to 22 May,
2006.
For the year ended 31 December, 2004, the amount incurred by the
Group to Southern Airlines Advertising Company for advertising
services was RMB1,166,000.
(c) 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 entered into a financial agreement dated 22 May, 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 commencing from 22 May, 1997 to 22
May, 2000. As agreed by the parties, the agreement was extended for
six years to 22 May, 2006. In order to comply with the new
requirements under the 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 Listing Rules), the Company and SA Finance
entered into a new financial agreement on 12 November, 2004,
commencing from that date for a period of three years, 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.
As SA Finance is a connected person of the Company under the Listing
Rules, the financial agreement constitutes a discloseable and
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
independent shareholders of the Company approved the financial
agreement at the second extraordinary general meeting of the Company
held on 31 December, 2004.
Under such agreement, SA Finance agrees to provide to the Company
the following financial services:
(a) accept deposit of money from the Company at interest rates not
lower than those set by the People's Bank of China for the
same term of deposit. SA Finance 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;
28 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Report of the Directors (Cont'd)
(b) make loans to the Company subject to the entering into of separate
loan agreements, which will set out the maximum aggregate annual
value ("Cap"), terms and conditions of the loans, upon application
by the Company during the term of the financial agreement. The
Company will comply with the 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 to the Company must not exceed the sum of SA Finance's
shareholders' equity, capital reserves and money deposit received
from other parties (except the Company); and
(c) 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
Listing Rules when entering into such separate written agreements.
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.
The Cap for the provision of deposit service under the financial agreement
is set at RMB1 billion per year. The Company usually receives interest on
its money deposited with SA Finance at rates which are more favourable
than the benchmark interest rates set by the People's Bank of China,
usually in the range between the benchmark interest rates set by the
People's Bank of China 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 SA Finance than the benchmark rates of
interest set by the People's Bank of China that the PRC commercial banks
can offer to the Company.
Subject to the entering into of further separate agreements, the Company
can borrow from SA Finance at interest rates not higher than those set by
the People's Bank of China for similar loans. In addition, the Company is
not precluded under the financial 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 People's Bank of China, which are
comparable to the rates charged by PRC commercial banks for similar
services.
As of 31 December, 2004, the Group's deposits placed with SA Finance
amounted to RMB406 million, which bore interest at the rate of 0.62% to
1.62% per annum.
[LOGO] [CHINESE CHARACTERS] 29
CHINA SOUTHERN
Report of the Directors (Cont'd)
(d) 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 entered into
an agreement dated 23 May, 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 will supply in-flight meals to the Group from time
to time during the term from 23 May, 1997 to 23 May, 1998. The
parties have mutually agreed that the agreement can be extended
automatically.
For the year ended 31 December, 2004, the amount incurred by the
Group to Shenzhen Air Catering Company Limited for the provision of
in-flight meals was approximately RMB50,197,000.
(e) GUANGZHOU AIRCRAFT MAINTENANCE ENGINEERING COMPANY LIMITED
("GAMECO"), WHICH IS 50% OWNED BY THE COMPANY AND 50% OWNED BY TWO
INDEPENDENT THIRD PARTIES
The Company and GAMECO had entered into an Aircraft Maintenance and
Engineering Agreement for the provision of aircraft repair and
maintenance services. On 17 May, 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 labour costs at US$30.0 per hour during 2004.
For the year ended 31 December, 2004, the amount incurred by the
Group for such repair and maintenance services was RMB659,850,000.
(f) 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 and the Australian Pilot College entered into an agreement
dated 7 October, 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 De-merger Agreement, the Company has assumed all the
interests, rights and obligations of CSAHC under the Training
Agreement.
For the year ended 31 December, 2004, the amount paid by the Group
to the Australian Pilot College for training services was
RMB79,436,000.
(g) SOUTHERN AIRLINES (GROUP) ECONOMIC DEVELOPMENT COMPANY, WHICH IS 61%
OWNED BY CSAHC AND 39% OWNED BY AN INDEPENDENT THIRD PARTY
The Company and Southern Airlines (Group) Economic Development
Company entered into an agreement dated 22 May, 1997 for the
provision of drinks, snacks, liquor, souvenirs and other products
for a term extending from 22 May, 1997 to 22 May, 2007.
For the year ended 31 December, 2004, 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 RMB65,637,000.
30 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Report of the Directors (Cont'd)
(h) GUANGZHOU NANLAND AIR CATERING COMPANY LIMITED ("NANLAND"), WHICH IS 51%
OWNED BY THE COMPANY AND 49% OWNED BY AN INDEPENDENT THIRD PARTY
The Company and Nanland entered into a catering agreement dated 22 May,
1999 for the sale and purchase of in-flight meals for flights originating
or stopping at the airport in Guangzhou. Pursuant to such agreement,
Nanland will supply in-flight meals to the Company from time to time
during the term from 22 May, 1999 to 22 May, 2000. The agreement will then
be automatically renewed annually.
For the year ended 31 December, 2004, the amount paid by the Group to
Nanland for the provision of in-flight meals was RMB105,756,000.
(i) TICKET SALES ARRANGEMENTS
The Group 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 commission on the basis of the rates stipulated by the CAAC
and International Air Transport Association ("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 regional/ international
tickets. 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 Group.
For the year ended 31 December, 2004, the aggregate amount of ticket sales
of the Group conducted through the Agents was RMB32,008,000.
(j) CHINA SOUTHERN AIRLINES GROUP AIR CATERING COMPANY LIMITED (THE "CATERING
COMPANY"), A WHOLLY OWNED SUBSIDIARY OF CSAHC
The Company and the Catering Company entered into a catering agreement
dated 12 November, 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
million per year.
[LOGO] [CHINESE CHARACTERS] 31
CHINA SOUTHERN
Report of the Directors (Cont'd)
(D) TRADEMARK LICENCE AGREEMENT
The Company and CSAHC entered into a ten year trademark licence agreement
dated 22 May, 1997 pursuant to which CSAHC acknowledges that the Company
has the right to use the name "China Southern" and "China Southern
Airlines" in both Chinese and English, and grants the Company a renewable
royalty free licence to use the kapok logo on a worldwide basis in
connection with the Company's airline and airline-related businesses.
Unless CSAHC gives a written notice of termination three months before the
expiration of the agreement, the agreement will be automatically renewed
for another ten-year term.
(E) LEASES
The Company, as leasee, and CSAHC, as leasor, entered into the following
lease agreements:
(a) The Company and CSAHC entered into a land lease agreement dated 22
May, 1997, in respect of the land used by the Company within
Guangzhou Baiyun International Airport. The rental payment is
RMB2,650,700 per year. The term of the lease is five years
commencing 1 April, 1997, renewable by both parties thereafter
(subject to mutual agreement with respect to rental terms).
(b) The Company and CSAHC separately entered into four lease agreements
dated 22 May, 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
RMB15,745,000 per year. The term of each lease is one year,
renewable by the parties thereafter (subject to mutual agreement
with respect to rental terms).
(c) The Company and CSAHC entered into an indemnification agreement
dated 22 May, 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.
(d) The Company, CSAHC and Northern Airlines entered into a lease
agreement dated 12 November, 2004, under which 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. The lease 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 lessor three months before the end of the fixed
term. The consideration for lease agreement is RMB41,993,318 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 RMB41,993,318 per year.
(e) The Company, CSAHC and Xinjiang Airlines entered into a lease
agreement dated 12 November, 2004, under which 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. 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 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
RMB5,797,909 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 RMB5,797,909 per year.
32 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Report of the Directors (Cont'd)
(f) The Company and CSAHC entered into a lease agreement dated 12
November, 2004, under which 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 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 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 designed lands under
lease agreement 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. The Cap for the lease agreement is
set at RMB22,298,033 per year.
(F) COMPREHENSIVE SERVICES AND EMPLOYEE BENEFITS
The Company and CSAHC entered into a comprehensive services agreement (the
"Services Agreement") dated 22 May, 1997.
The Services Agreement provides that CSAHC shall sell or rent housing to
eligible employees of the Group at lower than market price. As the housing
is sold or rented below cost and the construction costs of the leased
housing were originally paid by CSAHC, the Company shall pay CSAHC RMB85
million per year, payable quarterly in arrears, for a term of ten years
from 1995 to 2004.
(G) ONGOING CONNECTED TRANSACTIONS BETWEEN THE COMPANY, NORTHERN AIRLINES,
XINJIANG AIRLINES AND THEIR RESPECTIVE ASSOCIATES
CHINA NORTHERN AIRLINES COMPANY, A WHOLLY OWNED SUBSIDIARY OF CSAHC
Northern Airlines is principally engaged in commercial airline services in
the PRC with its headquarters based in Shenyang, East Northern part of the
PRC. Following the announcement of the consolidation and restructuring
among CSAHC, Northern Airlines and Xinjiang Airlines on 11 October, 2002
(the "Consolidation and Restructuring"), Northern Airlines has become a
wholly owned subsidiary of CSAHC and a connected person of the Company
under the Listing Rules. The following agreements have been terminated
following the acquisition of the core operational assets of Northern
Airlines and Xinjiang Airlines on 31 December, 2004.
XINJIANG AIRLINES COMPANY, A WHOLLY OWNED SUBSIDIARY OF CSAHC
Xinjiang Airlines is principally engaged in commercial airline services in
the PRC with its headquarters based in Urumqi, Xinjiang. Following the
Consolidation and Restructuring, Xinjiang Airlines has become a wholly
owned subsidiary of CSAHC and a connected person of the Company under the
Listing Rules. The following agreements have been terminated following the
acquisition of the core operational assets of Northern Airlines and
Xinjiang Airlines on 31 December, 2004.
(a) In-flight Meals Arrangement with Northern Airlines
Nanland has been providing and will provide in-flight meals to
Northern Airlines. Pursuant to an agreement dated 23 June, 2000,
Nanland has been providing in-flight meals to Northern Airlines from
time to time for a period of one year. The agreement will then be
automatically renewed annually. For the year ended 31 December,
2004, the amount paid by Northern Airlines to Nanland for the
provision of in-flight meals was approximately RMB5,221,000.
[LOGO] [CHINESE CHARACTERS] 33
CHINA SOUTHERN
Report of the Directors (Cont'd)
Pursuant to an agreement dated 30 October, 2001, Northern Airlines
has been providing and will continue to provide in-flight meals to
the Group from time to time for a period of one year. The agreement
will then be automatically renewed annually.
For the year ended 31 December, 2004, the amount paid by the Group
to Northern Airlines for the provision of in-flight meals was
approximately RMB3,303,000.
(b) In-flight Meals Arrangement with Xinjiang Airlines
Pursuant to an agreement dated 24 March, 2001, Nanland has been
providing and will continue to provide in-flight meals to Xinjiang
Airlines from time to time for a period of one year. The agreement
will then be automatically renewed annually.
For the year ended 31 December, 2004, the amount paid by Xinjiang
Airlines to Nanland for the provision of in-flight meals was
approximately RMB2,326,000.
Pursuant to an agreement dated 20 September, 1999, Xinjiang Airlines
has been providing and will provide in-flight meals to the Group for
a period of one year. The agreement will then be automatically
extended annually. The amount paid by the Group to Xinjiang Airlines
for the provision of in-flight meals for the year ended 31 December,
2004 was approximately RMB2,298,050.
(c) Ticket Sales Arrangement with Northern Airlines
In accordance with the relevant requirement and industry practice,
the Group has entered into ticket agency arrangement with Northern
Airlines for the sale of the Group's air tickets by Northern
Airlines and for the sale of Northern Airlines air tickets by the
Group. The selling party charges 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 regional and international tickets. These
commission rates are based on the rates stipulated by the CAAC and
IATA. The amount of commission paid by Northern Airlines to the
Group for the year ended 31 December, 2004 was approximately
RMB160,848,000. The amount of commission paid by the Group to
Northern Airlines for the year ended 31 December, 2004 was
approximately RMB13,074,000.
The amounts payable under the above aforesaid transactions are based
on the rates stipulated by the CAAC and IATA.
(d) Ticket Sales Arrangement with Xinjiang Airlines
The Group has entered into ticket agency arrangement with Xinjiang
Airlines for the sale of the Group's air tickets by Xinjiang
Airlines and for the sale of Xinjiang Airlines air tickets by the
Group. The selling party charges 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 regional and international tickets. These
commission sales are based on the rates stipulated by the CAAC and
IATA. The amount of commission paid by Xinjiang Airlines to the
Group for the year ended 31 December, 2004 was approximately
RMB78,207,000. The amount of commission paid by the Group to
Xinjiang Airlines for the year ended 31 December, 2004 was
approximately RMB7,585,000.
The amounts payable under the above aforesaid transactions are based
on the rates stipulated by the CAAC and IATA.
34 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Report of the Directors (Cont'd)
The Independent Non-Executive Directors of the Company have confirmed to
the Board of Directors of the Company that they have reviewed the
connected transactions described in (C) through (G) above (the "Reviewed
Transactions") and have concluded that:
(a) the Reviewed Transactions have been entered into by the Group in the
ordinary and usual course of its business;
(b) the Reviewed Transactions have been entered into either (A) on
normal commercial terms (by reference to transactions of a similar
nature made by similar entities within the PRC) or (B) (where there
is no available comparison) on terms no less favourable to the Group
than terms available to or from (as appropriate) independent third
parties; and
(c) the Reviewed Transactions have been performed in accordance with the
terms of the relevant agreement governing each such Reviewed
Transaction on terms that are fair and reasonable so far as the
shareholders of the Company are concerned.
The auditors of the Company have reviewed the Reviewed Transactions and
provided the Board of Directors with a letter stating that:
(a) the Reviewed Transactions have been approved by the Board of
Directors;
(b) nothing came to their attention that caused them to believe that the
Reviewed Transactions:
- were not conducted in accordance with the terms of the
relevant agreement; and
- have exceeded the Cap disclosed in the previous
announcement(s).
DONATIONS
During the year, the Group made donations for charitable purposes amounting to
RMB9 million.
DESIGNATED DEPOSITS AND OVERDUE TIME DEPOSITS
As at 31 December, 2004, the Group's deposits placed with financial institutions
or other parties did not include any designated deposits, or overdue time
deposits against which the Group failed to receive repayments.
[LOGO] [CHINESE CHARACTERS] 35
CHINA SOUTHERN
Report of the Directors (Cont'd)
MATERIAL LITIGATION
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
Group (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. As the defendants failed to perform the
agreement, UASSC should have 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, is being claimed for unspecified
damages for breach of the agreement. 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. On 3 May, 2004, the court made an award
in favour of the Company for the transfer to the PRC, against which the
plaintiff has filed an appeal.
AUDITORS
A resolution is to be proposed at the forthcoming annual general meeting of the
Company for the reappointment of KPMG as the international auditors of the
Company and of KPMG Huazhen as the PRC auditors of the Company.
By order of the Board of Directors
LIU SHAO YONG
Chairman
Guangzhou, the PRC
25 April, 2005
36 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Report of the Supervisory Committee
Dear Shareholders,
In 2004, the Supervisory Committee of the Company faithfully carried out their
duties and obligations with due diligence in accordance with the Working
Procedures for the Supervisory Committee of China Southern Airlines Company
Limited subject to the Company Law and Companies Ordinance. Members of the
committee participated in all board meetings of the Directors, monitored the
financial position of the Company and the conduct of the Directors and the
senior management of the Company in discharge of their duties and their
compliance with the applicable laws and regulations and their compliance with
the applicable laws and regulations and the Company's Articles of Association,
in protection of the legitimate rights and interests of the Shareholders and the
Company as a whole.
I. PARTICULARS OF THE WORK OF THE SUPERVISORY COMMITTEE
The Supervisory Committee of the Company met for three times in 2004, with
details as follows:
(1) The Supervisory Committee of the Company held a meeting on 23 April,
2004, during which the following resolutions were considered and
adopted:
1. That the 2003 annual report, including the summary and the
full version, and the results announcement (for A Shares and H
Shares) of the Company be reviewed and approved;
2. That the 2003 report of the Supervisory Committee be reviewed
and approved;
3. That the 2003 audited financial report be reviewed and
approved;
4. That the profit distribution proposal be reviewed and
approved;
5. That a resolution be put forward for approval by the general
meeting in relation to the election of members for the next
term of the Supervisory Committee and the authorization of the
incumbent Supervisory Committee for determination of the
remuneration of the newly elected members;
6. That the amendments to the Articles of Association, and the
Rules of Procedures of General Meeting and of Board Meeting be
reviewed and approved;
7. That the reappointment of KPMG and KPMG Huazhen as the
international auditor and PRC auditor of the Company
respectively be reviewed and approved;
8. That resolutions no. 2-7 set out above be reviewed and
approved for further endorsement by the general meeting.
(2) The Supervisory Committee of the Company held a meeting on 16 June,
2004, during which the following resolution was considered and
adopted:
That Mr. Sun Xiao Yi be elected as the Chairman of the Fourth
Session of the Supervisory Committee.
[LOGO] [CHINESE CHARACTERS] 37
CHINA SOUTHERN
Report of the Supervisory Committee (Cont'd)
(3) The Supervisory Committee of the Company held a meeting on 11
November, 2004, during which the following resolutions were
considered and adopted:
1. That the Company's acquisition of the airline business-related
assets and liabilities of China Southern Air Holding Company,
China Northern Airlines Company and Xinjiang Airlines Company
and execution of the "Asset Sale and Purchase Contract", "Land
Use Right Leasing Agreement", "Premises Leasing Agreement" and
"Catering Contract" be reviewed and approved for further
endorsement by the general meeting.
2. That the ""Report on Asset Acquisitions and Connected
Transactions of China Southern Airlines Company Limited"
(domestic) and "Announcement on Substantial Acquisitions and
Connected Transactions" (overseas) be reviewed and approved.
3. That the proposal of the Board of Directors for convening the
second extraordinary general meeting at the Company's
headquarters in Guangzhou on 31 December, 2004 and the agenda
therefor be approved.
II. THE SUPERVISORY COMMITTEE'S INDEPENDENT OPINION:
(1) The Company's policy making process and its operation were in
compliance with the laws and the Company established a relatively
comprehensive internal control system. The Supervisory Committee was
not aware of any actions of the Directors or senior management
officers of the Company who, in carrying out their duties, violated
laws, regulations, the Articles of Association of the Company or
were prejudicial to the interests of the Company.
(2) The Company's financial report for 2004 gave a true and fair view of
its financial position and operating results. The unqualified
opinion expressed in the auditors' reports issued by KPMG and KPMG
Huazhen gave an objective and fair view.
(3) The Supervisory Committee was of the opinion that the use of
proceeds from the offering was in accordance with the disclosure in
the prospectus and such use of proceeds had not been changed.
(4) The Supervisory Committee was not aware of any insider dealings or
acts which impaired the Shareholders' interests or caused loss of
assets of the Company in the course of acquisition or disposal of
assets.
(5) The Supervisory Committee was of the opinion that the connected
transactions between the Company and its connected persons were
conducted at fair market value without prejudice to the interests of
the Company and its minority shareholders.
38 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Report of the Supervisory Committee (Cont'd)
The Supervisory Committee is satisfied with the annual report for 2004 presented
by the Board of Directors of the Company, and appreciates the encouraging
results in respects of the Company's acquisition of the core assets of China
Northern Airlines Company and Xinjiang Airlines Company in connection with the
reorganization of China Southern Air Holding Company and the enhancement of
safety and service standards achieved by the management of the Company. The
Supervisory Committee will continue to closely monitor the progress of
consolidation of its operations and capital resources after the reorganization.
It will also pay attention to the performance of the Company's management in
taking effective cost control measures to counter the impact of rising oil
prices and other complex market issues.
The Supervisory Committee has every confidence in the Group's prospects.
By Order of the Supervisory Committee
SUN XIAO YI
Chairman of the Supervisory Committee
Guangzhou, the PRC
25 April, 2005
[LOGO] [CHINESE CHARACTERS] 39
CHINA SOUTHERN
Corporate Governance Report
The Company has always strived to comply with the regulatory requirements of the
China Securities Regulatory Commission, the Hong Kong Stock Exchange, The New
York Stock Exchange Inc. and the United States Securities and Exchange
Commission. The Company has complied with the Code of Best Practice as set out
in Appendix 14 of the Listing Rules throughout the year ended 31 December, 2004,
and adopted sound governance and disclosure practices. The Company will continue
to improve its corporate governance practices and increase transparency to the
shareholders.
Below are the corporate governance practices adopted by the Group.
THE BOARD
The Board is responsible for the oversight of the management of the business and
affairs of the Company with the objective of enhancing shareholder value.
The Board, headed by the Chairman, is responsible for the formulation and the
approval of the Group's development and business strategies and policies,
approval of annual budgets and business plans, recommendation of dividend, and
supervision of management in accordance with the rules governing the meeting of
the Board of Directors, the President's working guides, articles of association
and the rules governing the meeting of the shareholders. The management of the
Company is responsible for the day-to-day operations of the Group under the
leadership of the President.
The roles of the Chairman, Liu Shao Yong, and the Vice Chairman, Liu Ming Qi,
are separate from that of the President, Si Xian Min. Such division of
responsibilities allows a balance of power between the Board of Directors and
the management of the Group, and ensures their independence and accountability.
The Chairman, assisted by the Vice Chairman, is the leader of the Board and he
oversees the Board so that it acts in the best interests of the Group. The
Chairman is responsible for deciding the agenda for each Board meeting, taking
into account, where appropriate, matters proposed by other Directors for
inclusion in the agenda. The Chairman has overall responsibility for providing
leadership, vision and direction in the development of the business of the
Company.
The President, assisted by the Vice Presidents, is responsible for the
day-to-day management of the business of the Group, attends to the formulation
and successful implementation of policies, and assumes full accountability to
the Board for all operations of the Group. Working with the Vice Presidents and
the executive management team of each core business division, he ensures the
smooth operations and development of the Group. He maintains a continuing
dialogue with the Chairman, the Vice Chairman and all Directors to keep them
fully informed of all major business developments and issues. He is also
responsible for building and maintaining an effective executive team to support
him in his role.
40 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Corporate Governance Report (Cont'd)
The Board held 43 meetings in 2004 and the individual attendance of each
Director, on a named basis, is as follows:
ATTENDED/
NAME OF DIRECTOR ELIGIBLE TO ATTEND
---------------- ------------------
Chairman Liu Shao Yong 43/43
Vice Chairman Liu Ming Qi 43/43
Executive Directors Peng An Fa 43/43
Wang Quan Hua 43/43
Zhao Liu An 43/43
Zhou Yong Qian 43/43
Si Xian Min (President) 43/43
Zhou Yong Jin 43/43
Xu Jie Bo (Chief Financial Officer, Vice President) 43/43
Wu Rong Nan 43/43
Independent Non-executive Directors Simon To 42/43
Peter Lok 43/43
Wei Ming Hai 43/43
Wang Zhi 43/43
Sui Guang Jun 42/43
Each of the Directors is not connected with one another.
All independent non-executive Directors have entered into service contracts with
the Company for a term of three years commencing on 16 June, 2004. Except for
such service contracts, none of the independent non-executive Directors has
entered or proposed to enter into any service contracts with the Company or its
subsidiaries. None of the independent non-executive Directors 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.
Having made specific enquiries with all the Directors of the Company, the
Directors have for the year ended 31 December, 2004 complied with the Model Code
for Securities Transactions by Directors of Listed Issuers as set out in
Appendix 10 of the Listing Rules. The Company has not adopted a code of conduct
less stringent than the Model Code for Securities Transactions by Directors of
Listed Issuers regarding securities transactions of the Directors.
In the opinion of the Directors, the Group has complied with the Code of Best
Practice set out in Appendix 14 of the Listing Rules issued by the Hong Kong
Stock Exchange throughout the year ended 31 December, 2004.
DIRECTORS' RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
The following statement, which sets out the responsibilities of the Directors in
relation to the financial statements, should be read in conjunction with, but
distinguished from, the auditors' report herein, which acknowledges the
reporting responsibilities of the Group's auditors.
ANNUAL REPORT AND FINANCIAL STATEMENTS
The Directors acknowledge their responsibility to prepare financial statements
for each financial year which give a true and fair view of the state of affairs
of the Group.
[LOGO] [CHINESE CHARACTERS] 41
CHINA SOUTHERN
Corporate Governance Report (Cont'd)
ACCOUNTING POLICIES
The Directors consider that in preparing the financial statements the Group uses
appropriate accounting policies that are consistently applied, and that all
applicable accounting standards are followed.
ACCOUNTING RECORDS
The Directors are responsible for ensuring that the Group keeps accounting
records which disclose with reasonable accuracy the financial position of the
Group and which enable the preparation of financial statements in accordance
with PRC Laws and disclosure requirements of the Hong Kong Companies Ordinance
and the applicable accounting standards.
SAFEGUARDING ASSETS
The Directors are responsible for taking all reasonable and necessary steps to
safeguard the assets of the Group and to prevent and detect fraud and other
irregularities.
GOING CONCERN
The Directors, having made appropriate enquiries, consider that the Group has
adequate resources to continue in operational existence for the foreseeable
future and that, for this reason, it is appropriate to adopt the going concern
basis in preparing the financial statements.
NOMINATION OF DIRECTORS
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.
AUDIT COMMITTEE
The Audit Committee comprises five independent non-executive Directors, one of
whom possesses the appropriate professional qualifications or accounting or
related financial management expertise to understand financial statements. The
Committee is chaired by Wei Ming Hai and the other members of the Committee are
Simon To, Peter Lok, Wang Zhi and Sui Guang Jun. Since 1998, Professor Wei has
been a doctorate advisor for Accounting Information and Investment Analysis at
the School of Management of Zhongshan University. 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 and member of American
Accounting Association.
Under its terms of reference the Audit Committee is required, amongst other
things, to oversee the relationship with the external auditors, to review the
Group's interim results and annual financial statements, to monitor compliance
with statutory and listing requirements, to review the scope, if necessary, to
engage independent legal or other advisers as it determines is necessary and to
perform investigations.
The Audit Committee held five meetings in 2004, which were attended by all
members.
42 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Corporate Governance Report (Cont'd)
EXTERNAL AUDITORS
The Audit Committee reviews each year a letter from KPMG Hong Kong and KPMG
Huazhen (collectively "KMPG") confirming their independence, approves their
appointment, discusses the scope of their audit, approves their fees, and the
scope and appropriate fees for any non-audit services requested to be provided
by them.
KPMG provided annual statutory services in respect of the Group's financial
statements prepared under IFRS and PRC Accounting Rules and Regulations for the
year 2004. KPMG also reviewed the 2004 unaudited interim financial report of the
Group, prepared under IFRS. KPMG also acted as the reporting accountants in
connection with the VSA Sale and Purchase Agreement entered into by the Company
on 12 November, 2004.
Details of the audit fees paid to KPMG for 2004 are shown in note 4 to the
financial statements prepared under IFRS.
REMUNERATION COMMITTEE
The Remuneration Committee comprises 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 Remuneration Committee met once in 2004 which 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".
INTERNAL CONTROL
The Board has overall responsibility for the Group's system of internal
controls. The Board has conducted a review of, and is satisfied with the
effectiveness of the system of internal controls of the Group.
[LOGO] [CHINESE CHARACTERS] 43
CHINA SOUTHERN
Report of the International Auditors
[KPMG LOGO]
TO THE SHAREHOLDERS OF
CHINA SOUTHERN AIRLINES COMPANY LIMITED
(Established in the People's Republic of China with limited liability)
We have audited the financial statements on pages 44 to 99 which have been
prepared in accordance with International Financial Reporting Standards
promulgated by the International Accounting Standards Boards.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The company's directors are responsible for the preparation of financial
statements which give a true and fair view. In preparing financial statements
which give a true and fair view it is fundamental that appropriate accounting
policies are selected and applied consistently, that judgements and estimates
are made which are prudent and reasonable and that the reasons for any
significant departure form applicable accounting standards are stated.
It is our responsibility to form an independent opinion, based on our audit, on
those financial statements and to report our opinion solely to you, as a body,
and for no other purpose. We do not assume responsibility towards or accept
liability to any other person for the contents of this report.
BASIS OF OPINION
We conducted our audit in accordance with Statements of Auditing Standards
issued by the Hong Kong Institute of Certified Public Accountants. An audit
includes examination, on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements. It also includes an assessment of the
significant estimates and judgements made by the directors in the preparation of
the financial statements, and of whether the accounting policies are appropriate
to the company's and the group's circumstances, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance as to whether the financial
statements are free from material misstatement. In forming our opinion we also
evaluated the overall adequacy of the presentation of information in the
financial statements. We believe that our audit provides a reasonable basis for
our opinion.
OPINION
In our opinion, the financial statements give a true and fair view of the state
of affairs of the company and of the group as at 31 December, 2004 and of the
Group's loss and cash flows for the year then ended and have been properly
prepared in accordance with International Financial Reporting Standards
promulgated by the International Accounting Standards Board and the disclosure
requirements of the Hong Kong Companies Ordinance.
KPMG
Certified Public Accountants
Hong Kong, 25 April, 2005
44 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Consolidated Income Statement
For the year ended 31 December, 2004
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
Operating revenue:
Traffic revenue 23,344 16,965
Other operating revenue 630 505
-------- --------
Total operating revenue 3 23,974 17,470
-------- --------
Operating expenses:
Flight operations 10,418 7,070
Maintenance 3,459 2,589
Aircraft and traffic servicing 3,503 2,767
Promotion and sales 1,940 1,480
General and administrative 1,323 1,053
Depreciation and amortisation 2,413 2,038
Other 9 17
-------- --------
Total operating expenses 4 23,065 17,014
-------- --------
Operating profit 909 456
-------- --------
Non-operating income/(expenses):
Interest income 22 13
Interest expense 4 (691) (824)
Share of associates' results 12 48
Share of jointly controlled entities' results 14 (5) (39)
Loss on disposal of property, plant and equipment 5 (1) (22)
Exchange loss, net (59) (164)
Other, net 46 21
-------- --------
Total net non-operating expenses (676) (967)
-------- --------
Profit/(loss) before taxation and minority interests 4 233 (511)
Income tax (expense)/credit 7 (78) 324
-------- --------
Profit/(loss) before minority interests 155 (187)
Minority interests (203) (171)
-------- --------
Loss attributable to shareholders (48) (358)
======== ========
Basic loss per share 9 RMB(0.01) RMB(0.09)
======== ========
The notes on pages 51 to 99 form part of these financial statements.
[LOGO] [CHINESE CHARACTERS] 45
CHINA SOUTHERN
Consolidated Balance Sheet
As at 31 December, 2004
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
NON-CURRENT ASSETS
Property, plant and equipment 10 46,717 28,536
Construction in progress 11 565 1,630
Lease prepayments 346 349
Interest in associates 13 429 422
Interest in jointly controlled entities 14 782 731
Other investments 15 272 204
Lease and equipment deposits 5,397 2,933
Deferred expenditure 16 316 249
Long-term receivables 15 6
------- -------
54,839 35,060
------- -------
CURRENT ASSETS
Short-term investments 15 683 -
Inventories 18 1,302 544
Trade receivables 19 1,203 834
Other receivables 616 296
Prepaid expenses and other assets 378 248
Cash and cash equivalents 20 3,083 2,080
------- -------
7,265 4,002
------- -------
CURRENT LIABILITIES
Bank and other loans 21 11,518 7,097
Obligations under finance leases 22 2,081 1,298
Amounts due to related companies 23 2,330 929
Trade payables 24 1,554 928
Bills payable 136 438
Sales in advance of carriage 874 466
Accrued expenses 4,551 2,528
Other liabilities 2,974 1,020
Taxes payable 39 90
------- -------
26,057 14,794
------- -------
NET CURRENT LIABILITIES (18,792) (10,792)
------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES 36,047 24,268
------- -------
The notes on pages 51 to 99 form part of these financial statements.
46 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Consolidated Balance Sheet (Cont'd)
As at 31 December, 2004
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
LONG TERM LIABILITIES AND DEFERRED ITEMS
Bank and other loans 21 11,935 4,522
Obligations under finance leases 22 9,538 5,543
Provision for major overhauls 25 284 189
Deferred credits 100 47
Deferred tax liabilities 17 287 398
------ ------
22,144 10,699
------ ------
13,903 13,569
====== ======
REPRESENTING:
SHARE CAPITAL 26 4,374 4,374
RESERVES 27 7,474 7,522
------ ------
SHAREHOLDERS' EQUITY 11,848 11,896
MINORITY INTERESTS 2,055 1,673
------ ------
13,903 13,569
====== ======
Approved and authorised for issue by the board of directors on 25 April, 2005
LIU SHAO YONG SI XIAN MIN XU JIE BO
Director Director Director
The notes on pages 51 to 99 form part of these financial statements.
[LOGO] [CHINESE CHARACTERS] 47
CHINA SOUTHERN
Balance Sheet
As at 31 December, 2004
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
NON-CURRENT ASSETS
Property, plant and equipment 10 39,130 22,610
Construction in progress 11 232 1,532
Lease prepayments 128 116
Interest in subsidiaries 12 2,149 1,446
Interest in associates 13 296 287
Interest in jointly controlled entities 14 636 564
Other investments 15 167 107
Lease and equipment deposits 4,674 2,229
Deferred expenditure 16 305 241
Deferred tax assets 17 51 -
------- ------
47,768 29,132
------- ------
CURRENT ASSETS
Short-term investments 15 502 -
Inventories 18 999 213
Trade receivables 19 1,035 683
Other receivables 391 222
Prepaid expenses and other assets 289 183
Cash and cash equivalents 20 2,302 1,405
------- ------
5,518 2,706
------- ------
CURRENT LIABILITIES
Bank and other loans 21 10,161 5,959
Obligations under finance leases 22 2,081 1,298
Amounts due to related companies 23 2,278 871
Trade payables 24 1,320 746
Bills payable 136 438
Sales in advance of carriage 806 406
Accrued expenses 3,733 1,628
Other liabilities 2,467 854
Taxes payable - 48
------- ------
22,982 12,248
------- ------
NET CURRENT LIABILITIES (17,464) (9,542)
------- ------
TOTAL ASSETS LESS CURRENT LIABILITIES 30,304 19,590
------- ------
The notes on pages 51 to 99 form part of these financial statements.
48 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Balance Sheet (Cont'd)
As at 31 December, 2004
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
NON-CURRENT LIABILITIES AND DEFERRED ITEMS
Bank and other loans 21 10,540 3,670
Obligations under finance leases 22 9,538 5,543
Provision for major overhauls 25 186 131
Deferred credits 60 7
Deferred tax liabilities 17 - 90
------ ------
20,324 9,441
------ ------
9,980 10,149
====== ======
REPRESENTING:
SHARE CAPITAL 26 4,374 4,374
RESERVES 27 5,606 5,775
------ ------
SHAREHOLDERS' EQUITY 9,980 10,149
====== ======
Approved and authorised for issue by the board of directors on 25 April, 2005
LIU SHAO YONG SI XIAN MIN XU JIE BO
Director Director Director
The notes on pages 51 to 99 form part of these financial statements.
[LOGO] [CHINESE CHARACTERS] 49
CHINA SOUTHERN
Consolidated Statement of Changes in Shareholders' Equity
For the year ended 31 December, 2004
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
SHARE SHARE OTHER RETAINED
CAPITAL PREMIUM RESERVES EARNINGS TOTAL
RMB million RMB million RMB million RMB million RMB million
----------- ----------- ----------- ----------- -----------
At 1 January, 2003 3,374 3,684 586 1,969 9,613
Issue of A Shares (Note 26) 1,000 1,641 - - 2,641
Loss for the year - - - (358) (358)
Appropriations to reserves - - 25 (25) -
----- ----- --- ----- ------
At 31 December, 2003 4,374 5,325 611 1,586 11,896
===== ===== === ===== ======
At 1 January, 2004 4,374 5,325 611 1,586 11,896
Loss for the year - - - (48) (48)
Appropriations to reserves - - 61 (61) -
----- ----- --- ----- ------
AT 31 DECEMBER, 2004 4,374 5,325 672 1,477 11,848
===== ===== === ===== ======
The notes on pages 51 to 99 form part of these financial statements.
50 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Consolidated Cash Flow Statement
For the year ended 31 December, 2004
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
Cash inflows from operations 34 (a) 4,555 3,075
Interest received 22 13
Interest paid (754) (924)
Income tax paid (227) (35)
------ ------
Net cash inflows from operating activities 3,596 2,129
------ ------
Investing activities:
Proceeds from disposal of property, plant and equipment 47 57
Dividends received from associates 12 -
Dividends received from jointly controlled entities 5 -
Dividends received from equity securities held for trading 13 -
(Increase)/decrease in long term receivables (9) 6
Payment of lease and equipment deposits (3,151) (1,852)
Refund of lease and equipment deposits 1,253 1,066
Capital expenditures (6,631) (4,707)
Purchase of other investments (680) (1)
Investment in an associate (9) -
Investments in jointly controlled entities (72) (3)
Effect of the CNA/XJA Acquisitions 34 (b) 398 -
------ ------
Net cash used in investing activities (8,824) (5,434)
------ ------
Net cash outflows before financing activities (5,228) (3,305)
------ ------
Financing activities:
Proceeds from A Shares issue, net of issuance costs - 2,641
Proceeds from bank and other loans 14,555 8,914
Repayment of bank and other loans (7,108) (8,371)
Repayment of principal under finance lease obligations (1,272) (1,555)
Capital contribution received from minority shareholders 71 1
Dividends paid to minority shareholders (15) (15)
------ ------
Net cash inflows from financing activities 6,231 1,615
------ ------
Increase/(decrease) in cash and cash equivalents 1,003 (1,690)
Cash and cash equivalents at beginning of year 2,080 3,770
------ ------
Cash and cash equivalents at end of year 3,083 2,080
====== ======
The notes on pages 51 to 99 form part of these financial statements.
[LOGO] [CHINESE CHARACTERS] 51
CHINA SOUTHERN
Notes to the Financial Statements
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
1 BACKGROUND OF THE COMPANY
China Southern Airlines Company Limited (the "Company") and its subsidiaries
(the "Group") are principally engaged in the provision of domestic, Hong Kong
regional and international passenger, cargo and mail airline services, with
flights operating primarily from the new 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 25 March, 1995 as a joint stock limited company as
part of the reorganisation (the "Reorganisation") 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 shares ("H Shares") and American Depositary Shares ("ADS") (each
ADS representing 50 H Shares) have been listed on The 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 ("A Shares") which are
listed on the Shanghai Stock Exchange.
Pursuant to a sale and purchase agreement dated 12 November, 2004 between the
Company, CSAHC, China Northern Airlines Company ("CNA") and Xinjiang Airlines
Company ("XJA") which was approved by the Company's shareholders in an
extraordinary general meeting held on 31 December, 2004, the Company acquired
the airline operations and certain related assets of CNA and XJA with effect
from 31 December, 2004 (the "CNA/XJA Acquisitions"). The consideration payable
for the CNA/XJA Acquisitions amounting to RMB15,398 million was determined based
on the fair value of the acquired assets. Such consideration was partly
satisfied by assumption of debts and liabilities of CNA and XJA totalling
RMB13,439 million outstanding as at 31 December, 2004 and the remaining balance
of RMB1,959 million will be satisfied in cash.
As the above acquisitions were completed on 31 December, 2004, they have no
impact on the Company's consolidated income statement for the year ended 31
December, 2004.
Further details of the CNA/XJA Acquisitions are set out in Note 34(b) to the
financial statements.
2 PRINCIPAL ACCOUNTING POLICIES
(a) STATEMENT OF COMPLIANCE
These financial statements have been prepared in accordance with International
Financial Reporting Standards ("IFRS") promulgated by the International
Accounting Standards Board. IFRS includes International Accounting Standards
("IAS") and related interpretations. These financial statements also comply with
the disclosure requirements of the Hong Kong Companies Ordinance and the
applicable disclosure provisions of the Rules Governing the Listing of
Securities on The Stock Exchange of Hong Kong Limited.
(b) BASIS OF PREPARATION
The financial statements are prepared on the historical cost basis as modified
by the revaluation of certain property, plant and equipment.
The preparation of financial statements in conformity with IFRS 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.
52 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2 PRINCIPAL ACCOUNTING POLICIES (cont'd)
(b) BASIS OF PREPARATION (cont'd)
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised 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.
The accounting policies set out below have been applied consistently by the
Group and are consistent with those used in the previous year.
(c) BASIS OF CONSOLIDATION
(i) SUBSIDIARIES
A subsidiary is an entity controlled by the Company. Control exists when the
Company has the power, directly or indirectly, to govern the financial and
operating policies of an entity 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
commences until the date that control ceases.
Intra-group balances and transactions, and any unrealised profits arising from
intra-group transactions, are eliminated in full in preparing the consolidated
financial statements. Unrealised losses resulting from intra-group transactions
are eliminated in the same way as unrealised profits, but only to the extent
that there is no evidence of impairment.
In the Company's balance sheet, an investment in a subsidiary is stated at cost
less any impairment losses (see Note 2(l)).
(ii) ASSOCIATES AND JOINTLY CONTROLLED ENTITIES
An associate is an entity in which the Group has significant influence, but not
control, over the financial and operating policies. The consolidated financial
statements include the Group's share of the total recognised gains and losses of
associates 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 interest in an associate, the Group's
carrying amount is reduced to nil and recognition 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 associate.
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 recognised 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 jointly controlled entity, the
Group's carrying amount is reduced to nil and recognition 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 jointly controlled
entity.
[LOGO] [CHINESE CHARACTERS] 53
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2 PRINCIPAL ACCOUNTING POLICIES (cont'd)
(c) BASIS OF CONSOLIDATION (cont'd)
(ii) ASSOCIATES AND JOINTLY CONTROLLED ENTITIES (cont'd)
Unrealised profits arising from transactions with associates and jointly
controlled entities are eliminated to the extent of the Group's interest in the
entity. Unrealised losses are eliminated in the same way as unrealised profits,
but only to the extent that there is no evidence of impairment.
In the Company's balance sheet, its investments in associates and jointly
controlled entities are stated at cost less any impairment losses (see Note
2(l)).
(d) PROPERTY, PLANT AND EQUIPMENT
(i) OWNED ASSETS
An item of property, plant and equipment is initially recorded at cost less
accumulated depreciation (see (iv) below) and impairment losses (see 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. Subsequent to the revaluation (see Note 10), 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
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.
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 asset and are recognised in the
income statement on the date of retirement or disposal. Any related revaluation
surplus is transferred from the revaluation reserve to retained profits.
(ii) LEASED ASSETS
Leases in terms of which the Group assumes substantially all the risks and
rewards of ownership are classified as finance leases.
Flight equipment acquired by way of finance lease 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 (see Note 2(l)) and the corresponding liabilities, net of
finance charges, are recorded as obligations under finance leases. Subsequent to
the revaluation (see Note 10), 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 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.
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.
54 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2 PRINCIPAL ACCOUNTING POLICIES (cont'd)
(d) PROPERTY, PLANT AND EQUIPMENT (cont'd)
(ii) LEASED ASSETS (cont'd)
Gains or losses on aircraft sale and leaseback transactions which result in
finance leases are deferred and amortised over the terms of the related leases.
Gains or losses on other aircraft sale and leaseback transactions are recognised
immediately if the transactions are established at fair value. Any difference
between the sales price and the fair value is deferred and amortised over the
period the assets are expected to be used.
Payments made under operating leases are recognised in the income statement on a
straight-line basis over the term of the lease. Lease incentives received are
recognised in the income statement as an integral part of the total lease
expense.
(iii) SUBSEQUENT COSTS
The Group recognises in the carrying amount 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 recognised in the income statement as an expense as incurred.
(iv) DEPRECIATION
Depreciation is calculated to write off the cost or revalued amount of items of
property, plant and equipment over their estimated useful lives on a
straight-line basis, after taking into account its estimated residual value, 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%
Depreciation for leased assets is provided at rates which 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.
[LOGO] [CHINESE CHARACTERS] 55
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2 PRINCIPAL ACCOUNTING POLICIES (cont'd)
(e) CONSTRUCTION IN PROGRESS
Construction in progress represents office buildings, various infrastructure
projects under construction and equipment pending installation, and is stated at
cost. Cost comprises direct costs of construction as well as interest charges
during the periods of construction and installation. Capitalisation 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 delays in the issue of the relevant commissioning
certificates by the relevant PRC authorities.
(f) LEASE PREPAYMENTS
Lease prepayments represent the purchase costs of land use rights and are
amortised on a straight line basis over the period of land use rights.
(g) DEFERRED EXPENDITURE
Custom duties and other direct costs in relation to modifying, introducing and
certifying certain operating leased aircraft are deferred and amortised over the
terms of the related leases.
Lump sum housing benefits payable to employees of the Group are deferred and
amortised on a straight line basis over a period of 10 years, which represents
the benefit vesting period of the employees.
(h) OTHER INVESTMENTS
Financial instruments held for trading are classified as current assets and are
stated at fair value, with any resultant gain or loss recognised in the income
statement.
Where the Group has the positive intent and ability to hold bonds to maturity,
they are stated at amortised cost less impairment losses (see Note 2(l)).
Other financial instruments are stated at cost less impairment losses (see 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 made without incurring excessive costs.
(i) INVENTORIES
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 are stated at the lower of cost and net realisable value. Net
realisable value represents estimated resale price.
56 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2 PRINCIPAL ACCOUNTING POLICIES (cont'd)
(j) TRADE AND OTHER RECEIVABLES
Trade and other receivables are stated at cost less provision for doubtful
accounts. Provision for doubtful accounts is established based on evaluation of
the recoverability of these accounts at the balance sheet date.
(k) 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 purpose of the consolidated cash flow statement, cash and cash equivalents
are presented net of bank overdrafts, if any.
(l) IMPAIRMENT LOSS
The carrying amounts of the Group's assets, other than inventories (see Note
2(i)), trade and other receivables (see Note 2(j)) and deferred tax assets (see
Note 2(q)) are reviewed periodically in order to assess whether the recoverable
amounts have declined below the carrying amounts. These assets are tested for
impairment whenever events or changes in circumstances indicate that their
recorded carrying amounts may not be recoverable. When such a decline has
occurred, the carrying amount is reduced to the recoverable amount. The
recoverable amount is the greater of the net selling price and the value in use.
In determining the value in use, expected future cash flows generated by the
asset are discounted to their present value. The amount of the reduction is
recognised as an expense in the income statement.
The Group assesses at each balance sheet date whether there is any indication
that an impairment loss recognised for an asset in prior years may no longer
exist. An impairment loss is reversed if there has been a favourable change in
the estimates used to determine the recoverable amount. A subsequent increase in
the recoverable amount of an asset, when the circumstances and events that led
to the write-down or write-off cease to exist, is recognised as income. The
reversal is reduced by the amount that would have been recognised as
depreciation had the write-down or write-off not occurred.
(m) INTEREST-BEARING BORROWINGS
Interest-bearing borrowings are recognised initially at fair value, less
attributable transaction costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortised cost with any difference
between cost and redemption value being recognised in the income statement over
the period of the borrowings on an effective interest basis.
(n) PROVISIONS
A provision is recognised in the balance sheet when the Group has a legal or
constructive obligation as a result of a past event, and it is probable that an
outflow of economic benefits will be required to settle the obligations. If the
effect is material, provisions are determined by discounting the expected future
cash flows at a pre-tax rate that reflects current market assessments of the
time value of money and, where appropriate, the risks specific to the liability.
[LOGO] [CHINESE CHARACTERS] 57
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2 PRINCIPAL ACCOUNTING POLICIES (cont'd)
(o) 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.
(p) DEFERRED CREDITS
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 amortised as a reduction of rental expense
for aircraft and engines under operating leases.
(q) 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 utilisation against future
taxable income is recognised 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 realised.
(r) REVENUE RECOGNITION
(i) Passenger, cargo and mail revenues are recognised when the
transportation is provided. Ticket sales for transportation not yet
provided are included in current liabilities as sales in advance of
carriage. Revenues from airline-related business are recognised when
services are rendered. Revenue is stated net of sales tax. In
addition, prior to 1 May, 2003, revenue was stated net of the
contributions to the Civil Aviation Administration of China ("CAAC")
Infrastructure Development Fund.
(ii) Interest income is recognised on a time proportion basis according
to the outstanding principal and the applicable interest rate.
(iii) Dividend income is recognised when the Group's right to receive the
dividend is established.
(iv) Operating lease income is recognised on a straight line basis over
the terms of the respective leases.
58 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2 PRINCIPAL ACCOUNTING POLICIES (cont'd)
(s) TRAFFIC COMMISSIONS
Traffic commissions are expensed when the transportation is provided and the
related revenue is recognised. Traffic commissions for transportation not yet
provided are recorded on the balance sheet as a prepaid expense.
(t) MAINTENANCE AND OVERHAUL COSTS
Routine maintenance and repairs and overhauls in respect of owned aircraft and
aircraft held under finance leases are expensed in the income statement as and
when incurred. In respect of aircraft held under operating leases, a provision
is made over the lease term for the estimated cost of overhauls required to be
performed on the related aircraft prior to their return to the lessors.
(u) BORROWING COSTS
Borrowing costs are expensed in the income statement as and when incurred,
except to the extent that they are capitalised 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.
The capitalisation of borrowing costs as part of the cost of a qualifying asset
commences when expenditures for the asset are being incurred, borrowing costs
are being incurred and activities that are necessary to prepare the asset for
its intended use are in progress. Capitalisation of borrowing costs ceases when
substantially all the activities necessary to prepare the qualifying asset for
its intended use are complete.
(v) RETIREMENT BENEFITS
Contributions to retirement schemes and additional retirement benefits paid to
retired employees are charged to the income statement as and when incurred.
(w) FREQUENT FLYER AWARD PROGRAMMES
The Group maintains two frequent flyer award programmes, 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 recognised 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
programmes is recognised when the related transportation services are provided.
[LOGO] [CHINESE CHARACTERS] 59
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
2 PRINCIPAL ACCOUNTING POLICIES (cont'd)
(x) TRANSLATION OF FOREIGN CURRENCIES
Transactions in foreign currencies are translated into Renminbi at the
applicable rates of exchange quoted by the People's Bank of China ("PBOC rates")
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 rates at the balance sheet date. Non-monetary assets and liabilities
that are measured in terms of historical cost in a foreign currency are
translated into Renminbi at the PBOC rates prevailing on the transaction dates.
(y) RELATED PARTIES
For the purposes of these 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 or other entities.
(z) 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 rewards that are different from those of other segments.
60 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
3 TURNOVER
Turnover comprises revenues from airline and airline-related business and is
stated net of sales tax. In addition, turnover for the four-month period ended
30 April, 2003 was stated net of contributions to the CAAC Infrastructure
Development Fund. An analysis of turnover is as follows:
2004 2003
RMB MILLION RMB million
----------- -----------
Traffic revenue
Passenger 21,100 15,010
Cargo and mail 2,244 1,955
------ ------
23,344 16,965
------ ------
Other operating revenue
Commission income 203 140
General aviation income 55 40
Ground services income 146 99
Air catering income 53 31
Net income from lease arrangements (Note) - 69
Rental income 45 40
Aircraft lease income 11 -
Other 117 86
------ ------
630 505
------ ------
23,974 17,470
====== ======
Note: As result of a lease arrangement in 2003, the Company received net cash
benefits of RMB69 million which were recognised as income in 2003. Further
details of the arrangement are set out in note 10(g) to the financial
statements.
Pursuant to various sales tax rules and regulations, the Group is required to
pay sales tax to national and local tax authorities at the following rates:
TYPES OF REVENUE APPLICABLE SALES TAX RATES
Traffic revenue 3% (2003: 3%) of traffic revenue in respect of domestic flights and outbound
international/Hong Kong regional flights, except for the period from 1 May,
2003 to 31 December, 2003 when passenger revenue was exempted from sales tax.
Other operating revenue 3% (2003: 3%) of commission income, general aviation income and ground services
income, and 3% to 5% (2003: 3% to 5%) of other operating revenue.
[LOGO] [CHINESE CHARACTERS] 61
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
3 TURNOVER (cont'd)
Sales tax incurred during the year ended 31 December, 2004, netted off against
revenue, amounted to RMB716 million (2003: RMB206 million).
In addition, the Group is required to pay contributions to the CAAC
Infrastructure Development Fund. Prior to 1 May, 2003, contributions to CAAC
Infrastructure Development Fund were payable at 5% and 2% respectively of the
domestic and international/Hong Kong regional traffic revenue. For the period
from 1 May, 2003 to 31 March, 2004, the Group was exempted from paying any
contributions. Effective from 1 April, 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 million for the year ended 31
December, 2004. The contributions for the year ended 31 December, 2003 amounted
to RMB251 million and were netted off against traffic revenue.
Pursuant to approval documents issued by the CAAC, the Group imposes a fuel
surcharge on passengers carried by its domestic and Hong Kong regional flights
at certain prescribed rates on ticket fares. The fuel surcharge forms part of
the traffic revenue of the Group. For the year ended 31 December, 2004, the fuel
surcharge revenue of the Group totalled approximately RMB348 million (2003:
RMB740 million).
62 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
4 PROFIT/(LOSS) BEFORE TAXATION AND MINORITY INTERESTS
Profit/(loss) before taxation and minority interests is arrived at after
charging:
2004 2003
RMB MILLION RMB million
----------- -----------
Operating expenses
Jet fuel 6,050 3,867
Aircraft maintenance 3,132 2,377
Routes 5,626 4,363
Depreciation
- owned assets 1,891 1,502
- assets held under finance leases 472 496
Amortisation of deferred expenditure 50 40
Operating lease charges
- aircraft and flight equipment 1,665 1,536
- land and buildings 109 136
Staff costs
- salaries, wages and welfare 2,260 1,496
- contributions to retirement schemes 168 150
Office and administration 718 471
Auditors' remuneration 11 8
Other 913 572
------ ------
23,065 17,014
------ ------
Interest expense
Interest on bank and other loans wholly
repayable within five years 221 288
Interest on other loans 156 176
Finance charges on obligations under finance leases 348 443
Less: borrowing costs capitalised (Note) (34) (83)
------ ------
Net interest expense 691 824
------ ------
and after crediting:
Net realised and unrealised gain on
equity securities held for trading 15 -
Dividend income from unlisted investments 14 17
====== ======
Note: The borrowing costs have been capitalised at rates ranging from 1.51% to
3.48% per annum (2003: 1.62% to 5.46% per annum).
The loss attributable to shareholders for the year ended 31 December, 2004
includes a loss of RMB 169 million (2003: RMB581 million) which has been dealt
with in the financial statements of the Company.
[LOGO] [CHINESE CHARACTERS] 63
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
5 LOSS ON DISPOSAL OF PROPERTY, PLANT AND EQUIPMENT
Loss on disposal of property, plant and equipment represents:
2004 2003
RMB MILLION RMB million
----------- -----------
Aircraft (Note) - 20
Flight equipment and other 1 2
-- --
1 22
== ==
Note: During 2003, the Group incurred a loss of RMB20 million on early
retirement of two old Boeing 737-200 aircraft.
6 EMOLUMENTS OF DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
(a) DIRECTORS' AND SUPERVISORS' EMOLUMENTS
2004 2003
RMB'000 RMB'000
------- -------
Fees 255 203
Salaries, allowances and benefits in kind 3,498 1,244
Retirement benefits 116 98
Bonuses 868 943
----- -----
4,737 2,488
===== =====
Included in the above were fees of RMB255,000 (2003: RMB203,000) paid to
independent non-executive directors during the year.
An analysis of directors' and supervisors' emoluments by number of individuals
and emolument ranges is as follows:
2004 2003
NUMBER Number
------ ------
Nil to HK$1,000,000 (RMB1,066,000 equivalent) 18 18
== ==
64 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
6 EMOLUMENTS OF DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT (cont'd)
(b) SENIOR MANAGEMENT'S EMOLUMENTS
Details of emoluments paid to the five highest paid individuals (including
directors and supervisors) of the Group during the year are as follows:
2004 2003
RMB'000 RMB'000
------- -------
Salaries, allowances and benefits in kind 2,045 1,701
Retirement benefits 29 25
----- -----
2,074 1,726
===== =====
An analysis of emoluments paid to the five highest paid individuals (including
directors and supervisors) by number of individuals and emolument ranges is as
follows:
2004 2003
NUMBER Number
------ ------
Directors and supervisors - -
Employees 5 5
-- --
5 5
== ==
Nil to HK$1,000,000 (RMB1,066,000 equivalent) 5 5
== ==
7 INCOME TAX IN THE CONSOLIDATED INCOME STATEMENT
(a) INCOME TAX IN THE CONSOLIDATED INCOME STATEMENT REPRESENTS:
2004 2003
RMB MILLION RMB million
----------- -----------
PRC income tax 176 47
Share of associates' taxation 2 3
Share of jointly controlled entities' taxation 11 7
---- ----
189 57
Deferred tax (Note 17)
- current year (111) 11
- adjustment for change in enacted tax rate - (392)
---- ----
Income tax expense/(credit) 78 (324)
==== ====
[LOGO] [CHINESE CHARACTERS] 65
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
7 INCOME TAX IN THE CONSOLIDATED INCOME STATEMENT (cont'd)
(a) INCOME TAX IN THE CONSOLIDATED INCOME STATEMENT REPRESENTS: (cont'd)
On 17 October, 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 1 October, 2003. As a result, the
Company's income tax rate has been changed from 33% to 15% beginning from that
date.
As a result of the reduction in income tax rate, the Company's net deferred tax
liability balance at 1 January, 2003 of RMB507 million was reduced by RMB392
million. Accordingly, a net deferred tax credit of RMB392 million was recognised
in the income statement for the year ended 31 December, 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 government, or has
sustained tax losses in these overseas jurisdictions. Accordingly, no provision
for overseas tax has been made for both the current and prior years.
(b) RECONCILIATION BETWEEN TAX EXPENSE AND ACCOUNTING PROFIT AT APPLICABLE TAX
RATES:
2004 2003
RMB MILLION RMB million
----------- -----------
Profit/(loss) before taxation and minority interests 233 (511)
=== ====
Expected PRC income tax expense/(credit) at 15% (2003: 15%) 35 (77)
Adjustments:
Effect of change in income tax rate - (392)
Non-deductible expenses 40 80
Other, net 3 65
--- ----
Income tax expense/(credit) 78 (324)
=== ====
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 Tax Bureau, lease arrangements executed prior to 1
September, 1999 are exempted from PRC withholding tax.
The PRC withholding tax payable by the Group for the year ended 31 December,
2004 of RMB23 million (2003: RMB8 million) in respect of the leases executed on
or after 1 September, 1999 has been included as part of the operating lease
charges for the year.
66 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
8 DIVIDENDS
No interim dividend was paid during both the current and prior years.
The board of directors of the Company does not recommend the payment of a final
dividend in respect of the year ended 31 December, 2004. No final dividend was
paid in respect of the year ended 31 December, 2003.
9 BASIC LOSS PER SHARE
The calculation of basic loss per share is based on the consolidated loss
attributable to shareholders of RMB48 million (2003: RMB358 million) and the
weighted average number of shares in issue during the year of 4,374 million
(2003: 3,832 million).
The amount of diluted loss per share is not presented as there were no dilutive
potential ordinary shares in existence for both the current and prior years.
[LOGO] [CHINESE CHARACTERS] 67
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
10 PROPERTY, PLANT AND EQUIPMENT
(a) THE GROUP
AIRCRAFT OTHER FLIGHT
--------------------------- EQUIPMENT, MACHINERY,
HELD UNDER INCLUDING EQUIPMENT
FINANCE ROTABLE AND
BUILDINGS OWNED LEASES SPARES VEHICLES TOTAL
RMB million RMB million RMB million RMB million RMB million RMB million
----------- ----------- ----------- ------------ ----------- -----------
Cost or valuation:
At 1 January, 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
Transferred from construction
in progress 2,472 - - - 235 2,707
Through the CNA/XJA Acquisitions 915 5,206 4,492 1,753 490 12,856
Disposals (28) - - (76) (73) (177)
----- ------ ------ ----- ----- ------
AT 31 DECEMBER, 2004 6,988 27,134 14,405 9,044 2,599 60,170
----- ------ ------ ----- ----- ------
Representing:
Cost 6,633 20,905 10,065 6,870 2,115 46,588
Valuation - 1996 355 6,229 4,340 2,174 484 13,582
----- ------ ------ ----- ----- ------
6,988 27,134 14,405 9,044 2,599 60,170
----- ------ ------ ----- ----- ------
Accumulated depreciation:
At 1 January, 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
Written back on disposal (17) - - (51) (61) (129)
----- ------ ------ ----- ----- ------
AT 31 DECEMBER, 2004 757 4,331 2,894 4,137 1,334 13,453
----- ------ ------ ----- ----- ------
Net book value:
AT 31 DECEMBER, 2004 6,231 22,803 11,511 4,907 1,265 46,717
===== ====== ====== ===== ===== ======
At 31 December, 2003 2,694 14,030 7,858 3,198 756 28,536
===== ====== ====== ===== ===== ======
68 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
10 PROPERTY, PLANT AND EQUIPMENT (cont'd)
(b) THE COMPANY
AIRCRAFT OTHER FLIGHT
--------------------------- EQUIPMENT, MACHINERY,
HELD UNDER INCLUDING EQUIPMENT
FINANCE ROTABLE AND
BUILDINGS OWNED LEASES SPARES VEHICLES TOTAL
RMB million RMB million RMB million RMB million RMB million RMB million
----------- ----------- ----------- ----------- ----------- -----------
Cost or valuation:
At 1 January, 2004 1,644 12,868 10,463 5,396 1,189 31,560
Reclassification on exercise
of purchase options - 550 (550) - - -
Additions through transfer of
property, plant and equipment
upon dissolution of a subsidiary 3 - - 134 13 150
Additions 12 3,509 - 192 38 3,751
Transferred from construction
in progress 1,663 - - - 235 1,898
Through the CNA/XJA Acquisitions 727 5,206 4,492 1,745 441 12,611
Disposals (23) - - - (40) (63)
----- ------ ------ ----- ----- ------
AT 31 DECEMBER, 2004 4,026 22,133 14,405 7,467 1,876 49,907
----- ------ ------ ----- ----- ------
Representing:
Cost 3,832 17,520 10,065 5,642 1,612 38,671
Valuation - 1996 194 4,613 4,340 1,825 264 11,236
----- ------ ------ ----- ----- ------
4,026 22,133 14,405 7,467 1,876 49,907
----- ------ ------ ----- ----- ------
Accumulated depreciation:
At 1 January, 2004 324 2,231 2,605 3,073 717 8,950
Reclassification on exercise
of purchase options - 183 (183) - - -
Additions through transfer of
property, plant and equipment
upon dissolution of a subsidiary 1 - - 72 10 83
Charge for the year 110 744 472 346 117 1,789
Written back on disposal (10) - - - (35) (45)
----- ------ ------ ----- ----- ------
AT 31 DECEMBER, 2004 425 3,158 2,894 3,491 809 10,777
----- ------ ------ ----- ----- ------
Net book value:
AT 31 DECEMBER, 2004 3,601 18,975 11,511 3,976 1,067 39,130
===== ====== ====== ===== ===== ======
At 31 December, 2003 1,320 10,637 7,858 2,323 472 22,610
===== ====== ====== ===== ===== ======
[LOGO] [CHINESE CHARACTERS] 69
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
10 PROPERTY, PLANT AND EQUIPMENT (cont'd)
(c) 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 periods
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 Company and CSAHC. The leases with initial one-year
term are automatically renewable for another one-year period unless the
Company gives appropriate notice of termination. In this connection,
rental payments totalling RMB18 million (2003: RMB15 million) were paid to
CSAHC during 2004 in respect of these leases.
(d) In compliance with the PRC rules and regulations governing initial public
offering of shares by PRC joint stock limited companies, the property,
plant and equipment of the Group as at 31 December, 1996 were revalued.
This revaluation was conducted by Guangzhou Assets Appraisal Corp.
("GAAC"), 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.
In accordance with IAS 16 "Property, plant and equipment", subsequent to
the 1996 revaluation, which was based on replacement costs, the property,
plant and equipment of the Group are carried at revalued amount, being the
fair value at the date of the revaluation less any subsequent accumulated
depreciation and impairment losses. Revaluation is 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. In
accordance with the revaluation performed by the directors in respect of
property, plant and equipment held by the Group as at 31 December, 2000,
the carrying amounts of property, plant and equipment did not differ
materially from their respective fair value.
The effect of the above revaluation was to increase future annual
depreciation charges of the Group by approximately RMB33 million (2003:
RMB33 million). Had the property, plant and equipment of the Group and the
Company been stated at cost (i.e. the effect of the revaluation was
excluded), the net book value of property, plant and equipment of the
Group and the Company as at 31 December, 2004 would have been
approximately RMB46,714 million and RMB39,560 million respectively (2003:
RMB28,523 million and RMB22,794 million respectively), made up as follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Buildings 6,797 3,110 4,178 1,610
Aircraft
- owned 28,257 18,345 22,923 13,658
- held under finance leases 14,884 10,942 14,884 10,942
Flight equipment and others 12,516 9,634 9,726 6,910
------ ------ ------ ------
62,454 42,031 51,711 33,120
Less: Accumulated depreciation 15,740 13,508 12,151 10,326
------ ------ ------ ------
46,714 28,523 39,560 22,794
====== ====== ====== ======
70 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
10 PROPERTY, PLANT AND EQUIPMENT (cont'd)
(e) As at 31 December, 2004, certain aircraft of the Group and the Company
with an aggregate carrying value of approximately RMB23,438 million and
RMB21,690 million respectively (2003: RMB14,576 million and RMB12,796
million respectively) were mortgaged under certain loan and lease
agreements (see Notes 21 and 22).
(f) In 2003, the Company 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 Company. The leases with initial one-year term
are automatically renewable for another one year unless either party gives
appropriate notice of termination. In this connection, rental income
totalling RMB34 million (2003: RMB34 million) was received by the Company
during the year in respect of the leases. As at 31 December, 2004, the
cost and accumulated depreciation of the relevant property, plant and
equipment totalled RMB787 million and RMB514 million respectively (2003:
RMB787 million and RMB462 million respectively). Depreciation of the
relevant property, plant and equipment recognised during the year totalled
RMB55 million (2003: RMB55 million). As at 31 December 2004, the Company's
rental receivable in respect of the leases due in 2005 amounted to RMB34
million (2003: RMB34 million).
(g) The Company entered into two separate arrangements (the "Arrangements")
with certain independent third parties during each of 2002 and 2003. Under
each of the Arrangements, the Company sold an aircraft and then
immediately leased back the aircraft for an agreed period. The lease
payment obligations, with predetermined net present value, are to be
satisfied solely out of the sale proceeds and such amount has been placed
irrevocably by the Company in form of deposits and debt securities in
favour of the lessors. The Company 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 Company,
the Company is liable to pay a pre-determined penalty to the lessor.
Provided that the Company complies with the lease agreements, the Company
is entitled to the continued possession and operation of the aircraft.
Since the Company 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
property, plant and equipment. As at 31 December, 2004, the net present
value of the lease commitments and the corresponding defeased deposits and
debt securities amounted to RMB2,462 million (2003: RMB2,409 million). As
a result of the Arrangements, the Company received net cash benefits which
were recognised as income (Note 3).
(h) As at 31 December, 2004 and up to the date of approval of these 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 new airport, Guangzhou Baiyun International
Airport, in which the Group has interests and for which such certificates
have not been granted. As at 31 December, 2004, carrying value of such
properties of the Group and the Company amounted to RMB2,477 million and
RMB1,417 million 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.
[LOGO] [CHINESE CHARACTERS] 71
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
11 CONSTRUCTION IN PROGRESS
2004 2003
RMB MILLION RMB million
----------- -----------
THE COMPANY
Shenzhen cargo centre 22 -
Guangzhou new airport support area 65 -
Boeing 777 aircraft engines upgrade 18 12
Guangzhou new airport base - 1,378
Hubei catering building - 28
Zhengzhou ticket selling office - 22
Material and engineering system 22 21
Henan office building - 14
Other 105 57
--- -----
232 1,532
--- -----
SUBSIDIARIES
Guangzhou new cargo centre 254 68
Fuzhou Chang Le airport facilities 20 14
Other 59 16
--- -----
333 98
--- -----
565 1,630
=== =====
12 INTEREST IN SUBSIDIARIES
THE COMPANY
2004 2003
RMB MILLION RMB million
----------- -----------
Unlisted shares/capital contributions, at cost 1,232 978
Amounts due from subsidiaries 917 468
----- -----
2,149 1,446
===== =====
In 2004, China Southern Airlines (Group) Zhuhai Helicopter Company Limited, a
wholly owned subsidiary of the Company, was dissolved. Its operations and assets
and liabilities were transferred to the Company. No material gains or losses
were incurred by the Company on dissolution of the subsidiary.
A new subsidiary, Guangzhou Air Cargo Company Limited, was established in 2004.
Details of the Company's principal subsidiaries are set out in Note 37.
72 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
13 INTEREST IN ASSOCIATES
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Share of attributable net assets
other than goodwill 429 422 - -
Unlisted capital contributions, at cost - - 357 348
Impairment loss for investment
in an associate - - (61) (61)
--- --- --- ---
429 422 296 287
=== === === ===
Details of the Group's principal associates are set out in Note 38.
14 INTEREST IN JOINTLY CONTROLLED ENTITIES
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Share of attributable net assets
other than goodwill 782 731 - -
Unlisted capital contributions, at cost - - 636 564
--- --- --- ---
782 731 636 564
=== === === ===
Details of the Company's principal jointly controlled entities are set out in
Note 38.
An analysis of the Group's attributable share of assets, liabilities, revenues
and expenses of the jointly controlled entities is set out below:
2004 2003
RMB MILLION RMB million
----------- -----------
Non-current assets 845 606
Current assets 794 619
Non-current liabilities (389) (236)
Current liabilities (468) (258)
---- ----
Net assets 782 731
==== ====
Income 762 486
Expenses (767) (525)
---- ----
Net loss (5) (39)
==== ====
[LOGO] [CHINESE CHARACTERS] 73
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
15 OTHER INVESTMENTS
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
NON-CURRENT INVESTMENTS
Equity securities available for sale 272 204 167 107
=== === === ===
CURRENT INVESTMENTS
Equity securities held for trading 523 - 502 -
Debt securities held-to-maturity 160 - - -
--- --- --- ---
683 - 502 -
=== === === ===
16 DEFERRED EXPENDITURE
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Custom duties and other direct costs 19 26 8 18
Lump sum housing benefits (Note 29) 197 223 197 223
Deferred loss on aircraft sale and
leaseback arrangements 100 - 100 -
--- --- --- ---
316 249 305 241
=== === === ===
17 DEFERRED TAX
Movements in net deferred tax (liabilities)/assets are as follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Balance at 1 January, (398) (779) (90) (507)
Credited/(charged) to income
statement (Note 7)
- current year 111 (11) 141 25
- adjustment for change in
income tax rate - 392 - 392
---- ---- --- ----
Balance at 31 December, (287) (398) 51 (90)
==== ==== === ====
74 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
17 DEFERRED TAX (cont'd)
The net deferred tax (liabilities)/assets at 31 December, 2004 were made up of
the following tax effects:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Deferred tax assets:
Tax losses 39 223 39 223
Repairs and maintenance accruals 129 88 125 93
Repair charges capitalised 254 261 195 199
Accrued expenses 146 19 146 19
Other 21 9 20 11
---- ---- --- ---
Total deferred tax assets 589 600 525 545
---- ---- --- ---
Deferred tax liabilities:
Repairs and maintenance accruals 75 81 - -
Depreciation of property, plant and
equipment 752 848 459 591
Other 49 69 15 44
---- ---- --- ---
Total deferred tax liabilities 876 998 474 635
---- ---- --- ---
Net deferred tax (liabilities)/assets (287) (398) 51 (90)
==== ==== === ===
18 INVENTORIES
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Expendable spare parts
and maintenance materials 1,175 486 904 183
Other supplies 127 58 95 30
----- --- --- ---
1,302 544 999 213
===== === === ===
No significant amount of inventories was carried at net realisable value at 31
December, 2003 and 2004.
[LOGO] [CHINESE CHARACTERS] 75
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
19 TRADE RECEIVABLES
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
provision for doubtful accounts, is set out below:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Within 1 month 998 589 863 446
More than 1 month but
less than 3 months 163 236 133 228
More than 3 months but
less than 12 months 42 9 39 9
----- --- ----- ---
1,203 834 1,035 683
===== === ===== ===
As at 31 December, 2004, the Group and the Company had an amount due from a
fellow subsidiary of RMB52 million (2003: RMB54 million) which was included in
trade receivables.
All of the trade receivables are expected to be recovered within one year.
20 CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash at bank and in hand and deposits with
Southern Airlines Group Finance Company Limited ("SA Finance"), a PRC authorised
financial institution controlled by CSAHC and an associate of the Group. In
accordance with the financial agreement dated 22 May, 1997 between the Company
and SA Finance, all the Group's deposits accepted by SA Finance at 31 December,
2004 were simultaneously placed with several designated major PRC banks by SA
Finance. As at 31 December, 2004, the Group's and the Company's deposits with SA
Finance amounted to RMB406 million and RMB362 million respectively (2003: RMB366
million and RMB346 million respectively).
76 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
21 BANK AND OTHER LOANS
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
BANK LOANS DUE:
Within one year 11,518 7,097 10,161 5,959
In the second year 1,626 646 1,476 401
In the third to fifth year, inclusive 6,422 1,224 5,283 826
After the fifth year 3,887 2,649 3,781 2,443
------ ------ ------ -----
23,453 11,616 20,701 9,629
OTHER LOANS DUE:
In the second year - 3 - -
------ ------ ------ -----
23,453 11,619 20,701 9,629
Portion classified as current liabilities (11,518) (7,097) (10,161) (5,959)
------- ------ ------- ------
11,935 4,522 10,540 3,670
======= ====== ======= ======
As at 31 December, 2004, bank loans of the Group and the Company totalling
RMB8,620 million and RMB7,783 million respectively (2003: RMB4,902 million and
RMB3,823 million respectively) were secured by mortgages over certain of the
Group's and the Company's aircraft with carrying amount of RMB11,927 million and
RMB10,179 million respectively (2003: RMB6,718 million and RMB4,938 million
respectively).
As at 31 December, 2004, loans to the Group and the Company from SA Finance
amounted to RMB256 million and RMB76 million respectively (2003: RMB120 million
and RMB 120 million respectively).
As at 31 December, 2004, certain bank loans were guaranteed by the following
parties:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Industrial Commercial Bank of China 149 - 149 -
Export-Import Bank
of the United States 1,732 2,208 969 1,236
Bank of China 291 357 53 262
CSAHC 2,452 359 1,812 229
Guangzhou Baiyun International
Airport Company Limited - 63 - -
Shenzhen Yingshun Investment
Development Company Limited - 21 - -
SA Finance 9 10 - -
----- ----- ----- -----
4,633 3,018 2,983 1,727
===== ===== ===== =====
[LOGO] [CHINESE CHARACTERS] 77
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
21 BANK AND OTHER LOANS (cont'd)
Details of bank and other loans with original maturity over one year are as
follows:
INTEREST RATES AND FINAL MATURITY
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
(i) RENMINBI DENOMINATED LOANS
Fixed interest rates ranging from 4.80%
to 6.03% per annum as at 31 December, 2004,
with maturities through 2009. 1,628 - 135 -
Non-interest bearing loan from a municipal
government authority, repayable in 2005. 3 3 - -
Floating interest rates ranging from 4.94% to
5.76% per annum as at 31 December, 2004, with
maturities through 2014. 1,217 76 1,217 -
(ii) US DOLLARS DENOMINATED LOANS
Floating interest rates ranging from 3 months
LIBOR+0.65% to 0.9% per annum as at 31
December, 2004, with maturities through 2011. 1,426 - 1,426 -
Floating interest rates ranging from 6 months
LIBOR+0.3% to 1.2% per annum as at 31
December, 2004, with maturities through 2014. 6,578 2,505 6,578 2,505
Fixed interest rates ranging from 2.18% to 8.35%
per annum as at 31 December, 2004, with maturities
through 2011. 2,676 2,626 2,326 1,546
------ ----- ------ -----
13,528 5,210 11,682 4,051
Less: Loans due within one year classified as
current liabilities (1,593) (688) (1,142) (381)
------ ----- ------ -----
11,935 4,522 10,540 3,670
====== ===== ====== =====
78 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
21 BANK AND OTHER LOANS (cont'd)
As at 31 December, 2004, bank and other loans of the Group and the Company
included short-term bank loans totalling RMB9,925 million and RMB9,019 million
respectively (2003: RMB6,409 million and RMB5,578 million respectively). On such
date, the Group's and the Company's weighted average interest rate on short-term
borrowings were 1.60% and 1.56% per annum respectively (2003: 1.76% and 1.65%
per annum respectively).
As at 31 December, 2004, the Group had banking facilities with several PRC
commercial banks for providing loan finance up to an approximate amount of
RMB35,750 million (2003: RMB9,860 million). As at 31 December, 2004, an
approximate amount of RMB11,525 million (2003: RMB4,412 million) was utilised.
22 OBLIGATIONS UNDER FINANCE LEASES
The Group and the Company have commitments under finance lease agreements in
respect of aircraft and related equipment expiring during the years 2005 to
2013. As at 31 December, 2004, future payments under these finance leases, which
were 67% and 33% respectively (2003: 74% and 26% respectively) denominated in
United States dollars and Japanese yen, are as follows:
THE GROUP AND THE COMPANY
-------------------------------------------------------------------------------
2004 2003
OBLIGATIONS PAYMENTS INTEREST Obligations Payments Interest
RMB MILLION RMB MILLION RMB MILLION RMB million RMB million RMB million
----------- ----------- ----------- ----------- ----------- -----------
Balance due:
Within one year 2,081 2,580 499 1,298 1,648 350
In the second year 2,829 3,213 384 1,066 1,357 291
In the third to fifth year, inclusive 6,021 6,540 519 3,909 4,348 439
After the fifth year 688 722 34 568 608 40
------ ------ ----- ------ ----- -----
11,619 13,055 1,436 6,841 7,961 1,120
------ ------ ----- ------ ----- -----
Less: Balance due within one year
classified as current liabilities (2,081) (1,298)
------ ------
9,538 5,543
====== ======
Certain lease financing arrangements comprised finance leases between the
Company and certain of its subsidiaries, and corresponding borrowings between
such subsidiaries and banks. The Company has guaranteed the subsidiaries'
obligations under the bank borrowings and accordingly, the relevant leased
assets and obligations are recorded in the Company's balance sheet to reflect
the substance of the transactions. The future payments under these leases have
therefore been presented by the Company and the Group in amounts that reflect
the payments under the bank borrowings between the subsidiaries and banks.
[LOGO] [CHINESE CHARACTERS] 79
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
22 OBLIGATIONS UNDER FINANCE LEASES (cont'd)
Under the terms of the leases, the Group has an option to purchase, at or near
the end of the lease term, certain aircraft at fair market value and others 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.
As at 31 December, 2004, certain of the Group's and the Company's aircraft with
carrying amount of RMB11,511 million (2003: RMB7,858 million) were mortgaged to
secure facilities with financial institutions granted to lessors totalling
RMB11,619 million (2003: RMB6,841 million).
23 AMOUNTS DUE TO RELATED COMPANIES
Amounts due to related companies, which represent balances with CSAHC and its
affiliates, and the Group's associates and jointly controlled entities, are
unsecured, interest free and repayable within one year (Note 28).
24 TRADE PAYABLES
An ageing analysis of trade payables is set out below:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Due within 1 month or on demand 599 279 505 207
Due after 1 month but
within 3 months 430 278 370 231
Due after 3 months but
within 6 months 525 371 445 308
----- --- ----- ---
1,554 928 1,320 746
===== === ===== ===
As at 31 December, 2004, the Group and the Company had an amount due to a fellow
subsidiary of RMB838 million (2003: RMB693 million) which was included in trade
payables.
All of the trade payables are expected to be settled within one year.
80 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
25 PROVISION FOR MAJOR OVERHAULS
Details of provision for major overhauls in respect of aircraft held under
operating leases are as follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Balance at 1 January, 200 194 131 63
Provision for the year 89 68 47 68
Through the CNA/XJA Acquisitions 70 - 70 -
Amount utilised - (62) - -
--- --- --- ---
Balance at 31 December, 359 200 248 131
Less: Current portion included in
accrued expenses (75) (11) (62) -
--- --- --- ---
284 189 186 131
=== === === ===
26 SHARE CAPITAL
2004 2003
RMB MILLION RMB million
----------- -----------
Registered capital:
2,200,000,000 domestic shares of RMB 1.00 each 2,200 2,200
1,174,178,000 H shares of RMB 1.00 each 1,174 1,174
1,000,000,000 A shares of RMB 1.00 each 1,000 1,000
----- -----
4,374 4,374
===== =====
Issued and paid up capital:
2,200,000,000 domestic shares of RMB 1.00 each 2,200 2,200
1,174,178,000 H shares of RMB 1.00 each 1,174 1,174
1,000,000,000 A shares of RMB 1.00 each 1,000 1,000
----- -----
4,374 4,374
===== =====
In July 2003, the Company issued 1,000,000,000 A shares with a par value of
RMB1.00 each at an 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 million, amounted to RMB1,641
million and was credited to share premium account.
All the domestic, H and A shares rank pari passu in all material respects.
[LOGO] [CHINESE CHARACTERS] 81
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
27 RESERVES
THE GROUP THE COMPANY
2004 2003 2004 2003
Note RMB MILLION RMB million RMB MILLION RMB million
---- ----------- ------------ ----------- -----------
SHARE PREMIUM
Balance at 1 January, 5,325 3,684 5,325 3,684
Share premium from issuance of shares,
net of related issuance costs - 1,641 - 1,641
----- ----- ----- -----
Balance at 31 December, 5,325 5,325 5,325 5,325
----- ----- ----- -----
STATUTORY SURPLUS RESERVE (a)
Balance at 1 January, 361 337 339 338
Transfer from income statement 41 24 10 1
----- ----- ----- -----
Balance at 31 December, 402 361 349 339
----- ----- ----- -----
STATUTORY PUBLIC WELFARE FUND (b)
Balance at 1 January, 173 172 172 171
Transfer from income statement 20 1 5 1
----- ----- ----- -----
Balance at 31 December, 193 173 177 172
----- ----- ----- -----
DISCRETIONARY SURPLUS RESERVE (c)
Balance at 1 January and 31 December, 77 77 77 77
----- ----- ----- -----
RETAINED EARNINGS
Balance at 1 January, 1,586 1,969 (138) 446
Loss for the year (48) (358) (169) (581)
Appropriations to reserves (61) (25) (15) (3)
----- ----- ----- -----
Balance at 31 December, 1,477 1,586 (322) (138)
----- ----- ----- -----
TOTAL 7,474 7,522 5,606 5,775
===== ===== ===== =====
82 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
27 RESERVES (cont'd)
Notes:
(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 profits
after taxation, as determined under relevant PRC accounting 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.
(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% and 10% of their annual
net profits after taxation, as determined under PRC accounting
regulations, to the statutory public welfare fund. This fund can only be
utilised 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 fund
must be made before distribution of a dividend to shareholders.
(c) The usage of this reserve is similar to that of statutory surplus reserve.
(d) Under PRC Company Law and the Company's Articles of Association, the net
profit after taxation as reported in the PRC statutory financial
statements of the Company can only be distributed as dividends after
allowances have been made for:
(i) making up cumulative prior years' losses, if any;
(ii) allocations to the statutory surplus reserve of at least 10% of
after-tax profit, until the fund aggregates to 50% of the Company's
registered capital;
(iii) allocations of 5% to 10% of after-tax profit to the Company's
statutory public welfare fund; and
(iv) allocations to the discretionary surplus reserve, if approved by the
shareholders.
Pursuant to the Articles of Association of the Company, the net profit of
the Company for the purpose of profit distribution is deemed to be the
lesser of (i) the net profit determined in accordance with the PRC
accounting regulations and (ii) the net profit determined in accordance
with IFRS; or if the financial statements of the Company are not prepared
in accordance with IFRS, the accounting standards of one of the countries
in which its shares are listed. As at 31 December, 2004 the Company did
not have any distributable reserves (2003: Nil).
[LOGO] [CHINESE CHARACTERS] 83
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
28 RELATED PARTY TRANSACTIONS
The Group obtained various operational and financial services provided by CSAHC
and its affiliates, and the Group's associates and jointly controlled entities
during the normal course of its business.
The following is a summary of significant transactions carried out in the normal
course of business between the Group, CSAHC and its affiliates, and the Group's
associates and jointly controlled entities during the year:
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
EXPENSES
PAID TO CSAHC AND ITS AFFILIATES
Handling charges (a) 33 27
Wet lease rentals (b) - 36
Sundry aviation supplies (c) 66 43
Commission expense (d) 2 5
Air catering expense (e) 50 28
Housing benefits (f) 85 85
Lease charges for land and buildings (g) 18 15
PAID TO ASSOCIATES AND JOINTLY CONTROLLED ENTITIES
Repairing charges (h) 1,159 693
Flight simulation service charges (i) 100 101
Interest expense (j) 3 -
INCOME
RECEIVED FROM ASSOCIATES AND JOINTLY CONTROLLED ENTITIES
Interest income (k) 4 3
Rental income (l) 34 34
OTHERS
Short term advances from CSAHC (m) - 166
Refund of medical benefit payments (n) - 58
CNA/XJA Acquisitions (o) 15,398 -
====== ===
Notes:
(a) Handling charges represent fees payable to Southern Airlines (Group)
Import and Export Trading Company, a wholly owned subsidiary of CSAHC, in
connection with the procurement of aircraft and flight equipment on the
Group's behalf. Handling charges are calculated based on a fixed
percentage of the purchase value and other charges.
(b) Wet lease rentals in 2003 represented rentals payable to Xinjiang Airlines
Company, a subsidiary of CSAHC, pursuant to a wet lease agreement in
respect of a Boeing 757-200 aircraft effective from October 2002. The wet
lease agreement was terminated in April 2003.
84 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
28 RELATED PARTY TRANSACTIONS (cont'd)
Notes: (cont'd)
(c) Sundry aviation supplies represent purchases of aviation supplies from
Southern Airlines (Group) Economic Development Company, a subsidiary of
CSAHC. Prices charged by this supplier to the Group are similar to those
charged to other PRC airlines.
(d) Commission expense represents commissions payable to certain subsidiaries
of CSAHC in connection with services provided in exchange for air tickets
sold by them. These commissions are calculated based on a fixed rate
ranging from 1.5% to 12% on the ticket value.
(e) Air catering expense represents purchases of 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 profits after tax.
(f) Housing benefits represent a fixed annual fee payable to CSAHC in respect
of the provision of quarters to the eligible employees of the Group (Note
29).
(g) Charges were paid to CSAHC under certain lease agreements in respect of
certain land and buildings in the PRC (Note 10(c)).
(h) Repairing charges represent fees incurred by the Group in connection with
aircraft repair and maintenance services rendered by Guangzhou Aircraft
Maintenance Engineering Company Limited ("GAMECO") and MTU Maintenance
Zhuhai Co., Ltd. ("MTU Zhuhai"). GAMECO and MTU Zhuhai are jointly
controlled entities of the Company.
(i) Flight simulation service charges represent fees incurred by the Group in
connection with flight simulation services provided by Zhuhai Xiang Yi
Aviation Technology Company Limited ("Zhuhai Xiang Yi"), a jointly
controlled entity of the Company.
(j) Interest expense represents interest paid to loans from SA Finance. The
applicable interest rate in determined in accordance with borrowing rate
published by the PRC (Note 21).
(k) Interest income represents interest received from deposits placed with SA
Finance. The applicable interest rate is determined in accordance with the
deposit rate published by the PRC (Note 20).
(l) Rental income represents rental received under certain operating lease
agreements where the Company leases certain flight training facilities and
buildings to Zhuhai Xiang Yi (Note 10(f)).
(m) During 2003, CSAHC made short term advances to the Group. These advances
were unsecured, interest free and fully repaid in 2004.
(n) Prior to 1 January, 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 1 January, 2002. During 2003, CSAHC refunded to the
Group 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.
(o) As disclosed in Note 1 to the financial statements, on 31 December, 2004
the Company acquired the airline operations and certain related assets of
CNA and XJA at a total consideration of RMB15,398 million, which was
partly satisfied by assumption of debts and liabilities of CNA and XJA
totalling RMB13,439 million outstanding as at that date. The remaining
consideration payable of RMB1,959 million will be satisfied in cash.
[LOGO] [CHINESE CHARACTERS] 85
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
28 RELATED PARTY TRANSACTIONS (cont'd)
In addition to the above, certain business undertakings of CSAHC also provided
hotel and other services to the Group during the year. The total amount involved
is not material to the results of the Group for the year.
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.
29 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 located. The Group is required to contribute
to these schemes at the rates ranging from 14% to 20% (2003: 14% to 19%) of
salary costs including certain allowances. A member of the retirement schemes is
entitled to pension benefits equal to a fixed proportion of the salary at the
retirement date. The retirement benefit obligations of all existing and future
retired staff of the Group are assumed by these schemes.
In addition, the Group was selected as one of the pilot enterprises to establish
a supplementary defined contribution retirement scheme for the benefit of
employees. In this connection, employees of the Group participate in a
supplementary defined contribution retirement scheme whereby the Group is
required to make defined contributions at a rate of 4.5% 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 the income statement as and when incurred.
Furthermore, pursuant to the comprehensive services agreement (the "Services
Agreement") dated 22 May, 1997 between the Company and CSAHC, CSAHC agrees to
provide adequate quarters to eligible employees of the Group as and when
required. In return, the Group agrees to pay a fixed annual fee of RMB85 million
to CSAHC for a ten-year period effective 1 January, 1995.
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 housing. Such
expenditure has been deferred and amortised on a straight line basis over a
period of 10 years, which represents the vesting benefit period of the
employees. An employee who quits prior to the end of the vesting benefit period
is required to pay back a portion of the lump sum housing benefits determined on
a pro-rata basis of the vesting benefit period. 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 at 31 December, 2004, the Group already
made payments totalling RMB191 million (2003: RMB130 million) under the scheme
and recorded its remaining contractual liabilities totalling RMB69 million
(2003: RMB130 million) as accrued expenses on its balance sheet. Housing
allowances are payable when applications are received from eligible employees.
86 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
30 COMMITMENTS
(a) CAPITAL COMMITMENTS
As at 31 December, 2004, the Group and the Company had capital commitments as
follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Commitments in respect of aircraft and related
equipment (Note)
- authorised and contracted for 11,776 10,615 10,121 7,739
- authorised but not contracted for 13,571 - 13,571 -
------ ------ ------ ------
25,347 10,615 23,692 7,739
------ ------ ------ ------
Commitments in respect of investments in the
Guangzhou new airport
- authorised and contracted for 110 617 110 617
- authorised but not contracted for 714 1,455 714 1,455
------ ------ ------ ------
824 2,072 824 2,072
------ ------ ------ ------
Other commitments
- authorised and contracted for 132 233 117 30
- authorised but not contracted for 568 708 200 229
------ ------ ------ ------
700 941 317 259
------ ------ ------ ------
26,871 13,628 24,833 10,070
====== ====== ====== ======
[LOGO] [CHINESE CHARACTERS] 87
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
30 COMMITMENTS (cont'd)
(a) CAPITAL COMMITMENTS (cont'd)
Note:
As at 31 December, 2004, the Group had on order five Boeing 737-700 aircraft,
six Airbus 319-100 aircraft, fifteen Airbus 320-200 aircraft, two Airbus 321-200
aircraft, four Airbus 330-200 aircraft, one Embraer ERJ-145 aircraft and certain
flight equipment, scheduled for deliveries in 2005 to 2007. Deposits of RMB4,640
million have been made towards the purchase of these aircraft and related
equipment. As at 31 December, 2004, the approximate total future payments,
including estimated amounts for price escalation through anticipated delivery
dates for these aircraft and related equipment are as follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Year ended/ending 31 December
2004 - 4,585 - 3,249
2005 8,748 6,030 7,093 4,490
2006 2,996 - 2,996 -
2007 32 - 32 -
------ ------ ------ -----
11,776 10,615 10,121 7,739
=-==== ====== ====== =====
As at 31 December, 2004, the Group's and the Company's attributable share of the
capital commitments of jointly controlled entities was as follows:
2004 2003
RMB MILLION RMB million
----------- -----------
Authorised and contracted for - 24
Authorised but not contracted for 156 284
--- ---
156 308
=== ===
88 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
30 COMMITMENTS (cont'd)
(b) OPERATING LEASE COMMITMENTS
As at 31 December, 2004, commitments under non-cancellable aircraft and flight
equipment operating leases were as follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Payments due Within one year 1,761 1,483 1,488 1,194
In the second to fifth year, inclusive 9,207 4,248 8,602 3,579
After the fifth year 1,782 2,389 1,761 2,278
------ ----- ------ -----
12,750 8,120 11,851 7,051
====== ===== ====== =====
(c) INVESTING COMMITMENTS
At 31 December, 2004, the Group and the Company committed to make capital
contributions in respect of:
2004 2003
RMB MILLION RMB million
----------- -----------
Subsidiaries 181 -
Jointly controlled entities 83 446
--- ---
264 446
=== ===
31 CONTINGENT LIABILITIES
(a) Pursuant to the Reorganisation 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
Reorganisation, 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 Reorganisation. There are not,
however, any definitive PRC regulations or other pronouncements confirming
such conclusion.
[LOGO] [CHINESE CHARACTERS] 89
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
31 CONTINGENT LIABILITIES (cont'd)
(b) 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.
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 of the land in Guangzhou. The Company 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
their uses 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.
(c) The Company is involved in a civil litigation (Hong Kong High Court Action
No. 515 of 2001) ("Litigation") which commenced in 2003. According to the
writ of summons for the Litigation, New Link Consultants Limited, the
plaintiff claimed unspecified damages against the Group (as one of the
defendants to the Litigation) for breach of the agreement 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 should have
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. Based on the opinion given
by the Company's legal advisors, the directors of the Company consider
that the Company has a valid defence against the claim and that a
provision for such claim and/or the associated legal costs is not
required.
32 FINANCIAL INSTRUMENTS
Financial assets of the Group include cash and cash equivalents, trade
receivables, other receivables and short-term investments. Financial liabilities
of the Group include bank and other loans, amounts due to related companies,
trade payables, bills payable, other liabilities and taxes payable.
LIQUIDITY RISK
As at 31 December, 2004, the Group's net current liabilities amounted to
RMB18,792 million (2003: RMB10,792 million). For the year ended 31 December,
2004, the Group recorded a net cash inflow from operating activities of RMB3,596
million (2003: RMB2,129 million), a net cash outflow from investing activities
and financing activities of RMB2,593 million (2003: RMB3,819 million) and an
increase in cash and cash equivalents of RMB1,003 million (2003: decrease of
RMB1,690 million).
90 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
32 FINANCIAL INSTRUMENTS (cont'd)
LIQUIDITY RISK (cont'd)
In 2005 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. The Group has
obtained firm commitments from its principal bankers to renew its short-term
bank loans outstanding at 31 December, 2004 when they fall due during 2005. In
relation to its future capital commitments and other financing requirements, the
Group has already entered into loan financing agreements with several PRC banks
to provide loan finance up to an approximate amount of RMB24,225 million during
2005 and thereafter. The directors of the Company believe that such 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 31 December, 2005. 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
realised.
BUSINESS RISK
The Group conducts its principal operations in the 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
airlines services industry.
INTEREST RATE RISK
The interest rates and maturity information of the Group's bank and other loans,
and maturity information of the Group's finance lease obligations are disclosed
in Notes 21 and 22 respectively.
FOREIGN CURRENCY RISK
The Group has significant exposure to foreign currency as substantially all of
the Group's lease obligations and bank loans 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, or subject to certain restrictive
conditions, entering into forward foreign exchange contracts with authorised PRC
banks.
[LOGO] [CHINESE CHARACTERS] 91
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
32 FINANCIAL INSTRUMENTS (cont'd)
CREDIT RISKS
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 organised by International Air Transportation
Association. As of 31 December, 2004, the balance due from BSP agents amounted
to RMB411 million (2003: RMB446 million).
SELF INSURANCE RISK
The Group maintains a limited amount of property insurance in respect of certain
personal and real property.
FAIR VALUE
The carrying amounts and estimated fair values of significant financial assets
and liabilities at 31 December, 2003 and 2004 are set out below:
2004 2003
CARRYING FAIR Carrying Fair
AMOUNT VALUE amount value
RMB MILLION RMB MILLION RMB million RMB million
----------- ----------- ----------- -----------
THE GROUP
Cash and cash equivalents 3,083 3,083 2,080 2,080
Trade receivables 1,203 1,203 834 834
Other receivables 616 616 296 296
Short-term investments 683 683 - -
Bank and other loans 23,453 23,665 11,619 11,907
Amounts due to related companies 2,330 2,330 929 929
Trade payables 1,554 1,554 928 928
Bills payable 136 136 438 438
Other liabilities 2,974 2,974 1,020 1,020
Taxes payable 39 39 90 90
92 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
32 FINANCIAL INSTRUMENTS (cont'd)
FAIR VALUE (cont'd)
2004 2003
CARRYING FAIR Carrying Fair
AMOUNT VALUE amount value
RMB MILLION RMB MILLION RMB million RMB million
----------- ----------- ----------- -----------
THE COMPANY
Cash and cash equivalents 2,302 2,302 1,405 1,405
Trade receivables 1,035 1,035 683 683
Other receivables 391 391 222 222
Short-term investments 502 502 - -
Bank and other loans 20,701 20,862 9,629 9,837
Amounts due to related companies 2,278 2,278 871 871
Trade payables 1,320 1,320 746 746
Bills payable 136 136 438 438
Other liabilities 2,467 2,467 854 854
Taxes payable - - 48 48
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 investments, amounts due to related companies, trade payables,
bills payable, other liabilities and taxes payable
The carrying values approximate fair value because of the short maturities
of these instruments.
(ii) Bank and other loans
The fair value has been estimated by applying a discounted cash flow
approach using interest rates available to the Group for similar
indebtedness.
The economic characteristics of the Group's 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 the purpose
of estimating the fair value of such leases. Other investments represent
unquoted available-for-sale equity securities of companies established in
the PRC. There is no quoted market price for such equity securities and
accordingly a reasonable estimate of the fair value could not be made
without incurring excessive costs.
Fair value estimates are made at a specific point in time and are based on
relevant market information about the financial instruments. These
estimates are subjective in nature and involve uncertainties and matters
of significant judgement and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
[LOGO] [CHINESE CHARACTERS] 93
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
33 SEGMENTAL INFORMATION
The Group operates principally as a single business segment for the provision of
air transportation services. The analysis of turnover and operating profit 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.
Geographic information about the Group's turnover and operating profit/(loss) is
as follows:
HONG KONG
DOMESTIC REGIONAL *INTERNATIONAL TOTAL
RMB million RMB million RMB million RMB million
----------- ----------- -------------- -----------
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 profit 650 67 192 909
====== ===== ===== ======
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 profit/(loss) 440 (29) 45 456
====== ===== ===== ======
* Mainly routes between the PRC and Asian countries, the United States of
America, the Netherlands, Belgium, Australia and France.
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 the PRC.
94 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
34 RECONCILIATION AND SUPPLEMENTARY STATEMENT OF CASH FLOW INFORMATION
(a) THE RECONCILIATION OF PROFIT/(LOSS) BEFORE TAXATION AND MINORITY INTERESTS
TO CASH INFLOWS FROM OPERATIONS IS AS FOLLOWS:
2004 2003
RMB MILLION RMB million
----------- -----------
Profit/(loss) before taxation and minority interests 233 (511)
Depreciation and amortisation of property, plant and equipment 2,363 1,998
Other amortisation 50 40
Amortisation of deferred credits (4) (2)
Share of associates' results (12) (48)
Share of jointly controlled entities' results 5 39
Loss on disposal of property, plant and equipment 1 22
Interest income (22) (13)
Interest expense 725 824
Net realised and unrealised gain on equity securities held for trading (15) -
Unrealised exchange loss, net 42 177
(Increase)/decrease in inventories (29) 2
Increase in trade receivables (218) (162)
(Increase)/decrease in other receivables (166) 77
Increase in prepaid expenses and other assets (31) (6)
Increase in deferred expenditure (2) -
(Decrease)/increase in amounts due to related companies (586) 404
Increase in trade payables 344 396
Decrease in bills payable (374) (862)
Increase in sales in advance of carriage 408 76
Increase in accrued expenses 507 203
Increase in other liabilities 1,223 373
Increase in provision for major overhauls 113 48
----- -----
Cash inflows from operations 4,555 3,075
===== =====
[LOGO] [CHINESE CHARACTERS] 95
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
34 RECONCILIATION AND SUPPLEMENTARY STATEMENT OF CASH FLOW INFORMATION
(b) EFFECT OF THE CNA/XJA ACQUISITIONS
2004
RMB MILLION
-----------
Assets acquired:
Property, plant and equipment 12,856
Cash and cash equivalents 398
Trade receivables 314
Inventories 729
Other 1,101
------
15,398
======
Liabilities assumed:
Bank and other loans 4,587
Obligations under finance leases 6,001
Trade payables 343
Accrued expenses 1,475
Other 1,033
------
13,439
------
Net identifiable assets and liabilities 1,959
======
Cash consideration payable and not yet settled 1,959
======
Net cash inflow from acquisitions - cash and cash equivalents acquired 398
======
35 ULTIMATE HOLDING COMPANY
The directors of the Company consider the ultimate holding company to be CSAHC,
a state-owned enterprise established in the PRC.
36 SUBSEQUENT EVENTS
In January 2005, the Company, as a lessee, entered into an agreement with an
independent lessor for operating leases of nine Boeing 737-800 aircraft for a
term of seven years with total future lease payments totalling approximately
RMB1,721 million, scheduled for deliveries in 2005 and 2006.
In January 2005, China Aviation Supplies Import and Export Corporation, as a
sole importing agent, entered into, on behalf of several PRC airlines including
the Group, a general purchase agreement with the Boeing Company for the import
of Boeing B7E7 aircraft. The Company, being one of the ultimate users for
thirteen of the Boeing B7E7 aircraft, endorsed the general purchase agreement.
The Company is currently in negotiation with the Boeing Company regarding the
purchase agreements on such aircraft.
96 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
36 SUBSEQUENT EVENTS (cont'd)
In March 2005, the Company, as a lessee, entered into another agreement with an
independent lessor for operating leases of a total of twenty-five aircraft
comprising five Boeing 737-700 aircraft, five Boeing 737-800 aircraft, five
Airbus 320-200 aircraft and ten Airbus 321-200 aircraft with scheduled
deliveries in 2006 and 2007. The term of the lease ranges from ten to twelve
years with total future lease payments totalling approximately RMB8.2 million.
In April 2005, the Company entered into a purchase agreement with Airbus SNC for
the purchase of five Airbus A380 aircraft, scheduled for deliveries in 2007 to
2010.
37 SUBSIDIARIES
The particulars of the Company's principal subsidiaries at 31 December, 2004 are
as follows:
ATTRIBUTABLE
PLACE AND DATE OF EQUITY INTEREST ISSUED/
ESTABLISHMENT/ ---------------- REGISTERED
NAME OF COMPANY OPERATION DIRECT INDIRECT CAPITAL# PRINCIPAL ACTIVITIES
% %
Guangxi Airlines PRC 60 - 170,900,000 Airline
Company Limited (a) 28 April, 1994
Southern Airlines (Group) PRC 60 - 280,000,000 Airline
Shantou Airlines 20 July, 1993
Company Limited (a)
Zhuhai Airlines PRC 60 - 250,000,000 Airline
Company Limited (a) 8 May, 1995
Xiamen Airlines PRC 60 - 700,000,000 Airline
Company Limited (a) 11 August, 1984
Guizhou Airlines PRC 60 - 80,000,000 Airline
Company Limited (a) 12 November, 1991
Guangzhou Air Cargo PRC 70 - 238,000,000 Cargo services
Company Limited (a) 31 March, 2004
Guangzhou Baiyun International PRC 61 - 20,000,000 Logistics operations
Logistic Company Ltd (a) 23 July, 2002
Guangzhou Nanland Air PRC 51 - 55,980,000 Air catering
Catering Company 21 November, 1989
Limited (b)
China Northern Airlines PRC 75 - US$ 3,800,000 Aircraft repair
Aircraft Maintenance 8 November, 1997 and maintenance
Co., Ltd (a) services
[LOGO] [CHINESE CHARACTERS] 97
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
37 SUBSIDIARIES (cont'd)
PLACE AND DATE OF ATTRIBUTABLE ISSUED/
ESTABLISHMENT/ EQUITY INTEREST REGISTERED
NAME OF COMPANY OPERATION DIRECT INDIRECT CAPITAL# PRINCIPAL ACTIVITIES
% %
Xinjiang Aviation Ground PRC 60 - 15,000,000 Airport ground
Service Company Ltd (a) 27 May, 2002 services
China Southern West Australia 65 - A$ 100,000 Pilot training services
Australian Flying 26 January, 1971
College Pty Limited
Xinjiang Civil Aviation Property PRC 51.8 - 251,332,832 Utility service
Management Limited (a) 12 December, 2002
Guangzhou Aviation Hotel (a) PRC 90 - 63,290,000 Hotel operation
8 January, 1997
South China International PRC 90 - 2,100,000 Travel services
Aviation & Travel 11 May, 1992
Services Company (a)
CZ Flamingo Limited Cayman Islands 100 - US$ 1,000 Aircraft leasing
8 December, 1993
CZ Skylark Limited Cayman Islands 100 - US$ 1,000 Aircraft leasing
17 November, 1993
CZ Kapok Limited Cayman Islands 100 - US$ 1,000 Aircraft leasing
26 October, 1993
CSA-I Limited Cayman Islands 100 - US$ 1,000 Aircraft leasing
1 September, 1993
CZ93B Limited Cayman Islands 100 - US$ 1,000 Aircraft leasing
11 May, 1993
CZ97A Limited Cayman Islands 100 - US$ 1,000 Aircraft leasing
2 January, 1997
Zhong Yuan 99A Limited Cayman Islands 100 - US$ 1,000 Aircraft leasing
15 February, 1999
CXA92A Limited Cayman Islands - 60 US$ 1,000 Aircraft leasing
3 August, 1992
98 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
37 SUBSIDIARIES (cont'd)
ATTRIBUTABLE
PLACE AND DATE OF EQUITY INTEREST ISSUED/
ESTABLISHMENT/ ---------------- REGISTERED
NAME OF COMPANY OPERATION DIRECT INDIRECT CAPITAL# PRINCIPAL ACTIVITIES
% %
CXA93A Limited Cayman Islands - 60 US$ 1,000 Aircraft leasing
1 July, 1993
CXA95B Limited Cayman Islands - 60 US$ 1,000 Aircraft leasing
7 July, 1995
CXA95C Limited Cayman Islands - 60 US$ 1,000 Aircraft leasing
16 October, 1995
CXA98A Limited Cayman Islands - 60 US$ 1,000 Aircraft leasing
20 March, 1998
Xiamen Aviation PRC - 60 5,000,000 Property development
Property Development 22 June, 1993
Company (a)
Xiamen Aviation PRC - 60 8,560,000 Aviation supplies
Supplies Limited (a) 30 July, 1997
Xiamen Aviation PRC - 54 5,000,000 Hotel management
Development 18 February, 1998
Company Limited (a)
Xiamen Air Holidays Hong Kong - 54 HK$ 3,000,000 Travel servicing
Limited 28 April, 1994
Xiamen Macau Macau - 27.5 MOP 1,000,000 Travel servicing
Holidays Limited 11 May, 1995
Shantou Hua Kang Air PRC - 42 10,000,000 Air catering
Catering Company Ltd (a) 22 June, 1994
# Expressed in RMB, unless otherwise stated
(a) These subsidiaries are PRC limited companies.
(b) These subsidiaries are Sino-foreign equity joint venture companies.
[LOGO] [CHINESE CHARACTERS] 99
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under International Financial Reporting Standards)
(Expressed in Renminbi)
38 ASSOCIATES AND JOINTLY CONTROLLED ENTITIES
The particulars of the Group's principal associates and jointly controlled
entities as at 31 December, 2004 are as follows:
ATTRIBUTABLE
PLACE AND DATE OF EQUITY INTEREST ISSUED/
ESTABLISHMENT/ ---------------- REGISTERED
NAME OF COMPANY OPERATION DIRECT INDIRECT CAPITAL# PRINCIPAL ACTIVITIES
% %
Guangzhou Aircraft PRC
Maintenance 28 October, 1989 50 - US$ 27,500,000 Provision of aircraft
Engineering repair and
Company Limited* maintenance
services
Southern Airlines PRC 32 15.42 424,330,000 Provision of financial
Group Finance 28 June, 1995 services
Company Limited
Hainan Phoenix PRC 45 - US$ 16,360,000 Provision of ticket
Information 12 March, 1994 reservation system
System Limited services
Hong Kong Business Hong Kong 20 - HK$ 1,000,000 Provision of private
Aviation Centre 7 January, 1998 flight logistic
Company Limited services
Sichuan Airlines PRC 39 - 350,000,000 Airline
Corporation Limited 28 August, 2002
MTU Maintenance PRC 50 - US$ 63,100,000 Provision of engine
Zhuhai Co. Ltd.* 6 April, 2001 repair and
maintenance
services
China Postal Airlines PRC 49 - 306,000,000 Airline
Limited* 25 November, 1996
Zhuhai Xiang Yi PRC 51 - US$ 29,800,000 Provision of flight
Aviation Technology 10 July, 2002 simulation training
Company Limited* services
CSN-ETC e-commerce PRC 51 - 5,880,000 Provision of internet
Limited* 7 October, 2002 services
Beijing Ground Service PRC 50 - 18,000,000 Airport ground service
Company Limited* 1 April, 2004 support
Southern Airlines PRC 45 - 5,000,000 Aviation advertising
Advertising Company 3 March, 1994
Limited
# Expressed in RMB, unless otherwise stated
* These are jointly controlled entities
100 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Report of the PRC Auditors
[KPMG HUAZHEN LOGO]
KPMG-A(2005)AR No. 0283
TO THE SHAREHOLDERS OF CHINA SOUTHERN AIRLINES COMPANY LIMITED:
We have audited the accompanying Company's consolidated balance sheet and
balance sheet at 31 December, 2004, and the consolidated income statement and
profit appropriation statement, income statement and profit appropriation
statement, consolidated cash flow statement and cash flow statement for the year
then ended. The preparation of these financial statements is the responsibility
of the Company's management. Our responsibility is to express an audit opinion
on these financial statements based on our audit.
We conducted our audit in accordance with China's Independent Auditing Standards
of the Certified Public Accountants. Those standards require that we plan and
perform the audit to obtain reasonable assurance as to whether the financial
statements are free from material misstatement. An audit includes examination,
on a test basis, of evidence supporting the amounts and disclosures in the
financial statements, an assessment of the accounting policies used and
significant estimates made by the Company's management in the preparation of the
financial statements, as well as evaluating the overall financial statements
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the above-mentioned financial statements comply with the
requirements of the Accounting Standards for Business Enterprises and the
Accounting Regulations for Business Enterprises issued by the Ministry of
Finance of the People's Republic of China and present fairly, in all material
respects, the Company's consolidated financial position and financial position
at 31 December, 2004, and the consolidated results of operations, results of
operations, and consolidated cash flows and cash flows for the year then ended.
KPMG HUAZHEN Certified Public Accountants
Registered in the People's Republic
of China
8/F, Office Tower E2
Oriental Plaza CHEN YU HONG
No.1, East Chang An Avenue LEI IUN MEI
Beijing, The People's Republic of China
Post Code: 100738 25 April, 2005
[LOGO] [CHINESE CHARACTERS] 101
CHINA SOUTHERN
Consolidated Balance Sheet
As at 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
ASSETS
CURRENT ASSETS:
Cash at bank and on hand 5 3,274 2,321
Short-term investments 6 669 -
Trade receivables 7 1,592 892
Other receivables 8 731 317
Advance payments 9 147 85
Inventories 10 1,398 632
Prepaid expenses 11 346 203
------ ------
TOTAL CURRENT ASSETS 8,157 4,450
------ ------
LONG-TERM EQUITY INVESTMENTS 12 741 622
------ ------
FIXED ASSETS:
Fixed assets, at cost 61,326 40,898
Less: Accumulated depreciation 13,706 11,503
------ ------
Net book value of fixed assets 13 47,620 29,395
Construction materials 14 - 2
Construction in progress 15 626 1,937
------ ------
TOTAL FIXED ASSETS 48,246 31,334
------ ------
OTHER ASSETS:
Lease and equipment deposits 16 5,397 2,933
Long-term deferred expenditure 17 131 26
Intangible assets 18 467 -
Long-term receivables 19 16 6
------ ------
TOTAL OTHER ASSETS 6,011 2,965
------ ------
TOTAL ASSETS 63,155 39,371
====== ======
The notes on pages 119 to 182 form part of these financial statements.
102 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Consolidated Balance Sheet (Cont'd)
As at 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term loans 20 10,173 6,429
Bills payable 21 137 448
Trade payables 22 2,600 1,667
Receipts in advance 5 -
Sales in advance of carriage 23 874 466
Wages payable 179 74
Staff welfare payable 79 131
Taxes payable 3 324 102
CAAC infrastructure development fund payable 24 162 354
Other creditors 25 333 6
Other payables 26 4,328 892
Accrued expenses 27 3,729 2,387
Long-term liabilities due within one year 28 3,691 1,986
------ ------
TOTAL CURRENT LIABILITIES 26,614 14,942
LONG-TERM LIABILITIES:
Long-term loans 29 12,324 4,780
Obligations under finance leases 30 9,538 5,543
Provision for major overhauls 31 284 189
Deferred credits 32 240 217
------ ------
TOTAL LONG-TERM LIABILITIES 22,386 10,729
DEFERRED TAXATION:
Deferred tax liabilities 33 282 392
------ ------
TOTAL LIABILITIES 49,282 26,063
MINORITY INTERESTS 2,220 1,758
The notes on pages 119 to 182 form part of these financial statements.
[LOGO] [CHINESE CHARACTERS] 103
CHINA SOUTHERN
Consolidated Balance Sheet (Cont'd)
As at 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
SHAREHOLDERS' EQUITY:
Share capital 34 4,374 4,374
Capital reserve 35 5,801 5,801
Surplus reserves 36 672 611
Including: Statutory public welfare fund 193 173
Retained profits 806 764
------ ------
TOTAL SHAREHOLDERS' EQUITY 11,653 11,550
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 63,155 39,371
====== ======
Approved by the Board of Directors on 25 April, 2005.
LIU SHAO YONG SI XIAN MIN XU JIE BO XIAO LI XIN
Chairman Director and President Director and General Manager of
Chief Financial Officer Finance Department
The notes on pages 119 to 182 form part of these financial statements.
104 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Balance Sheet
As at 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
ASSETS
CURRENT ASSETS:
Cash at bank and on hand 5 2,302 1,405
Short-term investments 6 487 -
Trade receivables 7 1,297 683
Other receivables 8 1,395 754
Advance payments 9 118 68
Inventories 10 999 211
Prepaid expenses 11 199 114
------ ------
TOTAL CURRENT ASSETS 6,797 3,235
LONG-TERM EQUITY INVESTMENTS 12 4,227 3,658
FIXED ASSETS:
Fixed assets, at cost 49,899 31,795
Less: Accumulated depreciation 10,775 8,972
------ ------
Net book value of fixed assets 13 39,124 22,823
Construction materials 14 - 2
Construction in progress 15 219 1,543
------ ------
TOTAL FIXED ASSETS 39,343 24,368
OTHER ASSETS:
Lease and equipment deposits 16 4,674 2,229
Long-term deferred expenditure 17 109 17
Intangible assets 18 296 -
------ ------
TOTAL OTHER ASSETS 5,079 2,246
DEFERRED TAXATION:
Deferred tax assets 33 55 -
------ ------
TOTAL ASSETS 55,501 33,507
====== ======
The notes on pages 119 to 182 form part of these financial statements.
[LOGO] [CHINESE CHARACTERS] 105
CHINA SOUTHERN
Balance Sheet (Cont'd)
As at 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term loans 20 9,220 5,578
Bills payable 21 136 438
Trade payables 22 2,331 1,448
Receipts in advance 5 -
Sales in advance of carriage 23 806 406
Wages payable 152 30
Staff welfare payable 8 -
Taxes payable 3 141 11
CAAC infrastructure development fund payable 24 108 293
Other creditors 25 271 1
Other payables 26 3,752 766
Accrued expenses 27 3,191 1,683
Long-term liabilities due within one year 28 3,223 1,679
------ ------
TOTAL CURRENT LIABILITIES 23,344 12,333
LONG-TERM LIABILITIES:
Long-term loans 29 10,540 3,670
Obligations under finance leases 30 9,538 5,543
Provision for major overhauls 31 186 131
Deferred credits 32 240 217
------ ------
TOTAL LONG-TERM LIABILITIES 20,504 9,561
DEFERRED TAXATION:
Deferred tax liabilities 33 - 63
------ ------
TOTAL LIABILITIES 43,848 21,957
The notes on pages 119 to 182 form part of these financial statements.
106 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Balance Sheet (Cont'd)
As at 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
Note RMB'000 RMB'000
---- ------- -------
SHAREHOLDERS' EQUITY:
Share capital 34 4,374 4,374
Capital reserve 35 5,801 5,801
Surplus reserves 36 603 588
Including: Statutory public welfare fund 177 172
Retained profits 875 787
------ ------
TOTAL SHAREHOLDERS' EQUITY 11,653 11,550
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 55,501 33,507
====== ======
Approved by the Board of Directors on 25 April, 2005.
LIU SHAO YONG SI XIAN MIN XU JIE BO XIAO LI XIN
Chairman Director and President Director and General Manager
Chief Financial Officer Finance Department
The notes on pages 119 to 182 form part of these financial statements.
[LOGO] [CHINESE CHARACTERS] 107
CHINA SOUTHERN
Consolidated Income Statement and Profit Appropriation Statement
For the year ended 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
REVENUE FROM PRINCIPAL OPERATIONS 38 24,194 17,351
Less: Transfer to CAAC infrastructure development fund 4 - 251
------ ------
NET REVENUE FROM PRINCIPAL OPERATIONS 24,194 17,100
Less: Cost of principal operations 19,296 14,222
Business taxes and surcharges 39 692 191
------ ------
PROFIT FROM PRINCIPAL OPERATIONS 4,206 2,687
Add: Profit from other operations 40 135 326
Less: Selling expenses 2,058 1,519
Administrative expenses 1,226 893
Financial expenses 41 727 996
------ ------
OPERATING PROFIT/(LOSS) 330 (395)
Add: Investment income 42 63 62
Non-operating income 43 126 43
Less: Non-operating expenses 44 127 71
------ ------
PROFIT/(LOSS) BEFORE INCOME TAX 392 (361)
Less: Income tax 45 87 (605)
Minority interests 202 229
------ ------
NET PROFIT FOR THE YEAR 103 15
====== ======
The notes on pages 119 to 182 form part of these financial statements.
108 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Consolidated Income Statement and Profit Appropriation Statement (Cont'd)
For the year ended 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
NET PROFIT FOR THE YEAR 103 15
Add: Retained profits at the beginning of the year 764 774
--- ---
PROFITS AVAILABLE FOR DISTRIBUTION 867 789
Less: Transfer to statutory surplus reserve 36 41 24
Transfer to statutory public welfare fund 36 20 1
--- ---
PROFITS AVAILABLE FOR DISTRIBUTION TO SHAREHOLDERS 806 764
Less: Transfer to discretionary surplus reserve 36 - -
Dividends distributed to shareholders - -
--- ---
RETAINED PROFITS AT THE END OF THE YEAR 806 764
=== ===
The notes on pages 119 to 182 form part of these financial statements.
[LOGO] [CHINESE CHARACTERS] 109
CHINA SOUTHERN
Income Statement and Profit Appropriation Statement
For the year ended 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
REVENUE FROM PRINCIPAL OPERATIONS 38 16,735 11,918
Less: Transfer to CAAC infrastructure development fund 4 - 168
------ ------
NET REVENUE FROM PRINCIPAL OPERATIONS 16,735 11,750
Less: Cost of principal operations 13,818 10,243
Business taxes and surcharges 39 456 132
------ ------
PROFIT FROM PRINCIPAL OPERATIONS 2,461 1,375
Add: Profit from other operations 40 188 253
Less: Selling expenses 1,483 1,111
Administrative expenses 774 547
Financial expenses 41 585 888
------ ------
OPERATING LOSS (193) (918)
Add: Investment income 42 224 267
Non-operating income 43 106 18
Less: Non-operating expenses 44 58 24
------ ------
PROFIT/(LOSS) BEFORE TAXATION 79 (657)
Less: Income tax 45 (24) (672)
------ ------
NET PROFIT FOR THE YEAR 103 15
====== ======
The notes on pages 119 to 182 form part of these financial statements.
110 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Income Statement and Profit Appropriation Statement (Cont'd)
For the year ended 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
NET PROFIT FOR THE YEAR 103 15
Add: Retained profits at the beginning of the year 787 774
--- ---
PROFITS AVAILABLE FOR DISTRIBUTION 890 789
Less: Transfer to statutory surplus reserve 36 10 1
Transfer to statutory public welfare fund 36 5 1
--- ---
PROFITS AVAILABLE FOR DISTRIBUTION TO SHAREHOLDERS 875 787
Less: Transfer to discretionary surplus reserve 36 - -
Dividends distributed to shareholders - -
--- ---
RETAINED PROFITS AT THE END OF THE YEAR 875 787
=== ===
The notes on pages 119 to 182 form part of these financial statements.
[LOGO] [CHINESE CHARACTERS] 111
CHINA SOUTHERN
Consolidated Cash Flow Statement
For year ended 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sale of goods and rendering of services 24,134 17,542
Cash received relating to other operating activities 116 182
------ ------
SUB-TOTAL OF CASH INFLOWS 24,250 17,724
Cash paid for goods and services 16,125 12,272
Cash paid to and on behalf of employees 2,272 1,634
Cash paid for various types of taxes 955 463
Cash paid relating to other operating activities 588 513
------ ------
SUB-TOTAL OF CASH OUTFLOWS 19,940 14,882
NET CASH INFLOW FROM OPERATING ACTIVITIES (i) 4,310 2,842
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from return on investments 26 17
Net cash received from disposal of fixed assets
and other long-term assets 88 65
Refund of deposits for fixed assets purchases 1,253 1,066
Cash received from CNA/XJA Acquisitions (iii) 398 -
Other cash received relating to investing activities 22 13
------ ------
SUB-TOTAL OF CASH INFLOWS 1,787 1,161
Cash paid for acquisition of fixed assets and
other long-term assets 10,234 6,698
Cash paid for acquisition of investments 682 4
------ ------
SUB-TOTAL OF CASH OUTFLOWS 10,916 6,702
------ ------
NET CASH OUTFLOW FROM INVESTING ACTIVITIES (9,129) (5,541)
The notes on pages 119 to 182 form part of these financial statements.
112 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Consolidated Cash Flow Statement (Cont'd)
For year ended 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
Note RMB'000 RMB'000
---- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from investors 172 4
Cash received from borrowings 14,840 9,116
Cash received from the issuance of A shares - 2,641
------ ------
SUB-TOTAL OF CASH INFLOWS 15,012 11,761
Cash paid for repayment of borrowings 8,489 9,947
Cash paid for dividends or interest 751 939
------ ------
SUB-TOTAL OF CASH OUTFLOWS 9,240 10,886
------ ------
NET CASH OUTFLOW FROM FINANCING ACTIVITIES 5,772 875
------ ------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (ii) 953 (1,824)
====== ======
The notes on pages 119 to 182 form part of these financial statements.
[LOGO] [CHINESE CHARACTERS] 113
CHINA SOUTHERN
Consolidated Cash Flow Statement (Cont'd)
For year ended 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT RMB MILLION RMB million
--------------------------------------------- ----------- -----------
(i) RECONCILIATION OF NET PROFIT TO CASH FLOWS FROM
OPERATING ACTIVITIES:
Net profit 103 15
Add: Depreciation of fixed assets and amortisation of intangible assets 2,503 2,094
Amortisation of long-term deferred expenditure 15 14
Amortisation of deferred credits (34) (32)
(Gain)/loss on sale of fixed assets (6) 19
Financial expenses 697 975
Minority interests 202 229
Investment income (63) (62)
Increase in operating receivables (635) (105)
(Increase)/decrease in inventories (37) 21
Increase in prepaid expenses (78) (38)
Increase in operating payables 859 140
Increase in sales in advance of carriage 408 75
(Decrease)/increase in accrued expenses (72) 118
Increase/(decrease) in taxes payable 166 (20)
Increase in other creditors 323 3
Decrease in deferred taxation (110) (652)
Increase in provision for major overhauls 69 48
----- ------
NET CASH INFLOW FROM OPERATING ACTIVITIES 4,310 2,842
===== ======
(ii) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS:
Cash and cash equivalents at the end of the year 3,274 2,321
Less: Cash and cash equivalents at the beginning of the year 2,321 4,145
----- ------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 953 (1,824)
===== ======
The notes on pages 119 to 182 form part of these financial statements.
114 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Consolidated Cash Flow Statement (Cont'd)
For year ended 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004
NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (cont'd) RMB MILLION
------------------------------------------------------ -----------
(iii) CASH RECEIVED FROM CNA/XJA ACQUISITIONS:
Assets acquired:
Fixed assets 12,856
Cash at bank and on hand 398
Trade receivables 314
Inventories 729
Other 1,101
------
15,398
------
Liabilities assumed:
Short-term and long-term loans 4,587
Obligations under finance leases 6,001
Trade payables 343
Accrued expenses 1,475
Other 1,033
------
13,439
------
NET ASSETS AND LIABILITIES 1,959
======
CASH CONSIDERATION PAYABLE AND NOT YET SETTLED 1,959
======
NET CASH INFLOW FROM ACQUISITIONS
- CASH AND CASH EQUIVALENTS ACQUIRED 398
======
The notes on pages 119 to 182 form part of these financial statements.
[LOGO] [CHINESE CHARACTERS] 115
CHINA SOUTHERN
Cash Flow Statement
For year ended 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sale of goods and rendering of services 16,911 11,991
Cash received relating to other operating activities 105 88
------ ------
SUB-TOTAL OF CASH INFLOWS 17,016 12,079
Cash paid for goods and services 11,595 9,318
Cash paid to and on behalf of employees 1,753 1,255
Cash paid for various types of taxes 533 193
Cash paid relating to other operating activities 427 230
------ ------
SUB-TOTAL OF CASH OUTFLOWS 14,308 10,996
NET CASH INFLOW FROM OPERATING ACTIVITIES (i) 2,708 1,083
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from return on investments 46 3
Net cash received from disposal of fixed assets
and other long-term assets 81 7
Refund of deposits for fixed assets purchases 891 1,066
Cash received from CNA/XJA Acquisitions (iii) 370 -
Cash received relating to other investing activities 17 7
------ ------
SUB-TOTAL OF CASH INFLOWS 1,405 1,083
Cash paid for acquisition of fixed assets and
other long-term assets 7,312 5,512
Cash paid for acquisition of investments 734 12
------ ------
SUB-TOTAL OF CASH OUTFLOWS 8,046 5,524
------ ------
NET CASH OUTFLOW FROM INVESTING ACTIVITIES (6,641) (4,441)
The notes on pages 119 to 182 form part of these financial statements.
116 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Cash Flow Statement (Cont'd)
For year ended 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from borrowings 12,644 8,083
Cash received from the issuance of A shares - 2,641
------ ------
SUB-TOTAL OF CASH INFLOWS 12,644 10,724
Cash paid for repayment of borrowings 7,230 8,116
Cash paid for dividends or interest 584 805
------ ------
SUB-TOTAL OF CASH OUTFLOWS 7,814 8,921
------ ------
NET CASH INFLOW FROM FINANCING ACTIVITIES 4,830 1,803
------ ------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (ii) 897 (1,555)
====== ======
The notes on pages 119 to 182 form part of these financial statements.
[LOGO] [CHINESE CHARACTERS] 117
CHINA SOUTHERN
Cash Flow Statement (Cont'd)
For year ended 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004 2003
NOTES TO THE CASH FLOW STATEMENT RMB'000 RMB'000
-------------------------------- ------- -------
(i) RECONCILIATION OF NET PROFIT TO CASH FLOWS FROM
OPERATING ACTIVITIES:
Net profit 103 15
Add: Depreciation of fixed assets and amortisation of intangible assets 1,885 1,574
Amortisation of long-term deferred expenditure 12 7
Amortisation of deferred credits (34) (32)
Loss/(gain) on sale of fixed assets 17 (3)
Financial expenses 560 871
Investment income (224) (266)
Increase in operating receivables (769) (664)
Increase in inventories (61) (23)
Increase in prepaid expenses (17) -
Increase in operating payables 481 94
Increase in sales in advance of carriage 400 65
Increase in accrued expenses 102 79
Increase/(decrease) in taxes payable 76 (29)
Increase/(decrease) in other creditors 266 (1)
Decrease in deferred taxation (118) (672)
Increase in provision for major overhauls 29 68
----- ------
NET CASH INFLOW FROM OPERATING ACTIVITIES 2,708 1,083
===== ======
(ii) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS:
Cash and cash equivalents at the end of the year 2,302 1,405
Less: Cash and cash equivalents at the beginning of the year 1,405 2,960
----- ------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 897 (1,555)
===== ======
The notes on pages 119 to 182 form part of these financial statements.
118 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Cash Flow Statement (Cont'd)
For year ended 31 December, 2004
(Prepared under PRC Accounting Rules and Regulations)
2004
NOTES TO THE CASH FLOW STATEMENT (cont'd) RMB'000
----------------------------------------- -------
(iii) CASH RECEIVED FROM CNA/XJA ACQUISITIONS:
Assets acquired:
Fixed assets 12,606
Cash at bank and on hand 370
Trade receivables 305
Inventories 727
Other 1,336
------
15,344
------
Liabilities assumed:
Short-term and long-term loans 4,587
Obligations under finance leases 6,001
Trade payables 343
Accrued expenses 1,464
Other 990
------
13,385
------
NET ASSETS AND LIABILITIES 1,959
======
CASH CONSIDERATION PAYABLE AND NOT YET SETTLED 1,959
======
NET CASH INFLOW FROM ACQUISITIONS
- CASH AND CASH EQUIVALENTS ACQUIRED 370
======
The notes on pages 119 to 182 form part of these financial statements.
[LOGO] [CHINESE CHARACTERS] 119
CHINA SOUTHERN
Notes to the Financial Statements
(Prepared under PRC Accounting Rules and Regulations)
1 BACKGROUND OF THE COMPANY
China Southern Airlines Company Limited (the "Company") and its subsidiary
companies (collectively the "Group") are principally engaged in the provision of
domestic, Hong Kong regional and international passenger, cargo and mail airline
services, with flights operating primarily from the new 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 is a joint stock limited company established by China Southern Air
Holding Company ("CSAHC") pursuant to an approval document Ti Gai Sheng [1994]
No. 139 from the State Commission for Economic Restructuring of the Peoples'
Republic of China ("PRC"). CSAHC injected airline-related assets and liabilities
as at 1 January, 1994 into the Company in exchange for 2,200,000,000 domestic
shares with a par value of RMB1.00 each. The Company was established on 25
March, 1995, and took over the control of the airline business from CSAHC since
that date.
Pursuant to an approval document Zheng Wei Fa [1997] No. 33 from the China
Securities Regulatory Commission, the Company listed its 1,174,178,000 H Shares
on both the Stock Exchange of Hong Kong Limited and the New York Stock Exchange
in July 1997.
Pursuant to an extraordinary general meeting of shareholders held on 21 May,
2002, a resolution was passed authorising the Company to issue not more than
1,000,000,000 A shares of par value of RMB1.00 each. Pursuant to an approval
document (2003) No. 70 from the China Securities Regulatory Commission, the
Company issued and listed its 1,000,000,000 A shares with a par value of RMB1.00
each on the Shanghai Stock Exchange in July 2003.
On 13 March, 2003, the Company obtained an approval certificate Wai Jing Mao Zi
Yi [2003] No. 273 from the Ministry of Foreign Trade & Economic Cooperation to
change to a permanent joint stock limited company with foreign investments and
obtained the business licence dated 17 October, 2003 (Qi Gu Guo Fu Zi No.
000995) issued by the State Administration of Industry and Commerce of the PRC.
Pursuant to a sale and purchase agreement dated 12 November, 2004 between the
Company, CSAHC, China Northern Airlines Company ("CNA") and Xinjiang Airlines
Company ("XJA") which was approved by the Company's shareholders in an
extraordinary general meeting held on 31 December, 2004, the Company acquired
the airline operations and certain related assets of CNA and XJA with effect
from 31 December, 2004 (the "CNA/XJA Acquisitions"). The consideration payable
for the CNA/XJA Acquisitions amounting to RMB15,398 million was determined based
on the fair value of the acquired assets. Such consideration was partly
satisfied by assumption of debts and liabilities of CNA and XJA totalling
RMB13,439 million outstanding as at 31 December, 2004 and the remaining balance
of RMB1,959 million will be satisfied in cash.
120 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
2 SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies adopted by the Group in the preparation of
the financial statements conform to the Accounting Standards for Business
Enterprises and the "Accounting Regulations for Business Enterprises" and other
relevant regulations issued by the Ministry of Finance ("MOF"). Pursuant to a
notice Cai Kuai (2003) No.18 from the MOF, the Group adopts the "Accounting
Method for Civil Aviation Enterprises" since 1 January, 2003. The significant
accounting policies adopted in the preparation of these financial statements are
set out below:
(a) ACCOUNTING YEAR
The accounting year of the Group is from 1 January to 31 December.
(b) BASIS OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
"Accounting Regulations for Business Enterprises" and Cai Kuai Zi [1995] No.11
"Provisional regulations on consolidated financial statements" issued by the
MOF.
The consolidated financial statements include the financial statements of the
Company and all of its principal subsidiaries. Subsidiaries are those entities
in which the Company has more than 50% equity interest or those entities
controlled by the Company. The consolidated income statement of the Company only
includes the results of the subsidiaries during the period when the Company has
more than 50% equity interest, or when the Company does not have more than 50%
equity interest, but has control over those entities. The effect of minority
interests on equity and profit/loss attributable to minority interests are
separately shown in the consolidated financial statements. For those
subsidiaries whose assets and results of operations are not significant and have
no significant effect on the Group's consolidated financial statements, the
Company does not consolidate these subsidiaries.
Where the accounting policies adopted by subsidiaries are different from the
policies adopted by the Company, the financial statements of the subsidiaries
have been adjusted in accordance with the accounting policies adopted by the
Company on consolidation. All significant intercompany balances and
transactions, and any unrealised gains arising from inter-company transactions,
have been eliminated on consolidation.
For those jointly controlled entities which the Company has joint control with
other investors under contractual arrangements, the Company consolidates their
assets, liabilities, revenues, costs and expenses based on the proportionate
consolidation method according to its percentage of equity interest holding in
those entities in the consolidated financial statements.
(c) BASIS OF PREPARATION
The financial statements have been prepared on an accrual basis under the
historical costs convention, unless otherwise stated.
(d) REPORTING CURRENCY
The financial statements are prepared in Renminbi.
[LOGO] [CHINESE CHARACTERS] 121
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
2 SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(e) TRANSLATION OF FOREIGN CURRENCIES
Foreign currency transactions during the year are translated into Renminbi at
the exchange rates quoted by the People's Bank of China ruling at the
transaction dates. Monetary assets and liabilities denominated in foreign
currencies are translated into Renminbi at the exchange rates quoted by the
People's Bank of China ruling at the balance sheet date. Exchange gains and
losses on foreign currency translation, except for the exchange gains and losses
directly relating to the construction of fixed assets (see note 2(j)) below, are
dealt with in the income statement.
(f) CASH EQUIVALENTS
Cash equivalents are short-term and highly liquid investments which are readily
convertible into known amounts of cash and are subject to an insignificant risk
of change in value.
(g) PROVISION FOR BAD AND DOUBTFUL DEBTS
Trade accounts receivable showing signs of uncollectibility are identified
individually and allowance is then made based on the probability of being
uncollectible. In respect of trade accounts receivable showing no sign of
uncollectibility, allowance is made with reference to the ageing analysis and
management's estimation based on past experience.
Allowances for other receivables are made based on the nature of the receivables
and estimation of the corresponding collectibility risk.
(h) INVENTORIES
Inventories, which consist primarily of expendable spare parts and consumables,
are carried at the lower of cost and net realisable value. Inventories are
measured at their actual cost upon acquisition. The cost of inventories is
calculated using the weighted average method. Any excess of the cost over the
net realisable value of each class of inventories is recognised as a provision
for diminution in value of inventories. Net realisable value is determined based
on amount recoverable in the normal course of business after the balance sheet
date or estimates made by management based on market conditions. Inventories are
recorded using the perpetual stocking method.
Inventories are amortised in full when issued for use.
(i) INVESTMENTS
(ii) SHORT-TERM INVESTMENTS
Short-term investments are carried at the lower of cost and market value. The
cost of a short-term investment is the total price paid on acquisition of the
investment. However, it does not include cash dividends which have been declared
but which are unpaid or unpaid interest on debentures which was due at the time
of acquisition.
122 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
2 SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(i) INVESTMENTS (cont'd)
(i) SHORT-TERM INVESTMENTS (cont'd)
Provision for diminution in value is made on an item-by-item basis for any
shortfall of the market value over the cost of material short-term investments.
Provision for diminution in value is also made for any shortfall of the market
value over the cost of other short-term investments on an aggregate basis by
each category of the investments.
With the exception of cash dividends which have been declared but which are
unpaid at the time of acquisition and interest on debentures which is due but
not yet paid at the time of acquisition, cash dividends and interest are set off
against the carrying amount of the short-term investments when received by the
Company. Upon the disposal of short-term investments, the difference between the
carrying amount of the short-term investments and the proceeds received is
recognised in the income statement for the current period.
(ii) LONG-TERM EQUITY INVESTMENTS
Where the Company has the power to control, jointly control or exercise
significant influence over an investee enterprise, the investment is accounted
for under the equity method of accounting whereby the investment is initially
recorded at cost and adjusted thereafter for any post acquisition change in the
Company's share of the investors' equity in the investee enterprise.
Equity investment difference, which is the difference between the initial
investment cost and the Company's share of investors' equity in the investee
enterprise, is accounted for as follows:
- Any excess of the initial investment cost over the Company's share of the
investors' equity in the investee enterprise is amortised on a
straight-line basis. The amortisation period is determined according to
the investment period as stipulated in the relevant agreement, or 10 years
if the investment period is not specified in the agreement. The
unamortised balance is included in long-term equity investments at the
year end.
- Any shortfall of the initial investment cost over the Company's share of
the investors' equity in the investee enterprise is amortised on a
straight-line basis over 10 years if the investment was acquired before
the MOF's issuance of the "Questions and Answers on Implementing
Accounting Regulations for Business Enterprises and Related Accounting
Standards (II)" (Cai Kuai [2003] No. 10). The unamortised balance is
included in long-term equity investments at the year end. Any shortfalls
are recognised in the "Capital surplus - reserve for equity investment" if
the investment is acquired after the issuance of Cai Kuai [2003] No. 10.
Where the Company does not control, jointly control or exercise significant
influence over an investee enterprise, the investment is accounted for under the
cost method, stating it at the initial investment cost. Investment income is
recognised when the investee enterprise declares a cash dividend or distributes
profits.
Upon the disposal or transfer of long-term equity investments, the difference
between the proceeds received and the carrying amount of the investments is
recognised in the income statement.
The Group makes provision for impairment losses on long-term equity investments
(see note 2(n)).
[LOGO] [CHINESE CHARACTERS] 123
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
2 SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(j) FIXED ASSETS AND CONSTRUCTION IN PROGRESS
Fixed assets represent the assets held by the Group for rendering services and
administrative purposes with useful lives over 1 year and comparatively high
unit values.
Fixed assets are stated in the balance sheet at cost or revalued amount less
accumulated depreciation and impairment losses (see note 2(n)). Construction in
progress are stated in the balance sheet at cost less impairment losses (see
note 2(n)). Valuation is carried out in accordance with the relevant rules and
regulations in the PRC and the assets are adjusted to the revalued amounts
accordingly.
All direct and indirect costs related to the acquisition or construction of
fixed assets, incurred before the assets are ready for their intended uses, are
capitalised as construction in progress. Those costs include borrowing costs,
which include foreign exchange differences, on specific borrowings for the
construction of the fixed assets during the construction period.
Construction in progress is transferred to fixed assets when the asset is ready
for its intended use. No depreciation is provided on construction in progress.
Pursuant to an approval document Cai Kuai Han [2004] No. 39 issued by the MOF,
the Group accounts for high value rotables as fixed assets.
Depreciation is provided to write off the cost of fixed assets over their
estimated useful lives on a straight-line basis, after taking into account their
estimated residual values. The respective annual depreciation rates for fixed
assets are as follows:
ANNUAL DEPRECIATION RATE
Owned and leased aircraft 4.75%-6.33%
Other flight equipment:
- Jet engines 6.47%-12.13%
- Others, including high value rotables 6.67%-12.5%
Buildings 2.5%-6.67%
Machinery and equipment 9.7%-19.4%
Motor vehicles 16.17%
Land use rights are stated in the balance sheet at cost or revalued amount less
accumulated depreciation and impairment losses (see note 2(n)), and are
amortised on a straight-line basis over the period for land use rights.
(k) LEASED ASSETS
Leases are classified into finance leases and operating leases. A finance lease
is a lease that transfers substantially all the risks and rewards incidental to
ownership of a leased asset to the lessee, whether or not the legal title to the
asset is eventually transferred. An operating lease is a lease other than a
finance lease.
124 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
2 SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(k) LEASED ASSETS (cont'd)
(i) ASSETS ACQUIRED UNDER FINANCE LEASES
Fixed assets acquired by way of finance leases are stated under fixed assets at
an amount equal to the lower of their original carrying amount in the books of
the legal owner (the lessor) and the present value of the minimum lease payments
at the inception of the lease. Depreciation of leased assets is calculated using
the straight-line method.
If there is no reasonable certainty that the Group will obtain ownership of the
leased assets at the end of the lease term, the leased assets are depreciated
over the shorter of the lease term or their estimated useful lives. If there is
reasonable certainty that the Group will obtain ownership of the leased assets
at the end of the lease term, the leased assets are depreciated over their
estimated useful lives.
At the inception of the lease, the minimum lease payments are recorded as
payables under finance leases. The difference between the value of the leased
assets and the minimum lease payments is recognised as unrecognised finance
charges under finance leases. At the year end, payables under finance leases are
netted against the unrecognised finance charges under finance leases and
included in long-term payables in the balance sheet.
Unrecognised finance charges under finance leases are amortised using the
effective interest rate method over the lease term.
The Group makes provision for impairment losses on assets acquired under finance
leases (see note 2(n)).
(ii) OPERATING LEASE CHARGES
Rental payments under operating leases are recognised as expenses on a
straight-line basis over the lease term. Contingent rental payments are
recognised as expenses in the accounting period in which they are incurred.
(l) INTANGIBLE ASSETS
Intangible assets are stated in the balance sheet at cost less accumulated
amortisation and impairment losses (see note 2(n)). The cost of the intangible
assets is amortised on a straight-line basis over the contracted beneficial
period or the effective period stipulated by law, whichever is shorter. Where
the useful life is not stipulated by the contract or law, the amortisation is
over a period of 10 years.
(m) LONG-TERM DEFERRED EXPENSES
Custom duties and other direct costs incurred in relation to modifying,
introducing and certifying certain operating leased aircraft are deferred and
amortised on a straight-line basis over the terms of the related leases.
[LOGO] [CHINESE CHARACTERS] 125
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
2 SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(n) PROVISION FOR IMPAIRMENT
The carrying amounts of assets (including designated loans receivable, long-term
investments, fixed assets, construction in progress, intangible assets and other
assets) are reviewed regularly at each balance sheet date to determine whether
their recoverable amounts have declined below their carrying amounts. Assets are
tested for impairment whenever events or changes in circumstances indicate that
their recorded carrying amounts may not be recoverable. When such a decline has
occurred, the carrying amount is reduced to the recoverable amount. The amount
by which the carrying amount is reduced is the impairment loss.
The recoverable amount is the higher of the net selling price and the present
value of the estimated future cash flows arising from the continuous use of the
asset and from the disposal of the asset at the end of its useful life.
Provision for impairment loss is calculated on an item by item basis and
recognised as an expense in the income statement. However, when a shortfall of
the initial investment cost over the Group's share of the investors' equity of
the investee enterprise has been credited to the capital reserve, any impairment
losses for long-term equity investment are firstly set off against the
difference initially recognised in the capital reserve relating to the
investment and any excess impairment losses are then recognised in the income
statement.
If there is an indication that there has been a favourable change in the
estimates used to determine the recoverable amount and as a result the estimated
recoverable amount is greater than the carrying amount of the asset, the
impairment loss recognised in prior years is reversed. Reversals of impairment
losses are recognised in the income statement. Impairment losses are reversed to
the extent of the asset's carrying amount that would have been determined had no
impairment loss been recognised in prior years. In respect of the reversal of an
impairment loss for a long-term equity investment, the reversal starts with the
impairment losses that had previously been recognised in the income statement
and then the impairment losses that had been charged to the capital reserve.
(o) INCOME TAX
Income tax is recognised using the tax effect accounting method. Income tax for
the year comprises current tax paid and payable and movement of deferred tax
assets and liabilities.
Current tax is calculated at the applicable tax rate on taxable income.
Deferred tax is provided using the liability method for the differences between
the accounting profits and the taxable profits arising from the timing
differences in recognising income, expenses or losses between the accounting and
tax regulations. When the tax rate changes or a new type of tax is levied,
adjustments are made to the amounts originally recognised for the timing
differences under the liability method. The current tax rates are used in
arriving at the reversal amounts when the timing differences are reversed.
Deferred tax assets arising from tax losses, which are expected to be utilised
against future taxable profits, are set off against the deferred tax liabilities
(only for the same taxpayer within the same jurisdiction). When it is not
probable that the tax benefits of deferred tax assets will be realised, the
deferred tax assets are reduced to the extent that the related tax benefits are
expected to be realised.
126 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
2 SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(p) PROVISIONS AND CONTINGENT LIABILITIES
Provisions are recognised when the Group has a present obligation as a result of
a past event, it is probable that an outflow of economic benefits will be
required to settle the obligations and a reliable estimate can be made.
Where it is not probable that the settlement of the above obligation will cause
an outflow of economic benefits, or the amount of the outflow cannot be
estimated reliably, the obligation is disclosed as a contingent liability.
(q) REVENUE RECOGNITION
Provided it is probable that the economic benefits will flow to the Group and
the revenue and costs can be measured reliably, revenue is recognised in the
income statement as follows:
(i) Passenger, cargo and mail revenues are recognised when the transportation
is provided. Ticket sales for transportation not yet provided are included
in current liabilities as sales in advance of carriage;
(ii) Revenues from airline-related businesses are recognised when the relevant
services are rendered;
(iii) Interest income is recognised on a time proportion basis according to the
principal outstanding and the applicable rate; and
(iv) Dividend income is recognised when the Group's right to receive the
dividend is established.
(r) TRAFFIC COMMISSIONS
Traffic commissions are expensed when the transportation is provided and the
related revenue is recognised. Traffic commissions for transportation not yet
provided are recorded on the balance sheet as a prepaid expense.
(s) BORROWING COSTS
Borrowing costs incurred on specific borrowings for the construction of fixed
assets are capitalised into the cost of the fixed assets during the construction
period until the fixed assets are ready for their intended uses.
Except for the above borrowing costs, other borrowing costs are recognised as
financial expenses in the income statement when incurred.
(t) REPAIRS AND MAINTENANCE EXPENSES
Routine maintenance and repairs and overhauls in respect of owned aircraft and
aircraft held under finance leases are expensed as and when incurred. In respect
of aircraft held under operating leases, a provision is made over the lease term
for the estimated cost of overhauls that are required to be performed on the
related aircraft prior to their return to the lessors.
[LOGO] [CHINESE CHARACTERS] 127
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
2 SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(u) DIVIDENDS
Dividends appropriated to shareholders are recognised in the income statement
and profit appropriation statement when approved. Dividends proposed or approved
after the balance sheet date but before the date on which the financial
statements are authorised for issue are separately disclosed under shareholders'
equity in the balance sheet.
(v) RETIREMENT BENEFITS
Pursuant to the relevant laws and regulations in the PRC, the Group has joined
certain defined contribution retirement schemes for the employees arranged by
the governmental organisations. The Group makes contributions to the retirement
schemes at the applicable rates based on the employees' salaries. The required
contributions under the retirement schemes are charged to the income statement
when they are due.
(w) FREQUENT FLYER AWARD PROGRAMMES
The Group maintains two frequent flyer award programmes, namely, the China
Southern Airlines Sky Pearl Club and Egret Mileage Plus, which provide travel
awards to members based on accumulated mileage. The estimated incremental cost
of providing free travel is recognised 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
programmes is recognised when the related transportation services are provided.
(x) RELATED PARTIES
If the Group has the power, directly or indirectly, to control, jointly control
or exercise significant influence over another party, or vice versa, or where
the Group and one or more parties are subject to common control from another
party, they are considered to be related parties. Related parties may be
individuals or enterprises.
128 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
3 TAXATION
(a) MAJOR TAXES APPLICABLE TO THE RENDERING OF SERVICES BY THE GROUP ARE AS
FOLLOWS:
TYPE OF TAXES TAX RATES BASIS OF TAX
Business tax 3% or 5% Traffic revenue, ground services income and
commission income. All inbound international
and Hong Kong regional flights are exempted
from business tax
City construction tax 7% Business tax
Education surcharge 3% Business tax
Pursuant to approval documents Cai Shui [2003] No. 113 and Cai Shui [2003] No.
227 jointly issued by the MOF and State Tax Bureau, passenger revenue from
airline operations was exempted from business tax, city construction tax and
education surcharge during the period from 1 May, 2003 to 31 December, 2003.
As mentioned in Note 1, the Company has become a foreign investment enterprise.
Pursuant to Article 5 of [1985] Cai Sui Zi No. 069 "Ministry of Finance's Rules
on Certain Questions on City Construction Tax Provisional Regulations" and
Article 2 of [1994] No. 23 "State Council Supplementary Notice on Exemption of
Education Surcharge", the Company is exempted from city construction tax and
education surcharge since 1 October, 2003.
(b) INCOME TAX
The income tax rate applicable to the Company for the period from 1 January,
2003 to 30 September, 2003 was 33%. Commencing 1 October, 2003 the applicable
tax rate is 15%.
On 17 October, 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 1 October, 2003. As a result, the
Company's income tax rate has been changed to 15% beginning from that date.
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 PRC government, or has sustained
tax losses in these overseas jurisdictions. Accordingly, no provision for
overseas tax has been made for the year.
[LOGO] [CHINESE CHARACTERS] 129
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
3 TAXATION (cont'd)
(b) INCOME TAX (cont'd)
Certain subsidiaries and jointly controlled entities of the Company have been
granted with tax concessions which are set out below:
APPLICABLE
NAME OF SUBSIDIARIES TAX RATE REASONS FOR GRANTING CONCESSION
Zhuhai Airlines Company Limited 15% Operates in a special economic zone and
accordingly enjoys a reduced income tax rate
pursuant to documents Cai Shui Zi (86) No. 122
and Cai Shui Zi (87) No. 115.
Southern Airlines (Group) 15% Ditto
Shantou Airlines Company Limited
Xiamen Airlines Company Limited 15% Ditto
Guangzhou Nanland Air Catering 27% Pursuant to Rules and Regulations for
Company Limited Implementation of Income Tax for Foreign
Investment Enterprises and Foreign Enterprises
of the PRC, the applicable state income tax
rate is 24% and local income tax rate is 3%.
Zhuhai Xiang Yi Aviation Technology 7.5% Pursuant to Zhu Guo Shui Hang [2003] 94
Company Limited issued by Zhuhai Municipal State Tax Bureau,
the entity enjoys a reduced income tax rate.
NAME OF JOINTLY CONTROLLED ENTITIES
Guangzhou Aircraft Maintenance 15% Pursuant to Sui Guo Shui Zhi Fa [2001] No.
Engineering Company Limited 77 issued by Guangzhou Municipal State Tax
Bureau, the applicable income tax rate is 15%
since 2000.
MTU Maintainance Zhuhai Co. Ltd. 15% Pursuant to Rules and Regulations for
Implementation of Income Tax for Foreign
Investment Enterprises and Foreign Enterprises
of the PRC, the applicable income tax rate is
15%.
130 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
3 TAXATION (cont'd)
(c) TAXES PAYABLE
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Enterprise income tax 41 46 - -
Business tax 239 25 127 3
City construction tax 16 2 8 1
Value added tax 15 13 - -
Other 13 16 6 7
--- --- --- --
Total 324 102 141 11
=== === === ==
4 CAAC INFRASTRUCTURE DEVELOPMENT FUND
Contributions to the CAAC infrastructure development fund were levied at a
certain percentage on traffic revenue and payable to the Civil Aviation
Administration of China ("CAAC") on or before 31 March, 2004. Pursuant to the
regulation, Cai Zhong Zi [1999] No. 11 jointly issued by the MOF and the State
Development Commission, contributions to the CAAC infrastructure development
Fund was levied at 5% and 2% on domestic traffic revenue and international/Hong
Kong regional traffic revenue respectively.
Pursuant to the approval documents Cai Zong Ming Dian No. 1 and Ming Hang Ji No.
2026, the Group was exempted from paying any contributions to the CAAC
infrastructure development fund during the period from 1 May, 2003 to 31 March,
2004.
Pursuant to the Minhang Gui Cai Fa [2004] No. 94, commencing 1 April, 2004,
contributions to the CAAC infrastructure development fund are payable based on
the notice [2004] No. 38 issued by MOF. Contributions to the CAAC infrastructure
development fund are now calculated based on the route type, flight loading,
flight distance and prescribed charge rates and form part of the cost of
principal operations.
[LOGO] [CHINESE CHARACTERS] 131
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
5 CASH AND CASH EQUIVALENTS
THE GROUP THE COMPANY
2004 2003 2004 2003
ORIGINAL Original ORIGINAL Original
CURRENCY RMB currency RMB CURRENCY RMB currency RMB
MILLION MILLION million million MILLION MILLION million million
-------- ------- -------- ------- -------- ------- -------- -------
Cash in hand
Renminbi 6 1 6 1
US Dollars - 4 - 3 - 1 - 2
Other currencies - 3 - 1 - 1 - 1
------ ----- ------ ----- ------ ----- ------ -----
13 5 8 4
Cash at bank
Renminbi 2,084 1,383 1,233 624
US Dollars 40 334 31 261 41 342 18 148
HK Dollars 83 88 10 11 24 25 4 4
Japanese Yen 1,275 101 537 42 1,242 99 537 42
Singapore Dollars 2 8 2 12 2 8 2 12
Thai Bahts 45 10 55 11 38 8 52 11
Malayshian Ringgit 32 70 20 44 31 68 18 40
Euro 3 38 2 20 3 36 2 18
Korean Won 6,835 54 13,770 95 6,329 50 13,472 93
Vietnam Dong 28,588 15 41,531 22 28,588 15 41,531 22
Australian Dollars 6 40 6 35 5 35 5 32
Other currencies - 13 - 9 13 - 9
------ ----- ------ ----- ------ ----- ------ -----
2,855 1,945 1,932 1,055
Deposits in financial institution
Renminbi 406 371 362 346
----- ----- ----- -----
406 371 362 346
----- ----- ----- -----
Total 3,274 2,321 2,302 1,405
===== ===== ===== =====
132 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
5 CASH AND CASH EQUIVALENTS (cont'd)
Deposits in financial institution represent deposits with Southern Airlines
Group Finance Company Limited ("SA Finance"), a PRC authorised financial
institution controlled by CSAHC and an associated company of the Group (Note
46).
The Group does not have any collateralised or frozen bank deposits as at 31
December, 2004. As at 31 December, 2004, the Group's overseas bank deposits
amounted to RMB388 million (2003: RMB343 million). These overseas bank deposits
are not subject to any significant risk of uncollectibility.
The above cash, bank deposits and deposits with financial institution
denominated in foreign currencies are translated into Renminbi at the following
exchange rates:
2004 2003
--------- ---------
US Dollar 8.2765 8.2767
HK Dollar 1.0637 1.0657
Japanese Yen 0.079701 0.077263
Singapore Dollar 5.0550 4.8587
Thai Bahts 0.2122 0.2087
Malaysian Ringgit 2.177 2.172
Euro 11.2627 10.3383
Korean Won 0.007900 0.006925
Vietnam Dong 0.0005247 0.0005291
Australian Dollar 6.4428 6.2013
========= =========
Note: Balances dominated in foreign currencies in these financial statements are
translated into Renminbi at the above rates, unless otherwise stated.
6 SHORT-TERM INVESTMENTS
THE GROUP
BALANCE BALANCE
AT THE BEGINNING ADDITIONS DURING DISPOSALS DURING AT THE END
OF THE YEAR THE YEAR THE YEAR OF THE YEAR
RMB million RMB million RMB million RMB million
---------------- ---------------- ---------------- -----------
Equity investment
-Investments in stocks - 509 - 509
Debt investments
-Government bonds - 160 - 160
--- --- --- ---
Total - 669 - 669
=== === === ===
[LOGO] [CHINESE CHARACTERS] 133
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
6 SHORT-TERM INVESTMENTS (cont'd)
THE COMPANY
BALANCE BALANCE
AT THE BEGINNING ADDITIONS DURING DISPOSALS DURING AT THE END
OF THE YEAR THE YEAR THE YEAR OF THE YEAR
RMB million RMB million RMB million RMB million
---------------- ---------------- ---------------- -----------
Equity investment
-Investments in stocks - 487 - 487
=== === === ===
The market value, if available, of the above short-term investments as at the
year end are as follows:
THE GROUP
2004 2003
CARRYING AMOUNT MARKET VALUE Carrying amount Market value
RMB MILLION RMB MILLION RMB million RMB million
--------------- ------------ --------------- ------------
Investments in stocks 509 529 - -
Debt investments 160 160 - -
=== === === ===
THE COMPANY
2004 2003
CARRYING AMOUNT MARKET VALUE Carrying amount Market value
RMB MILLION RMB MILLION RMB million RMB million
--------------- ------------ --------------- ------------
Investments in stocks 487 502 - -
=== === === ===
The market value information is extracted from Shanghai Stock Exchange, Shenzhen
Stock Exchange and chinabond.com.cn.
In 2004, the Company and an independent third party jointly appointed Centergate
Securities Company Limited to manage and invest asset of the Company and the
independent third party of RMB500 million and RMB75 million respectively. The
entrusted investment consist mainly of investment securities. The entrusting
period is from 27 July, 2004 to 26 July, 2005. According to the contract, the
independent third party has the responsibility to ensure the Company has a
reasonable return on investment, and avoid any loss from investment.
As at 31 December, 2004, there were no material restrictions on the realisation
of the short-term investments of the Group and the Company.
134 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
7 TRADE RECEIVABLES
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Trade receivables 1,687 962 1,379 740
Less: Provision for bad and
doubtful debts 95 70 82 57
----- --- ----- ---
1,592 892 1,297 683
===== === ===== ===
The ageing analysis of trade receivables is as follows:
THE GROUP
2004 2003
% OF % OF % of % of
TOTAL TRADE BAD DEBT BAD DEBT total trade Bad debt Bad debt
AMOUNT RECEIVABLE PROVISION PROVISION Amount receivable provision provision
RMB MILLION % RMB MILLION % RMB million % RMB million %
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Within 1 year 1,576 93.4% 5 0.3% 898 93.2% 6 0.5%
Over 1 year but within 2 years 14 0.8% 9 64.3% 42 4.4% 42 100.0%
Over 2 years but within 3 years 25 1.5% 9 36.0% 14 1.5% 14 100.0%
Over 3 years 72 4.3% 72 100.0% 8 0.9% 8 100.0%
----- ----- -- ----- --- ----- -- -----
Total 1,687 100.0% 95 5.6% 962 100.0% 70 7.3%
===== ===== == ===== === ===== == =====
THE COMPANY
2004 2003
% OF % OF % of % of
TOTAL TRADE BAD DEBT BAD DEBT total trade Bad debt Bad debt
AMOUNT RECEIVABLE PROVISION PROVISION Amount receivable provision provision
RMB MILLION % RMB MILLION % RMB million % RMB million %
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Within 1 year 1,282 92.9% 6 0.5% 685 92.5% 2 0.3%
Over 1 year but within 2 years 8 0.6% 3 37.5% 42 5.7% 42 100.0%
Over 2 years but within 3 years 23 1.7% 7 30.4% 8 1.1% 8 100.0%
Over 3 years 66 4.8% 66 100.0% 5 0.7% 5 100.0%
----- ---- -- ----- --- --- -- -----
Total 1,379 100.0% 82 5.9% 740 100.0% 57 7.7%
===== ===== == ===== === ===== == =====
[LOGO] [CHINESE CHARACTERS] 135
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
7 TRADE RECEIVABLES (cont'd)
Provision for bad and doubtful debts is analysed as follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Balance as at 1 January, 70 60 57 29
Add: Charge for the year 26 12 27 9
Additions arising from
dissolution of subsidiary - - - 19
Additions through the CNA/XJA
Acquisitions 44 - 44 -
Less: Write-off during the year 45 2 46 -
-- - -- --
Balance as at 31 December, 95 70 82 57
== == == ==
Except for the balances disclosed in Note 46, there was no amount due from
shareholders who hold 5% or more voting right of the Company included in the
balance of trade receivables.
During the year, the Group and the Company had no individually significant
recovery of doubtful debts that had been fully or substantially provided for in
prior years.
At 31 December, 2004, the Group and the Company did not have any individually
significant trade receivables aged over three years.
At 31 December, 2004, the total amounts of the Groups and the Company's largest
5 trade receivables were as follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
---- ---- ---- ----
Amounts (RMB million) 408 543 345 459
% of total trade receivables 24% 56% 25% 62%
=== === === ===
136 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
8 OTHER RECEIVABLES
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Due from subsidiaries - - 917 527
Due from related companies 62 17 62 17
Others 743 330 490 240
--- --- ----- ---
805 347 1,469 784
Less: Provision for bad and
doubtful debts 74 30 74 30
--- --- ----- ---
731 317 1,395 754
=== === ===== ===
Provision for bad and doubtful debts is analysed as follows:
THE GROUP AND THE COMPANY
2004 2003
RMB MILLION RMB million
----------- ------------
Balance as at 1 January, 30 30
Add: Charge for the year 2 -
Additions through the CNA/XJA Acquisitions 59 -
Less: Write-off during the year 17 -
-- --
Balance as at 31 December, 74 30
== ==
Ageing analysis of other receivables is as follows:
THE GROUP
2004 2003
% OF % OF % of % of
TOTAL OTHER BAD DEBT BAD DEBT total other Bad debt bad debt
AMOUNT RECEIVABLES PROVISION PROVISION Amount receivables provision provision
RMB MILLION % RMB MILLION % RMB million % RMB million %
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Within 1 year 625 77.6% 2 0.3% 286 82.3% - 0.0%
Over 1 year but within 2 years 60 7.5% - 0.0% 21 5.9% - 0.0%
Over 2 years but within 3 years 35 4.3% - 0.0% 7 2.1% - 0.0%
Over 3 years 85 10.6% 72 84.7% 33 9.7% 30 89.6%
--- ----- -- ---- --- ----- -- ----
Total 805 100.0% 74 9.2% 347 100.0% 30 8.6%
=== ===== == ==== === ===== == ====
[LOGO] [CHINESE CHARACTERS] 137
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
8 OTHER RECEIVABLES (cont'd)
THE COMPANY
2004 2003
% OF % OF % of % of
TOTAL OTHER BAD DEBT BAD DEBT total other Bad debt bad debt
AMOUNT RECEIVABLES PROVISION PROVISION Amount receivables provision provision
RMB MILLION % RMB MILLION % RMB million % RMB million %
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Within 1 year 1,259 85.7% 2 0.2% 740 94.3% - 0.0%
Over 1 year but within 2 years 91 6.2% - 0.0% 8 1.0% - 0.0%
Over 2 years but within 3 years 35 2.4% - 0.0% 5 0.7% - 0.0%
Over 3 years 84 5.7% 72 85.7% 31 4.0% 30 96.3%
----- ----- -- ---- --- ----- -- ----
Total 1,469 100.0% 74 5.0% 784 100.0% 30 3.8%
===== ===== == ==== === ===== == ====
Except for the balances disclosed in Note 46, there was no amount due from
shareholders who hold 5% or more voting right of the Company included in the
balance of other receivables.
During the year, the Group and the Company had no individually significant
recovery of doubtful debts that had been fully or substantially provided for in
prior years.
At 31 December, 2004, the Group and the Company had no individually significant
other receivables that aged over three years.
At 31 December, 2004, the total amounts of the Group's and the Company's largest
5 other receivables were as follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
---- ---- ---- ----
Amounts (RMB million) 194 111 976 459
% of total other receivables 24% 32% 66% 58%
=== === === ===
9 ADVANCE PAYMENTS
All advance payments are aged within one year.
There was no amount due from shareholders who hold 5% or more voting right of
the Company included in the balance of advance payments.
138 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
10 INVENTORIES
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
At cost:
Expendable spare parts 1,267 573 904 183
Consumables 61 35 58 16
Aviation on-board supplies 27 20 24 10
Others 43 4 13 2
----- --- --- ---
Total 1,398 632 999 211
===== === === ===
At 31 December, 2004, no provision for impairment in value was necessary for the
inventories of the Group and the Company.
All of the above inventories were obtained by way of purchases.
The Group's and the Company's cost of inventories charged to costs and expenses
in the income statement were as follows:
2004 2003
RMB MILLION RMB million
----------- -----------
The Group 448 501
The Company 275 293
11 PREPAID EXPENSES
THE GROUP THE COMPANY
2004 2003 2004 2003
Notes RMB'000 RMB'000 RMB'000 RMB'000
----- ------- ------- ------- -------
Operating lease rentals (a) 167 127 105 75
Ticket sales commissions (b) 24 21 23 19
Catering and consumables (c) 79 33 - -
Insurance premiums (d) 40 11 36 11
Others 36 11 35 9
--- --- --- ---
Total 346 203 199 114
=== === === ===
[LOGO] [CHINESE CHARACTERS] 139
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
11 PREPAID EXPENSES (cont'd)
Notes:
(a) Pursuant to aircraft operating lease agreements, the Group is required to
prepay one to six months' rentals to lessors. The prepaid rentals are then
amortised over the relevant lease periods. The balance at the year end
represents the unamortised balance of the prepaid rentals.
(b) The Group pays sales commissions to sales agents for tickets sales. The
sales commissions are initially recorded as prepaid expenses and charged
to the income statement upon the provision of the related transportation
services.
(c) A jointly controlled entity of the Group is principally engaged in the
provision of engine repairs and maintenance services. Consumables consumed
prior to the completion of the related engine repairs and maintenance are
recorded as prepaid expenses and charged to income statement upon the
completion of the related engine repairs and maintenance services.
(d) The Group prepays the insurance premiums to an insurance company. The
prepaid insurance premiums are then amortized over the relevant period.
The balance at the year end represents the unamortised balance of the
prepaid insurance premiums.
12 LONG-TERM EQUITY INVESTMENTS
THE GROUP
INVESTMENTS OTHER
IN ASSOCIATED INVESTMENTS OTHER EQUITY
COMPANIES IN STOCKS INVESTMENTS TOTAL
RMB million RMB million RMB million RMB million
------------- ----------- ------------ -----------
Balance as at 1 January, 2004 422 57 143 622
Add: Additions 9 6 2 17
Additions through the CNA/XJA
Acquisitions - - 69 69
Adjustment under the equity
accounting method 49 - - 49
Less: Dividends received 12 - - 12
Disposals 1 1 2 4
--- -- --- ---
BALANCE AS AT 31 DECEMBER, 2004 467 62 212 741
=== == === ===
140 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
12 LONG-TERM EQUITY INVESTMENTS (cont'd)
THE COMPANY
INVESTMENTS
INVESTMENTS INVESTMENTS IN JOINTLY OTHER OTHER
IN IN ASSOCIATED CONTROLLED INVESTMENTS EQUITY
SUBSIDIARIES COMPANIES ENTITIES IN STOCKS INVESTMENTS TOTAL
RMB million RMB million RMB million RMB million RMB million RMB million
------------ ------------- ----------- ----------- ----------- -----------
Balance as at 1 January, 2004 2,601 311 644 1 101 3,658
Add: Additions 230 9 9 - - 248
Additions through the CNA/XJA
Acquisitions 155 - - - 69 224
Adjustment under the equity
accounting method 215 50 (43) - - 222
Amortisation of equity investment
differences 2 - - - - 2
Less: Dividends received 34 12 - - - 46
Disposals 79 1 - 1 - 81
----- --- --- -- --- -----
BALANCE AS AT 1 DECEMBER, 2004 3,090 357 610 - 170 4,227
===== === === == === =====
At 31 December, 2004, no provision for impairment losses for the long-term
equity investments of the Group and the Company was necessary.
In connection with the Group's overseas listing, the assets of the Group as at
31 December, 1996 were revalued. As a result of this revaluation, the Company's
subsidiaries had a net revaluation deficit amounting to RMB30,284,000. The
Company made corresponding adjustments amounting to RMB20,498,000 to investments
in these subsidiaries. These adjustments were recorded as equity investment
differences and amortised on a straight-line basis over 10 years, which
represented the estimated remaining useful lives of the revalued assets of the
subsidiaries. The equity investment differences are analysed as follows:
EQUITY
INVESTMENT
DIFFERENCE
RMB million
-----------
ORIGINAL AMOUNT 20
==
ACCUMULATED AMORTISATION:
At 1 January, 2004 14
Amortisation for the year 2
--
AT 31 DECEMBER, 2004 16
==
UNAMORTISED BALANCE:
AT 31 DECEMBER, 2004 4
==
At 31 December, 2003 6
==
Details of the Group's associated companies, jointly controlled entities and the
Company's subsidiaries are set out in Notes 50.
[LOGO] [CHINESE CHARACTERS] 141
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
12 LONG-TERM EQUITY INVESTMENTS (cont'd)
Details of the Group's and the Company's equity investments accounted for under
the equity method are analysed as follows:
THE GROUP
INVESTMENTS IN ASSOCIATED COMPANIES:
SICHUAN AIRLINES
SA CORPORATION
FINANCE LIMITED OTHERS TOTAL
RMB million RMB million RMB million RMB million
----------- ---------------- ----------- -----------
Attributable equity interest:
Direct 32% 39% - -
Indirect 15.42% - 17.1% -
Initial investment costs
(as at 1 January, 2004) 246 137 79 462
===== === ==== ===
Balance as at 1 January, 2004 245 164 13 422
Add: Additions - - 9 9
Adjustment under the equity
accounting method (9) 55 3 49
Less:Dividends received - 10 2 12
Disposals - - 1 1
----- --- ---- ---
BALANCE AS AT 31 DECEMBER, 2004 236 209 22 467
===== === ==== ===
Note: The principal accounting policies of Sichuan Airlines are different from
the Group's. The major difference is on the accounting policies of repairs
and maintenance expenses. Repairs and maintenance expenses of rotables are
expensed as and when incurred in the Group's financial statements whereas
such expenses are capitalised and amortised over 6 years in Sichuan
Airlines' financial statements. Repairs and maintenance expense of
aircraft and engines are expensed as and when incurred in the Group's
financial statements whereas such expenses are capitalised and amortised
over 1-10 years in Sichuan Airlines' financial statements.
142 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
12 LONG-TERM EQUITY INVESTMENTS (cont'd)
THE COMPANY
INVESTMENTS IN SUBSIDIARIES
SOUTHERN
AIRLINES
(GROUP)
XIAMEN SHANTOU GUANGXI ZHUHAI GUIZHOU
AIRLINES AIRLINES AIRLINES AIRLINES AIRLINES
COMPANY COMPANY COMPANY COMPANY COMPANY OTHER
LIMITED LIMITED LIMITED LIMITED LIMITED SUBSIDIARIES TOTAL
RMB million RMB million RMB million RMB million RMB million RMB million RMB million
----------- ----------- ----------- ----------- ----------- ------------ -----------
Attributable equity interest:
Direct 60% 60% 60% 60% 60% -
Period of operations - 16 years - 20 years - -
Initial investment costs
(as at 1 January, 2004) 353 168 103 150 48 269 1,091
===== ======== ===== ======== == === =====
Balance as at 1 January, 2004 1,822 167 140 85 44 343 2,601
Add: Additions - - - - - 230 230
Additions through the
CNA/XJA Acquisitions - - - - - 155 155
Adjustment under the equity
accounting method 158 3 37 (20) 32 5 215
Amortisation of equity
investment differences 4 - (2) 3 - (3) 2
Less:Dividends received - 8 14 - - 12 34
Disposals - - - - - 79 79
----- -------- ----- -------- -- --- -----
BALANCE AS AT 31 DECEMBER, 2004 1,984 162 161 68 76 639 3,090
===== ======== ===== ======== == === =====
[LOGO] [CHINESE CHARACTERS] 143
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
12 LONG-TERM EQUITY INVESTMENTS (cont'd)
THE COMPANY (cont'd)
INVESTMENTS IN ASSOCIATED COMPANIES
SICHUAN AIRLINES
SA CORPORATION
FINANCE LIMITED OTHERS TOTAL
RMB million RMB million RMB million RMB million
----------- ---------------- ----------- -----------
Attributable equity interest:
Direct 32% 39%
Initial investment costs
(as at 1 January, 2004) 127 137 78 342
=== === == ===
Balance as at 1 January, 2004 134 164 13 311
Add: Additions - - 9 9
Adjustment under the equity
accounting method (8) 55 3 50
Less: Dividends received - 10 2 12
Disposals - - 1 1
--- --- -- ---
BALANCE AS AT 31 DECEMBER, 2004 126 209 22 357
=== === == ===
Note: The principal accounting policies of Sichuan Airlines are different from
the Company's. The major difference is on the accounting policies of
repairs and maintenance expenses. Repairs and maintenance expenses of
rotables are expensed as and when incurred in the Company's financial
statements whereas such expenses are capitalised and amortised over 6
years in Sichuan Airlines' financial statements. Repairs and maintenance
expense of aircraft and engines are expensed as and when incurred in the
Company's financial statements whereas such expenses are capitalised and
amortised over 1-10 years in Sichuan Airlines' financial statements.
144 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
12 LONG-TERM EQUITY INVESTMENTS (cont'd)
THE COMPANY (cont'd)
INVESTMENTS IN JOINTLY CONTROLLED ENTITIES
GUANGZHOU BEIJING
AIRCRAFT SOUTHERN
MAINTENANCE MTU GROUND
ENGINEERING MAINTENANCE SERVICES
CHINA POSTAL COMPANY ZHUHAI COMPANY
AIRLINES LIMITED LIMITED CO. LTD. LIMITED TOTAL
RMB million RMB million RMB million RMB million RMB million
---------------- ----------- ----------- ----------- -----------
Attributable equity interest:
Direct 49% 50% 50% 50%
Period of operations 15 years 40 years 30 years 16 years
Initial investment costs
(as at 1 January, 2004) 150 87 261 - 498
======== ======== ======== ======== ===
Balance as at 1 January, 2004 129 333 182 - 644
Add:Additions - - - 9 9
Adjustment under the equity
accounting method (38) 34 (35) (4) (43)
-------- -------- -------- -------- ---
BALANCE AS AT 31 DECEMBER, 2004 91 367 147 5 610
======== ======== ======== ======== ===
The Group's and the Company's investments in the above companies are not subject
to any restrictions on realisation of the investments and remittance of the
investment returns.
At 31 December, 2004, the Group's and the Company's other investments in stocks
are analysed as follows:
INITIAL
NUMBER PERCENTAGE INVESTMENT
TYPE OF OF SHARES OF EQUITY COST 2004 2003
NAME OF INVESTEES INVESTMENT HELD INTEREST HELD RMB million RMB MILLION RMB million
------------------- ---------- ------------- ----------- ----------- -----------
THE COMPANY:
Hainan Meilan International
Airport Co., Ltd. Ordinary shares 925,000 0.37% - - 1
SUBSIDIARIES:
Travelsky Technology Limited Legal person shares 21,924,500 2.5% 33 33 33
China Pacific Insurance Co. Ordinary shares 10,000,000 0.5% 13 13 13
Ltd.
Bank of Communications Ordinary shares 7,480,000 0.008% 11 11 10
Others 5 -
-- --
62 57
== ==
[LOGO] [CHINESE CHARACTERS] 145
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
12 LONG-TERM EQUITY INVESTMENTS (cont'd)
At 31 December, 2004, the Group's and the Company's other equity investments are
analysed as follows:
INITIAL AS AT 31 AS AT 31
INVESTMENT INVESTMENT PERCENTAGE DECEMBER, DECEMBER,
NAME OF INVESTEES PERIOD COST OF EQUITY 2004 2003
(Years) RMB million INTEREST HELD RMB MILLION RMB million
---------- ----------- ------------- ----------- -----------
THE COMPANY:
Haikou Meilan Airport International Co., - 100 7.4% 100 100
Ltd.
CITIC Offshore Helicopter Co., Ltd 69 6% 69 -
Hunan Southern Airlines Travel
Service Co., Ltd (Note) 10 years 1 54% 1 1
--- ---
170 101
--- ---
SUBSIDIARIES:
Xiamen Aviation Industry Co. Ltd. - 20 10% 20 20
CAAC Express Ltd - 8 4.29% 8 8
Xiamen Soccer Club - 3 4.94% 3 3
China Aircraft Services Ltd. - 2 1% 2 2
Guangzhou International Logistics
Company Limited (Note) 10 years 2 51% 2 -
Zhuhai Air-Express Co., Ltd. (Note) - 1 30% 1 1
Guilin Guangsheng Development
Co., Ltd (Note) 10 years 1 30% 1 1
Guangzhou Baiyun International Express
Customs Supervision Co., Ltd. (Note) - 2 55% - 2
Other 5 5
--- ---
42 42
--- ---
Total 212 143
=== ===
Note: The impact of these companies on the Group's results for the year was not
material. Accordingly, they have been accounted for under cost method
(Note 50). Whilst the Group holds more than 50% equity interest in certain
of these companies, their financial statements are not consolidated in the
Group's financial statements because their aggregate assets, liabilities
and results of operations had no significant effect to the Group.
At 31 December, 2004, the proportion of the total amount of the Group's and the
Company's long-term equity investments to the net assets was 6% and 36%
respectively (2003: 5% and 32% respectively).
146 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
13 FIXED ASSETS
THE GROUP
AIRCRAFT OTHER FLIGHT MACHINERY,
--------------------------- EQUIPMENT EQUIPMENT
LAND USE RIGHTS HELD UNDER INCLUDING AND MOTOR
AND BUILDINGS OWNED FINANCE LEASES ROTABLE SPARES VEHICLES TOTAL
RMB million RMB million RMB million RMB million RMB million RMB million
--------------- ----------- -------------- -------------- ----------- -----------
COST OR VALUATION:
At 1 January, 2004 3,920 17,222 10,463 7,017 2,276 40,898
Reclassification on exercise
of purchase options - 550 (550) - - -
Additions through the CNA/XJA
Acquisitions 907 5,206 4,492 1,753 490 12,848
Additions 346 4,156 - 629 191 5,322
Transferred from construction
in progress 2,730 - - - 266 2,996
Reclassification (Note 18) (408) - - - - (408)
Disposals (28) - - (76) (226) (330)
----- ------ ------ ----- ----- ------
AT 31 DECEMBER, 2004 7,467 27,134 14,405 9,323 2,997 61,326
ACCUMULATED DEPRECIATION:
At 1 January, 2004 697 3,192 2,605 3,691 1,318 11,503
Reclassification on exercise
of purchase options - 183 (183) - - -
Charge for the year 166 955 472 656 246 2,495
Reclassification (Note 18) (44) - - - - (44)
Written back on disposal (17) - - (66) (165) (248)
----- ------ ------ ----- ----- ------
AT 31 DECEMBER, 2004 802 4,330 2,894 4,281 1,399 13,706
NET BOOK VALUE:
AT 31 DECEMBER, 2004 6,665 22,804 11,511 5,042 1,598 47,620
===== ====== ====== ===== ===== ======
At 31 December, 2003 3,223 14,030 7,858 3,326 958 29,395
===== ====== ====== ===== ===== ======
[LOGO] [CHINESE CHARACTERS] 147
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
13 FIXED ASSETS (cont'd)
THE COMPANY
AIRCRAFT OTHER FLIGHT MACHINERY,
---------------------------- EQUIPMENT EQUIPMENT
LAND USE RIGHTS HELD UNDER INCLUDING AND MOTOR
AND BUILDINGS OWNED FINANCE LEASES ROTABLE SPARES VEHICLES TOTAL
RMB million RMB million RMB million RMB million RMB million RMB million
--------------- ----------- -------------- -------------- ----------- -----------
COST OR VALUATION:
At 1 January, 2004 1,879 12,868 10,463 5,396 1,189 31,795
Reclassification on exercise
of purchase options - 550 (550) - - -
Additions through the CNA/XJA
Acquisitions 722 5,206 4,492 1,745 441 12,606
Additions 77 3,509 - 327 51 3,964
Transferred from construction
in progress 1,663 - - - 235 1,898
Reclassification (Note 18) (301) - - - - (301)
Disposals (23) - - - (40) (63)
----- ------ ------ ----- ----- ------
AT 31 DECEMBER, 2004 4,017 22,133 14,405 7,468 1,876 49,899
ACCUMULATED DEPRECIATION:
At 1 January, 2004 346 2,231 2,605 3,073 717 8,972
Reclassification on exercise
of purchase options - 183 (183) - - -
Charge for the year 120 744 472 418 126 1,880
Reclassification (Note 18) (32) - - - - (32)
Written back on disposal (10) - - - (35) (45)
----- ------ ------ ----- ----- ------
AT 31 DECEMBER, 2004 424 3,158 2,894 3,491 808 10,775
NET BOOK VALUE:
AT 31 DECEMBER, 2004 3,593 18,975 11,511 3,977 1,068 39,124
===== ====== ====== ===== ===== ======
At 31 December, 2003 1,533 10,637 7,858 2,323 472 22,823
===== ====== ====== ===== ===== ======
At 31 December, 2004, no provision for the impairment losses for fixed assets of
the Group and Company was necessary.
At 31 December, 2004, the net book values of the fully depreciated fixed assets
of the Group and the Company in use were RMB54 million and RMB38 million
respectively (2003: RMB60 million and RMB43 million repectively).
The period of land use rights granted ranged from 30 to 70 years. As at 31
December, 2004, the remaining unamortised period ranged from 16 years to 64
years.
148 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
13 FIXED ASSETS (cont'd)
At 31 December, 2004, certain aircraft and other flight equipment of the Group
and the Company were mortgaged under certain bank loans and finance lease
agreements (see Notes 29 and 30). The net book value of these fixed assets is
analysed as follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Aircraft
Mortgaged under bank loans 11,927 6,719 10,179 4,939
Mortgaged under finance leases 11,511 7,857 11,511 7,857
------ ------ ------ ------
Sub-total 23,438 14,576 21,690 12,796
Other flight equipment
Mortgaged under bank loans 7 26 - -
------ ------ ------ ------
Total 23,445 14,602 21,690 12,796
====== ====== ====== ======
At 31 December, 2004, the net book value of the Company's fixed assets leased
out under operating leases are analysed as follows:
THE COMPANY
2004 2003
RMB MILLION RMB million
----------- -----------
Land use rights and buildings 142 147
Other flight equipment 131 178
--- ---
273 325
=== ===
The Company entered into two separate arrangements (the "Arrangements") with
certain independent third parties during each of 2002 and 2003, under each of
the Arrangements, the Company sold an aircraft and then immediately leased back
the aircraft. As agreed, the lease payment obligations, with pre-determined net
present values, were to be satisfied solely out of the sale proceeds and such
amounts have been placed irrevocably by the Company in form of deposits and debt
securities in favour of the lessors. The Company has an option to purchase the
aircraft at a pre-determined date and the agreed purchase price is to be
satisfied by the balance of the deposits and debt securities outstanding at that
date. In the event that the lease agreements are early terminated by the
Company, the Company is liable to pay a pre-determined penalty to the lessors.
As long as the Company complies with the lease agreements, the Company is
entitled to the continued possession and operation of the aircraft. Since the
Company retains substantially all the 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. As at 31
December, 2004, the net present value of the lease commitments and the
corresponding defeased deposits and debt securities amounted to RMB2,462 million
(2003: RMB 2,409 million). As a result of the Arrangements, the Company received
net cash benefits which were recognised as income in the relevant period.
[LOGO] [CHINESE CHARACTERS] 149
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
14 CONSTRUCTION MATERIALS
The Group's and the Company's construction materials mainly represented the
materials to be used for construction projects
15 CONSTRUCTION IN PROGRESS
BALANCE ADDITIONS BALANCE
AS AT 1 THROUGH THE TRANSFERRED AS AT 31
JANUARY, CNA/XJA TO FIXED DECEMBER,
PROJECT BUDGET 2004 ADDITION ACQUISITIONS ASSETS 2004 PERCENTAGE SOURCE OF
RMB million RMB million RMB million RMB million RMB million RMB million OF PROGRESS FUNDING
----------- ----------- ----------- ------------ ----------- ----------- ----------- --------------
THE COMPANY:
Guangzhou new airport base 3,450 1,378 400 - (1,778) -
Hubei catering building 31 28 3 - (31) -
Zhengzhou ticket selling office 49 22 - - (22) -
Material and engineering system 39 21 1 - - 22 56% Self-financing
Guangzhou new airport
supporting area 89 - 55 - - 55 62% Self-financing
Henan office building 19 14 5 (19) -
B777 engine upgrading project 95 12 6 - - 18 19% Self-financing
Shenzhen cargo centre 40 - 22 - - 22 55% Self-financing
Pilot quarters - 8 2 - (10) -
Integrated office tower 18 12 3 - (15) -
Motor vehicle warehouse 24 12 8 - (20) -
Others 120 36 47 22 (3) 102 Self-financing
----- ----- ----- --- ------ --- --
COMPANY TOTAL 3,974 1,543 552 22 (1,898) 219
SUBSIDIARIES:
Guangzhou new cargo centre 1,275 182 975 - (854) 303 91% 35% bank loans
Fuzhou Chang Le airport
facilities 157 14 12 - (6) 20 17% Self-financing
Others 210 40 50 4 (26) 68 Self-financing
----- ----- ----- --- ------ --- --
SUBSIDIARY TOTAL 1,642 236 1,037 4 (886) 391
JOINTLY CONTROLLED ENTITIES:
Guangzhou new airport base 430 151 67 - (205) 13 51% Self-financing
Others 13 7 3 - (7) 3 Self-financing
----- ----- ----- --- ------ --- --
JOINTLY CONTROLLED ENTITY TOTAL 443 158 70 - (212) 16
----- ----- ----- --- ------ ---
GROUP TOTAL 6,059 1,937 1,659 26 (2,996) 626
===== ===== ===== === ====== ===
At 31 December, 2004, the Group and the Company did not have any provision for
the impairment of construction in progress.
150 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
15 CONSTRUCTION IN PROGRESS (cont'd)
The Group's borrowing costs capitalised in the construction in progress for the
year are as follows:
2004 2003
RMB MILLION RMB million
----------- -----------
Borrowing cost capitalised 23 83
== ==
The interest rates at which the Group's and the Company's borrowing costs were
capitalised during the year ranged from 1.51% to 3.48% (2003: 1.62% to 5.46%)
per annum.
16 LEASE AND EQUIPMENT DEPOSITS
THE GROUP THE COMPANY
2004 2003 2004 2003
ORIGINAL Original ORIGINAL Original
CURRENCY RMB currency RMB CURRENCY RMB currency RMB
MILLION MILLION million million MILLION MILLION million million
-------- ------- -------- ------- -------- ------- -------- -------
Advance payments for purchase
of aircraft (US$) 560 4,640 304 2,516 486 4,024 229 1,900
Rental deposits for aircraft under
operating leases (US$) 92 757 50 417 75 650 40 329
--- ----- --- ----- --- ----- --- -----
5,397 2,933 4,674 2,229
===== ===== ===== =====
Pursuant to aircraft purchase agreements, the Group is generally required to pay
a deposit equal to approximately 30% of the purchase price of the aircraft to
aircraft manufacturers six months prior to delivery.
Pursuant to aircraft operating lease agreements, the Group and the Company are
generally required to pay lessors rental deposits equal to approximately three
months' rentals.
[LOGO] [CHINESE CHARACTERS] 151
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
17 LONG-TERM DEFERRED EXPENDITURE
THE GROUP THE COMPANY
RMB million RMB million
----------- -----------
COST:
At 1 January, 2004 65 36
Additions 17 2
Additions through the CNA/XJA Acquisitions 103 102
Write off (21) (20)
--- ---
AT 31 DECEMBER, 2004 164 120
--- ---
ACCUMULATED AMORTISATION:
At 1 January, 2004 39 19
Amortisation for the year 15 12
Write off (21) (20)
--- ---
AT 31 DECEMBER, 2004 33 11
CARRYING VALUE:
AT 31 DECEMBER, 2004 131 109
=== ===
At 31 December, 2003 26 17
=== ===
Long-term deferred expenditure mainly comprises custom duties and other direct
costs incurred in respect of the Group's and the Company's operating leased
aircraft upon the inception of their respective leases. The balance is amortised
on a straight-line basis over the lease period of the aircraft.
At 31 December, 2004, the remaining unamortised period ranged from 2 to 3 years.
152 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
18 INTANGIBLE ASSETS
THE GROUP THE COMPANY
RMB million RMB million
----------- -----------
COST:
Balance as at 1 January, 2004 - -
Reclassification (Note 13) 408 301
Additions 102 26
Additions through the CNA/XJA Acquisitions 9 6
--- ---
BALANCE AS AT 31 DECEMBER, 2004 519 333
--- ---
ACCUMULATED AMORTISATION:
Balance as at 1 January, 2004 - -
Reclassification (Note 13) 44 32
Charge for the year 8 5
--- ---
BALANCE AS AT 1 DECEMBER, 2004 52 37
--- ---
CARRYING VALUE:
AT 31 DECEMBER, 2004 467 296
=== ===
At 31 December, 2003 - -
=== ===
During 2004, the Group reclassified land use rights not yet commenced
developments or constructions from fixed assets to intangible assets pursuant to
"Accounting Regulations for Business Enterprises". In addition, the Group
reclassified land use rights acquired before 1 January, 2001 from fixed assets
to intangible assets pursuant to "Questions and Answers on Implementing
Accounting Regulations for Business Enterprises and Related Accounting
Standards" as set out in notice "Cai Kua [2001] No. 43".
19 LONG-TERM RECEIVABLES
Long-term receivables represent insurance premiums deposited with a PRC
insurance company. Pursuant to the relevant insurance agreement, the insurance
premiums will be fully refunded to the Group upon the expiry of the agreement in
2007.
[LOGO] [CHINESE CHARACTERS] 153
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
20 SHORT-TERM LOANS
The Group's and the Company's short term loans are analysed as follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
ORIGINAL Original ORIGINAL Original
CURRENCY RMB currency RMB CURRENCY RMB currency RMB
MILLION MILLION million million MILLION MILLION million million
-------- ------- -------- ------- -------- ------- -------- -------
Unsecured loans
US Dollars 682 5,650 709 5,867 678 5,612 659 5,458
Hong Kong Dollars 2,678 2,842 194 207 2,678 2,842 - -
Renminbi 1,270 120 766 120
------- ------- ------- -------
Sub-total 9,762 6,194 9,220 5,578
------- ------- ------- -------
Guaranteed loans
Renminbi 411 235 - -
------- ------- ------- -------
Sub-total 411 235 - -
------- ------- ------- -------
Total 10,173 6,429 9,220 5,578
======= ======= ======= =======
The guaranted loans were guaranteed by the following parties:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
CSAHC 411 151 - -
Guangzhou Baiyun International
Airport Company Limited - 63 - -
Shenzhen Yingshun Investment
Development Company Limited - 21 - -
--- --- -- --
411 235 - -
=== === == ==
At 31 December, 2004, the Group's and the Company's weighted average interest
rates on short-term borrowings were 1.6% and 1.56% per annum respectively (2003:
1.76% and 1.65% per annum respectively).
At 31 December, 2004, the Group and the Company had no overdue short-term loans
(2003: Nil).
There were no short-term loans payable to shareholders who hold 5% or more of
the voting rights of the Company.
154 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
21 BILLS PAYABLE
THE GROUP
2004 2003
RMB MILLION % RMB million %
----------- ------ ----------- ------
Bank accepted bills 72 52.6% 2 0.4%
Commercial bills 65 47.4% 446 99.6%
--- ----- --- -----
137 100.0% 448 100.0%
=== ===== === =====
THE COMPANY
2004 2003
RMB MILLION % RMB million %
----------- ------ ----------- ------
Bank accepted bills 71 52.2% 2 0.4%
Commercial bills 65 47.8% 436 99.6%
--- ----- --- -----
136 100.0% 438 100.0%
=== ===== === =====
All bills payable are due within one year.
There were no bills payable to shareholders who hold 5% or more of the voting
rights of the Company.
22 TRADE PAYABLES
The ageing analysis of trade payables is as follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Within 3 months 1,871 1,018 1,715 909
Over 3 months but within 6 months 349 278 301 231
Over 6 months 380 371 315 308
----- ----- ----- -----
2,600 1,667 2,331 1,448
===== ===== ===== =====
Except for the balances disclosed in Note 46, there were no trade payables to
shareholders who hold 5% or more of the voting rights of the Company in the
balance of trade payables.
At 31 December, 2004, the Group and the Company had no individual significant
trade payables aged over three years.
[LOGO] [CHINESE CHARACTERS] 153
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
23 SALES IN ADVANCE OF CARRIAGE
Sales in advance of carriage represent the proceeds from sales of the Group's
and the Company's air tickets in advance of carriage. The sales in advance of
carriage are aged within one year.
There were no payable to shareholders who hold 5% or more of the voting rights
of the Company in the balance of sales in advance of carriage.
24 CAAC INFRASTRUCTURE DEVELOPMENT FUND PAYABLE
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
At 1 January, 2004 354 281 293 201
Add: Amount payable for the year 433 251 303 168
Additions through the
CNA/XJA Acquisitions 37 - 37 -
Less: Payments during the year 662 178 525 76
--- --- --- ---
At 31 December, 2004 162 354 108 293
=== === === ===
25 OTHER CREDITORS
Other creditors represent payables for education surcharge.
26 OTHER PAYABLES
Except for the balances disclosed in Note 46, there were no payables to
shareholders who hold 5% or more of the voting rights of the Company in the
balance of other payables.
At 31 December, 2004, the Group and the Company had no individual significant
other payables aged over three years.
156 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
27 ACCRUED EXPENSES
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB RMB RMB RMB
Notes MILLION million MILLION million Reason for accrual
----- ------- ------- ------- ------- --------------------
Custom duties and value-added tax (a) 71 337 45 103 Accrued but not paid
Landing and take-off fees (b) 1,383 826 1,100 585 Accrued but not paid
Aircraft and engine repair charges (b) 901 242 983 253 Accrued but not paid
Staff housing allocations and
lump sum housing allowances (c) 145 215 145 215 Accrued but not paid
Interest expense (d) 249 158 229 138 Accrued but not paid
Jet fuel expenses (b) 377 255 226 118 Accrued but not paid
Sales commissions and bonuses 14 62 14 62 Accrued but not paid
Air catering expenses (b) 98 114 118 134 Accrued but not paid
Provision for major overhauls
- current portion (Note 31) 75 11 62 - Accrued but not paid
Seat reservation charges 144 55 100 42 Accrued but not paid
Aircraft insurance premiums 13 - 3 - Accrued but not paid
Operating lease rentals 25 18 15 15 Accrued but not paid
Other expenses 234 94 151 18 Accrued but not paid
------- ------- ------- -------
Total 3,729 2,387 3,191 1,683
======= ======= ======= =======
Notes:
(a) CUSTOM DUTIES AND VALUE-ADDED TAX
Custom duties and value-added tax mainly represent custom duties and value-added
tax payable by the Group in connection with purchases of aircraft. These custom
duties and value-added tax payable have been capitalised as part of the
aircraft's costs. The Group is required to pay the customs duties and
value-added tax by instalments.
(b) LANDING AND TAKE-OFF FEES, AIRCRAFT AND ENGINE REPAIR EXPENSES, JET FUEL
EXPENSES AND AIR CATERING EXPENSES
The transaction volumes and amounts involved for landing and take-off fees,
aircraft and engine repair expenses, jet fuel expenses and air catering expenses
are significant. Their settlements generally take two to three months.
Therefore, such expenses were accrued in the year to which they related in order
to match with revenue.
(c) STAFF HOUSING ALLOCATIONS AND LUMP SUM HOUSING ALLOWANCES
Pursuant to Cai Kuai Zi[2001] No. 5 issued by the MOF, staff housing allocation
charges and lump sum housing allowances payable to employees who joined the
Company before 1998 but not yet allocated with staff housing were recorded as
accrued expenses. These expenses were debited against retained earnings at the
beginning of 2001.
[LOGO] [CHINESE CHARACTERS] 157
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
27 ACCRUED EXPENSES (cont'd)
Notes: (cont'd)
(d) INTEREST EXPENSE
Interest expense accrual was mainly from finance lease obligations and loans
relating to the purchases of aircraft. The Group is generally required to repay
the principal and interest once every three or six months. Therefore, interest
expense was accrued in the year to which this is related.
28 LONG-TERM LIABILITIES DUE WITHIN ONE YEAR
THE GROUP THE COMPANY
2004 2003 2004 2003
ORIGINAL Original ORIGINAL Original
CURRENCY RMB currency RMB CURRENCY RMB curreny RMB
MILLION MILLION million million MILLION MILLION million million
-------- ------- -------- ------- -------- ------- -------- -------
Long-term loans
due within one
year (Note 29)
Guaranteed (RMB) 1 2 - -
Unsecured (RMB) 16 64 - -
Unsecured (US$) 10 82 - - 10 82 - -
Mortgaged and
guaranteed (US$) 60 496 74 610 31 254 46 381
Mortgaged (US$) 119 989 2 12 94 780 - -
Mortgaged (RMB) 26 - 26 -
----- --- ----- ---
Sub-total 1,610 688 1,142 381
----- --- ----- ---
Obligations under
finance leases due
within one
year (Note 30)
Mortgaged and
guaranteed
- US Dollars 246 2,032 135 1,120 246 2,032 135 1,120
- Japanese Yen 615 49 2,298 178 615 49 2,298 178
--- ----- ----- ----- --- ----- ----- -----
Sub-total 2,081 1,298 2,081 1,298
----- ----- ----- -----
Total 3,691 1,986 3,223 1,679
===== ===== ===== =====
158 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
29 LONG-TERM LOANS
THE GROUP
2004 2003
ORIGINAL Original
CURRENCY RMB currency RMB
INTEREST RATE (AT 31 DECEMBER, 2004) MILLION MILLION million million
-------------------------------------------------- -------- ------- -------- -------
RENMINBI LOANS:
Fixed interest rates ranging from 4.80% to
6.03% per annum, with maturities through 2009. 1,687 77
Non-interest bearing loan from a municipal
government authority, repayable in 2005. 3 3
Floating interest rates ranging from 4.94% to
5.76% per annum, with maturities through 2014. 1,217 76
US DOLLAR LOANS:
Floating interest rates ranging from 3 months
LIBOR+0.65% to 0.9% per annum, with maturities
through 2011. 212 1,753 - -
Floating interest rates ranging from 6 months
LIBOR+0.3% to 1.2% per annum, with maturities
through 2014. 796 6,589 325 2,686
Fixed interest rates ranging from 2.18% to
8.35% per annum, with maturities through 2011. 323 2,676 317 2,626
HK DOLLAR LOANS:
Floating interest rates ranging from 3 months
HIBOR+1.32% to 2.05% per annum,
with maturities through 2005. 9 9 - -
--- ------ --- -----
13,934 5,468
Less: Current portion of long-term loans (Note 28) (1,610) (688)
------ -----
12,324 4,780
====== =====
[LOGO] [CHINESE CHARACTERS] 159
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
29 LONG-TERM LOANS (cont'd)
THE COMPANY
2004 2003
ORIGINAL Original
CURRENCY RMB currency RMB
INTEREST RATE (AT 31 DECEMBER, 2004) MILLION MILLION million million
-------------------------------------------------- -------- ------- -------- -------
RENMINBI LOANS:
Fixed interest rates ranging from 4.80% to
6.03% per annum, with maturities through 2009. 135 -
Floating interest rates ranging from 4.94% to
5.76% per annum, with maturities through 2014. 1,217 -
US DOLLAR LOANS:
Floating interest rates ranging from 3 months
LIBOR+0.65% to 0.9% per annum, with maturities
through 2011. 172 1,426 - -
Floating interest rates ranging from 6 months
LIBOR+0.3% to 1.2% per annum, with maturities
through 2014. 795 6,578 302 2,505
Fixed interest rates ranging from 2.18% to
8.35% per annum, with maturities through 2011. 281 2,326 187 1,546
--- ------ --- -----
11,682 4,051
Less: Current portion of long-term loans (Note 28) (1,142) (381)
------ -----
10,540 3,670
====== =====
The long-term loans by borrowing terms are analysed as follows:
2004 2003
RMB RMB RMB RMB
MILLION million MILLION million
-------- ------- -------- -------
Unsecured loans 4,538 85 4,459 -
Guaranteed loans 2,424 430 1,812 229
Mortgaged loans 4,800 2,388 4,240 2,324
Mortgaged and guaranteed loans 2,172 2,565 1,171 1,498
------ ----- ------ -----
13,934 5,468 11,682 4,051
====== ===== ====== =====
160 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
29 LONG-TERM LOANS (cont'd)
The guaranteed loans were guaranteed by the following parties:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
CSAHC 2,415 420 1,812 229
SA Finance 9 10 - -
----- --- ----- ---
2,424 430 1,812 229
===== === ===== ===
The mortgaged and guaranteed loans were secured by mortgages over certain of the
Group's and the Company's aircraft (Note 13), and were guaranteed by the
following parties:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Export-Import Bank of
the United States 1,732 2,208 969 1,236
Bank of China 291 357 53 262
The Industrial and Commercial
Bank of China 149 - 149 -
----- ----- ----- -----
2,172 2,565 1,171 1,498
===== ===== ===== =====
The mortgaged loans were secured by mortgages over certain of the Group's and
the Company's aircraft and other flight equipment (Note 13).
The maturity analysis of the long-term loans is as follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Balance due:
Within one year 1,610 688 1,142 381
In the second year 1,698 683 1,476 402
In the third year 4,436 488 3,817 257
After the third year 6,190 3,609 5,247 3,011
------ ----- ------ -----
13,934 5,468 11,682 4,051
====== ===== ====== =====
There were no payables to shareholders who hold 5% or more of the voting rights
of the Company in the balance of long-term loans.
[LOGO] [CHINESE CHARACTERS] 161
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
30 OBLIGATIONS UNDER FINANCE LEASES
THE GROUP AND THE COMPANY
2004 2003
RMB MILLION RMB million
----------- -----------
At 1 January, 6,841 8,198
Add: Additions through the CNA/XJA Acquisitions 6,001 -
Effect due to fluctuations of foreign exchange rates 49 198
Less: Payments during the year 1,272 1,555
------ -----
At 31 December, 11,619 6,841
Less: Balance due within one year (Note 28) 2,081 1,298
------ -----
9,538 5,543
====== =====
Obligations under finance leases represent the Group's commitments under finance
lease agreements in respect of aircraft and related equipment expiring during
from 2005 to 2013. At 31 December, 2004, the weighted average interest rate for
obligations under finance leases was 5.50% per annum. Future payment obligations
of the Group's and the Company's under finance leases are as follows:
2004 2003
RMB MILLION RMB million
----------- -----------
Balance due:
Within one year 2,081 1,298
In the second year 2,829 1,066
In the third year 2,559 1,197
After the third year 4,150 3,280
------ -----
11,619 6,841
====== =====
Under the terms of the leases, the Group has an option to purchase, at or near
the end of the lease term, certain aircraft at fair market value and other
aircraft at either fair market value or a percentage of the respective lessor's
defined cost of the aircraft.
Certain of the Group's and the Company's aircraft and the related insurance
policies were pledged to the lessors. The carrying amounts of these aircraft at
31 December, 2004 are disclosed in Note 13.
162 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
30 OBLIGATIONS UNDER FINANCE LEASES (cont'd)
THE GROUP AND THE COMPANY (cont'd)
The Group's and the Company's obligations under finance leases were guaranteed
by the following parties:
2004 2003
RMB MILLION RMB million
----------- -----------
Bank of China 7,134 2,577
The Industrial and Commercial Bank of China 4,485 4,264
------ -----
11,619 6,841
====== =====
At 31 December, 2004, the Group's and the Company's obligations under finance
leases analysed by original currencies were as follows:
THE GROUP THE COMPANY
2004 2003
ORIGINAL Original
CURRENCY RMB currency RMB
MILLION MILLION million million
-------- ------- -------- -------
US Dollars 698 5,775 478 3,957
Japanese Yen 47,214 3,763 20,532 1,586
------ ----- ------ -----
9,538 5,543
===== =====
Balance due within one year is disclosed in Note 28 to the financial statements.
There was no amount due to shareholders who hold 5% or more of the voting rights
of the Company included in the balance of obligations under finance leases.
31 PROVISION FOR MAJOR OVERHAULS
THE GROUP THE COMPANY
RMB million RMB million
----------- -----------
Balance at 1 January, 2004 200 131
--- ---
Including current portion 11 -
--- ---
Add: Provision for the year 89 47
Additions through the CNA/XJA Acquistions 70 70
--- ---
Balance at 31 December, 2004 359 248
Less: Current portions included in accrued expenses (Note 27) 75 62
--- ---
284 186
=== ===
[LOGO] [CHINESE CHARACTERS] 163
CHINA SOUTHERN
Notes To The Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
32 DEFERRED CREDITS
THE GROUP AND THE COMPANY
GAIN ON SALE REBATES ON REBATES ON
AND LEASE BACK AIRCRAFT AIRCRAFT
TRANSACTION OPERATING LEASES FINANCE LEASES TOTAL
RMB million RMB million RMB million RMB million
-------------- ---------------- -------------- -----------
COST:
At 1 January, 2004 259 24 - 283
Additions through the CNA/XJA Acquistions - 36 21 57
--- -- -- ---
31 DECEMBER, 2004 259 60 21 340
--- -- -- ---
ACCUMULATED AMORTISATION:
At 1 January, 2004 48 18 - 66
Amortisation for the year 31 3 - 34
--- -- -- ---
AT 31 DECEMBER, 2004 79 21 - 100
--- -- -- ---
CARRYING VALUE:
AT 31 DECEMBER, 2004 180 39 21 240
=== == == ===
At 31 December, 2003 211 6 - 217
=== == == ===
Pursuant to certain sale and leaseback arrangements, the Company sold certain
aircraft 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 gain on sale and leaseback arrangements, 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, was deferred and
amortised over the terms of the respective leases.
Pursuant to certain aircraft operating lease arrangements, the Group received
cash rebates from the lessors. Such rebates were deferred and amortised over the
terms of the respective leases.
Pursuant to certain aircraft finance lease arrangements with independent third
parties, the Group received cash rebates from the lessors. Such rebates were
deferred and amortised over the terms of the respective leases.
164 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes To The Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
33 DEFERRED TAXATION
The movements of net deferred tax liabilities/(assets) are as follows:
THE GROUP THE COMPANY
RMB million RMB million
----------- -----------
Balance at 1 January, 2004 392 63
Less: Reduction for the year (Note 45) (110) (118)
---- ----
BALANCE AT 31 DECEMBER, 2004 282 (55)
==== ====
The deferred tax liabilities/(assets) were made up of the taxation effects of:
THE GROUP THE COMPANY
2004 2003 2004 2003
Note RMB MILLION RMB million RMB MILLION RMB million
---- ----------- ----------- ----------- -----------
Deferred tax assets:
Tax losses (a) 39 223 39 223
Repairs and maintenance accruals (b) 129 88 125 93
Rotables repair charges capitalised (c) 254 261 195 199
Accrued expenses (d) 143 19 143 19
Gains on sale and leaseback
transactions (e) 27 32 27 32
Other 18 8 22 11
--- ----- --- ---
Total deferred tax assets 610 631 551 577
--- ----- --- ---
Deferred tax liabilities:
Repairs and maintenance accruals (b) 74 80 - -
Depreciation of fixed assets (f) 757 873 459 616
Other 61 70 37 24
--- ----- --- ---
Total deferred tax liabilities 892 1,023 496 640
--- ----- --- ---
Net deferred tax liabilities/(assets) 282 392 (55) 63
=== ===== === ===
Notes:
(a) TAX LOSSES
Pursuant to the relevant tax regulations, taxable losses can be carried forward
over a maximum period of five years to be offset against future taxable profits.
The deferred tax is recognised based on the unutilised taxable losses and
estimated future taxable profits.
(b) REPAIRS AND MAINTENANCE ACCRUALS
Certain of the Group's and the Company's overhaul expenses were deductible on a
cash payment basis for taxation purposes. According to the accounting policies
adopted in these financial statements, overhaul expenses are expensed as and
when incurred. The Group and the Company recognised the deferred tax for these
timing differences.
[LOGO] [CHINESE CHARACTERS] 165
CHINA SOUTHERN
Notes To The Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
33 DEFERRED TAXATION (cont'd)
Notes: (cont'd)
(c) ROTABLES REPAIR CHARGES CAPITALISED
Pursuant to the relevant tax regulations, repair charges for rotables are
initially capitalised and amortised over five years for taxation purposes.
According to the accounting policies adopted in these financial statements,
repair charges for rotables are expensed as and when incurred. The Group and the
Company recognised the deferred tax for these timing differences.
(d) ACCRUED EXPENSES
Certain of the Group's and the Company's expenses are deductible on a cash
payment basis for taxation purposes. In the preparation of these financial
statements, these expenses are accounted for on an accrual basis. The Group and
the Company recognised a deferred tax for these timing differences.
(e) GAINS ON SALE AND LEASEBACK TRANSACTIONS
Pursuant to the relevant tax regulations, gains on sale and leaseback
transactions are taxable in the period they arise. According to the accounting
policies adopted in these financial statements, these gains are recorded as
deferred credits and amortised over the terms of the leases. The Group and the
Company recognised the deferred tax on these timing differences.
(f) DEPRECIATION OF FIXED ASSETS
Deferred tax was recognised for the timing difference arising from the
difference between the aircraft depreciation rates for accounting purposes and
the rates used for taxation purposes
34 SHARE CAPITAL
2004 2003
RMB MILLION RMB million
----------- -----------
(a) Registered capital:
2,200,000,000 domestic 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
===== =====
(b) Issued and paid up capital:
2,200,000,000 domestic 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
===== =====
Pursuant to an extraordinary general meeting of shareholders held on 21 May,
2002, a resolution was passed authorising the Company to issue not more than
1,000,000,000 A shares of par value of RMB1.00 each. Pursuant to an approval
document (2003) No. 70 from the China Securities Regulatory Commission, the
Company issued and listed its 1,000,000,000 A shares with a par value of RMB1.00
each on the Shanghai Stock Exchange in July 2003.
The receipt of above paid-in capital were verified by KPMG Huazhen which issued
capital verification reports on 31 December, 1994, 10 September, 1997 and 17
July, 2003 respectively.
166 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes To The Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
35 CAPITAL RESERVE
THE GROUP AND THE COMPANY
2004 2003
RMB MILLION RMB million
----------- -----------
Balance at 1 January, 5,801 4,160
Share premium from A shares issue, net of issuance costs - 1,641
----- -----
Balance at 31 December, 5,801 5,801
===== =====
36 SURPLUS RESERVES
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Statutory surplus reserve
Balance at 1 January, 361 337 339 338
Add: Profit appropriations 41 24 10 1
--- --- --- ---
Balance at 31 December, 402 361 349 339
--- --- --- ---
Statutory public welfare fund
Balance at 1 January, 173 172 172 171
Add: Profit appropriations 20 1 5 1
--- --- --- ---
Balance at 31 December, 193 173 177 172
--- --- --- ---
Discretionary surplus reserve
Balance at 1 January, 77 77 77 77
Add: Profit appropriations - - - -
--- --- --- ---
Balance at 31 December, 77 77 77 77
--- --- --- ---
Total 672 611 603 588
=== === === ===
[LOGO] [CHINESE CHARACTERS] 167
CHINA SOUTHERN
Notes to the Financial Statements (cont'd)
(Prepared under PRC Accounting Rules and Regulations)
37 PROFIT APPROPRIATION
(a) Appropriations to surplus reserves
Pursuant to the Board of Directors' resolution on 25 April, 2005, the Company
made appropriations to the following surplus reserves in respect of the year
2004:
(i) Statutory surplus reserve 10%
(ii) Statutory public welfare fund 5%
(b) On 25 April, 2005, the Board of Directors did not recommend the payment of
a dividend to ordinary shareholders.
38 REVENUE FROM PRINCIPAL OPERATIONS
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Passenger 21,624 15,342 14,481 10,184
------ ------ ------ ------
Cargo and mail 2,315 2,009 2,022 1,734
Others 255 - 232 -
------ ------ ------ ------
24,194 17,351 16,735 11,918
====== ====== ====== ======
Revenue from principal operations represent revenues from airline businesses.
The Group's segmental information is analysed in Note 47.
The total revenue from the Group's and the Company's top five customers and
their percentage of the total revenue are analysed as follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
---- ---- ---- ----
Amounts (RMB million) 209 260 173 223
% of total revenue 0.9% 1.5% 1.0% 1.9%
39 BUSINESS TAXES AND SURCHARGES
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Business tax 673 176 447 121
City construction tax 11 10 5 8
Education surcharge 8 5 4 3
--- --- --- ---
Total 692 191 456 132
=== === === ===
168 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
40 PROFIT FROM OTHER OPERATIONS
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Sales commission income - 146 - 125
General aviation income - 3 - 1
Ground services income 112 79 110 79
Others 23 98 78 48
--- --- --- ---
Total 135 326 188 253
=== === === ===
41 FINANCIAL EXPENSES
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Interest expenses incurred 734 907 586 792
Less: Capitalised interest expenses 23 83 23 83
--- --- --- ---
Net interest expense 711 824 563 709
Interest income (34) (13) (17) (8)
Net foreign exchange loss 20 164 14 170
Bank charges 30 21 25 17
--- --- --- ---
Total 727 996 585 888
=== === === ===
Net foreign exchange loss arose mainly from the Group's and the Company's
Japenese Yen denominated finance lease obligations due to fluctuations in the
exchange rate of Japenese Yen.
42 INVESTMENT INCOME
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
EQUITY INVESTMENT INCOME
ACCOUNTED FOR
Under cost method 14 17 - -
Under equity method 49 45 224 267
-- -- --- ---
Total 63 62 224 267
== == === ===
There are no major restrictions on the remittance of the Group's and the
Company's investment returns.
[LOGO] [CHINESE CHARACTERS] 169
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
43 NON-OPERATING INCOME
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Gain on sale of fixed assets 50 22 40 3
Written off of expired sales
in advance of carriage 35 - 35 -
Others 41 21 31 15
--- -- --- --
Total 126 43 106 18
=== == === ==
44 NON-OPERATING EXPENSES
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Loss on sale of fixed assets 44 41 57 -
Donations 9 2 - -
Technical fee 30 - - -
Others 44 28 1 24
--- -- -- --
Total 127 71 58 24
=== == == ==
45 INCOME TAX
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Provision for income tax 197 47 94 -
Deferred taxation (Note 33) (110) (652) (118) (672)
---- ---- ---- ----
87 (605) (24) (672)
==== ==== ==== ====
170 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
46 RELATED PARTIES AND RELATED PARTY TRANSACTIONS
(a) RELATED PARTY WITH CONTROLLING RELATIONSHIP
Name of company: China Southern Air Holding Company
Registered address: No. 278, Ji Chang Road, Guangzhou, Guangdong
Province.
Major business: Management of the companies' operations within
the Group and the sale of products
Relation with the Company: The ultimate holding company
Nature of ownership: State-owned
Legal representative: Liu Shao Yong
Registered capital: RMB 2,198,980,000
At 31 December, 2004 and 2003, CSAHC held 2,200,000,000 Legal Person Shares of
the Company totalling RMB 2,200,000,000.
(b) RELATIONSHIP BETWEEN THE COMPANY AND RELATED PARTIES WITHOUT CONTROLLING
RELATIONSHIPS
(i) COMPANIES THAT ARE UNDER THE CONTROL OF CSAHC, I.E. SUBSIDIARIES OF CSAHC:
Southern Airlines (Group) Import and Export Trading Company
Zhongyuan Airlines Company
Southern Airlines (Group) Economic Development Company
Nanlung Travel & Express (H.K.) Ltd.
Shenzhen Baiyun Air Service Co. Ltd.
Southern Airlines Group Finance Company Limited
Xinjiang Airlines Company
China Northern Airlines Company
(ii) COMPANY THAT IS UNDER THE SIGNIFICANT INFLUENCE OF CSAHC:
Shenzhen Air Catering Company Limited
(iii) JOINTLY CONTROLLED ENTITIES OF THE GROUP:
Guangzhou Aircraft Maintenance Engineering Company Limited
MTU Maintenance Zhuhai Co. Ltd.
China Postal Airlines Limited
(iv) ASSOCIATED COMPANIES OF THE GROUP:
Hong Kong Business Aviation Centre Company Limited
Sichuan Airlines Corporation Limited
[LOGO] [CHINESE CHARACTERS] 171
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
46 RELATED PARTIES AND RELATED PARTY TRANSACTIONS (cont'd)
(c) THE RELATED PARTY TRANSACTIONS CARRIED OUT IN DURING THE YEAR WERE AS
FOLLOWS:
2004 2003
Notes RMB MILLION RMB million
----- ----------- -----------
EXPENSES
Handling charges (1) 33 27
Wet lease rentals (2) - 6
Sundry aviation supplies (3) 66 43
Sales commission expense (4) 2 5
Air catering expense (5) 50 28
Repairing charges (6) 579 347
Staff housing allocation benefits (7) 85 85
Lease charges for land and buildings (8) 18 15
Trademark (9) - -
INCOME
Interest income (10) 4 3
OTHERS
Short-term loans (11) - 166
Refund of medical benefit payments (12) - 58
CNA/XJA Acquisitions (13) 15,398 -
Notes:
(1) Handling charges represent fees payable to Southern Airlines (Group)
Import and Export Trading Company in connection with the procurement of
aircraft and flight equipment on the Group's behalf. Handling charges are
calculated based on a fixed percentage of the procurement value by
reference to market rates. The fees are usually paid by the end of the
following month.
(2) Pursuant to a wet lease agreement effective October 2002, the Group paid
rentals to Xinjiang Airlines in respect of one Boeing 757-200 aircraft.
The wet lease rentals are calculated by reference to market rates. The
rentals payable were settled on the 14th of the following month. The wet
lease agreement was terminated in April 2003.
(3) Sundry aviation supplies represent purchases of sundry aviation supplies
from Southern Airlines (Group) Economic Development Company. Prices are
determined by reference to market prices. The payable amount is generally
settled by the end of the following month.
(4) Sales commission expenses represent commission payable to Nanlung Travel &
Express (H.K.) Ltd., South China International and Aviation and Travel
Services Company and Shenzhen Baiyun Air Services Co. Ltd. in connection
with air tickets sold by these sales agents on the Group's behalf. The
commission rates are based on the rates stipulated by the CAAC. The sales
commission expense payable is offset directly against the sales proceeds
receivable from these sales agents.
(5) Air catering expenses represent fees payable to Shenzhen Air Catering
Company Limited for providing inflight meals to the Group. CSAHC holds a
33% equity interest in the company. Prices are determined by reference to
market prices. The payable amount is usually settled by the end of the
following month.
172 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
46 RELATED PARTIES AND RELATED PARTY TRANSACTIONS (cont'd)
(c) THE PRINCIPAL RELATED PARTY TRANSACTIONS CARRIED OUT IN DURING THE YEAR
WERE AS FOLLOWS: (cont'd)
Notes: (cont'd)
(6) Repair charges represent fees payable to Guangzhou Aircraft Maintenance
Engineering Company Limited and MTU Maintenance Zhuhai Co. Ltd. in
connection with aircraft repairs and maintenance services rendered to the
Group. Fees are charged based on market prices. For the year, repair fees
amounting to RMB 579,000,000 were eliminated in applying the proportional
consolidation method.
(7) Staff housing allocation benefits payable to CSAHC represent the
difference between the cost of the quarters sold to the employees of the
Group and the proceeds from sales of these quarters by CSAHC. The payment
is determined based on number of quarters and the construction cost of the
housing sold over the sales prices, and is payable in accordance with the
related agreement.
(8) Lease charges for land and buildings represent rentals payable to CSAHC by
the Group under certain lease agreements in respect of certain land and
buildings of CSAHC. The rentals are determined based on market rents. The
rentals payments are due in June and December of each year.
(9) The Company and CSAHC have entered into a 10-year trademark licence
agreement dated 22 May, 1997, pursuant to which CSAHC acknowledged that
the Company has the right to use the name "China Southern" and "China
Southern Airlines" in both Chinese and English, and granted to the Company
a renewable royalty-free licence to use the kapok logo on a world-wide
basis in connection with the Company's airline and airline-related
businesses. Unless CSAHC gives written notice of termination three months
before the expiration of the agreement, the agreement will be
automatically extended for another 10-year term.
(10) Interest income represents the interest received from deposits placed with
SA Finance by the Group (Note 5). The applicable interest rate is
determined in accordance with the deposit rate published by the People's
Bank of China. Interest income is received quarterly. Please refer to Note
46 (d) for the balance of deposits at the end of each year.
(11) As at 31 December, 2003, CSAHC made short-term cash advances to the Group.
These advances were unsecured, interest free and repayable on demand. The
cash advances were fully settled during the year.
(12) The Group provides retirees with medical benefits, transportation
subsidies and other welfare facilities. Prior to 2002, the Group paid a
fixed annual fee to CSAHC in return for CSAHC providing such benefits to
the retired employees of the Group. With effect from 1 January, 2002, such
arrangement was terminated. During 2003, CSAHC refunded to the Group the
difference between the aggregate fixed annual fees received from the Group
and the aggregate cost of services incurred by CSAHC.
(13) As disclosed in Note 1 to the financial statements, on 31 December, 2004
the Company acquired the airline operations and certain related assets of
CNA and XJA at a total consideration of RMB15,398 million, which was
partly satisfied by assumption of debts and liabilities of CNA and XJA
totalling RMB13,439 million outstanding as at that date. The remaining
consideration payable of RMB1,959 million will be satisfied in cash.
In addition to the above, certain business undertakings of CSAHC provided
transportation, hotel and other services to the Group during the year. The total
amount involved was not material to the results of the Group for the year.
[LOGO] [CHINESE CHARACTERS] 173
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
46 RELATED PARTIES AND RELATED PARTY TRANSACTIONS (cont'd)
(d) THE MAJOR BALANCES WITH RELATED PARTIES ARE SUMMARISED AS FOLLOWS:
2004 2003
RELATIONSHIP RMB MILLION RMB million
------------------------- ----------- -----------
Cash at bank and on hand
SA Finance Affiliated company 406 371
Trade receivables
Nanlung Travel & Express (H.K.) Ltd. Affiliated company 52 54
Golden Royal International Travel Ltd. Affiliated company - 8
Other receivables
Southern Airlines (Group) Import and
Export Traveling Company Affiliated company 15 17
Guangzhou Aircraft Maintenance
Engineering Company Limited Jointly controlled entity 22 -
Trade payables
Southern Airlines (Group) Import and
Export Trading Company Affiliated company 838 693
Guangzhou Aircraft Maintenance
Engineering Company Limited Jointly controlled entity 118 156
Xinjiang Airlines Company Affiliated company - 81
China Northern Airlines Company Affiliated company - 337
Southern Airlines (Group) Economic
Development Company Affiliated company 3 -
Other payables
China Southern Air Holding Company Ultimate holding company 1,990 166
Accrued expenses
MTU Maintenance Zhuhai Co. Ltd. Jointly controlled entity 138 47
(e) GUARANTEES PROVIDED BY RELATED PARTIES AND OTHER CONTINGENT LIABILITIES:
(i) Other than the guarantees given by CSAHC and SA Finance to banks in
respect of certain loans of the Group (Note 20 and Note 29), there were no
guarantees given to banks by related parties.
(ii) A demerger agreement dated 25 March, 1995 (as amended by amendment no. 1
dated 22 May, 1997) (the "Demerger Agreement") was entered into between
the CSAHC and the Company for the purpose of defining and allocating the
assets and liabilities between CSAHC and the Company. Under the Demerger
Agreement, CSAHC and the Company have agreed to indemnify the other party
against, among other things, claims, liabilities and expenses incurred by
the other party but relating to the businesses, assets and liabilities
held or assumed by CSAHC or the Company pursuant to the Demerger
Agreement. From the date of the Demerger Agreement to the date on which
these financial statements are authorised for issue, there have been no
incidences of compensation in respect of claims, assets or liabilities
held or assumed by CSAHC or the Company.
174 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
46 RELATED PARTIES AND RELATED PARTY TRANSACTIONS (cont'd)
(e) GUARANTEES PROVIDED BY RELATED PARTIES AND OTHER CONTINGENT LIABILITIES:
(cont'd)
(iii) The Company leases from CSAHC certain land in Guangzhou and certain land
and buildings in Wuhan, Haikou and Zhengzhou. The Group has significant
investments in buildings and other leasehold improvements located on such
land. However, such land and buildings lack adequate documentation
evidencing the CSAHC rights thereto.
Pursuant to a compensation agreement dated 22 May, 1997, CSAHC agrees 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.
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.
47 SEGMENTAL INFORMATION
The Group engages in a single operation, i.e. the provision of airline services.
Geographic information about the Group's profit from principal operations are as
follows:
HONG KONG INTERNATIONAL
DOMESTIC & MACAU (Note) TOTAL
RMB million RMB million RMB million RMB million
----------- ----------- ------------- -----------
2004
NET REVENUE FROM PRINCIPAL OPERATIONS 18,582 1,201 4,411 24,194
LESS: COST OF PRINCIPAL OPERATIONS 14,825 932 3,539 19,296
BUSINESS TAXES AND SURCHARGES 532 34 126 692
------ ----- ----- ------
PROFIT FROM PRINCIPAL OPERATIONS 3,225 235 746 4,206
====== ===== ===== ======
2003
Net revenue from principal operations 13,243 793 3,064 17,100
Less: Cost of principal operations 10,936 699 2,587 14,222
Business taxes and surcharges 156 5 30 191
------ ----- ----- ------
Profit from principal operations 2,151 89 447 2,687
====== ===== ===== ======
Note: Mainly routes between the PRC and Asian countries, the United States of
America, the Netherlands, Belguim, Australia and France.
The major revenue-earning asset of the Group is its aircraft fleet, most of
which is registered in the PRC. Since the Group's aircraft fleet is employed
flexibly across its route network, there is no suitable basis for allocating its
assets to geographic segments. Substantially all of the Group's non-aircraft
identifiable assets are located in the PRC.
[LOGO] [CHINESE CHARECTERS] 175
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
48 CONTINGENT LIABILITIES
The Company is 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 unspecified
damages against the Group (as one of the defendants to the Litigation) for
breach of the agreement 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. Based on the opinion given by the
Company's legal advisors, the directors of the Company consider that the Company
has a valid defence against the claim and that a provision for such claim and/
or the associated legal costs is not required.
49 COMMITMENTS
(i) CAPITAL COMMITMENTS
As at 31 December, 2004, the Group and the Company had capital commitments as
follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Commitments in respect of aircraft
and related equipment:
- authorised and contracted for 11,776 10,615 10,121 7,739
- authorised but not contracted for 13,571 - 13,571 -
------ ------ ------ ------
25,347 10,615 23,692 7,739
------ ------ ------ ------
Commitments in respect of
investments in the Guangzhou
new airport:
- authorised and contracted for 110 617 110 617
- authorised but not contracted for 714 1,455 714 1,455
------ ------ ------ ------
824 2,072 824 2,072
------ ------ ------ ------
Other commitments:
- authorised and contracted for 132 257 117 30
- authorised but not contracted for 724 992 200 229
------ ------ ------ ------
856 1,249 317 259
------ ------ ------ ------
27,027 13,936 24,833 10,070
====== ====== ====== ======
176 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
49 COMMITMENTS (cont'd)
(i) CAPITAL COMMITMENTS (cont'd)
As at 31 December, 2004, the Group had on order five Boeing 737-700 aircraft,
six Airbus 319-100 aircraft, fifteen Airbus 320-200 aircraft, two Airbus 321-200
aircraft, four Airbus 330-200 aircraft, one Embraer ERJ-145 aircraft and certain
flight equipment, scheduled for deliveries in 2005 to 2007. Deposits of RMB4,640
million have been made towards the purchase of these aircraft and related
equipment. As at 31 December, 2004, the approximate total future payments,
including estimated amounts for price escalation through anticipated delivery
dates for these aircraft and related equipment are as follows:
THE GROUP THE COMPANY
RMB million RMB million
----------- -----------
Payments due:
2005 8,748 7,093
2006 2,996 2,996
2007 32 32
------ ------
11,776 10,121
====== ======
(ii) OPERATING LEASE COMMITMENTS
The Group's and the Company's commitments under non-cancellable aircraft and
flight equipment operating leases were as follows:
THE GROUP THE COMPANY
2004 2003 2004 2003
RMB MILLION RMB million RMB MILLION RMB million
----------- ----------- ----------- -----------
Payments due:
Within one year 1,761 1,483 1,489 1,194
In the second year 1,622 1,411 1,418 1,169
In the third year 1,562 1,144 1,376 969
After the third year 7,805 4,082 7,568 3,719
------ ----- ------ -----
12,750 8,120 11,851 7,051
====== ===== ====== =====
(iii) INVESTING COMMITMENTS
As at 31 December, 2004, the Group and the Company committed to making capital
contributions of approximately RMB181 million and RMB83 million respectively
(2003: nil and RMB446 million respectively) towards its subsidiaries and jointly
controlled entities.
[LOGO] [CHINESE CHARECTERS] 177
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
50 PRINCIPAL SUBSIDIARIES, ASSOCIATED COMPANIES, AND JOINTLY CONTROLLED
ENTITIES
The particulars of the Company's principal subsidiaries, and the Group's
associated companies and jointly controlled entities as at 31 December, 2004 are
as follows:
(i) PRINCIPAL SUBSIDIARIES
ATTRIBUTABLE/ ISSUED/
PLACE AND DATE OF EQUITY INTEREST REGISTERED
ESTABLISHMENT/ DIRECT INDIRECT CAPITAL PRINCIPAL
NAME OF COMPANY OPERATION % % (NOTE A) ACTIVITIES
-------------- ----------------- ------ -------- -------------- -----------------------
Guangxi Airlines Company Limited PRC 60 - 170,900,000 Airline
28 April, 1994
China Southern (Group) Shantou PRC
Airlines Company Limited 20 July, 1993 60 - 280,000,000 Airline
Zhuhai Airlines Company Limited PRC 60 - 250,000,000 Airline
8 May, 1995
Xiamen Airlines Company Limited PRC 60 - 700,000,000 Airline
11 August, 1984
Guizhou Airlines Company Limited PRC 60 - 80,000,000 Airline
12 November, 1991
Guangzhou Nanland Air Catering PRC 51 - 55,980,000 Air catering
Company Limited (Note b) 21 November, 1989
Guangzhou Aviation Hotel PRC 90 - 63,290,000 Hotel operation
8 January, 1997
Southern China International PRC 90 - 2,100,000 Travel services
Aviation & Travel Services 11 May, 1992
Company
Guangzhou Baiyun International PRC 61 - 20,000,000 Logistic operations
Logistic Company Limited 23 July, 2002
Zhuhai Xiang Yi Aviation PRC 51 - USD 29,800,000 Provision of flight
Technology Company Limited 10 July, 2002 simulation training
(Note b) services
CSN - ETC e-commerce Limited PRC 51 - 5,880,000 Provision of internet
10 February, 2003 service
China Southern West Australian Australia 65 - AUD 100,000 Pilot training services
Flying College Pty Limited 26 January, 1971
CZ Flamingo Limited Cayman Islands 100 - USD 1,000 Aircraft leasing
8 December, 1993
CZ Skylark Limited Cayman Islands 100 - USD 1,000 Aircraft leasing
17 November, 1993
CZ Kapok Limited Cayman Islands 100 - USD 1,000 Aircraft leasing
26 October, 1993
CSA-I Limited Cayman Islands 100 - USD 1,000 Aircraft leasing
1 September, 1993
178 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
50 PRINCIPAL SUBSIDIARIES, ASSOCIATED COMPANIES, AND JOINTLY CONTROLLED
ENTITIES (cont'd)
(i) PRINCIPAL SUBSIDIARIES (cont'd)
ATTRIBUTABLE/ ISSUED/
PLACE AND DATE OF EQUITY INTEREST REGISTERED
ESTABLISHMENT/ DIRECT INDIRECT CAPITAL PRINCIPAL
NAME OF COMPANY OPERATION % % (NOTE A) ACTIVITIES
-------------- ----------------- ------ -------- --------------- -----------------------
CZ93B Limited Cayman Islands 100 - USD 1,000 Aircraft leasing
11 May, 1993
CZ97A Limited Cayman Islands 100 - USD 1,000 Aircraft leasing
2 January, 1997
Zhong Yuan 99A Limited Cayman Islands 100 - USD 1,000 Aircraft leasing
15 February, 1999
CXA92A Limited Cayman Islands - 60 USD 1,000 Aircraft leasing
3 August, 1992
CXA93A Limited Cayman Islands - 60 USD 1,000 Aircraft leasing
1 July, 1993
CXA95B Limited Cayman Islands - 60 USD 1,000 Aircraft leasing
7 July, 1995
CXA95C Limited Cayman Islands - 60 USD 1,000 Aircraft leasing
16 October, 1995
CXA98A Limited Cayman Islands - 60 USD 1,000 Aircraft leasing
20 March, 1998
Xiamen Aviation Supplies Limited PRC - 60 8,560,000 Aviation supplies
30 July, 1997
Xiamen Aviation Development PRC - 54 5,000,000 Hotel management
Company Limited 18 February, 1998
Xiamen Air Holidays Limited Hong Kong - 54 HK$ 3,000,000 Travel servicing
28 April, 1994
Xiamen Macau Holidays Limited Macau - 27.5 MOP 1,000,000 Travel servicing
(Note c) 11 May, 1995
Shantou Hua Kang Air Catering PRC - 42 10,000,000 Air catering
Company Ltd (Note c) 22 June, 1994
Xinjiang Aviation Ground Service PRC 60 - 15,000,000 Airport ground services
Company Limited 27 May, 2002
Xinjiang Civil Aviation Property PRC 51.8 - 251,332,832 Utility services
Management Limited 12 December, 2002
China Northern Airlines Aircraft PRC 75 - USD 3,800,000 Aircraft repair and
Maintenance Co., Ltd. 8 November, 1997 maintenance
services
Xiamen Aviation Property PRC - 60 5,000,000 Property development
Development Company 22 June, 1993
[LOGO] [CHINESE CHARACTERS] 179
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
50 PRINCIPAL SUBSIDIARIES, ASSOCIATED COMPANIES, AND JOINTLY CONTROLLED
ENTITIES (cont'd)
(i) PRINCIPAL SUBSIDIARIES (cont'd)
ATTRIBUTABLE/ ISSUED/
PLACE AND DATE OF EQUITY INTEREST REGISTERED
ESTABLISHMENT/ DIRECT INDIRECT CAPITAL PRINCIPAL
NAME OF COMPANY PERATION % % (NOTE A) ACTIVITIES
------------------------------ ----------------- ------ -------- ----------- --------------------
Guangzhou Air Cargo Company PRC 70 - 238,000,000 Cargo services
Limited 31 March, 2004
Zhuhai Aviation Advertising PRC - 36 1,500,000 Advertising services
Company Limited (Note d) 3 August, 1995
Guangzhou Baiyun International PRC - 55 5,000,000 Logistic operations
Express Customs Supervision 28 July, 2003
Co. Ltd. (Note d)
Notes:
(a) Expressed in RMB, unless otherwise stated.
(b) These subsidiaries are Sino-foreign equity joint venture companies.
(c) The Company holds over 51% equity interest in these companies through its
non-wholly owned subsidiaries. The Company has a controlling interest in
these companies through these non-wholly owned subsidiaries. These
companies are therefore consolidated in the Group's consolidated financial
statements.
(d) Notwithstanding that the Group holds over 50% of the registered capital of
these companies, the Company did not consolidate these companies into its
consolidated financial statements for the year because their assets,
liabilities and results of operations were not significant and had no
significant effect on the Group's consolidated financial statements.
Accordingly, the Group accounted for the investments in these companies
under the cost method.
Other than those stated in Note (d) above, the subsidiaries were accounted for
under the equity method in the Group's consolidated financial statements during
the year.
180 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
50 PRINCIPAL SUBSIDIARIES, ASSOCIATED COMPANIES, AND JOINTLY CONTROLLED
ENTITIES (cont'd)
(ii) PRINCIPAL ASSOCIATED COMPANIES AND JOINTLY CONTROLLED ENTITIES
ATTRIBUTABLE/ ISSUED/
PLACE AND DATE OF EQUITY INTEREST REGISTERED
ESTABLISHMENT/ DIRECT INDIRECT CAPITAL PRINCIPAL
NAME OF COMPANY OPERATION % % (NOTE A) ACTIVITIES
-------------------------------- ------------------ ------ -------- -------------- -----------------------
Guangzhou Aircraft Maintenance PRC 50 - US$ 27,500,000 Provision of aircraft
Engineering Company Limited 28 October, 1989 repair and
(Note b) maintenance
services
Southern Airlines Group Finance PRC 32 15.42 424,330,000 Provision of financial
Company Limited 28 June, 1995 services
Hainan Phoenix Information PRC 45 - US$ 16,360,000 Provision of ticket
System Limited 12 March, 1994 reservation system
services
Hong Kong Business Aviation Hong Kong 20 - HK$ 1,000,000 Provision of private
Centre Company Limited 7 January, 1998 flight logistic
services
MTU Maintenance Zhuhai PRC 50 - US$ 63,100,000 Provision of engine
Co. Ltd. (Note b) 6 April, 2001 repair and
maintenance
services
China Postal Airlines Limited PRC 49 - 36,000,000 Airline
(Note b) 25 November, 1996
Beijing Southern Ground Services PRC 50 - 18,000,000 Airport Ground service
Company Limited (Note b) 1 April, 2004 support
Southern Airlines Advertising PRC 45 - 5,000,000 Aviation advertising
Company 3 March, 1994
Sichuan Airlines Corporation PRC 39 - 350,000,000 Airline
Limited 28 August, 2002
Zhuhai Air Express Co. Ltd. PRC - 18 3,000,000 Air express services
(Note c) 26 February, 1997
Guilin Guangsheng Industrial PRC - 18 2,100,000 Wholesale and retailing
Development Co. Ltd. 18 January, 2000
Civil Aviation Cares of PRC - 17.1 2,000,000 Computer hardware
Xiamen Ltd. 14 September, 2001 and software services
[LOGO] [CHINESE CHARACTERS] 181
CHINA SOUTHERN
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
50 PRINCIPAL SUBSIDIARIES, ASSOCIATED COMPANIES, AND JOINTLY CONTROLLED
ENTITIES (cont'd)
(ii) PRINCIPAL ASSOCIATED COMPANIES AND JOINTLY CONTROLLED ENTITIES (cont'd)
Notes:
(a) Expressed in RMB, unless otherwise stated.
(b) These are jointly controlled entities. They were proportionately
consolidated in the Group's consolidated financial statements.
(c) The results of the operations of these companies were not significant and
had no significant effect on the Group's consolidated financial
statements. Accordingly, the Group accounted for the investments in these
companies under the cost method.
Other than those stated in Note (c) above, the associated companies were
accounted for under the equity method in the Group's consolidated financial
statements for the year ended 31 December, 2004.
51 EXTRAORDINARY GAINS AND LOSSES
In accordance with the requirements of "Questions and Answers on the Preparation
of Information Disclosures of Companies Issuing Public Shares No.1 -
Extraordinary Gains and Losses" (revised 2004), the extraordinary gains and
losses of the Group are set out below:
2004 2003
RMB MILLION RMB million
----------- -----------
Extraordinary gains and losses for the year
Refund of deferred taxation (Note 33) - 516
Refund of medical benefit payments (Note 46(c)) - 58
Loss on sale of fixed assets 6 (19)
Written off of expired sales in advance of carriage 35 -
Technical fee (30) -
Various subsidies - 4
Net of other non-operating income and expenses other than
impairment loss and loss on sale of fixed assets - (13)
Taxation effect of the above items (2) -
--- ---
Total 9 546
=== ===
182 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Notes to the Financial Statements (Cont'd)
(Prepared under PRC Accounting Rules and Regulations)
52 POST BALANCE SHEET EVENTS
In January 2005, the Company, as a lessee, entered into an agreement with an
independent lessor for operating leases of nine Boeing 737-800 aircraft for a
term of seven years with total future payments totalling approximately RMB1,721
million, scheduled for deliveries in 2005 and 2006.
In January 2005, China Aviation Supplies Import and Export Corporation, as a
sole importing agent, entered into, on behalf of several PRC airlines including
the Group, a general purchase agreement with the Boeing Company for the import
of Boeing B7E7 aircraft. The Company, being one of the ultimate users for
thirteen of the Boeing B7E7 aircraft, endorsed the general purchase agreement.
The Company is currently in negotiation with the Boeing Company regarding the
purchase agreements on such aircraft.
In March 2005, the Company, as a lessee, entered into another agreement with an
independent lessor for operating leases of a total of twenty-five aircraft
comprising five Boeing 737-700 aircraft, five Boeing 737-800 aircraft, five
Airbus 320-200 aircraft and ten Airbus 321-200 aircraft with scheduled
deliveries in 2006 and 2007. The term of the lease ranges from ten to twelve
years with total future lease payments totally approximately RMB8,243 million.
In April 2005, the Company entered into a purchase agreement with Airbus SNC for
the purchase of five Airbus A380 aircraft, scheduled for deliveries in 2007 to
2010.
[LOGO] [CHINESE CHARACTERS] 183
CHINA SOUTHERN
Supplementary Information for PRC Shareholders
(Expressed in Renminbi)
Effects of significant differences between PRC Accounting Rules and Regulations
and IFRS on net results are analysed as follows:
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
Net profit under PRC Accounting Rules and Regulations 103 15
Adjustments:
Gains on aircraft sale and leaseback transactions (a) (31) (31)
Losses on staff housing allocations (b) (111) (111)
Adjustment for revaluation of land use rights (c) 4 4
Adjustment for investment in associates (d) (26) -
Interest capitalisation (e) 11 -
Effect of the above adjustments on taxation 2 4
Effect of change in income tax rate on deferred taxation (e) - (122)
Adjustment for unrealised deferred tax assets (f) - (117)
-- --- ----
Net loss under IFRS (48) (358)
=== ====
Effects of significant differences between PRC Accounting Rules and Regulations
and IFRS on shareholders' equity are analysed as follows:
2004 2003
Note RMB MILLION RMB million
---- ----------- -----------
Shareholders' equity under PRC Accounting Rules
and Regulations 11,653 11,550
Adjustments:
Gains on aircraft sale and leaseback transactions (a) 180 211
Losses on staff housing allocation (b) 197 308
Adjustment for revaluation of land use rights (c) (162) (166)
Adjustment for investment in associates (d) (26) -
Interest capitalisation (e) 11 -
Effect of the above adjustments on taxation (5) (7)
------ ------
Shareholders' equity under IFRS 11,848 11,896
====== ======
184 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Supplementary Information for PRC Shareholders (Cont'd)
(Expressed in Renminbi)
Notes:
(a) In accordance with PRC accounting rules and regulations, gains on aircraft
sale and leaseback transactions are recorded as deferred credits and
amortised over the lease terms on a straight line basis. Under IFRS, gains
on sale and leaseback transactions where the subsequent lease is an
operating lease are recognised as income immediately, if the transactions
are established at fair value. Differences between the sale price and fair
value are deferred and amortised over the lease term.
(b) In accordance with PRC accounting rules and regulations, losses on staff
housing allocation executed by CSAHC on the Company's behalf are charged
to retained profits as and when incurred. In addition, lump sum housing
benefits are charged to retained profits as of 1 January, 2001 pursuant to
the relevant regulations. Under IFRS, losses on staff housing allocations
and lump sum housing benefits are charged to the income statement in the
obligatory periods stipulated by the relevant contracts.
(c) In accordance with PRC accounting rules and regulations, land use rights
are carried at revalued amounts. Under IFRS, land use rights are carried
at cost with effect from 1 January, 2002. Accordingly, the unamortised
surplus on revaluation of the land use rights was reversed against
shareholders' equity.
(d) In the PRC GAAP financial statements, the investment in an associate has
been equity accounted for based on the PRC GAAP financial statements of
such associate. The accounting policies of such associate differ in
certain aspects from those of the Group. In the IFRS financial statements,
the differences arising from the different accounting policies of the
associate have been adjusted to conform to the accounting policies of the
Group.
(e) In the PRC GAAP financial statements, interest incurred on specific
borrowings obtained for the construction of fixed assets is capitalised.
In the IFRS financial statements, interest incurred on specific and other
borrowings which are directly attributable to the construction of fixed
assets is capitalised.
(f) In the financial statements prepared under IFRS, an adjustment has been
made to reverse certain unrealised deferred tax assets upon the annual
assessment performed by the Group for the year. Such items were adjusted
for in the financial statements of the Group prepared under PRC accounting
rules and regulations in respect of the prior years.
(g) The Group's consolidated financial statements prepared under IFRS for the
two years ended 31 December, 2003 and 2004 were audited by KPMG, a firm of
certified public accountants in Hong Kong.
[LOGO] [CHINESE CHARACTERS] 185
CHINA SOUTHERN
Five Year Summary
The following consolidated financial information is extracted from the
consolidated financial statements of the Group, prepared under IFRS.
CONSOLIDATED INCOME STATEMENT DATA
(in million, except per share data)
YEAR ENDED 31 DECEMBER,
2004 2003 2002 2001 2000
RMB RMB RMB RMB RMB
------- ------- ------- ------- -------
Operating revenue 23,974 17,470 18,019 16,880 15,178
Operating expenses (23,065) (17,014) (15,993) (15,479) (13,996)
Operating profit 909 456 2,026 1,401 1,182
Share of associated companies' results 12 48 37 53 46
Share of jointly controlled entities' results (5) (39) (3) (4) -
(Loss)/gain on sale of fixed assets (1) (22) 171 (56) 373
Interest income 22 13 53 50 90
Interest expense (691) (824) (959) (934) (1,074)
Exchange (loss)/gain, net (59) (164) (176) 297 319
Other, net 46 21 (10) (11) (5)
Profit/(loss) before taxation and minority interests 233 (511) 1,139 796 931
Taxation (expense)/credit (78) 324 (398) (321) (339)
Minority interests (203) (171) (165) (135) (90)
(Loss)/profit attributable to shareholders (48) (358) 576 340 502
Basic (loss)/earnings per share (Note 1) (0.01) (0.09) 0.17 0.10 0.15
Note:
1. Basic (loss)/earnings per share for year 2004, year 2003 and for years
2000 to 2002 are computed by dividing (loss)/ profit attributable to
shareholders for the respective years by the weighted average number of
shares in issue of 4,374,178,000 for year 2004, 3,831,712,000 for year
2003 and 3,374,178,000 for years 2000 to 2002 respectively.
186 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Five Year Summary (Cont'd)
CONSOLIDATED BALANCE SHEET DATA
(in million)
AS AT 31 DECEMBER,
2004 2003 2002 2001 2000
RMB RMB RMB RMB RMB
------ ------ ------ ------ ------
Cash and cash equivalents 3,083 2,080 3,771 2,818 4,197
Other current assets 4,182 1,922 1,835 1,560 1,692
Property, plant and equipment 46,717 28,536 26,921 22,352 23,282
Total assets 62,104 39,062 37,188 30,653 30,924
Bank and other loans, current portion 11,518 7,097 5,241 2,178 783
Obligations under finance leases, current portion 2,081 1,298 1,567 1,452 1,776
Bank and other loans, non-current portion 11,935 4,522 5,835 3,628 3,789
Obligations under finance leases, non-current portion 9,538 5,543 6,632 7,692 9,416
Shareholders' equity 11,848 11,896 9,613 9,222 8,881
[LOGO] [CHINESE CHARACTERS] 187
CHINA SOUTHERN
The Board of Directors, Supervisory Committee and
Senior Administrative Officers
BOARD OF DIRECTORS
MR. LIU SHAO YONG is the chairman of the Board of Directors. He joined the
Company since November 2004. Mr. Liu graduated from China Civil Aviation Flying
College and joined the civil aviation industry in 1978. He held the positions of
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 Shanxi Provincial Civil Aviation Administration, General
Manager of the Shanxi branch of China Eastern Airlines Corporation Limited and
the Chief of the Flying Model Division of the Civil Aviation Administration of
China. He served as the General Manager of China Eastern Airlines Corporation
Limited and was appointed as the Vice Minister of Civil Aviation Administration
of China. Since August 2004, Mr. Liu has served as the General Manager of China
Southern Air Holding Company. Mr. Liu obtained a post-graduate degree in
International Trading from Tianjin Institute of Finance and Economics in 1999.
He is a qualified class one pilot. Save as disclosed above, Mr. Liu is not
connected with any Directors, senior management, substantial shareholders or
Supervisors of the Company.
MR. LIU MING QI is the Vice 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 Supervisors of the
Company.
MR. PENG AN FA is currently a Director of the Company and the Vice President of
CSAHC and became the employee of the Company since March 1995 after the
establishment of the Company. Mr. Peng graduated from the pilot department of
China Civil Aviation Flying College and the department of Chinese language and
literature of South China Normal University. Mr. Peng began his career in civil
aviation in 1969, and successively served as the Pilot Director, Vice Party
Secretary and Party Secretary of the Sixth Squadron of the Civil Aviation
Administration. In July 1994, Mr. Peng held office as the Party Secretary of the
Flight Operation Department of China Southern Airlines. In March 1998, Mr. Peng
served as the President and Vice Secretary of China Southern Airlines Shenzhen
Co. From August 2001 to October 2002, Mr. Peng served as 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 Supervisors
of the Company.
MR. WANG QUAN HUA is currently a Director of the Company and Vice President of
CSAHC and became the employee of the Company since March 1995 after the
establishment of the Company. Mr. Wang graduated from the Economic Management
Department of Central Communist Party College. Mr. Wang began his career in
civil aviation in 1972, and successively served as the Director of Planning
Department of Guangzhou Civil Aviation Administration, the Office Director of
China Southern Airlines Shenzhen Co., the Director of the Planning and Operation
Division of CSAHC, the President of Strategy and Development Department of China
Southern Airlines Company Limited and the Vice President of CSAHC. Save as
disclosed above, Mr. Wang is not connected with any Directors, senior management
or substantial shareholders or Supervisors of the Company.
188 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
The Board of Directors, Supervisory Committee and
Senior Administrative Officers (Cont'd)
BOARD OF DIRECTORS (CONT'D)
MR. ZHAO LIU AN is a Director of the Company and the Vice President of CSAHC.
Mr. Zhao joined the Company since May 2003. Mr. Zhao began his career in civil
aviation in 1966, and successively served as the Director of Flight Meteorology
and Flight Safety Monitoring Division, Director of Science Education Division,
the Director of Flying Model Division of Urumqi Civil Aviation Administration,
Captain of the Ninth Squadron of the Civil Aviation Administration, the Vice
President and President of Urumqi Civil Aviation Administration and Xinjiang
Airlines. Save as disclosed above, Mr. Zhao is not connected with any Directors,
senior management or substantial shareholders or Supervisors of the Company.
MR. ZHOU YONG QIAN is currently a Director of the Company and the Vice President
of CSAHC and the President of China Northern Airlines. Mr. Zhou joined the
Company since May 2003. Mr. Zhou graduated from Nanjing Institute of
Meteorology. Mr. Zhou began his career in civil aviation in 1990, and
successively served as Minister of the Organization Division of the Northeastern
Civil Aviation Administration, Vice Secretary of Shenyang Taoxian International
Airport, Vice Secretary of the Northeastern Civil Aviation Administration and
the President of China Northern Airlines. Save as disclosed above, Mr. Zhou is
not connected with any Directors, senior management or substantial shareholders
or Supervisors of the Company.
MR. SI XIAN MIN is 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. Save as
disclosed above, Mr. Si is not connected with any Directors, senior management,
substantial shareholders or Supervisors of the Company.
MR. ZHOU YONG JIN is a Director of the Company. He joined the CSAHC in January
1991 and became an employee of the Company upon its establishment in March 1995,
and has successively served as a Director of the Propaganda Department of the
CSAHC, Party Secretary of the Transportation Department (Guangzhou) of the
Company, and Party Secretary of the Company's Shenzhen branch. He served as
Chairman of the Labour Union of the Company. Save as disclosed above, Mr. Zhou
is not connected with any Directors, senior management or substantial
shareholders or Supervisors of the Company.
MR. XU JIE BO is a Director, Assistant General Manager 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 Assistant General Manager 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 Company Limited. Save as disclosed above, Mr. Xu is not connected with
any of the Directors, senior management, substantial shareholders or Supervisors
of the Company.
MR. WU RONG NAN is a Director of the Company. He joined the CSAHC in January
1991 and became an employee of the Company upon its establishment in March 1995.
Mr. Wu is an air traffic control engineer. He was once employed as the Director
of Flight Operations of the Guangzhou Civil Aviation Administration and has been
President of Xiamen Airlines since 1986. Save as disclosed above, Mr. Wu is not
connected with any Directors, senior management or substantial shareholders or
Supervisors of the Company.
[LOGO] [CHINESE CHARACTERS] 189
CHINA SOUTHERN
The Board of Directors, Supervisory Committee and
Senior Administrative Officers (Cont'd)
BOARD OF DIRECTORS (CONT'D)
MR. SIMON TO has been an Independent Non-Executive Director of the Company since
June 1999. Mr. To is currently a 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 Supervisors of the Company.
MR. PETER LOK has been an Independent Non-Executive Director of the Company
since June 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 Supervisors of the Company.
MR. WEI MING HAI has been an Independent Non-Executive Director of the Company
since June 2001. 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 ten academic books or textbooks, and over 60
academic papers. Mr. Wei is not connected with any Directors, senior management
or substantial shareholders or Supervisors of the Company.
MR. WANG ZHI has been an Independent Non-Executive Director of the Company since
May 2003. Mr. Wang graduated from the Aircraft Design Department of Harbin
Institute 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 secretary 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 Supervisors of the Company.
MR. SUI GUANG JUN has been an Independent 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,
the Dean of corporate administration department of Jinan University and the
Chief of the Post-doc Committee of Applied Economics and the Dean of Management
College in Jinan University. Mr. Sui is currently the Deputy Vice Chancellor of
Guangdong University of Foreign Studies. Mr. Sui is not connected with any
Directors, senior management or substantial shareholders or Supervisors of the
Company.
190 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
The Board of Directors, Supervisory Committee and
Senior Administrative Officers (Cont'd)
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. SUN XIAO YI is a member of Party Committee and head of Discipline
Supervision Team of China Southern Air Holding Company. 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 Hubei branch of the Company,
Party Secretary of the Flight Operations Department of the Company, and Vice
Party Secretary of China Southern Air Holding Company. Save as disclosed above,
Mr. Sun is not connected with any Directors, senior management, substantial
shareholders or Supervisors of the Company.
MR. YANG GUANG HUA is the Vice Party Secretary and Discipline Supervision
Secretary of the Company. Mr. Yang is an engineer with university qualification.
Mr. Yang has successively served as Deputy General Manager of the Hunan branch
of the Company, General Manager of Southern Airlines (Group) Zhuhai Helicopters
Company Limited, General Manager of the Hunan branch of the Company, and Deputy
General Manager of the Company. Save as disclosed above, Mr. Yang is not
connected with any Directors, senior management, substantial shareholders or
Supervisors of the Company.
MS. YANG YI HUA is 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, Manager of the
Financial Office of the Company's Financial Division, and Deputy General Manager
of the Company's Audit Department. Save as disclosed above, Ms. Yang is not
connected with any Directors, senior management, substantial shareholders or
Supervisors of the Company.
SENIOR ADMINISTRATIVE OFFICERS
MR. LI KUN is a Managing Vice President of the Company. He graduated from the
CAAC Management Institute specializing in Air Transport Management. Mr. Li was
the General Manager of the Thailand Office, China Southern Airlines from 1993 to
1995. He became the General Manager of Transportation Department of the Company
from 1998 to 2000. Mr Li has been holding the position as a Vice President of
the Company since 2000.
MR. YUAN XIN AN is a Vice President and Chief Engineer of the Company. He
graduated from the Air Engineering College. Mr. Yuan 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 has become the Chief Engineer
of the Company since 2000, and he has been appointed as a Vice President of the
Company from April 2002.
MR. ZHENG EN REN is a Vice President of the Company. He graduated from the CAAC
Advanced Flying College and possesses the qualification as a First Class Pilot.
Mr. Zheng has over 40 years of experience in the Chinese aviation industry. He
served as the Captain of the Sixth Squadron of the Civil Aviation
Administration, Chairman of the Labour Union and Deputy Chief Captain. During
the period from 1996 to 1999, he held the position as President of Southern
Airlines (Group) Shantou Airlines Company Limited. Mr. Zheng was an Assistant to
the President of the Company from 1999 to April 2002. He has been appointed as a
Vice President of the Company from April 2002.
[LOGO] [CHINESE CHARACTERS] 191
CHINA SOUTHERN
The Board of Directors, Supervisory Committee and
Senior Administrative Officers (Cont'd)
SENIOR ADMINISTRATIVE OFFICERS (CONT'D)
MR. HAO JIAN HUA is currently the Vice President of the Company. He completed
his piloting 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 has been the Vice President of the Company since 31 July, 2003.
MR. REN JI DONG is 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 has assumed the offices of the Party Secretary and Vice
President of the Urumqi branch of the Company since 2004.
MR. HE ZONG KAI is 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 2003.
MR. LIU QIAN is 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 has
assumed the offices of the Deputy Chief Pilot and Chief Pilot of the Company
since November 2004.
MR. SU LIANG is 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.
From 2000 to date, Mr. Su is the Company Secretary.
MR. CHEN WEI HUA is the Chief Legal Adviser to the Company. Mr. Chen graduated
from the school of law of Peking University. He is a qualified solicitor and a
qualified corporate legal counsellor. Mr. Chen joined the Civil Aviation
Administration of China in 1998. He then joined the CSAHC in January 1991. From
1997 to 2003, he served as Vice Director and Director of the Legal Affairs
Office of the Company. Currently, he is President of the Legal Department of the
Company. Since December 2003, Mr. Chen has been the Chief Legal Adviser to the
Company. He is also a Director of Xiamen Airlines Company Limited.
192 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2004 ANNUAL REPORT
Glossary
In this Annual Report, unless the context otherwise requires, the
following terms shall have the meanings indicated:
CAPACITY MEASUREMENTS
"available seat kilometres" the number of seats made available for sale
or "ASKs" multiplied by the kilometres flown
"available tonne kilometres" the tonnes of capacity available for the
or "ATKs" transportation of revenue load (passengers
and cargo) multiplied by the kilometres
flown
TRAFFIC MEASUREMENTS
"revenue passenger the number of passengers carried multiplied
kilometres" or "RPKs" by the kilometres flown
"cargo tonne kilometres" the load in tonnes multiplied by the
kilometres flown
"revenue tonne kilometres" the load (passengers and cargo) in tonnes
or "RTKs" multiplied by the kilometres flown
YIELD MEASUREMENTS
"passenger yield" revenue from passenger operations divided by
RPKs
"cargo yield" revenue from cargo operations divided by
cargo tonne kilometres
"average yield" revenue from airline operations (passenger
and cargo) divided by RTKs
"tonne" a metric ton, equivalent to 2,204.6 pounds
LOAD FACTORS
"passenger load factor" RPKs expressed as a percentage of ASKs
"overall load factor" RTKs expressed as a percentage of ATKs
UTILISATION
"utilisation rates" the actual number of flight and taxi hours
per aircraft per operating day
NOTICE OF 2004 ANNUAL GENERAL MEETING
[LOGO] [CHINESE CHARACTERS]
CHINA SOUTHERN AIRLINES COMPANY LIMITED
(a joint stock limited company incorporated in the People's Republic of China
with limited liability)
(STOCK CODE: 1055)
NOTICE IS HEREBY GIVEN that pursuant to the resolutions passed by the
Board of Directors of China Southern Airlines Company Limited (the "Company") at
the Board Meeting held on 25 April, 2005, the 2004 Annual General Meeting of the
Company will be held at the headquarters of China Southern Airlines Company
Limited, No. 278 Ji Chang Road, Guangzhou, Guangdong Province, the PRC at 9:00
a.m., on 15 June, 2005 for the following purposes:
I. To examine and approve the following resolutions as ordinary
resolutions:
1. Report of the Directors of the Company for the year 2004;
2. Report of the Supervisory Committee of the Company for the
year 2004;
3. Audited consolidated financial statements of the Company for
the year 2004;
4. Profit distribution budget of the Company for the year 2004;
5. Appoint KPMG as the international auditors of the Company for
the year 2005 and KPMG Huazhen as the PRC auditors of the
Company for the year 2005 and authorize the Board to determine
their remuneration;
6. The operating lease of 5 Boeing B737-700, 5 Boeing B737-800, 5
Airbus A320-000 and 10 Airbus A321-200;
7. Proposal of the Board of Directors for amendments to the
"Rules of Procedures for Shareholders' General Meetings" as
stated below;
a. Article 2 of the "Rules of Procedures for Shareholders'
General Meetings" shall be replaced by the following
provision:
"ARTICLE 2 The Shareholders' General Meeting is the
organ of authority of the Company and shall exercise the
following functions and powers in accordance with law:
(1) to decide on the Company's operational policies
and investment plans;
(2) to elect and replace directors and decide on
matters relating to the remuneration of directors;
(3) to elect and replace the supervisors who are
representatives of shareholders and decide on
matters relating to the remuneration of
supervisors;
(4) to examine and approve reports of the Board of
Directors;
(5) to examine and approve reports of the supervisory
committee;
(6) to examine and approve the Company's proposed
annual preliminary and final financial budgets;
(7) to examine and approve the Company's profit
distribution plans and plans for making up losses;
(8) to decide on increases or reductions in the
Company registered capital;
(9) to decide on matters such as merger, division,
dissolution and liquidation of the Company;
(10) to decide on the issue of debentures by the
Company;
(11) to decide on matters relating to external security
according to the relevant provisions of the
Articles of Association of the Company;
(12) to decide on the appointment, dismissal and
disengagement of the accountants of the Company;
(13) to amend these Articles of Association;
(14) to consider motions raised by shareholders who
represent 5 percent or more of the total shares of
the Company carrying the right to vote;
(15) to decide on other matters which require
resolutions of the shareholders in Shareholders'
General Meeting according to relevant laws,
administrative regulations and provisions of the
these Articles of Association;
(16) to decide on matters which the Board of Directors
may be authorized or delegated to deal with by the
shareholders in Shareholders' General Meeting;
(17) to consider and approve significant acquisition,
disposal and replacement of assets of the Company
(the standards shall be fixed in accordance with
the rules of the stock exchange of the listing
place).
b. Article 12 of the "Rules of Procedures for Shareholders'
General Meetings" shall be replaced by the following
provision:
"ARTICLE 12 A notice of meeting of shareholders shall
meet the following requirements:
(1) be in writing;
(2) specify the place, the date and time of the
meeting;
(3) state the matters to be discussed at the meeting;
(4) provide such information and explanation as are
necessary for the shareholders to make an informed
decision on the proposals put before them. Without
limiting the generality of the foregoing, where a
proposal is made to amalgamate the Company with
another, to repurchase shares, to reorganize the
share capital, or to restructure the Company in
any other way, the terms of the proposed
transaction must be provided in detail together
with copies of the proposed agreement, if any, and
the cause and effect of such proposal must be
properly explained;
(5) contain a disclosure of the nature and extent, if
any, of the material interests of any director,
supervisor, president or other senior
administrative officer in the proposed transaction
and the effect of the proposed transaction on them
in their capacity as shareholders in so far as it
is different from the effect on the interests of
the shareholders of the same class;
(6) contain the full text of any special resolution to
be proposed at the meeting;
(7) contain conspicuously a statement that a
shareholder entitled to attend and vote is
entitled to appoint one or more proxies to attend
and vote instead of him and that a proxy need not
be a shareholder;
(8) specify the time and place for lodging proxy forms
for the relevant meeting.
Where the Company convenes the Shareholders' General
Meeting and provides shareholders with online voting,
the time and voting procedures of online voting and the
matters to be considered and approved.";
c. Article 20 of the "Rules of Procedures for Shareholders'
General Meetings" shall be replaced by the following
provision:
"ARTICLE 20 The Company shall, subject to the
Shareholders' General Meetings being legally and validly
held and availability of corresponding conditions,
encourage a higher proportion of participation of public
shareholders in Shareholders' General Meetings through
various means, including using modern information
technology to establish an online voting platform.";
d. Article 21 of the "Rules of Procedures for Shareholders'
General Meetings" shall be replaced by the following
provision:
"ARTICLE 21 In order to protect the interests of public
shareholders in good faith, the Company shall provide an
online voting system for the shareholders to exercise
their voting right at the Shareholders' General Meeting
so far as the condition permits. On a voting by poll on
the matters mentioned in Article 53 at the Shareholders'
General Meeting, online voting shall be adopted
therefore.
Where online voting is adopted for the Shareholders'
General Meeting, all shareholders whose names appear on
the register of members on the record date for the
purpose of the Shareholders' General Meeting, are
entitled to exercise their voting rights through the
online voting system of the Shareholders' General
Meeting, provided that the voting right of the same
shares shall be exercised only by one of the following
ways: on-the-spot voting, online voting or otherwise as
specified.
Where online voting is adopted for the Shareholders'
General Meeting, it shall be conducted in accordance
with the relevant laws, regulations and rules.";
e. Article 22 of the "Rules of Procedures for Shareholders'
General Meetings" shall be replaced by the following
provision:
"ARTICLE 22 The Board of Directors, independent
directors and shareholders who meet the relevant
requirements may solicit from other shareholders their
voting rights in Shareholders' General Meetings. The
solicitation shall be without consideration and
information shall be fully disclosed to such
shareholders.";
f. Article 23 of the "Rules of Procedures for Shareholders'
General Meetings" shall be replaced by the following
provision:
"ARTICLE 23 A motion of a Shareholders' General Meeting
is a discussion paper of a specific matter which shall
be discussed in a Shareholders' General Meeting and
shareholders shall resolve on the specific motion in a
Shareholders' General Meeting.
At a Shareholders' General Meeting of the Company,
shareholders who individually or jointly hold 5% or more
of the Company's voting shares shall have the right to
propose new motions.
Shareholders individually or jointly holding 5% of the
total voting shares of the Company or the Supervisory
Committee may put forward an extempore motion at annual
general meetings. If the extempore motion concerns
matters not listed in the notice of Board Meeting but
falls into the scope of matters listed in Article 96,
the proposing party shall submit the motion to the Board
not less than 10 days before the convening of the
Shareholders' General Meeting for announcement by the
Board of Directors upon their approval.
Where the principal shareholder proposes a new motion on
profit distribution, the motion shall be submitted to
the Board not less than 10 days before holding of the
annual general meeting for announcement by the Board. If
the motion is submitted less than 10 days before the
annual general meeting, the principal shareholder may
not propose the new profit distribution motion at the
current annual general meeting.
If online voting is adopted by the Company for the
annual general meeting, the extempore motion so proposed
shall be announced by the Board of Directors at least 10
days in advance. Any extempore motion proposed at the
Shareholders' General Meeting or other extempore motions
which have not been announced shall not be included in
the agenda of the Shareholders' General Meeting.
Apart from the above, other motions may be proposed to
the Board for its announcement before the annual general
meeting or may be proposed at the annual general meeting
directly.";
g. Article 24 of the "Rules of Procedures for Shareholders'
General Meetings" shall be replaced by the following
provision:
"ARTICLE 24 A motion proposed at Shareholders' General
Meetings shall satisfy the following criteria:
(1) The substance of the motion proposed shall be in
compliance and not conflict with laws,
administrative regulations and the requirements
set forth in the Company's Articles of
Association, and shall fall within the scope of
business of the Company and the functions of
Shareholders' General Meetings;
(2) There is a clear subject of discussion and a
specific resolution;
(3) The motion shall be submitted or delivered to the
Board of Directors in writing.";
h. Article 53 of the "Rules of Procedures for Shareholders'
General Meetings" shall be replaced by the following
provision:
"ARTICLE 53 Unless otherwise provided, the following
matters shall not be implemented or applied for unless
they have been approved by all the shareholders of the
Company at the Shareholders' General Meeting and have
been passed by more than half of the public shareholders
with voting rights present at the Shareholders' General
Meeting:
Any issue of new shares by the Company to the public
(including issue of overseas listed foreign shares or
share of other natures), issue of convertible
debentures, placing of shares to existing shareholders
(except in such placing where the controlling
shareholders have provided an undertaking to fully
subscribe for the shares in cash before the
Shareholders' General Meeting is convened);
Major asset restructuring in which the assets will be
acquired at a total price which is 20% higher than the
audited net book value of such assets;
Repayment of debts due to the Company by any shareholder
using his shares of the Company;
Overseas listing of any significant subsidiary of the
Company;
Other relevant issues which may have a material impact
on the interests of the public shareholders in the
development of the Company.
Where the Company makes an announcement on the
resolutions of the Shareholders' General Meeting about
any issue mentioned above, the announcement shall set
out the number of the public shareholders voting at the
Shareholders' General Meeting, the number of shares they
held and its percentage in the total number of shares
held by the public shareholders, the voting result and
shareholdings of the ten largest public shareholders
voting at the Shareholders' General Meeting and the
results of their votes.
Where the Company convenes a Shareholders' General
Meeting to consider and approve any issue mentioned
above, it shall provide the shareholders with an online
voting system.";
i. Article 54 of the "Rules of Procedures for Shareholders'
General Meetings" shall be replaced by the following
provision:
"ARTICLES 54 Where any event referred to in the
preceding Article 53 occur, after the notice of
Shareholders' General Meeting has been issued, the
Company shall issue a notice of the Shareholders'
General Meeting again within three days from the date of
shareholding registration.";
j. Article 55 of the "Rules of Procedures for Shareholders'
General Meetings" shall be replaced by the following
provision:
"ARTICLE 55 Annual General Meetings or extraordinary
shareholders' meetings held at the request of
shareholders and the Supervisory Committee shall
not adopt voting by way of written resolutions.
Extraordinary general meetings held for other reasons
may vote by way of written resolutions, except for the
following matters:
(1) Increase or decrease in the Company registered
capital;
(2) Any issue of debentures by the Company;
(3) Merger, division, dissolution and liquidation of
the Company;
(4) Any amendment to the Articles of Association;
(5) plan for distribution of profits and recovery of
losses;
(6) Appointment and removal of members of the Board of
Directors and the supervisory committee;
(7) Change in application of raised funds;
(8) Connected transactions that shall be considered
and examined by the Shareholders' General Meeting;
(9) acquisition and disposal of assets that shall be
considered and examined by the Shareholders'
General Meeting;
(10) Change of accounting firms;
(11) Other matters that shall not be voted by way of
written resolutions as provided by these Articles
of Association.";
k. Article 56 of the "Rules of Procedures for Shareholders'
General Meetings" shall be replaced by the following
provision:
"ARTICLE 56 The nominee list of Directors and
Supervisors of the Company shall be submitted to the
Shareholders' General Meeting for resolution. The Board
of Directors shall simultaneously provide shareholders
with bibliographical details and basic information about
nominees of Directors and Supervisors.";
l. Article 57 of the "Rules of Procedures for Shareholders'
General Meetings" shall be replaced by the following
provision:
"ARTICLE 57 After issue of notice of Shareholders'
General Meeting by the Company about election of
Directors and Supervisors, shareholders holding or
aggregately holding 1% or more of shares with voting
rights of the Company may propose nominees of Directors
and Supervisors before the Shareholders' General Meeting
for review by the Board of Directors in accordance with
the procedures for amendments to proposals of
Shareholders' General Meeting before submission to
Shareholders' General Meeting for examination.";
m. Article 59 of the "Rules of Procedures for Shareholders'
General Meetings" shall be replaced by the following
provision:
"ARTICLE 59 Method of voting:
(1) disclosed ballot;
(2) the right to vote by hand on resolutions which
ballot is not necessary;
(3) unconditional ballot, that is, no additional
conditions are attached to voting;
(4) a resolution shall be made after voting.
The following issues shall be approved by vote on a poll
under the supervisor's supervision at Shareholders'
General Meeting:
(1) connected transactions;
(2) transactions that shall be approved by independent
shareholders;
(3) options granted to major shareholders or
independent directors or any other related
parties; and
(4) any other transactions in which shareholders are
materially interested and accordingly are required
to refrain from voting at Shareholders' General
Meeting.
Notwithstanding the above regulations, unless a
poll is demanded before or after any vote by show
of hands, at any general meeting of shareholders,
a resolution shall be decided on a show of hands
if not expressly required to be decided by a poll:
(1) by the chairman of the meeting;
(2) by at lease two shareholders entitled to
vote present in person or by proxy;
(3) by one or more shareholders present in
person or by proxy and representing 10
per cent or more of all shares carry the
rights to vote at the meeting.
Unless a poll be so demanded, a declaration by the
chairman that a resolution has on a show of hands been
carried unanimously, or carried by a particular
majority, or lost, and an entry to that effect in the
minutes of the meeting shall be conclusive evidence of
the fact without proof of the number or proportion of
the votes recorded in favor of or against such
resolution.
The demand for a poll may be withdrawn by the person who
makes such demand."
Where online voting is provided at the Shareholders'
General Meeting of the Company concurrently, the number
of votes by Shareholders or their appointed
representatives through online voting system of the
Shareholders' General Meeting shall be taken into the
total number of votes of the Shareholders' General
Meeting together with the number of votes on site of the
meeting and by other mean as specified."
8. Proposal of the Board of Directors for amendments to the
"Rules of Procedures for Board of Directors" as stated below;
a. Article 12 of "Rules of Procedures for Board of
Directors" shall be replaced by the following provision:
"ARTICLE 12 Where a director's resignation results in
the number of directors being less than the quorum, the
written resignation of such directors shall become
effective only when the vacancy arising from his
resignation has been filled by new directors. The Board
of Directors consisting of the remaining directors shall
convene a Shareholders' General Meeting as soon as
possible to elect a new director to fill the vacancy
arising from the resignation of such directors. The
power of the resigning director and the Board of
Directors consisting of the remaining directors shall be
subject to due restrictions until the Shareholders'
General Meeting has made a resolution in respect of the
re-election of the directors.
Where directors leave the Company before expiry of their
terms of office, they shall compensate the Company for
any losses arising from their unauthorized
resignation.";
b. Article 15 of "Rules of Procedures for Board of
Directors" shall be replaced by the following provision:
"ARTICLE 15 The Company shall not in any manner pay
taxes for or on behalf of a director, supervisor,
president or other senior administrative officer.";
c. Article 18 of "Rules of Procedures for Board of
Directors" shall be replaced by the following provision:
"ARTICLE 18 The Company shall have independent
directors. The independent directors shall have no other
position in the Company (other than as
director of the Company), and shall not be in any
relationship with the Company or its major shareholders
that will impair their independent and objective
judgment.
The Board of Directors shall comprise more than
one-thirds of independent directors, of which at least
one director shall be accounting professional.
Independent directors shall perform the fiduciary duties
and protect the interests of the Company, and in
particular, they shall protect the legal interests of
public shareholders from any loss.";
d. Article 21 of "Rules of Procedures for Board of
Directors" shall be replaced by the following provision:
"ARTICLE 21 To facilitate the independent directors in
performing their function more efficiently, the
independent directors shall have the following special
powers, in addition to having those powers granted by
the Company Law and other relevant laws and regulations
to directors:
(i) connected transactions of which the aggregate
consideration is in compliance with the relevant
provisions of the existing listing rules and other
supervisory regulation in places where the Company
is listed, engaging or disengaging accounting
firms, shall first be approved by the independent
directors before submission to the Board of
Directors for discussion. Before making the
decision with respect to such transactions, the
independent directors may engage a professional
institution to prepare independent financial
advisor's reports as a basis of their decision;
(ii) propose to the Board of Directors with respect to
engaging or disengaging accounting firms;
(iii) propose to the Board of Directors with respect to
the convening of extraordinary shareholders'
meetings;
(iv) propose the convening of board meetings;
(v) engage external auditing firms or consultancy
firms;
(vi) publicly solicit and collect proxies before the
convening of the Shareholders' General Meetings.
The independent director shall obtain the consent of
over half of the independent directors in exercising any
of the above powers, among which (v) requires the
consent of all of the independent directors.";
e. Article 22 of "Rules of Procedures for Board of
Directors" shall be replaced by the following provision:
"ARTICLE 22 In addition to the above obligation, the
independent directors shall provide their independent
opinions to the Board of Directors or the Shareholders'
General Meeting on the following matters:
(1) nomination, appointment and removal of directors;
(2) appointment and dismissal of senior administrative
officers;
(3) remuneration of directors and senior
administrative officers;
(4) newly occurred transactions, loans and other forms
of fund transfer between the Company and its
shareholders, actual controllers or their
affiliates, the aggregate amount of which is in
compliance with the relevant provisions of the
existing listing rules and other supervisory
regulations in places where the Company is listed,
and whether the Company has taken effective
measures to collect the amounts due;
(5) matters which may harm the interests of the
minority shareholders;
(6) matters which the Board of Directors has not put
forward cash profit distribution proposal;
(7) matters relating to security provided to external
parties by the Company;
(8) other matters provided for in these Articles of
Association.
The independent directors shall choose to provide any of
the following opinions in respect of the above matters:
agree, reserve opinion and the reasons therefor, dissent
and the reasons therefor; unable to comment and the
reasons therefor.
If the matters concerned fall under those which require
disclosure, the company shall publicly disclose the
opinions of the independent directors. If the
independent directors cannot reach a consensus, the
Company shall publicly disclose the opinions of each of
the independent directors.";
f. Article 23 of "Rules of Procedures for Board of
Directors" shall be replaced by the following provision:
"ARTICLE 23 Independent directors shall attend the
meetings of the Board of Directors as scheduled, have an
understanding of the production and operation of the
Company, take initiative to conduct investigation and
obtain information necessary for decision-making.
Independent directors shall submit their report to the
annual general meeting of the Company, describing the
discharge of their duties.";
g. Article 28 of "Rules of Procedures for Board of
Directors" shall be replaced by the following provision:
"ARTICLE 28 Nomination, Election and Replacement of
Independent Directors:
(1) The Board of Directors, the supervisory committee,
and shareholder(s) of the Company who alone or
jointly with other persons hold(s) more than 5% of
the issued shares of the Company shall have the
right to nominate candidates as independent
directors, and the nominated candidates shall
become independent directors by election at a
Shareholders' General Meeting.
(2) The nominator shall have the approval of the
proposed candidate for the nomination before
making a nomination. The nominator shall have
adequate knowledge of the profession, education,
professional title and detailed work experience of
the nominee as well as status of all his part-time
jobs. The nominator shall also comment on the
qualification and independence of the nominee as
an independent director. The nominee shall make a
public statement disclaiming any relationship
between him and the Company that will affect his
independent judgment. Before the shareholders
meeting for the election of independent directors,
the Company's Board of Directors shall announce
the above information in accordance with relevant
provisions.
(3) Before convening the Shareholders' General Meeting
for the election of independent directors, the
Company shall submit relevant materials of all the
nominees to the China Securities Regulatory
Commission and its local office as well as the
stock exchange at which the Company's shares are
listed. Dissenting opinions of the board with
regard to the nominees shall also be submitted.
Nominees of independent directors objected by
China Securities Regulatory Commission may be
candidates of the directors of the Company but not
as candidates of independent directors of the
Company. At the Shareholders' General Meeting for
the election of independent directors, the Board
of Directors shall make clear whether the nominees
of independent directors are objected to by China
Securities Regulatory Commission.
(4) The term of office of the independent directors is
the same as that of the other directors.
Successive terms are allowed upon the expiration
of the term, but may not be extended to more than
6 years.
(5) An independent director who fails to attend in
person three consecutive board meetings shall be
deemed as unable to perform his duties and shall
be replaced upon the proposal of the board to the
Shareholders' General Meeting. Independent
directors shall not be dismissed without just
cause before the expiration of his term, unless
the above condition or any of the conditions
specifying the disqualification of a director
under the Company Law has occurred. When an
independent director is dismissed, the Company
shall disclose the dismissal as a special
discloseable matter and shall give reasons for the
dismissal. The independent director may make a
public statement if he thinks that such a
dismissal is without justification.
(6) Independent directors may resign before the
expiration of their term. The resigning
independent director shall submit written
resignation to the Board of Directors. The written
resignation shall contain explanations on matters
related to his resignation or any other matters
which in his opinion, should be brought to the
notice of the shareholders and creditors of the
Company. In the event that due to the resignation
of an independent director the number of
independent directors or a member of the board
falls below the percentage required by the
Articles of
Association, the resignation of such independent
director shall be effective only after a new
independent director has been appointed to fill up
the vacancy. The Board of Directors shall hold the
Shareholders' General Meeting to reappoint
independent directors within two months. Where
Shareholders' General Meeting is not convened
within this period, independent directors may
cease to perform their duties.";
h. Article 36 of "Rules of Procedures for Board of
Directors" shall be replaced by the following provision:
"ARTICLE 36 When the Board of Directors votes on matters
relating to the relevant connected transactions, in the
event that the number of voting directors is less than
half of total number of all directors after unrelated
directors refrain from voting, all directors (including
unrelated directors) shall vote on the procedures for
the connected transactions to be submitted to the
Shareholders' General Meeting for approval, and the
relevant resolutions relating to such transactions shall
be approved at the Shareholders' General Meeting, and an
announcement stating the opinions of independent
directors shall be made separately";
II. TO CONSIDER AND APPROVE THE FOLLOWING RESOLUTIONS AS SPECIAL
RESOLUTION
1. Proposals of the Board of Directors for amending the Articles
of Association of the Company as stated below be and is hereby
approved, and the Board of Directors is authorized to amend
appropriately the wordings of the following amendment
proposals and to deal with any other matters as required by
any PRC relevant auditing authorities and the listing rules of
any stock exchange in which the securities of the Company are
listed:
a. The original Article 58 of the "Articles of Association"
shall be followed by the following new provisions:
"CHAPTER 8 Shareholders' Rights and Obligations
ARTICLE 58 The controlling shareholders of the Company
shall assume the following obligations for the Company:
(1) The controlling shareholders and the Company shall
implement separation of personnel, assets and
finance and independence between organs and
business of the Company;
(2) The controlling shareholders shall respect
decisions made by Shareholders' General Meeting
and the Board of the Company, and shall not bypass
the Shareholders' General Meeting or the Board in
interfering with the decisions made and production
and operation activities carried out legally by
the Company;
(3) The controlling shareholders shall nominate
candidates of the Company's directors and
supervisors in accordance with laws and
regulations and the Company's Articles of
Association. Nominated candidates of directors and
supervisors shall have the relevant knowledge and
capacity of decision-making and supervision. The
controlling shareholders shall not execute any
approval procedure relating to the appointment of
members of the Board of Directors or appointment
of personnel at the Shareholders' General Meeting,
or bypass Shareholders' General Meeting and Board
of Directors in employing/dismissing any senior
managerial officers of the Company; The
controlling shareholders shall not interfere with
the employment and dismissal and use of any senior
managerial officers of the Company;
(4) The controlling shareholders shall not take
advantage of asset restructuring or otherwise to
harm the legal interests of the Company and other
shareholders, and shall not exploit their special
position to obtain additional benefits;
(5) The controlling shareholders shall abide by the
provisions about abstaining from decision on
connected transactions of the Company;
(6) The controlling shareholders and their related
companies shall avoid direct competition with the
Company;
(7) The controlling shareholders shall ensure that
relevant information provided to the Company is
true, accurate and complete, and ensure that the
Company can legally perform disclosure obligation
to public investors;
(8) When exercising voting rights, the controlling
shareholders shall not make decisions which harm
the legal interests of the Company and other
shareholders.";
ARTICLE 59 The controlling shareholders and beneficial
controller of the Company shall have the obligations to
act in good faith towards the Company and public
shareholders of the Company. The controlling
shareholders shall by law strictly exercise their rights
as contributors. The controlling shareholders shall not
take advantage of connected transactions, profit
distribution, asset restructuring, external investment,
capital appropriation and loan guarantee to the
detriment of the legal interests of the Company and
public shareholders, nor shall they exploit their
position as controlling shareholders to harm the
interests of the Company and public shareholders.";
ARTICLE 60 Written agreements shall be made in respect
of connected transactions between the Company and a
connected person, which shall be in line with the
principles of equality, voluntariness and fair
consideration. Connected transactions shall be made on
normal commercial terms, and the consideration must be
comparable with those provided by independent third
parties in the market.
The Company shall take effective measures to prevent its
connected persons from interfering with the operations
of the Company and damaging the Company's benefits by
way of monopolizing its purchase and sales channels.
The Company shall take effective measures to prevent
shareholders and its connected parties from
misappropriating or transferring the Company's funds,
assets or other resources in whatever manner.";
b. Unless otherwise specified, wordings in sections
subsequent to the original Article 58 of the "Articles
of Association" are kept the same except that item
numbers of articles are deferred. The original Article
59 of the "Articles of Association" shall be replaced by
the following provision:
"CHAPTER 9 Shareholders' General Meeting
"ARTICLE 62 The Shareholders' General Meeting shall
exercise the following functions and powers:
(1) to decide on the Company's operational policies
and investment plans;
(2) to elect and replace directors and decide on
matters relating to the remuneration of directors;
(3) to elect and replace the supervisors who are
representatives of shareholders and decide on
matters relating to the remuneration of
supervisors;
(4) to examine and approve reports of the Board of
Directors;
(5) to examine and approve reports of the supervisory
committee;
(6) to examine and approve the Company's proposed
annual preliminary and final financial budgets;
(7) to examine and approve the Company's profit
distribution plans and plans for making up losses;
(8) to decide on increases or reductions in the
Company registered capital;
(9) to decide on matters such as merger, division,
dissolution and liquidation of the Company;
(10) to decide on the issue of debentures by the
Company;
(11) to decide on matters relating to external security
according to the relevant provisions of the
Articles of Association of the Company;
(12) to decide on the appointment, dismissal and
disengagement of the accountants of the Company;
(13) to amend these Articles of Association;
(14) to consider motions raised by shareholders who
represent 5 percent or more of the total shares of
the Company carrying the right to vote;
(15) to decide on other matters which require
resolutions of the shareholders in Shareholders'
General Meeting according to relevant laws,
administrative regulations and provisions of the
these Articles of Association;
(16) to consider and approve significant acquisition,
disposal and replacement of assets of the Company
(the standards shall be fixed in accordance with
the rules of the stock exchange of the listing
place);
(17) to decide on matters which the Board of Directors
may be authorized or delegated to deal with by the
shareholders in Shareholders' General Meeting.
When the Shareholders' General Meeting decide on
matters which the Board of Directors may be
authorized or delegated to deal with, the
Shareholders' General Meeting shall maintain the
legitimate rights and interests of the Company
according to law and abide by laws and regulations
strictly in order to ensure the Company's
principle of efficient operation and scientific
decision making. Matters authorized or delegated
to the Board of Directors to deal with include
(without limitation):
(1) to modify the language of these Articles of
Association after the Shareholders' General
Meeting passed the resolution on the
amendments to these Articles of Association;
(2) to distribute the interim profit;
(3) to decide on matters in connection with the
issue of new shares and convertible bonds;
(4) to deal with, mortgage and secure the fixed
assets under the current operation policy
and investment plan passed at the
Shareholders' General Meeting, excluding
direct or indirect provision of debts
guarantee for the secured party with a
gearing ratio exceeding 70%;
(5) other matters authorized or delegated at the
Shareholders' General Meeting to the Board
of Directors to deal with from time to time
in accordance with laws, regulations and
these Articles of Association.";
c. The original Article 66 of the "Articles of Association"
shall be replaced by the following provision:
"ARTICLE 69 A notice of meeting of shareholders shall
meet the following requirements:
(1) be in writing;
(2) specify the place, the date and time of the
meeting;
(3) state the matters to be discussed at the meeting;
(4) provide such information and explanation as are
necessary for the shareholders to make an informed
decision on the proposals put before them. Without
limiting the generality of the foregoing, where a
proposal is made to amalgamate the Company with
another, to repurchase shares, to reorganize the
share capital, or to restructure the Company in
any other way, the terms of the proposed
transaction must be provided in detail together
with copies of the proposed agreement, if any, and
the cause and effect of such proposal must be
properly explained;
(5) contain a disclosure of the nature and extent, if
any, of the material interests of any director,
supervisor, president or other senior
administrative officer in the proposed transaction
and the effect of the proposed transaction on them
in their capacity as shareholders in so far as it
is different from the effect on the interests of
the shareholders of the same class;
(6) contain the full text of any special resolution to
be proposed at the meeting;
(7) contain conspicuously a statement that a
shareholder entitled to attend and vote is
entitled to appoint one or more proxies to attend
and vote instead of him and that a proxy need not
be a shareholder;
(8) specify the time and place for lodging proxy forms
for the relevant meeting.
Where the Company convenes the Shareholders' General
Meeting and provides shareholders with online voting,
the time and voting procedures of online voting and the
matters to be considered and approved.";
d. The original Article 74 of the "Articles of Association"
shall be followed by the following new provision:
"ARTICLE 78 The Company shall, subject to the
Shareholders' General Meetings being legally and validly
held and availability of corresponding conditions,
encourage a higher proportion of participation of public
shareholders in Shareholders' General Meetings through
various means, including using modern information
technology to establish an online voting platform.
ARTICLE 79 In order to protect the interests of public
shareholders in good faith, the Company shall provide an
online voting system for the shareholders to exercise
their voting right at the Shareholders' General Meeting
so far as the condition permits. On a voting by poll on
the matters mentioned in Article 94 at the Shareholders'
General Meeting, online voting shall be adopted
therefore.
Where online voting is adopted for the Shareholders'
General Meeting, all shareholders whose names appear on
the register of members on the record date for the
purpose of the Shareholders' General Meeting, are
entitled to exercise their voting rights through the
online voting system of the Shareholders' General
Meeting, provided that the voting right of the same
shares shall be exercised only by one of the following
ways: on-the-spot voting, online voting or otherwise as
specified.
Where online voting is adopted for the Shareholders'
General Meeting, it shall be conducted in accordance
with the relevant laws, regulations and rules.
ARTICLE 80 The Board of Directors, independent directors
and shareholders who meet the relevant requirements may
solicit from other shareholders their voting rights in
Shareholders' General Meetings. The solicitation shall
be without consideration and information shall be fully
disclosed to such shareholders.
ARTICLE 81 A motion of a Shareholders' General Meeting
is a discussion paper of a specific matter which shall
be discussed in a Shareholders' General Meeting and
shareholders shall resolve on the specific motion in a
Shareholders' General Meeting.
At a Shareholders' General Meeting of the Company,
shareholders who individually or jointly hold 5% or more
of the Company's voting shares shall have the right to
propose new motions.
Shareholders individually or jointly holding 5 % of the
total voting shares of the Company or the Supervisory
Committee may put forward an extempore motion at annual
general meetings. If the extempore motion concerns
matters not listed in the notice of Board Meeting but
falls into the scope of matters listed in Article 96,
the proposing party shall submit the motion to the Board
not less than 10 days before the convening of the
Shareholders' General Meeting for announcement by the
Board of Directors upon their approval.
Where the principal shareholder proposes a new motion on
profit distribution, the motion shall be submitted to
the Board not less than 10 days before holding of the
annual general meeting for announcement by the Board. If
the motion is submitted less than 10 days before the
annual general meeting, the principal shareholder may
not propose the new profit distribution motion at the
current annual general meeting.
If online voting is adopted by the Company for the
annual general meeting, the extempore motion so proposed
shall be announced by the Board of
Directors at least 10 days in advance. Any extempore
motion proposed at the Shareholders' General Meeting or
other extempore motions which have not been announced
shall not be included in the agenda of the Shareholders'
General Meeting.
Apart from the above, other motions may be proposed to
the Board for its announcement before the annual general
meeting or may be proposed at the annual general meeting
directly.
ARTICLE 82 A motion proposed at Shareholders' General
Meetings shall satisfy the following criteria:
(1) The substance of the motion proposed shall be in
compliance and not conflict with laws,
administrative regulations and the requirements
set forth in the Company's Articles of
Association, and shall fall within the scope of
business of the Company and the functions of
Shareholders' General Meetings;
(2) There is a clear subject of discussion and a
specific resolution;
(3) The motion shall be submitted or delivered to the
Board of Directors in writing.
ARTICLE 83 The Board of the Company shall act in the
best interest of the Company and its shareholders and
shall examine the motions proposed at the Shareholders'
General Meeting according to the provisions of Article
82.;
ARTICLE 84 Where the Board decides not to include any
motions proposed to the Shareholders' General Meeting in
the agenda thereof, it shall give an explanation at the
meeting and issue an announcement setting out the
content of such motion and its explanation, together
with the resolutions of the Shareholders' General
Meeting, after the conclusion of the meeting.
ARTICLE 85 If the proposing shareholders have any
objection to the decision of the Board of Directors of
not including their motions in the agenda, they may
request the convening of an extraordinary general
meeting according to the provisions of Article 99.";
e. The original Article 82 of the "Articles of Association"
shall be followed by the following new provisions:
"ARTICLE 94 Unless otherwise provided, the following
matters shall not be implemented or applied for unless
they have been approved by all the shareholders of the
Company at the Shareholders' General Meeting and have
been passed by more than half of the public shareholders
with voting rights present at the Shareholders' General
Meeting:
Any issue of new shares by the Company to the public
(including issue of overseas listed foreign shares or
share of other natures), issue of convertible
debentures, placing of shares to existing shareholders
(except in such placing where the controlling
shareholders have provided an undertaking to fully
subscribe for the shares in cash before the
Shareholders' General Meeting is convened);
Major asset restructuring in which the assets will be
acquired at a total price which is 20% higher than the
audited net book value of such assets;
Repayment of debts due to the Company by any shareholder
using his shares of the Company;
Overseas listing of any significant subsidiary of the
Company;
Other relevant issues which may have a material impact
on the interests of the public shareholders in the
development of the Company.
Where the Company makes an announcement on the
resolutions of the Shareholders' General Meeting about
any issue mentioned above, the announcement shall set
out the number of the public shareholders voting at the
Shareholders' General Meeting, the number of shares they
held and its percentage in the total number of shares
held by the public shareholders, the voting result and
shareholdings of the ten largest public shareholders
voting at the Shareholders' General Meeting and the
results of their votes.
Where the Company convenes a Shareholders' General
Meeting to consider and approve any issue mentioned
above, it shall provide the shareholders with an online
voting system.
ARTICLE 95 Where any event referred to in the preceding
Article 94 occur, after the notice of Shareholders'
General Meeting has been issued, the Company shall issue
a notice of the Shareholders' General Meeting again
within three days from the date of shareholding
registration.
ARTICLE 96 Annual General Meetings or extraordinary
shareholders' meetings held at the request of
shareholders and the Supervisory Committee shall not
adopt voting by way of written resolutions.
Extraordinary general meetings held for other reasons
may vote by way of written resolutions, except for the
following matters:
(1) Increase or decrease in the Company registered
capital;
(2) Any issue of debentures by the Company;
(3) Merger, division, dissolution and liquidation of
the Company;
(4) Any amendment to the Articles of Association;
(5) plan for distribution of profits and recovery of
losses;
(6) Appointment and removal of members of the Board of
Directors and the supervisory committee;
(7) Change in application of raised funds;
(8) Connected transactions that shall be considered
and examined by the Shareholders' General Meeting;
(9) acquisition and disposal of assets that shall be
considered and examined by the Shareholders'
General Meeting;
(10) Change of accounting firms;
(11) Other matters that shall not be voted by way of
written resolutions as provided by these Articles
of Association.
ARTICLE 97 The nominee list of Directors and Supervisors
of the Company shall be submitted to the Shareholders'
General Meeting for resolution. The Board of Directors
shall simultaneously provide shareholders with
bibliographical details and basic information about
nominees of Directors and Supervisors.
ARTICLE 98 After issue of notice of Shareholders'
General Meeting by the Company about election of
Directors and Supervisors, shareholders holding or
aggregately holding 1% or more of shares with voting
rights of the Company may propose nominees of Directors
and Supervisors before the Shareholders' General Meeting
for review by the Board of Directors in accordance with
the procedures for amendments to proposals of
Shareholders' General Meeting before submission to
Shareholders' General Meeting for examination.";
f. The original Article 83 of the "Articles of Association"
shall be replaced by the following provision:
"ARTICLE 99 Shareholders requisitioning the convening of
extraordinary general meetings of shareholders or class
meeting shall abide by the following procedures:
(1) Two or more shareholders or the Supervisory
Committee holding in aggregate 10 per cent or more
of the shares carrying the right to vote at the
meeting sought to be held shall sign one or more
counterpart requisitions stating the object of the
meeting and requiring the Board of Directors to
convene a shareholders' extraordinary general
meeting or a class meeting thereof. The Board of
Directors shall as soon as possible proceed to
convene the extraordinary general meeting of
shareholders or a class meeting thereof after
receiving the requisition.
The amount of shareholdings referred to above
shall be calculated as at the date of the deposit
of the requisition.
(2) If the Board of Directors fails to issue a notice
of such a meeting within thirty (30) days from the
date of the receipt of the requisition, the
requisitionists may themselves convene such a
meeting in a manner as similar as possible as that
in which shareholders' meeting are to be convened
by the Board of Directors within four (4) months
from the date of receipt of the requisition by the
Board of Directors.
Any reasonable expenses incurred by the
requisitions by reason of the failure of the Board
of Directors to duly convene a meeting shall be
repaid to the requisitionists by the Company and
any sum so repaid shall be set off against sums
owed by the Company to the directors in default.";
g. The original Article 85 of the "Articles of Association"
shall be replaced by the following provision:
"ARTICLE 101 The chairman of the meeting shall be
responsible for the determination of whether a
resolution is passed. His decision, which is final and
conclusive, shall be announced at the meeting and
recorded in the minute book.
Where online voting is provided at the Shareholders'
General Meeting of the Company concurrently, the number
of votes by shareholders or their appointed
representatives through online voting system of the
Shareholders' General Meeting shall be taken into the
total number of votes of the Shareholders' General
Meeting together with the number of votes on site of the
meeting and by other means as specified.
Where a resolution of the Shareholders' General Meeting
is required to be approved by public shareholders
independently, the total number of votes and voting
results of public shareholders shall be also calculated
independently.";
h. The original Article 101 of the "Articles of
Association" shall be replaced by the following
provision:
"CHAPTER 11 Board of Directors
SECTION 1 Directors and Board of Directors
ARTICLE 117 Directors shall be elected and replaced by
the Shareholders' General Meeting. The term of office of
directors is three (3) years, renewable by re-election
upon expiry. Alternate directors shall have a term
expired upon conclusion of the tenure of the existing
Board of Directors.
Directors shall be elected by the Shareholders' General
Meeting from the candidates nominated by Board of
Directors or shareholders representing 5% (including the
5%) or more of the issued shares. At least 7 days'
notice of nomination of a candidate for election as a
director and particulars of such candidate shall be
given to the Company, and such 7 days period shall start
no sooner than the date of giving the notice of
Shareholders' General Meeting and end no later than 7
days prior to the date of the such Shareholders' General
Meeting.
The candidates for election as directors shall give at
least 7 days' prior written confirmation to the Company,
and such 7 days period shall start no sooner than the
day after the date of giving the notice and end no later
than 7 days prior to the date of such Shareholders'
General Meeting. The written confirmation shall indicate
the willingness of the candidate to be nominated, and
confirm that information of the candidate publicly
disclosed are true and complete, that the candidate will
faithfully discharge its duties as a director if he is
elected.
Where shareholders severally or jointly holding 5% or
more of the voting rights or the supervisory committee
of the Company propose any special resolutions for
election of non-independent directors at the Company's
annual general meeting, written notice of the intention
to propose a candidate for election as a Director,
notice by such candidate of his willingness to be
elected and details and confirmation of the candidate
shall be given to the Company not more than 7 days prior
to the date of the meeting appointed for such election.
The 7 days period shall start no sooner than the first
day after the date of giving the notice and end no later
than 7 days prior to the date of such Shareholders'
General Meeting.
The Chairman and the Vice-chairman shall be elected and
removed by more than one half of all the members of the
Board of Directors. The term of office of each of the
Chairman and the Vice-chairman is three (3) years,
renewable upon re-election.
The Shareholders' General Meeting may by ordinary
resolution remove any director before the expiration of
his term of office (but without prejudice to such
director's right to claim damages based on any contract)
on the condition that all the relevant laws and
administrative regulations are fully complied with.
The Directors shall not be required to hold shares of
the Company.";
i. The original Article 101 of the "Articles of
Association" shall be followed by the following new
provision:
"ARTICLE 118 Directors may resign before expiry of his
term of office. Directors shall submit a written
resignation to the Board of Directors before their
resignation.
Where a director's resignation results in the number of
directors being less than the quorum, the written
resignation of such directors shall become effective
only when the vacancy arising from his resignation has
been filled by new directors. The Board of Directors
consisting of the remaining directors shall convene a
Shareholders' General Meeting as soon as possible to
elect a new director to fill the vacancy arising from
the resignation of such directors. The power of the
resigning director and the Board of Directors consisting
of the remaining directors shall be subject to due
restrictions until the Shareholders' General Meeting has
made a resolution in respect of the re-election of the
directors.
Where directors leave the Company before expiry of their
terms of office, they shall compensate the Company for
any losses arising from their unauthorized
resignation.";
j. The original Article 108 of the "Articles of
Association" shall be followed by the following new
provision:
"ARTICLE 127 When the Board of Directors votes on
matters relating to the relevant connected transactions,
in the event that the number of voting directors is less
than half of total number of all directors after
unrelated directors refrain from voting, all directors
(including unrelated directors) shall vote on the
procedures for the connected transactions to be
submitted to the Shareholders' General Meeting for
approval, and the relevant resolutions relating to such
transactions shall be approved at the Shareholders'
General Meeting, and an announcement stating the
opinions of independent directors shall be made
separately";
k. The original Article 116 of the "Articles of
Association" shall be followed by the following new
provision:
"ARTICLE 136 The Board of Directors shall comprise more
than one-thirds of independent directors, of which at
least one director shall be accounting professional.
Independent directors shall perform the fiduciary duties
and protect the interests of the Company, and in
particular, they shall protect the legal interests of
public shareholders from any loss.";
l. The original Article 120 of the "Articles of
Association" shall be replaced by the following
provision:
"ARTICLE 140 Nomination, Election and Replacement of
Independent Directors:
(1) The Board of Directors, the supervisory committee,
and shareholder(s) of the Company who alone or
jointly with other persons hold(s) more than 5% of
the issued shares of the Company shall have the
right to nominate candidates as independent
directors, and the nominated candidates shall
become independent directors by election at a
Shareholders' General Meeting.
(2) The nominator shall have the approval of the
proposed candidate for the nomination before
making a nomination. The nominator shall have
adequate knowledge of the profession, education,
professional title and detailed work experience of
the nominee as well as status of all his part-time
jobs. The nominator shall also comment on the
qualification and independence of the nominee as
an independent director. The nominee shall make a
public statement disclaiming any relationship
between him and the Company that will affect his
independent judgment. Before the shareholders
meeting for the election of independent directors,
the Company's Board of Directors shall announce
the above information in accordance with relevant
provisions.
(3) Before convening the Shareholders' General Meeting
for the election of independent directors, the
Company shall submit relevant materials of all the
nominees to the China Securities Regulatory
Commission and its local office as well as the
stock exchange at which the Company's shares are
listed. Dissenting opinions of the board with
regard to the nominees shall also be submitted.
Nominees of independent directors objected by
China Securities Regulatory Commission may be
candidates of the directors of the Company but not
as candidates of independent directors of the
Company. At the Shareholders' General Meeting for
the election of independent directors, the Board
of Directors shall make clear whether the nominees
of independent directors are objected to by China
Securities Regulatory Commission.
(4) The term of office of the independent directors is
the same as that of the other directors.
Successive terms are allowed upon the expiration
of the term, but may not be extended to more than
6 years.
(5) An independent director who fails to attend in
person three consecutive board meetings shall be
deemed as unable to perform his duties and shall
be replaced upon the proposal of the board to the
Shareholders' General Meeting. Independent
directors shall not be dismissed without just
cause before the expiration of his term, unless
the above condition or any of the conditions
specifying the disqualification of a director
under the Company Law has occurred. When an
independent director is dismissed, the Company
shall disclose the dismissal as a special
discloseable matter and shall give reasons for the
dismissal. The independent director may make a
public statement if he thinks that such a
dismissal is without justification.
(6) Independent directors may resign before the
expiration of their term. The resigning
independent director shall submit written
resignation to the Board of Directors. The written
resignation shall contain explanations on matters
related to his resignation or any other matters
which in his opinion, should be brought to the
notice of the shareholders and creditors of the
Company. In the event that due to the resignation
of an independent director the number of
independent directors or a member of the board
falls below the percentage required by the
Articles of Association, the resignation of such
independent director shall be effective only after
a new independent director has been appointed to
fill up the vacancy. The Board of Directors shall
hold the Shareholders' General Meeting to
reappoint independent directors within two months.
Where Shareholders' General Meeting is not
convened within this period, independent directors
may cease to perform their duties.";
m. The original Article 121 of the "Articles of
Association" shall be replaced by the following
provision:
"ARTICLE 141 Rights and Obligations of Independent
Directors:
(1) To facilitate the independent directors in
performing their function more efficiently, the
independent directors shall have the following
special powers, in addition to having those powers
granted by the Company Law and other relevant laws
and regulations to directors:
(i) connected transactions of which the
aggregate consideration is in compliance
with the relevant provisions of the existing
listing rules and other supervisory
regulation in places where the Company is
listed, engaging or disengaging accounting
firms, shall first be approved by the
independent directors before submission to
the Board of Directors for discussion.
Before making the decision with respect to
such transactions, the independent directors
may engage a professional institution to
prepare independent financial advisor's
reports as a basis of their decision;
(ii) propose to the Board of Directors with
respect to engaging or disengaging
accounting firms;
(iii) propose to the Board of Directors with
respect to the convening of extraordinary
shareholders' meetings;
(iv) propose the convening of board meetings;
(v) engage external auditing firms or
consultancy firms;
(vi) publicly solicit and collect proxies before
the convening of the Shareholders' General
Meetings.
(2) The independent director shall obtain the consent
of over half of the independent directors in
exercising any of the above powers, among which
(v) requires the consent of all of the independent
directors.
(3) If any of the above proposals has not been adopted
or if any of the above powers cannot be exercised,
the Company shall disclose the relevant
information.
(4) Apart from the powers of an ordinary director and
the special powers of an independent director, an
independent director shall comply with all the
obligations of a director set forth in these
Articles of Association.";
n. The original Article 122 of the "Articles of
Association" shall be replaced by the following
provision:
"ARTICLE 142 The independent directors shall provide
their opinions on all the important matters of the
Company.
(1) In addition to the above obligation, the
independent directors shall provide their
independent opinions to the Board of Directors or
the Shareholders' General Meeting on the following
matters:
(i) nomination, appointment and removal of
directors;
(ii) appointment and dismissal of senior
administrative officers;
(iii) remuneration of directors and senior
administrative officers;
(iv) newly occurred transactions, loans and other
forms of fund transfer between the Company
and its shareholders, actual controllers or
their affiliates, the aggregate amount of
which is in compliance with the relevant
provisions of the existing listing rules and
other supervisory regulations in places
where the Company is listed, and whether the
Company has taken effective measures to
collect the amounts due;
(v) matters which may harm the interests of the
minority shareholders;
(vi) matters which the Board of Directors has not
put forward cash profit distribution
proposal;
(vii) matters relating to security provided to
external parties by the Company;
(viii)other matters provided for in these Articles
of Association.
(2) The independent directors shall choose to provide
any of the following opinions in respect of the
above matters:
(i) agree;
(ii) reserve opinion and the reasons therefor;
(iii) dissent and the reasons therefor;
(iv) unable to comment and the reasons therefor.
(3) If the matters concerned fall under those which
require disclosure, the company shall publicly
disclose the opinions of the independent
directors. If the independent directors cannot
reach a consensus, the Company shall publicly
disclose the opinions of each of the independent
directors.";
o. The original Article 122 of the "Articles of
Association" shall be followed by the following
provision (new addition):
"ARTICLE 143 Independent directors shall attend the
meetings of the Board of Directors as scheduled, have an
understanding of the production and operation of the
Company, take initiative to conduct investigation and
obtain information necessary for decision-making.
Independent directors shall submit their report to the
annual general meeting of the Company, describing the
discharge of their duties.";
p. The original Article 214 of the "Articles of
Association" shall be followed by the following new
provision:
"CHAPTER 27 Definition and Interpretation of these
Articles of Association
ARTICLE 236 The Board of Directors is responsible for
the interpretation of these Articles of Association.
Uncovered matters in these Articles of Association shall
be settled by special resolutions that Board of
Directors proposes for Shareholders' General Meeting to
adopt."
By order of the Board
SU LIANG
Company Secretary
Guangzhou, the PRC. April 28 April, 2005
As at the date of this announcement, the Directors of the Company include Liu
Shao Yong, Liu Ming Qi, Peng An Fa, Wang Quan Hua, Zhao Liu An, Zhou Yong Qian,
Zhou Yong Jin, Xu Jie Bo, Wu Rong Nan and Si Xian Min as executive Directors;
and Simon To, Peter Lok, Wei Ming Hai, Wang Zhi and Sui Guang Jun as independent
non-executive Directors.
Notes:
I. Shareholders eligible for attending the general meeting:
1. Holders of H shares of the Company who are registered with Hong Kong
Registrars Limited, the registrar of H shares of the Company, at or
before the close of business on Friday, 13 May 2005 are entitled to
attend the Annual General Meeting ("AGM") after duly completion of
the required registration procedures in accordance with Section 4 of
"Registration Procedures for Attending General Meeting". Holders of
A shares of the Company shall receive a notice separately.
II. Registration procedures for attending a general meeting:
1. Registered shareholders who intend to attend the AGM either in
person or by proxy must deliver to the Company, on or before 25 May
2005, either in person, by post or by fax, the reply slip for
attending the AGM.
2. Registered shareholders of H shares of the Company who intend to
attend the Annual General Meeting and who are entitled to the final
dividend must deliver their instruments of transfer together with
the relevant share certificates to Hong Kong Registrars Limited, the
registrar of H shares of the Company, before 4:00 p.m. on 13 May
2005.
3. The register of H shares of the Company will be closed from 14 May
2005 to 25 May 2005 (both days inclusive), during which period no
transfer of H shares will be registered.
4. When attending the AGM, a shareholder or his proxy shall produce
proof of identity. If a corporate shareholder appoints its legal
representative to attend the meeting, such legal representative
shall produce proof of his own identity, together with a notarized
copy of the resolution or power of attorney issued by the Board of
Directors or other governing body to appoint such legal
representative to attend the meeting.
III. Proxies:
1. A registered shareholder has the right to appoint one or more
proxies to attend the AGM and vote on his behalf by completing a
form of proxy. A proxy need not be a shareholder of the Company.
2. A proxy must be appointed by a shareholder or his attorney by way of
a form of proxy. If the proxy is appointed by the shareholder's
attorney, the power of attorney or other authorization document
authorizing such attorney to appoint the proxy must be notarized.
3. To be valid, the duly completed proxy form(s), together with the
notarized power of attorney or other authorization document (if
any), must be lodged with Hong Kong Registrars Limited 24 hours
before the time designated for the holding of the AGM.
IV. Miscellaneous:
1. The AGM is expected to last not more than one day. Shareholders who
attend shall bear their own traveling and accommodation expenses.
2. The address of Hong Kong Registrars Limited is:
46th Floor
Hopewell Centre
183 Queen's Road East
Hong Kong
3. The registered address of the Company is:
Guangzhou Economic & Technology Development Zone
Guangdong Province
PRC
Telephone No.: (+86) 20-8612 4737
Facsimile No.: (+86) 20-8665 9040
Website: www.cs-air.com
Contact persons: Su Liang and Lei Bin
[LOGO] [CHINESE CHARACTERS]
CHINA SOUTHERN AIRLINES COMPANY LIMITED
(a joint stock limited company incorporated in the People's
Republic of China with limited liability)
(STOCK CODE: 1055)
ATTACHMENT A
REPLY SLIP
TO: CHINA SOUTHERN AIRLINES COMPANY LIMITED
I/we intend to attend (in person/by proxy)1 the AGM of the Company to be held on
15 June, 2005.
Name(2)
Number of ordinary shares
registered in my name(3)
Identity card/passport number(1,4)
Share account number
Mailing address
Telephone number
Signature(5): _____________________ Date: _____________2005
Notes:
1. Please delete the option which is not applicable.
2. Please insert your full name in both English and Chinese in block capital
letters.
3. Please attach a photocopy of proof of ownership of your shares.
4. Please attach a photocopy of your identity card/passport.
5. This reply slip must be signed by the registered shareholder. If the
registered shareholder is a company or an organization, then this reply
slip must be sealed with the common seal of such company or organization
or under hand by any directors or agents duly appointed by such company or
organization.
[LOGO] [CHINESE CHARACTERS]
CHINA SOUTHERN AIRLINES COMPANY LIMITED
(a joint stock limited company incorporated in the People's
Republic of China with limited liability)
(STOCK CODE: 1055)
ATTACHMENT B
The number of H Shares to which this
proxy form relates(1)
FORM OF PROXY FOR ANNUAL GENERAL MEETING
I/We(2), ___________________, holder of share account number____________________
residing at______________________________________________________________ being
the registered holder of (3)_________________________________________ ordinary
shares of the Company, HEREBY APPOINT(4) _______________________, residing at ,
_______________________________________________________________________________,
as my/our proxy/proxies to attend on my/our behalf the AGM of the Company to be
held at the headquarters of China Southern Airlines Company Limited, No. 278 Ji
Chang Road, Guangzhou, Guangdong Province, the PRC at 9:00 a.m., on 15 June,
2005 and to act and vote on my/our behalf at the AGM in respect of the
resolutions listed below, in accordance with my/our instructions below(5).
FOR AGAINST
--- -------
I. ORDINARY RESOLUTIONS
1. To approve the Report of the Directors of the Company for the year 2004;
2. To approve the Report of the Supervisory Committee of the Company for the
year 2004;
3. To approve the audited consolidated financial statements of the Company
for the year 2004;
4. To approve the profit distribution budget of the Company for the year
2004;
5. To approve the appointment of KPMG as the international auditors for the
year 2005 and KPMG Huazhen as the PRC auditors of the Company for the year
2005 and authorize the Board to determine their remuneration;
6. To approve the operating lease of 5 Boeing B737-700, 5 Boeing B737-800, 5
Airbus A320-000 and 10 Airbus A321-200;
7. To approve the resolution on the proposed amendments to the "Rules of
Procedures for Shareholders' General Meetings" of the Company as set out
in section I, no.7(a-m) of the Notice of 2004 Annual General Meeting of
the Company;
8. To approve the resolution on the proposed amendments to the "Rules of
Procedures for Board of Directors" of the Company as set out in section I,
no.8(a-h) of the Notice of 2004 Annual General Meeting of the Company;
II. SPECIAL RESOLUTIONS
1. To approve the resolution on the proposed amendments to the "Articles of
Association" of the Company as set out in section II, no.1 (a-p) of the
Notice of 2004 Annual General Meeting of the Company.
Signature(5): _________________________ Date: __________________ 2005
Notes:
1. Please insert the number of shares in the Company registered in your
name(s) and to which this proxy form relates. If no such number is
inserted, this form of proxy will be deemed to relate to all the shares in
the Company registered in your name(s).
2. Please insert the name(s) and address(es) (as shown in the register of
members) in block capital(s).
3. Please insert the number of all the Shares in the Company registered in
your name(s).
4. If no person is appointed as proxy, the Chairman of the AGM will be deemed
to have been appointed by you as your proxy.
5. If you wish to vote for any of the resolutions, please insert a "X" in the
box marked "FOR" or if you wish to vote against any of the resolutions,
please insert a "X" in the box marked "AGAINST" if no indication is given,
then your proxy/proxies may vote in such manner as he/she/they think(s)
fit.
6. This form of proxy must be signed by you or your attorney duly authorised
in writing or, in the case of a company or an organization, either under
the common seal or under the hand of any director or attorney duly
authorised in writing. In any event, the execution shall be made in
accordance with the articles of association of such company or
organization.
7. To be valid, this proxy form and, if such proxy form is signed by a person
under a power of attorney or authority on behalf of the appointer, a
notarised copy of that power of attorney or other authority, must be
delivered to Hong Kong Registrars Limited at 46th Floor, Hopewell Centre,
183 Queen's Road East, Hong Kong in not less than 24 hours before the time
appointed for the holding of the AGM.
8. A proxy, on behalf of the Shareholder, attending AGM shall bring along the
proxy form duly completed and signed as well as the proof of
identification of the proxy, in the case of a company or an organization,
the proxy shall also bring along a notarised copy of the resolution of the
board of directors or other governing body of the appointer or a letter of
authorization.
9. This proxy form shall be completed in form of a set of two copies, one of
which shall be lodged to the Company pursuant to Note 7; and the other
copy shall be produced upon the AGM by the proxy of the Shareholder
pursuant to Note 8.
10. Completion and return of the form of proxy will not preclude you from
attending and voting in person at the AGM or any adjourned AGM should you
so wish.
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
----------------------------------
Name: Su Liang
Title: Company Secretary
Date: April 29, 2005