山航Ｂ(200152)2004年年度报告（英文版）

SHANDONG AIRLINES CO., LTD. ANNUAL REPORT 2004 March 2005 Jinan · PRC Contents Ⅰ. Company Profile ---------------------------------------------------------------------------- 1 Ⅱ. Summary Financial Highlight and Business Highlight ----------------------------- 2 Ⅲ. Changes in Capital Shares and Particulars about Shareholders ------------------4 Ⅳ. Particulars about Directors, Supervisors, Senior Executives and Employees --7 Ⅴ. Administrative Structure ------------------------------------------------------------------11 Ⅵ. Brief Introduction to the Shareholders’ General Meeting -------------------------13 Ⅶ. Report of the Board of Directors --------------------------------------------------------14 Ⅷ. Report of the Supervisory Committee --------------------------------------------------23 Ⅸ. Significant Events ---------------------------------------------------------------------------24 Ⅹ. Financial Report ---------------------------------------------------------------------------- 28 Ⅺ. Documents for Reference ------------------------------------------------------------------57 Important Notes: The Board of Directors of Shandong Airlines Co., Ltd. (hereinafter referred to as the Company) and its directors hereby confirm that there are no any important omissions, fictitious statements or serious misleading information carried in this report, and shall take all responsibilities, individual and/or joint, for the reality, accuracy and completion of the whole contents. Director General Manager Mr. Zeng Guoqiang and Independent Director Mr. Fang Chaokun were absent from the Board meeting respectively due to aboard on business and on business, and respectively authorized Chairman of the Board Mr. Li Junhai and Independent director Mr. Wang Zhi to vote on their behalf. BDO Certified Public Accountants and Reanda Certified Public Accountants produced the unqualified Auditors’ Report for the Company. Welcome the investors to read carefully. The Company’s Chairman of the Board Mr. Li Junhai ,Chief Accountant Mr. Li Qing’en and Manager of Finance Dept Mr. Xue Ruitao hereby confirm that the Financial Report of the Annual Report is true and complete. This report has been prepared in Chinese version and English version respectively. In this event of difference in interpretation between the two versions, the Chinese report shall prevail. Paraphrase: The Company: Shandong Airlines Co., Ltd. SDA: Shandong Aviation Group; the holding shareholder of the Company Air China: Air China Limited, the actual controller of the Company Air China Group: China National Aviation Group Co., Ltd., the holding shareholder of Air China - - 1 I. Company Profile 1. Legal Name of the Company In Chinese: 山东航空股份有限公司 In English: SHANDONG AIRLINES CO., LTD. 2. Legal Representative: Li Junhai 3. Vicarious Secretary of Board of Directors: Li Qing’en Contact Address: 19/F, SDA Bldg., No. 5746, Er Huan East Road, Jinan, Shandong Tel.: (86)531-5698966 E-mail: liqe@shandongair.com.cn Authorized Representative: Huang Haiming E-mail: huanghm@shandongair.com.cn Tel.: (86) 531-5698678 Fax: (86) 531-5698679 4. Registered Address: Yaoqiang International Airport, Jinan, Shandong Office Address: SDA Bldg., No. 5746, Er Huan East Road, Jinan, Shandong Post Code: 250014 Company’s Web Site: http://www.shandongair.com.cn E-mail: zqb@shandongair.com.cn 5. Newspapers for Disclosing the Information Appointed by the Company: Domestic: China Securities and Securities Times Overseas: Ta Kung Pao Internet Web Site for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Enterprise Management and Securities Dept. of the Company Liaison Tel: (86) 531-5698678 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: SHANHANG B Stock Code: 200152 7. Other Relevant Information of the Company Initial registration date: Dec. 13, 1999 Registration date after change: Apr. 1, 2004 Business scope after change: mainly engaged in the business of passenger and cargo aviation transportation within Shandong province and from Shandong province to partial domestic cities and from Shangdong province to adjacent countries and regions as approved by the relevant authority and concurrently engaged in hotel and food service. Registration address: Industrial and Commercial Administration Bureau of Shangdong Province Registered number for enterprise corporation business license: QGLZ Zi No. 003926 Registered number for taxation: 370112720721201 Name and address of certified public accountants engaged by the Company: Domestic: Reanda Certified Public Accountants Overseas: BDO International Certified Public Accountants Address: Room 2008 on 20/F, East District of No. 1 Building, No. 100, Xili Street, Balizhuang, Chaoyang District, Beijing II. Summary Financial Highlight and Business Highlight (I) Financial highlights and related indexes as of the report year (reported according to the PRC GAAP) Increase/decrease 2004 2003 2002 than the previous - - 2 year（％） Income from main operations 2,229,357,012.00 1,723,844,877.00 29.32% 1,596,589,636.00 Total profit 41,758,805.00 26,153,333.00 59.67% -48,480,107.00 Net profit 41,214,611.00 26,531,043.00 55.34% -45,584,123.00 Net profit after deducting non- 40,489,094.00 20,985,111.00 92.94% -63,668,785.00 recurring gains and losses Net cash flow arising from 393,032,371.00 303,164,599.00 29.64% 61,007,300.00 operating activities Increase/decrease At the end of year At the end of than the end of At the end of year 2004 year 2003 previous year 2002 （％） Total assets 3,714,318,531.00 3,996,247,440.00 -7.05% 3,327,912,054.00 Shareholders’ equity (excluding 593,074,974.00 551,860,363.00 7.47% 525,329,320.00 minority interests) (II) Differences in the net profit as calculated according to PRC GAAP and IFRS RMB’000 PRC GAAP IFRS Net profit 41,214 85,193 Items 2004 net profit As reported under PRC GAAP and GAAS 41,214 Adjustments: Explanation on - Difference in calculation depreciation basis of high price the difference revolving parts and amortization year-limit 44,353 - Difference in disposal of long-term expenses to be apportioned -4,110 - Influence on tax 3,736 As reported under IFRS 85,193 (III) Items of non-recurring gains and losses Non-recurring gains and losses items A mount Gains and losses from disposing long-term equity investment, fixed - assets, construction in progress, intangible assets and other long-term 44,911.00 assets Other items of non-operating income and expenses after deducting - impairment losses for assets of the Company normally withdrawn 12,067,780.00 according to the regulations of accounting principles Switch-back from various impairment losses withdrawn in previous 12,838,20 years 8.00 Total 725,5 17.00 (IV)Major accounting data and financial highlights over the previous three years as at the end of the report period (reported according to PRC GAAP) 1. Statement of accounting data and financial indexes Unit: RMB Increase/decrease 2004 2003 than the previous 2002 year（％） Earnings per share 0.10 0.07 42.86% -0.11 Earnings per share (Note) 0.10 -- -- -- Return on equity 6.95% 4.81% 2.14% -8.68% Return on equity as calculated based on net profit after deducting non-recurring gains and 7.07% 3.90% 3.17% -11.76% losses Net cash flow per share arising from operating 0.98 0.76 28.95% 0.15 activities Increase/decrease At the end of At the end of year than the end of At the end of year 2004 2003 previous year year 2002 （％） Net assets per share 1.48 1.38 7.25% 1.31 Net assets per share after adjustment 1.18 1.10 7.27% 1.01 - - 3 (Ⅴ) Profit data calculated according to the requirements of the “Disclosure and Preparation Rules for Publishing the Information of Security Companies” promulgated by China Securities Regulatory Committee (NO 9). Profit of the report Return rate of net assets (%) Proceeds per share,CNY period Fully Weighted Fully Weighted amortized average amortized average Main business profit 72.36 74.97 1.07 1.07 Operating profit 8.57 8.88 0.13 0.13 Net profit 6.95 7.20 0.10 0.10 Net profit after deducting non-recurring gains and losses 6.83 7.07 0.10 0.10 (Ⅵ) Change of shareholders’ equity during the report period Item Capital stock Capital surplus Earned surplus Legal welfare Undistributed Total fund porfit shareholders’e quity At beginning of the period 400,000,000 82,889,717 15,248,327 7,617,902 46,104,417 551,860,363 Increase in this period - - 4,144,801 2,072,401 41,214,611 47,431,813 Reduce in this period - - - - 6,217,202 6,217,202 At end of the period 400,000,000 82,889,717 19,393,128 9,690,303 81,101,826 593,074,974 Profit Reasons of Profit distribution distribution Profit increasing Profit increasing change of this period of this period of this period of this period III. Changes in Shares Capital and Particulars about the Shareholders (I) Statement of changes in share (Unit: shares) Increase/decrease in this time (+ , - ) Before the After the Rationed Bonus Capitalization of Additional Others Sub- total change change share shares public reserve issuance I. Unlisted shares 260000000 260000000 1. Sponsor’s shares 260000000 -91200000 -91200000 168800000 Including: 259801000 -91200000 -91200000 168601000 State-owned shares Domestic legal person’s shares 199000 199000 Foreign legal person’s shares Others 2. Raised legal person’s shares 3. Inner employees’ shares 4. Preference shares or other +91200000 +91200000 91200000 Total unlisted shares 260000000 260000000 Ⅱ. Listed shares 140000000 140000000 1. RMB ordinary shares 2. Domestically listed foreign shares 140000000 140000000 3. Overseas listed foreign shares 4. Other Total listed shares 140000000 140000000 Ⅲ. Total shares 400000000 400000000 Note: 91.2 million shares preference shares or other listed in the above table are the Company’s shares held byAir China, whose type is state-owned legal person’s shares. - - 4 (II) Particulars about issuance and listing of shares 1. Issuance and listing The previous three year by the period-end, the Company did not issue shares. 2. During the report period, there was no changes in the number and structure of the Company’s shares due to bonus share, capital public reserve transferring into share capital, rationed share, additional issuance, combination, convertible company’s bonds transferring shares, disinvestments, listing of inner employees’ shares or company’s employee’s shares, etc.. There exist no inner employees’ shares in the Company. On Feb. 28, 2004, SDA signed the Agreement of Shares Transfer with Air China Group, which transferred 22.8% of the Company’s shares amounting to 91,200,000 shares to Air China Group, whenas SDA still held 42% of the Company’s shares. In Nov. 2004, the Board of Directors of the Company accepted the Reply of Relevant Problems on Implementing Transfer of Contract on Shandong Airlines Co., Ltd.’s State-owned Shares Acquired by Air China Group issued by SASAC (GZCQ [2004] No. 956), which approved that Air China Group transferred the Company’s state-owned equity acquired by Air China Group to Air China, that all rights and obligations of Air China Group in the aforesaid Agreement of Shares Transfer were transferred to Air China for sharing and undertaking. On Dec. 3, 2004, SDA and Air China confirmed the transfer registration in China Securities Registration and Clearing Co., Ltd. Shenzhen Branch, Air China formally held the aforesaid 91.2 million state-owned legal person’s shares of the Company. The relevant public notice was published on China Securities, Securities Times and Ta Kung Pao dated Mar. 2, 2004, May 15, 2004, Nov. 5, 2004 and Dec. 7, 2004. (III) About Shareholders 1. Total shareholders as at the end of the report period At the end of the report period, the Company had totally 22,447 shareholders, including 5 ones of sponsor shares (namely Shandong Aviation Group, Luyin Investment Group Co., Ltd., Shandong Hualu Group Co., Ltd., Shandong Fisheries Group Corp. and Langchao Group Corp.) 1 one of state-owned legal person’s shares (namely Air China Limited) and 22,441 ones of domestically listed foreign shares. Ended Dec. 31, 2004, the top ten shareholders of the Company are as following: Unit: share No. Increase/ Number of Proportion Type Number of Shareholders’ name decrease in holding (%) shares pledged this year shares (share) or frozen State-owned legal 84000000 1 SHANDONG AVIATION GROUP -91200000 168004000 42 person’s share shares pledged State-owned legal 2 AIR CHINA LIMITED +91200000 91200000 22.8 person’s share Unknown 3 CHEN CHUN PENG +1411671 1543271 0.39 Circulation share Unknown 4 XIE KE Unknown 1108500 0.28 Circulation share Unknown 5 LIU LI YA Unknown 1015216 0.25 Circulation share Unknown 6 WU HAO YUAN 0 945700 0.24 Circulation share Unknown 7 JOHN POSS -18200 918990 0.23 Circulation share Unknown 8 CHEN YIK KIAN Unknown 610000 0.15 Circulation share Unknown 9 HE DA QIANG Unknown 608600 0.15 Circulation share Unknown 10 XU ZHAO HUAN 0 608000 0.15 Circulation share Unknown Note 1: Shandong Aviation Group is the first largest shareholder of the Company, who holds the shares of the Company on behalf of the State with unlisted shares. Note 2: Air China Limited is the second largest shareholder of the Company, who holds the shares of the Company on behalf of the State with unlisted shares; Air China is the first largest shareholder of SDA and the actual controller of the Company. - - 5 Note 3: Among the above the top ten shareholders, Air China, shareholders of state-owned legal person’s share, is the first largest shareholder of the SDA, and there exists no associated relationship between SDA and Air China and the other shareholders, and they don’t belong to the consistent actionist regulated by the Management Regulation of Information Disclosure on Change of Shareholding for Listed Companies with the other shareholders. The Company is not aware of their associated relationship among the other shareholders of circulation share, whether belongs to the consistent actionist regulated by the Management Regulation of Information Disclosure on Change of Shareholding for Listed Companies. 2. The holding shareholder of the Company Name of the holding shareholder: Shandong Aviation Group Legal representative: Sun Yude Date of foundation: Feb. 9, 1995 Place of SDA: No. 5746, Er Huan East Road, Lixia District, Jinan, Shandong Business scope: Maintaining of aerostat and ground facilities limited by permission; handicraft article, souvenir (excluding gold and silver jewelry), sale of general merchandise; accommodation and hotel (Red -crowned Crane Hotel). Registered capital: RMB 580 million SDA changed its registration of industry and commerce dated Dec. 24, 2004, legal representative was changed as Mr. Sun Yude from Mr. Jia Fuwen, and the registered capital was changed into RMB 580,000,000. 3. The actual controller of the Company: Air China Limited. The relevant matters are as follows: Legal Representative: Li Jiaxiang Structure of share equity: China National Aviation Corporation (Group) Limited and China Aviation (Group) Co., Ltd. (wholly-owned subsidiary company of Air China Group in Hong Kong) jointly sponsored and founded Air China Limited, which was listed in Hong Kong and London. Air China Group holds its 51.16% equity. Date of Foundation: Sep. 30, 2004 Business scope: It was mainly engaged in the domestic and overseas transportation business such as periodic and aperiodic aviation passenger, cargo, letter and baggage; domestic and overseas official flight business; aeroplane management business; repairing of aerostat; business agent among air companies; ground service and air courier services related with the main operations (excluding letter and articles with the nature of letters); tax-free commodities in airplane. Registered capital: 6.5 billion Air China was listed in Hong Kong and London in Dec. 2004, at present, its registered capital and nature of enterprise was not changed yet. Air China Limited 48% Shandong Aviation Group 22.8% 42% Shandong Airlines Co., Ltd. 4. The Company has no shareholders holding over 10% of shares of the Company except for the holding shareholder. 5. Particulars about the top ten shareholders of circulation share No. Name of shareholders Number of shares held Type of shares held at the year-end (share) 1 CHEN CHUN PENG 1543271 B-share - - 6 2 XIE KE 1108500 B-share 3 LIU LI YA 1015216 B-share 4 WU HAO YUAN 945700 B-share 5 JOHN POSS 918990 B-share 6 CHEN YIK KIAN 610000 B-share 7 HE DA QIANG 608600 B-share 8 XU ZHAO HUAN 608000 B-share 9 XU QIAN 500000 B-share 10 GAO QIAO CHENG 476700 B-share The Company is not aware of their associated relationship among the top ten shareholders of circulation share, whether belongs to the consistent actionist regulated by the Management Regulation of Information Disclosure on Change of Shareholding for Listed Companies. IV. Particulars about Directors, Supervisors, Senior Executives and Employees (I) Directors, Supervisors and Senior Executives Amounts at the Amounts at Name Sex Age Title Office term year-begin the year-end Dec. 25, 2002 – Li Junhai Male 59 Chairman of the Board 0 0 Dec. 24, 2005 Dec. 25, 2002 – Jia Fuwen Male 59 Vice Chairman of the Board 0 0 Dec. 24, 2005 Zeng Dec. 25, 2002 – Male 52 Director, General Manger 0 0 Guoqiang Dec. 24, 2005 Director, Standing Deputy Dec. 25, 2002 – Su Zhongmin Male 51 0 0 General Manager Dec. 24, 2005 Director, Deputy General Dec. 25, 2002 – Bai Weisan Male 48 0 0 Manager Dec. 24, 2005 Director, Deputy General Dec. 25, 2002 – Song Yuxia Female 49 Manager, General Manager of 0 0 Dec. 24, 2005 Qingdao Branch Dec. 25, 2002 – Wang Fuzhu Male 52 Director 0 0 Dec. 24, 2005 Dec. 25, 2002 – Wang Zhi Male 63 Independent Director 0 0 Dec. 24, 2005 Dec. 25, 2002 – Hu Jijian Male 63 Independent Director 0 0 Dec. 24, 2005 May 21, 2003 – Li Xiuqin Male 42 Independent Director 0 0 Dec. 24, 2005 Dec. 28, 2004 – Fang Shaokun Femal 43 Independent Director 0 0 Dec. 24, 2005 e Convener of the Supervisory Dec. 25, 2002 – Wang Kaixun Male 52 0 0 Committee Dec. 24, 2005 Dec. 25, 2002 – Wang Wuping Male 40 Supervisor 0 0 Dec. 24, 2005 Supervisor, Team Leader of Dec. 25, 2002 – Wang Xianlin Male 40 0 0 the 2nd flying Team Dec. 24, 2005 Supervisor, Deputy Manager Dec. 25, 2002 – Li Jiemin Male 49 of Beijing Sales Department, 0 0 Dec. 24, 2005 Director of Beijing Station Dec. 25, 2002 – Guo Caisen Male 35 Supervisor 0 0 Dec. 24, 2005 Mar. 27, 2003 – Yu Haitian Male 36 Deputy General Manager 0 0 Dec. 24, 2005 Zhang Dec. 25, 2002 – Male 47 Chief Pilot 0 0 Qingshe Dec. 24, 2005 Mar. 27, 2003 – He Guobin Male 56 Chief Engineer 0 0 Dec. 24, 2005 Deputy General Manager, Dec. 25, 2002 – Li Qing’en Male 50 Chief Accountant, Proxy 0 0 Dec. 24, 2005 Secretary of the Board Note 1: There was no change in the number of shares held by directors, supervisors and senior executives - - 7 in the report period. Note 2: Particulars about directors, supervisors holding the post in Shareholding Company Name Name of the Post in the Shareholding Company Draw payment and Shareholding allowance from the Company Shareholding Company (Yes or no) Li Junhai SDA Secretary of Party Committee No Jia Fuwen SDA President Yes Wang Fuzhu SDA Chief Accountant Yes Wang Kaixun Deputy Secretary of Party Committee, SDA Secretary of Commission for Inspecting Discipline and concurrently Chairman of Yes Labor Union Wang Wuping SDA Head of Financial Department Yes (II) Main work experiences of the directors, supervisors and senior executives, as well as particulars of their full time or part time posts in companies other than the shareholding companies. Name Main work experience Full-time or part-time posts in companies other than the shareholding companies Li Junhai 01/2000-03/2002, Deputy Secretary of Party Committee of SDA; 01/2000 up to now, director of the Company; 03/2002 up to now, Secretary of Party Committee of SDA; 12/2002 up to now, Chairman of the Board of Directors of the Company. Jia Fuwen 01/2000-10/2001, Director and General Chairman of the Board of Taikoo Manager of the Company; Shandong Aircraft Engineering 10/2001-12/2002, Chairman of the Board of Co., Ltd. Directors of the Company; 04/2002 till now, Chairman of the Board and President of SDA; 12/2002 till now, Vice Chairman of the Board of the Company. Zeng Guoqiang 01/2000-10/2001, Director, Vice General Director of Jinan Airport Co., Ltd. Manager and Chief Pilot; 10/2001-11/2002, Director and Vice General Manager of the Company; 12/2002 till now, Director and General Manager of the Company. Su Zhongmin 01-10/2000, Director and Secretary of the Board Chairman of the Board of Qingdao of the Company; International Logistics Center Co., 10/2000-10/2001, Director of the Company, and Ltd.; General Manager of Qingdao Branch; Chairman of the Board of 10/2001-11/2002, Director and Vice General Shandong Air Combined Express Manager of the Company; Co., Ltd.; 12/2002, Director and Standing Vice General Chairman of the Board of Manager. Shenzhen Heng Chi Forwarding Co., Ltd.. Bai Weisan 01/2000-10/2001, Director of the Marketing Chairman of the Board of Department of the Company; Shandong Airlines Rainbow Jets 10/2001 till now, Vice General Manager of the Co., Ltd.. Company; 11/2001 till now, Director of the Company. Song Yuxia 01/2000-12/2000, Director and General Chairman of the Board of Economist of the Company; Shandong International Aero 01/2001 till now, Director and Vice General Training Co., Ltd. Manager of the Company; 10/2002 till now, General Manager of Qingdao Branch of the Company. Wang Fuzhu 01/2000-10/2001, Director and Chief Chairman of the Board of - - 8 Accountant of the Company; Shangdong Jinping Aviation Food 10/2001-12/2004, Director of the Company and Co., Ltd.; Chief Accountant of SDA. Chairman of the Board of Qingdao Jinping Aviation Food Co., Ltd. Wang Zhi 01/2000-05/2000, director of Planning and Professor of Beijing University of Technological Reform Department of CAAC; Aeronautics and 05/2000-12/2002, Director of the Department of Astronautics,Nanjing University of Planning, Science and Technology of CAAC; Aeronautics and Astronautics, Civil 12/2002 till now, Independent Director of the Aviation University of China, and Company. Shanghai Tongji University; Independent director of China Southern Airlines and Hainan Airlines Hu Jijian 01/2000-01/2003, Secretary of Party Committee 07/2002 till now, independent of Shandong Institute of Economics; director of Luyin Investment 01/2003 till now, member of CPPCC Committee Group. of Shandong Province and professor of Shandong Institute of Economics; 12/2002 till now, Independent Director of the Company. Li Xiuqin 01/2001-06/2002, Vice Director of Housing Reserve Management Center of Tai’an City, Shandong Province; 06/2002-05/2003, Vice Director of Department of Economic Development and Investment Company; 05/2003 till now, Deputy Chairwoman of the Board of Shandong Jinyang Business Management Co., Ltd. and Independent Director of the Company. Fang Shaokun 01/2000-12/2003, Dean of Law School of 01/2000 till now, lawyer at Yantai University; Shandong Sunsum Law Firm; 12/2003 till now, Vice President of Yantai 06/2003 till now, Independent University; Director of Yantai Oriental 12/2004 till now, Independent Director of the Electronics Information Industry Company. Group Co., Ltd.. Wang Kaixun 01/2000 till now, Secretary of Discipline Inspection Commission and Chairman of Labor Union of SDA; Convener of the Supervisory Committee of the Company; 01/2003 till now, Vice Secretary of Party Committee of SDA. Wang Wuping 01/2000-01/2003, Vice Director of the Financial Department of SDA; 01/2003 till now, Director of the Financial Department of SDA; 01/2000 till now, Supervisor of the Company. Wang Xianlin 01/2000-10/2002, Squadron Troop Leader of the Company; 10/2002-01/2003, Vice Group Leader of NO. 2 Flying Group of the Company; 01/2003 till now, Group Leader of NO. 2 Flying Group of the Company; 12/2002 till now, Supervisor of the Company. Li Jiemin 01/2000-07/2002, Vice Manager of Beijing Sales Department of the Company; 07/2002-12/2004, Director of Beijing Station as well as Vice Manager of the Beijing Sales Department of the Company. Guo Caisen 01/2000-01/2002, Shandong Pharmaceutical Group Corporation; - - 9 01/2002-08/2004, HR Department of SDA; 08/2004 till now, Financial Department of the Company. Yu Haitian 01/2000-10/2001, Director of the Locomotive Engineering Department of the Company; 10/2001-03/2003, General Engineer of the Company; 03/2003 till now, Vice General Manager of the Company. Li Qing’en 01/2000-12/2002, Vice Director, Director and Deputy Chief Accountant of the Accounting Department of the Company; 01/2003-12/2004, Chief Accountant of the Company. Zhang Qingshe 01/2000-12/2001, Deputy Chief Pilot and Director of the Security Supervision Department of the Company; 10/2001 till now, Chief Pilot of the Company. He Guobin 01/2000-02/2002, General Manager of Taikoo Shandong Aircraft Engineering Co., Ltd.; 01/2000-11/2002, Director of the Company; 02/2002-03/2003, Chairman of the Board of Taikoo Shandong Aircraft Engineering Co., Ltd.; 03/2003 till now, General Engineer of the Company. (II) Particulars about annual payment The payments of the directors, supervisors and senior executives were determined according to the achievements and results salary system, in which wages are bound with the Company’s benefits, and implemented after being examined and approved by the Board of Directors of the Company. The total payments drew by directors, supervisors and senior executives from the Company were RMB 2.218 million (including basic wage, reward, welfare, subsidy, housing allowance, etc.). The total payments of the top three directors drawing the highest payment were RMB 705.8 thousand. The total payments of the top three senior executives drawing the highest payment were RMB 623 thousand. The allowance for each independent director was RMB 30 thousand per year as the basic number plus an extra allowance of RMB 400 for every working day. Among the directors, supervisors and senior executives drew payment from the Company, 2 enjoy an annual payment of over RMB 200 thousand respectively, 8 between RMB 150 thousand and RMB 200 thousand respectively, 1 between RMB 100 thousand and 150 thousand, and 2 below 100 thousand in the report period. Director Mr. Jia Fuwen, Mr. Wang Fuzhu, Convener of the Supervisory Committee Mr. Wang Kaixun, and Supervisor Mr. Wang Wuping drew their payments from SDA, the holding shareholder, not from the Company. (III) Particulars about changes of directors, supervisors and senior executive 1. Directors In the report period, due to work shift, Director Mr. Zheng Bao’an submitted the resignation letter to the Board of Directors, and the Board of Directors had approved his resignation from the post of Director. To further perfect the administrative structure of the Company, improve the normative operation of the Company and safeguard the interests of vast investors, according to the nomination of holding shareholder SDA, Mr. Fang Shaokun was elected Independent Director of the 2nd Board of Directors at the 1st Provisional Shareholders’ General Meeting of the Company dated Dec. 28, 2004. (The resume of Mr. Fang - - 10 Shaokun was published in Securities Times, China Securities and Hong Kong Ta Kong Pao dated Nov. 27, 2004) 2. Supervisors The Company’s supervisors remained unchanged in the report period. 3. Senior executives (1) Due to his work shift, Mr. Zheng Bao’an was dismissed from his positions as Vice General Manager and Secretary of the Board of Directors after the examination and approval of the 1st provisional meeting of the 2nd Board of Directors 2005 of the Company. (2) After the examination and approval of the 1st provisional meeting of the 2nd Board of Directors 2005 of the Company, Mr. Li Qing’en was engaged as Vice General Manager of the Company and Acting Secretary of the Board of Directors. (Mr. Li will formally hold this post after he gets the certificate of qualified secretary of the Board of Directors issued by Shenzhen Stock Exchange.) The above-mentioned personnel changes within the higher administrative level occurred after the report period. The public notice of was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Mar. 31, 2004. (IV) About staff Ended the report period, the Company had 1377 employees in total, including 18 graduate students (Master degree and Doctor degree) or above, taking 1.3% of total employees of the Company; 1082 persons graduated from 3-years regular college, taking 78.6% of total employees of the Company. The staff structure is as follows: Type of employee Number Proportion holding total staff Flight personnel 310 22.5% Aircraft crew and maintenance man 251 18.2% Salespeople 184 13.4% Steward and stewardess (safety person) 277 20.1% Accountant 90 6.5% Others 265 19.2% At present, the Company has 15 retirees. V. Administration Structure of the Company (I) Particulars about Company Administration Strictly according to Company Law, Securities Law and relevant laws and regulations promulgated by CSRC, the Company perfected consistently the Company’s administration structure, operated the Company in a normative way and improved the construction of modern enterprise management system. In the report period, according to the relevant regulations in the Administration Rules of Listed Companies, by way of SDA’s nomination, the Company add one independent director again and make the members of the independent Directors reach four which beyond one third of the Board of Directors of the Company and benefit to the further standardize the administration structure and bring its supervisory role of independent directors into full play. (II) Performance of Independent Directors Since the Independent Directors of the Company, Mr. Wang Zhi, Mr. Hu Jijian and Mrs. Li Xiuqin, took their posts, they fulfilled their duties in an honest, diligent responsible way, attended various meetings of the Board and Shareholders’ General Meeting on time and Supervisory Committee meetings; researched and studies actively the operation, business development and finance of the Company, supervised patiently over and guided the normative operation of the Company, participated actively in the decision-making of the Board of Directors and expressed independent and objective opinions on the nomination, appointing and - - 11 removing of directors, engagement and disengagement of senior executives, suggestion and engagement of certified public accountants and significant related transactions of the Company. 1. Particulars about Independent Directors’ Attending the Board of Directors: Name of the Present Presenting Entrusted Absent Remarks Independent Times for in person presence (Times) Directors the Board of (Times) (Times) Directors this year Wang Zhi 7 7 0 0 Attend 1 time as non-voting delegate for Supervisory Committee Hu Jijian 7 7 0 0 Attend 2 times as non-voting delegate for Supervisory Committee Li Xiuqin 7 7 0 0 Attend 1 time as nonvoting delegate for Supervisory Committee Fang 0 0 0 0 Independent Director Mr. Chaokun Fang Chaokun takes its post on Dec. 28, 2004; Attend 1 time as nonvoting delegate for Shareholders General Meeting 2.Objections on the related terms of the Company offered by the independent directors: Name of the Independent Terms of Contents of Remarks Directors Objections Objections Wang Zhi Naught Naught Hu Jijian Naught Naught Li Xiuqin Naught Naught Fang Chaokun Naught Naught (III) Separation of the Company and holding shareholder in business, personal, assets, organization and finance. The Company and the holding shareholder are separated in business, personal, assets, organization and finance. The Company possesses the independent and complete business and operates independently. 1. In respect of business Engaging principally in passenger and cargo aviation transportation, the Company was independent of its holding shareholder in regard to both business and operation. The holding shareholder had no actions interfering with the Company’s decision-making and operation directly exceeding the Shareholders’ General Meeting and was not involved in the same or similar operation, which fulfilled the commitment of non-competition in the same industry with the Company. 2. In respect of personal The Company operated independently in terms of labor, personal and wage management and has independent organizations and management regulations. The holding shareholder recommended directors and supervisors through legal procedure and didn’t interfered with the decision of appointing and removing on personal by the Board of Directors and Shareholders’ General Meeting. 3. In respect of assets The Company has independent aviation system, auxiliary system and auxiliary facilities, ect.. Meanwhile, the Company has independent and complete production and sales system and conducted independently the purchase of principal aviation materials and sales of passenger and cargo transportation. With regard to the unavoidable related transactions interfering with the holding shareholder in operation, the - - 12 Company implemented legal procedure in fair, just and open principle and there existed no actions harmful of the interest of the small and medium shareholders. When voting in the Shareholders’ General Meeting, the related shareholders implemented the procedure of obviation strictly according to Article of Association. The Company purchased part of house property from SDA, including Jinan Airport Tiangong Garden Office Building and signing and delivering Building, etc, which lies in the Whole Planning Area of Jinan Airport and until now the Company didn’t transact transfer procedures. 4. In respect of organization The Company established perfect legal person administration structure according to relevant regulations of Company Law and set up the Shareholders’ General Meeting, the Board of Directors and the Supervisory Committee in a legal way and operated them in a normative way. The holding shareholder didn’t intervene the arrangement of the Company’s organizations. There was no superior and subordinate relationship between the holding shareholder and its functional departments and the Company and its functional departments. 5. In respect of finance The Company has independent finance department and accounting personal and set up independent financial settlement system, financing and accounting system. The Company opened an independent account in bank independently, had independent bank accounts. The Company paid tax independently and has independent taxation registration number. The Company is independent from the holding shareholder in terms of finance. (IV) Evaluation and encouragement mechanism of senior executives According to the internal Regulation on the Integrated Evaluation and Management of Executives, the Company conducted the annual comprehensive evaluation on the senior executives and implemented the wage system where payment was linked with achievements. VI. Brief introduction to the Shareholders’ General Meeting In the report period, the Company held two Shareholders’ General Meeting. (I) 2003 Annual Shareholders’ General Meeting 1. Notification, convening and holding of the Shareholders’ General Meeting On May 26, 2004 at time of 9:30, the Company held its 2003 Annual Shareholders’ General Meeting on 31/F conference room of SDA Bldg.. The Company noticed the shareholders of the meeting by means of Public Notice, and the notification of the meeting was published in China Securities, Securities Times and Hong Kong Ta Kung Pao dated Apr. 23, 2004. 6 shareholders and shareholder’s proxies attended the meeting with representing 260,167,600 shares, one shareholder of B share authorized HSBC, Shanghai Branch to appoint the secretariat as representative to vote according to its voting will, representing 382,000 shares. The above representing shares of the Company is totally amounting to 260,549,600, taking 65.14% of total shares of the Company, including 259,801,000 state-owned legal person’s shares, taking 64.95% of total shares of the Company; 199,000 domestic legal person’s shares, taking 0.05% of total shares; 549,600 domestically listed foreign share (B share), taking 0.14% of total shares of the Company. Chairman of the Board, Mr. Li Junhai presided the meeting. The directors, supervisors and senior executives of the Company attended the meeting. The convening and holding of the Meeting accorded with the regulations of Company Law, Standardizing Opinions on Shareholders’ General Meeting of Listed Company and Articles of Association. 2. The resolutions passed by the Shareholders’ General Meeting and the disclosure of public notice on resolutions. Following proposals were examined item-by-item and approved by means of signed vote in the meeting: (1) Annual Report 2003 and its summary Work Report of the Board of Shangdong Airlines Co., Ltd.; (2) Work Report 2003 of the Board of Directors of Shangdong Airlines Co., Ltd.; (3) Work Report 2003 of the Supervisory Committee of Shangdong Airlines Co., Ltd.; (4) Financial Settlement Report 2003 and Financial Budget Report 2004 of Shangdong Airlines Co., Ltd.; (5) Profit Distribution Plan 2003 of Shangdong Airlines Co., Ltd.; - - 13 (6) Proposal on Reducing the Registered Capital of Qingdao International Aviation Logistic Center Co., Ltd.; (7) Proposal on Leasing back two CRJ-700 Airplanes after Selling; The resolutions of the meeting were published in China Securities, Securities Times and Ta Kung Pao dated May 27, 2004. (II) The 1st Extraordinary Shareholders’ General Meeting 2004 1. Notification, convening and holding of the Shareholders’ General Meeting On Dec. 28, 2003 at time of 9:30, the Company held its 1st Extraordinary Shareholders’ General Meeting of the year 2004 on 31/F meeting room of SDA Bldg.. The Company noticed the shareholders of the meeting by means of Public Notice, and the notification of the meeting was published in China Securities, Securities Times and Ta Kung Pao dated Nov. 27, 2004. 7 shareholders and shareholder’s proxies attended the meeting with representing 260,382,000 shares, one shareholder of B share authorized HSBC Bank, Shanghai Branch and Langcaho Group Co., Ltd. respectively to appoint secretariat as representatives to vote according to its voting will, with representing 581,000 shares. The above representing shares of the Company totally amount to 260,382,600, taking 65.0955% of total shares of the Company, including 259,801,000 state-owned legal person’s shares, taking 64.95% of total shares of the Company; 199,000 domestic legal person’s shares, taking 0.05% of total shares; 382,000 domestically listed foreign share (B share), taking 0.0955% of total shares of the Company. Chairman of the Board, Mr. Li Junhai presided the meeting. The directors, supervisors and senior executives of the Company attended the meeting. The convening and holding of the Meeting accorded with the regulations of Company Law, Standardizing Opinions on Shareholders’ General Meeting of Listed Company and Articles of Association. 2. The resolutions passed by the Shareholders’ General Meeting and the disclosure of public notice on the resolutions. Following proposals were examined item-by-item and approved by means of signed voting in the meeting: (1) Proposal on Adjusting the Directors Structure of the 2nd Board of Directors of the Company; (2) Proposal on Engaging Domestic: Reanda Certified Public Accountants and BDO International Certified Public Accountants as the 2004 Auditing Organizations; (3) Proposal on Increasing Investment on Jinan Airport Co., Ltd.; (4) Proposal on Revising the Articles of Association of the Company; The resolutions of the meeting were published in China Securities, Securities Times and Ta Kung Pao dated Dec. 29, 2004. 3. The Meeting elected Mr. Fang Chaokun as independent director of the 2nd Board of Directors of the Company. VII. Report of the Board of Directors (I) Discussion and analysis to the operation The Company is a civil aviation transportation enterprise. In 2004, facing the increasing complex market competition environment, according to the annual operation work plan formed by the Board at the year- beginning, with safety operation and benefit enhancement as the core, and with the realization of the safe flights for ten years as the objective, all staffs of the Company took pressure as impetus and challenge as chance, grasped the nettle, successfully fulfilled every production task, and kept the good development tendency of the Company. In the report period, the Company opened airlines from Jinan to Singapore and airline from Qingdao to Singapore one after the other. The airline to Seoul was being prepared closely. The operation network of the Company formed the situation covering all over the country and connecting circumjacent states and regions with Shangdong as the center. In the report period, the Company successfully fulfilled safe flights for ten years and consistently kept the persistent safety record; the benefit of the Company realized sharp increase and the company gained dual achievements on safety and benefit. 1. Safe flights for ten years fulfilled - - 14 The Company further strengthened flight safety instructions and rectifications. In line with working guideline of “guard against pride and haste, work solidly, ensure safety”, the Company consistently improved safety idea of the whole staff and enhanced safety management level. The Company specially established flight technology management department and strengthened flight technology management, and simultaneously integrating the Company’s actuality, the Company prepared and promoted , which obtained unanimous approbation by National Aviation Bureau and ISOA; in the aspect of airplane maintenance, according to the working requirements of “Five Majors”, “Five Guards”, “Five Protections”, through grasping spot management firmly, maintenance quality of the air team was further improved; the Company reinforced safety training work, implemented planned overall training, which gave prominence to universality and masses of training; the Company perfected air police organization structure to ensure air safety; in the aspect of safety quality supervision , total supervision rate of every airplane type increased to 90%. Through the above measures, the Company successfully achieved safety flights for ten years. 2. Operating benefits increasing by a big margin In the report period, the Company conducted customers and commodities marketing strategy of “adjust flexibly and organize carefully”, and strengthened income management, which helped airline benefits create best achievement since the establishment of the Company; the popularity and utilization of 96777 service hotline of the Company enhanced steadily, and the direct sale ratio increased by a big margin over the previous period, which cut down the sales costs; through the following measures such as code share with Air China, reorganizing frequent passengers resources etc., the Company effectively realized revenue-enhancing and expenditure control, which improved market share and market competitive edge; the Company further consummated plan control system and established cost control system, which effectively reduced operating costs of the Company and improved profitability. 3. Service brand construction making great achievements In the report period, the Company successfully accomplished significant transportation business including private planes security for leaders of the Party and the State, carrying representatives of “MPC & CPPCC”, and Asian Cup etc.; through aggrandizing service training, the service level improved greatly; the Company continuously played sample influence of precise demonstration team into role, spread human service, and improved the cabin service greatly in the aspect of arrangement and quality; the Company improved punctual rate of air flights greatly, which ranked front in the punctual rates announced by CAAC. (II) Operations in the report period 1. Scope of main operations and their status The Company is mainly engaged in the business of passenger and cargo aviation transportation within Shandong province and from Shandong province to partial domestic cities and from Shangdong province to adjacent countries and regions as approved by the relevant authority and concurrently is engaged in hotel and food service. In the report period, the Company completed total turnover volume of transport amounting to 340.7293 million tons kilometers, an increase of 34.5% over the year 2003 and carried 3,009,000 passengers in a safe way, an increase of 37.0% over the last year. In the report period, the Company realized income from main operations amounting to RMB 2,229,357,012, an increase of 29.3% compared with the corresponding period of the previous year, including revenue from passenger aviation transportation of RMB 2,144,760,571, taking 96.21% of the total income and revenue from cargo and mail aviation transportation of RMB 81,176,081, taking 3.64% of the total income. In the report period, the Company also realized an agent income from passenger and cargo aviation transportation of RMB1,103,897, taking 0.05% of the total income. ,and realized other income of RMB2,316,463, taking 0.1% of the total income. 2. Operations and achievements of holding and share-holding companies (1) Qingdao International Airlines Logistics Center Co., Ltd. In the report period, this company realized income from main operations amounting to RMB 2,316,500 and net profit amounting to RMB 337,800. (2) Shenzhen Hengchi Freight Co., Ltd. In the report period, this company realized income from main operations amounting to RMB 1,040,400 and net profit amounting to RMB 288,500. - - 15 (3) Shandong Airlines United Express Co., Ltd. In the report period, this company realized income from main operations and net profit amounting to RMB 1,113,100 and RMB 592,300 respectively. (4) Sichuan Airlines Co., Ltd. This company had not been audited. (5) Shandong TAECO Aircraft Engineering Co., Ltd. In the report period, this company realized income from main operations and net profit amounting to RMB 85,224,000 and RMB 14,159,800 respectively as audited. (6) China Civil Aviation Information Network Co., Ltd. In the report period, this company realized income from main operations amounting to RMB 1,282.9 million and net profit amounting to RMB 449.2 million as audited.. (7) Shandong Airlines Rainbow Jet Co., Ltd. In the report period, this company realized income from main operations and net profit amounting to RMB 51,745,400 and RMB -45,037,000 respectively as audited. (8) Jinan International Airport Co., Ltd. This company had not been audited. In the report period, according to Proposal on Selling Equity of Shandong Airline Rainbow International Travel Agency Co., Ltd. (hereinafter referred to as Rainbow International Travel Agency) examined and approved by the 9th meeting of the 2nd Board of the Company, the Company sold 49% equity Rainbow International Travel Agency as evaluated at the price no less than the net assets to natural person shareholders including personnel upper than section managers of the Company. The Company no longer held this company’s equity. The Company enjoyed the relevant shareholders’ equity of this company from Jan. to Apr. 2004 according to the relevant equity transfer agreement. The Company had no any investment earning with influence on net profit by over 10% from individual holding and share-holding companies. 3. Particulars about major suppliers and customers The total amount of purchase of the top five suppliers of the Company took % of the total annual amount of purchase (mainly is purchase of aviation oil, aviation materials and plane supply products) and the total amount of sales of the top five customers took % of the total annual amount of sales of the Company. 4. Problems and difficulties from operations and their solutions (1) The introduction tariff tax for running series of CRJ airplanes of the Company was far beyond high, which increased running original costs of the Company; introduction of airplanes need a large amount of capital, but, due to the single financing channel of the Company (capital basically relied on loan from bank), so the Company’s financial expenses stayed at the higher level; in the report period especially the first half of the year, domestic aviation oil rose up increasingly and the charges for airports increased over the previous report year, which increased costs of the Company. (2) Since the State has reformed the measures for collecting civil aviation infrastructure construction fund and the civil aviation fund will be established with the income collected from the chargeable use of airline resources, the duty born by Shandong Province Financial Bureau and SDA of paying civil aviation infrastructure construction fund for the Company was naturally exempted. The Company will pay by itself the fees charged by the use of airline resources, thus ensuing the increase of the running cost of the Company. (3) In the aftermath of the “11.21” airplane disaster, according to the requirements of National Aviation Bureau, all CRJ-200 planes of the Company had stopped flying for a month and undergone examination. This caused great influence on the Company. Solutions: the Company stopped leasing four SAAB340 planes; two CRJ-700 planes were leased back after sale; cooperation with Air China in regional airlines is being arranged, and five CRJ-200 planes will be put in the Beijing base and Chengdu base of Air China and operate by using the airlines of Air China. The Company established and perfected the cost-control system as well as strengthened the plan and control of fund use. It also further improved the oil-saving reward-and-punish measures and reduced costs effectively. 5. Achievement Estimation: - - 16 The 3rd Quarterly Report 2004 had estimated that the achievement of the Company would increase by a large margin year-on-year. According to the financial report in the report period, the estimation has been realized. (III) Investment 1.Investment of proceeds raised through share offering In the report period, there was no application of proceeds raised or application of proceeds raised in the previous period nut lasting to the report period in the Company. 2. Investment of proceeds not raised (1) According to the Proposal of Increasing Investment to Taikoo Shandong Aircraft Engineering Co., Ltd., which had been examined and approved by the 2nd Board of Directors, the Company would increase investment to this company by an amount of RMB 4.2 million. During the report period, the aforesaid investment had been fully put into place. According to the Proposal of Increasing Investment to Jinan Airport Inc., which had been examined and approved by the 1st Provisional Shareholders’ General Meeting for 2004, the Company would increase investment to this company by an amount of RMB 30 million. During the report period, of the above- mentioned investment, RMB 5 million had been put into place. (IV) Financial status of the Company 1. Financial status and reasons for changes（According to PRC GAAP） Increased Increase Item 2004 2003 amount proportion Total assets 3,714,318,531 3,996,247,440 -281,928,909 -7.05% Shareholders' equity 593,074,974 551,860,363 41,214,611 7.47% Fixed assets 2,365,975,011 2,836,729,450 -470,754,440 -16.59% Bank loans-Short term 869,000,000 1,900,769,271 -1,031,769,271 -54.28% Long term payable 421,082,070 555,564,480 -134,482,410 -24.21% General and administration 90,542,102 73,793,769 16,748,333 22.70% Finance costs 118,497,051 133,714,548 -15,217,497 -11.38% Profit from main operations 429,165,529 341,886,110 87,279,419 25.53% Net profit(loss) for the year 41,214,611 26,531,043 14,683,568 55.34% Net increase in cash and cash equivalents -258,229,144 24,504,416 -282,733,560 -1153.81% Item Reason of Change Total assets CRJ-700 planes leasing back after sale Shareholders' equity Profitability in the period Fixed assets CRJ-700 planes leasing back after sale Bank loans-Short term Payment of bank loans Long term payable Payment of rent for financing lease General and administration Enlargement of operating scale Finance costs Decrease in short-term loans Decrease in operating cost, increase in flight Profit from main operations earnings Decrease in operating cost, increase in flight Net profit(loss) for the year earnings Net increase in cash and cash equivalents Increase in cash outflow for financing activities - - 17 2. Changes in accounting policies and accounting estimate and their influences In the report period, no change occurred to the accounting policies or accounting estimate. (V) Influence of changes in productive and operative environment, macro-policies and regulations on the Company Since the State has reformed the measures for collecting civil aviation infrastructure construction fund and the civil aviation fund will be established with the income collected from the chargeable use of airline resources, the duty born by Shandong Province Financial Bureau and SDA of paying civil aviation infrastructure construction fund for the Company was naturally exempted. The Company will pay by itself the fees charged by the use of airline resources, thus ensuing the increase of the running cost of the Company. (VI) Explanation of the Board on interpretative explanation paragraph in the auditors’ report BDO International Certified Public Accountants and Reanda Certified Public Accountants audited Financial Report 2004 of the Company according to International Accountant Standards and China Accountant Standards respectively and presented unqualified Auditor’s Report. (VII) Business plan for year 2005 The Board of the Company considered, according to area development arrangement as the whole and the overall layouts of modernization construction determined by the State in the year 2005, Shangdong’s economic development faces significant opportunity, then the Company will be confronted with more expansive foreground. Along with the continual fulfillment of civil aviation system reform, increasing sound laws and regulations system, which provided more normative market environment for civil aviation industry. Domestic economy increase steadily, thus the civil aviation market hopefully keeps its steady increase. In order to keep all-round, harmonized and sustainable development of the Company, the Board of Directors determined to carry out science development concept as topic, developed 5-item capacity construction (security safeguards, sustaining payoff, excellent service, harmonized management, ideological and political work capacity), further perfected decision-making objective system, implement obligation system, examination and supervision system, so as to improve the overall operating quality and realize the development of the Company stepping on new stage. 1. To persist in regarding the safe work as the key work, enhance the construction of security safeguards; grasp the safe work with perseverance. Firstly, to enhance training and education for flight crew and aircrew; secondly, to work in all-round auditing of IOSA and perfect and ensure long-acting safe mechanism; thirdly, to increase input of scientific technology and improve the safe supervisory level; fourthly, to strengthen ideological style construction to the whole staff; fifthly, to reinforce air defense and ground safe work in order to put an end to security accidents. 2. To grasp the opportunity of market development, reinforce payoff capability construction and reduce the running cost. Firstly, to use advantages conditions of increase of running capability, scientifically and rationally arrange for its running capability, explore airline resource and further perfect airline network, realize the airline to Seoul and strive for more international airlines; secondly, to greatly develop freight business and improve flight load factor; thirdly, to improve financial management level, strengthen cost control, perfect budget management system and well-develop the research work of financial strategy; fourthly, to push and promote investors to improve its payoff capability and realize harmonized development with main operation of the Company. The Board of Directors has noticed recently aviation oil price rose up by a big margin, which brought rising pressure on the cost of the Company. The Company specially held the meeting and required the relevant function divisions to research solving ways, adopt effective measures, increase benefits and cut expenditures, remove the above disadvantageous influence as soon as possible, control strictly the costs and guarantee the normal operation of the Company. 3. To improve service standard, reinforce high-quality service capability, promote human-based service and upgrade the overall service quality of the Company. Firstly, to strengthen service base management; secondly, to perfect operating control system and further improve punctual rate of airline; thirdly, to perfect service brand construction. 4. To reinforce management capability construction and promote the sustainable development of the Company. Firstly, to improve the executive capability of the operator and earnestly fulfill various resolutions of Shareholders’ General Meeting and the Board of Directors; secondly, to improve decision- making capability of the Board and promote the Company’s standardized operation. - - 18 5. To strengthen ideological and political work capability construction, enrich enterprise’s culture, enhance cohesiveness of the employees, and raise the competitive capacity of the Company. (VIII) Routine work of the Board of Directors 1.The Board of Directors of the Company totally held seven meetings in 2004 (1) On Jan. 13, 2004, the Company held the 1st Meeting of the 2nd Board of Directors for the Year 2004. 11 Directors should be present and actually 11 attended the Meeting. All Supervisors and other Senior Executives of the Company attended the Meeting as nonvoting delegates. The meeting was presided by Chairman of the Board Mr. Li Junhai. The following resolutions were examined and approved in the Meeting: a) Examined and approved Proposal on Financing of seven B737-700/800 planes; b) Examined and approved Proposal on Setting up Partial Ticket Office; c) Examined and approved Proposal on Setting up Freight Parlour; The public notice of the resolutions of the meeting was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Jan. 15, 2004. (2) On Feb. 29, 2004, the Company held the 2nd Extraordinary Meeting of the 2nd Board of Directors for the Year 2004. 11 Directors should be present and actually 11 attended the Meeting. Supervisors and other Senior Executives of the Company attended the Meeting as nonvoting delegates. The meeting was presided by Chairman of the Board Mr. Li Junhai. The contents of the Meeting are as follows: The Board of Directors issued their opinion on matters of Air China Group purchasing the equity of the Company according to Purchasing Management Measure for Listed Companies, and signed Report on Purchasing the Partial Equity by Air China Group to the Whole Shareholders of Shandong Airlines Co., Ltd.. The public notice of the resolutions of the meeting was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Mar. 2, 2004. (3) On Mar. 26, 2004, the Company held the 8th Meeting of the 2nd Board of Directors. 11 Directors should be present while actually 10 attended the Meeting. Director Mr. Zeng Guoqiang was absent from the Board meeting due to going abroad for business trip and authorized Director Mr. Su Zhongmin to vote on his behalf. Supervisors and other Senior Executives of the Company attended the Meeting as nonvoting delegates. The meeting was presided by Chairman of the Board Mr. Li Junhai. The following were the contents of the Meeting: a) Examined and approved Work Report 2003 of the Board of Directors; b) Examined and approved Work Report 2003 of General Manager; c) Examined and approved Annual Report 2003 and its Summary; d) Examined and approved Financial Settlement Report 2003 and Financial Budget Report 2004; e) Examined and approved Profit Distribution Preplan 2003; f) Examined and approved Investor Relationship Management System of Shangdong Airlines Co., Ltd.; g) Examined and approved Proposal on Decreasing the Registered Capital of Qingdao International Airlines Logistic Center Co., Ltd.; h) Examined and approved Proposal on Renewing Use License Agreement of Trademark and Logo with SDA; i) Examined and approved Proposal on Purchasing House Property as Base Office and on-duty Apartment in Yantai; j) Examined and approved Report on Rectifying Processing of Shangdong Airlines Co., Ltd. (second); k) Examined and approved Report on Specific Explanation of Items involved in Audit Report of the Shandong Airlines Co., Ltd.; l) Examined and approved Report on Changing of Accounting Policies Issued by the Board, Independent Director and the Supervisory Committee of Shandong Airlines Co., Ltd. The public notice of the resolutions of the meeting was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Mar. 31, 2004. - - 19 (4) On Apr. 22, 2004, the Company held the 9th Meeting of the 2nd Board of Directors. 11 Directors should be present while actually 9 attended the Meeting. Chairman of the Board Mr. Li Junhai and Director Mr. Bai Weisan were absent from the Board meeting due to going abroad for business trip and respectively authorized vice Chairman of the Board Mr. Jia Fuwen and Director Mr. Zeng Guoqiang to vote on his behalf. Supervisors and senior executives of the Company attended the Meeting as nonvoting delegates. The meeting was presided by Vice Chairman of the Board Mr. Jia Fuwen. The following were the contents of the Meeting: a) Examined and approved the 1st Quarterly Report for 2004 of Shangdong Airlines Co., Ltd.; b) Examined and approved Proposal on Selling and Subleasing Two CRJ-700 Planes; c) Examined and approved Proposal on Signing the Supplement Agreement for Share Transfer Agreement; d) Examined and approved Proposal on Selling Equity of Shandong Airline Rainbow International Travel Agency Co., Ltd.; e) Examined and approved Proposal on Holding the 2003 Shareholders’ General Meeting. The public notice of the resolutions of the meeting was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Apr. 23, 2004. (5) On Aug. 17, 2004, the Company held the 10th Meeting of the 2nd Board of Directors. 11 Directors should be present while actually 10 attended the Meeting. Director Ms. Song Yuxia was absent from the Board meeting due to some reasons, and authorized Chairman of the Board Mr. Li Junhai to vote on her behalf; Supervisors and senior executives attended the Meeting as nonvoting delegates. The meeting was presided by Chairman of the Board Mr. Li Junhai. The following were the main contents of the Meeting: a) Examined and approved 2004 Semi-Annual Report and its Summary of Shangdong Airlines Co., Ltd.; b) Examined and approved Proposal on Changing Certified Public Accountant; c) Examined and approved Proposal on Short-time Operating and Leasing Two B737 series planes; d) Examined and approved Proposal on Moving the Jingsi Road Ticket Office of Jinan Sales Department; e) Examined and approved Proposal on Increasing investment on Shangdong TAECO Aircraft Engineering Co., Ltd.; f) Examined and approved Report on Rectifying Processing of Shandong Airlines Co., Ltd. (third); g) Examined and approved Management System of Raised Proceed of Shangdong Airlines Co., Ltd.; h) Examined and approved Internal Report System on Significant Information of Shandong Airlines Co., Ltd.. The public notice of the resolutions of the meeting was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Aug. 20, 2004. (6) On Oct. 22, 2004, the Company held the 11th Meeting of the 2nd Board of Directors. 11 Directors should be present while actually 9 attended the Meeting. Vice Chairman of the Board Mr. Jia Fuwen and Director Mr. Bai Weisan were absent from the Board meeting due to work and both authorized Chairman of the Board Mr. Li Junhai to vote on them behalf. Supervisors and Senior Executives of the Company attended the Meeting as nonvoting delegates. The meeting was presided by Chairman of the Board Mr. Li Junhai. The following resolutions were the contents of the Meeting: a) Examined and approved the 3rd Quarterly Report for 2004; b) Examined and approved Proposal on Ending to Lease four SAAB340 Planes; c) Examined and approved Proposal on Establishing Guangzhou Freight Department. The public notice of the resolutions of the meeting was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Oct. 23, 2004. (7) On Nov. 26, 2004, the Company held the 12th Meeting of the 2nd Board of Directors. 10 Directors should be present while actually 10 attended the Meeting. Supervisors and other Senior Executives of the Company attended the Meeting as nonvoting delegates. The meeting was presided by Chairman of the Board Mr. Li Junhai. The following resolutions were the contents of the Meeting: a) Examined and approved Proposal on Adjusting the Directors Structure of the 2nd Board of Directors of the Company; b) Examined and approved Proposal on Adjusting 2004 Accounting Auditing Institutions; c) Examined and approved Proposal on Increasing investment on Jinan Airport Co., Ltd.; d) Examined and approved Proposal on Amending Articles of Association of the Company; - - 20 e) Examined and approved Proposal on Holding 2004 1st Shareholders’ General Provisional Meeting. The public notice of the resolutions of the meeting was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Nov. 27, 2004. 2. The implementation of the resolutions of Shareholders’ General Meeting by the Board of Directors In the report period, according to the requirements of the relevant laws and regulations of Company Law, Securities Law and Articles of Association, the Board of Directors of the Company seriously implemented various resolutions approved by Shareholders’ General Meeting strictly in compliance with the resolutions and authorization of Shareholders’ General Meeting. (1) The implementation of profit distribution of the Company of 2003 According to Profit Distribution Preplan 2003 of Shangdong Airlines Co., Ltd. approved by Annual Shareholders’ General Meeting 2003 held on May 26, 2004, the Company didn’t implement distribution and convert public reserve into share capital in the end of 2003. (2) The Board of Directors of the Company strictly implemented other various resolutions approved by Shareholders’ General Meeting. (IX) Profit distribution preplan or preplan on converting capital public reserve into share capital Audited by BDO International Certified Public Accountants as per International Accounting Standards and Reanda Certified Public Accountants Ltd. as per Chinese Accounting Standards, the Company realized a net profit of RMB 85,193,000 and RMB 41,078,600 respectively in 2004. According to the lower principle and the regulation of Articles of Association, based on the net profit of RMB 41,078,600 realized in the report year, the Company withdrew RMB 4,107,900 as statutory public reserve and RMB 2,053,900 as statutory welfare fund, the remaining distributable profit is RMB 34,916,800. Adding the undistributed profit of RMB 46,167,100 in the previous year, the distributable profit was RMB 81,083,900. In 2004, the Company introduced quite a few airplanes, and seven B737-700/800 airplanes purchased by the Company will reach the designated positions successively in the year 2005. Considering the actual situation of the Company’s cash flow, to keep sustainable, steady and healthy development of the Company, and concurrently protect the interests of all shareholders, the Board planned to distribute cash dividends at the rate of RMB 0.6 (tax included) for every 10 shares to all shareholders, based on total share capital amounting to 40,000,000, which amounted to RMB 24,000,000. The balance of RMB 55,941,900 would be carried into next year. The said profit distribution preplan should be submitted to Annual Shareholders’ General Meeting 2004 for examination and approval before its implementation. (X) Specific explanation of CPA on the capital occupied by the Company’s controlling shareholder and other related parties We has audited the balance sheet as of Dec. 31, 2004 and income statement and cash flow statement for the year then ended of Shandong Airlines Co., Ltd. (hereinafter referred to as the Company) according to Independent Auditing Standards of Chinese CPA and presented auditors’ report without reservation with REANDA(A) No. （2005）1034 document in Mar.26 2005. According to the requirements in Circular on Standardizing Listed Companies’ Capital Current with Related Parties, External Guarantees and Other Several Problems released by CSRC and State-owned Assets Supervision and Administration Commission of the State Council, the Company has prepared Investigation Form of Capital Occupation of the Company (hereinafter referred to as Investigation Form) ended Dec. 31, 2004 listed in the appendix of the Letter. The Company is responsible for truly preparingfor and disclosing Investigation Form out and is also liable for ensuring its truthfulness, legality and completeness. We have checked the materials carried in the Investigation Form and the accounting materials rechecked in the financial report of the Company in 2004 audited by us and contents related to the financial report after audited and have found no difference in all material aspects. Except for implementing the auditing procedures relevant to the related transactions implemented in the audit of accounting statements for 2004 to the Company, we do not implement extra auditing procedures to the materials carried in the Investigation Form. Be audited, Funds Occupation of Controlling Shareholders and Other Related Parties as follows: - - 21 Ended Dec.31,2004, Controlling Shareholders and Other Related Parties occupied funds of the Company RMB 101,610thousand,including Controlling Shareholders and its Subsidiary RMB 4140thousand. Funds of Controlling Shareholders and Other Related Parties occupied the Company accumulatec to RMB 612,630thousand,including Controlling Shareholders and its Subsidiary RMB 290,980thousand. The Letter is only used by the Company for disclosing about capital occupied by the controlling shareholder and other related parties and can not be used for any other purposes without written agreement from us. Appendix: Special Comments on Funds Occupation of Controlling Shareholders and Other Related Parties . Reanda Xinlong Certified Public Accountants Special Comments on Funds Occupation of Controlling Shareholders and Other Related Parties Ended Dec.31,2004 Unit:RMB 0’000yuan Beginging- Debit Credit Ending- Capital Repayment Names of related parties Relationships Accounting balance at balance at occupied Remarks the year amount amount method subject the year Shandong Aviation Controlling Other Borrowing 8,077 20,512 28,481 108 cash Group Co., Ltd. shareholder receivables capital Shandong International Subsidiary Aviation Training belonging to the Other Business 45 88 —— 133 cash Co.,Ltd same controlling receivables transaction shareholder Shandong Aviation Subsidiary Building Administration belonging to the Other Business 23 36 59 —— cash Co.,Ltd same controlling receivables transaction shareholder Subsidiary Shandong Airlines belonging to the Other Business 39 101 140 —— cash Qingdao Foods Co., Ltd. same controlling receivables transaction shareholder Shandong Xiangyu Subsidiary Aviation Technology belonging to the Other Business 4 —— 4 —— cash Service Co., Ltd. same controlling receivables transaction shareholder Shandong Aviation Subsidiary Rainbow International belonging to the Other Business —— —— —— —— cash note1 Travel Agency Co., Ltd. same controlling receivables transaction shareholder Qingdao Feisheng Subsidiary International Aviation belonging to the Other Business 108 65 —— 173 cash Technology Training same controlling receivables transaction Co., Ltd. shareholder Shandong Airlines Associated Other Business 196 31,969 22,418 9,747 cash Rainbow Jet Co., Ltd. company receivables transaction note：Shares of Shandong Aviation Rainbow International Travel Agency Co., Ltd had been transferred in this year. (XI) Special explanations and independent opinions of independent directors on the Company’s accumulated and current external guarantees and relevant particulars about the Company’s implementing Circular on Standardizing Listed Companies’ Capital Current with Related Parties, External Guarantees and Other Several Problems. Mar 26,2005,the Company’s independent directors Mr. Wang Zhi, Mr. Hu Jijian and Ms. Li Xiuqin signed Explanations and Independent Opinions on Relevant Conditions of the Company’s Implementing Circular on Standardizing Listed Companies’ Capital Current with Related Parties, External Guarantees and Other Several Problems with whole text as follows: - - 22 The independent directors of Shandong Airlines Co., Ltd. now explain the condition relevant to the Company’s implementing Circular on Standardizing Listed Companies’ Capital Current with Related Parties, External Guarantees and Other Several Problems as follows: 1. Capital current of the related parties (1)According to the Agreement and Addition of Shares Transfer between SDA with Air China Group signed Fed,28,2004, we consistantly concerned and supervised SDA completed Refundment Plan.Ended Dec. 31, 2004, Shandong Airlines Group Co., Ltd., the controlling shareholder of the Company,still owed RMB 1,083,000 to the Company ,which belonged to normal related transaction.. We considered the problem of SDA occupation to the Company had been solved.. (2)Through Annual Report of 2004, we know that the Company should receive RMB 97,475,000 from Shandong Airlines Rainbow Jet Co. ended the end of the year. The Board of Directors of the Company is in negotiation with SDA and Air China about solutions to the arrearages of the Jets Company. 2. External guarantees of the Company After being audited, the Company did not conduct any guarantee for others in 2004. 3. Independent opinions Based on the said condition, we considered the Company has implemented Circular on Standardizing Listed Companies’ Capital Current with Related Parties, External Guarantees and Other Several Problems and the capital current between the Company and its controlling shareholder and its related parties is oriented to be standardized gradually, which is beneficial for safeguarding the interests of the Company and all shareholders. VIII. Report of the Supervisory Committee (I) Particulars about the work of Supervisory Committee In 2004, the Supervisory Committee exerted the duties authorized by Company Law of the P.R.C. and the Articles of Association of the Company according to laws, dutifully implemented supervision functions on the Company’s operation in the period and strictly safeguarded the rights and interests of the shareholders. The Supervisory Committee had attended all Shareholders’ General Meetings and meetings of the Board as non-voting delegates in 2004, and sent delegate to attend the work meeting of general managers of the Company. In the report period, the Supervisory Committee held totally two meetings, which each supervisor had attended except for work reasons. The Committee had invited independent directors of the Company to attend the meetings, thus enhancing communication with independent directors on the supervisory work of the Company. The Supervisory Committee had examined and discussed about the financial budget and settlement report, quarterly report, rules of procedure of the Supervisory Committee, etc. and formed resolutions. As to related transactions between the Company and its controlling shareholders and subsidiaries, the Supervisory Committee requested the Board to pay special attention to them and made special resolutions. It also dispatched members to participate in the annual auditing of the Company so as to further strengthen the financial supervision. In the report period, the Supervisory Committee totally held two meetings: 1. On Mar. 26, 2004, the 6th meeting of the 2nd Supervisory Committee was held in the meeting room of SDA Building. The meeting was presided by the Supervisory Committee convener Mr. Wang Kaixun. 5 supervisors should have been present and actually 4 were present. Independent director Mr. Hu Jijian also attended. The meeting examined and approved a) Annual Report 2003 and its summary of Shangdong Airlines Co., Ltd.; b) Work Report of the Supervisory Committee 2003 of Shangdong Airlines Co., Ltd.; c) Supervisory Committee’s Opinions on the Special Explanation for Issues involved in the Auditing Report by the Board of Directors of Shangdong Airlines Co., Ltd.; d) Report of Accounting Estimation and Accounting Policy Changes by Board of Directors, Independent Directors and Supervisory Committee of Shangdong Airlines Co., Ltd.; e) Report on Supervisory Work 2003 by Supervisory Committee of Shangdong Airlines Co., Ltd.. The public notice of the resolutions was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Mar. 31, 2004. - - 23 2. On Aug. 17, 2004, the 7th meeting of the 2nd Supervisory Committee was held in the meeting room of SDA Building. The meeting was presided by the Supervisory Committee convener Mr. Wang Kaixun. 5 supervisors should have been present and actually 4 were present. Supervisor Mr. Wang Wuping went abroad due to business while independent directors of the Company attended the meeting. The meeting examined and approved. Semi-annual Report 2004 and its summary of Shandong Airlines Co., Ltd.. The public notice of the resolutions was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Aug. 20, 2004. (II) Independent Opinions of the Supervisory Committee on relevant events in 2004 The Supervisory Committee conducted serious inspection and supervision on such conditions as the Company’s finance, implementing resolutions of shareholders’ general meeting, operating decision- making, operation according to laws, operating behaviors of directors, managers and senior executives and related transactions etc.. 1.Operation according to laws In the report period, the Company conducted regulated operation complying with Company Law, Securities Law, Articles of Association of the Company, and Rules for Shares Listed with Shenzhen Stock Exchange and other national relevant policies and regulations. It implemented effective internal control system inside the Company. Following the regulations and laws and being honest with faith and diligence, directors and senior executives of the Company carefully implemented every resolutions approved by shareholders’ general meeting with a view to protecting the shareholders’ interests. There was no behaviors found that directors or senior executives broke the laws, regulations, or Articles of Association or harmed the interests of the Company in their office term. 2.Inspection of finance The Supervisory Committee examined patiently and meticulously the financing situation of the Company. In the opinion of the Supervisory Committee, 2004 Financial Report of the Company reflected the financial situation and operation result of the Company. The accounting vouchers, books and statements, and other accounting materials were genuine and standard. BDO International Certified Public Accountants and Reanda Certified Public Accountants Ltd. audited 2004 financial report of the Company respectively according to international and domestic accounting standards and issued auditor’s unqualified audit report. The Supervisory Committee believed in the authenticity objectivity and accuracy of the report about the financial and operative status of the Company. 3. Raised capital The Company had not raised any capital in the report period. 4. Purchase and sales of assets The trading prices for purchase or sales of assets of the Company were reasonable. Neither inside trading had been found, nor had there occurred cases of damaging of the interests and rights of some shareholders or loss of the Company’s assets. 5.Related transactions The Company conducted related transactions strictly according to market principle in fair and juristic way. The price of the transactions was reasonable, and relevant effective information punctually disclosed was authentic, accurate and complete, safeguarding the interests of the shareholders and listed companies. IX. Significant Events (I) The Company had no significant lawsuits or arbitrations in the report period. (II) Purchase and sales of assets, mergence in the report period 1. According to the Proposal on Purchasing Real Estate in Yantai as the Base Work Office and Duty Apartment examined and approved by the 8th meeting of the 2nd Board of Directors, the Company had spent - - 24 RMB 5.2 million to purchase the property of the Tax Affairs Reception Department of Yantai Local Taxation Bureau as Base Work Office and Duty Apartment The implementation of the transaction offered logistics safeguard of flight base and work office at Yantai base, beneficial to the future development of Yantai base. 2. According to the Proposal on Leasing back two CRJ-700 Planes after Selling examined and approved by the 9th meeting of the Board of Directors as well as Annual Shareholders’ General Meeting 2003, the Company sold two CRJ-700 planes to Shenzhen Financial Leasing Co., Ltd., and then re-leased them in the form of operational lease in the report period. The price of this transaction was RMB 500 million. In the report period, the Company had received all payments from selling the said planes. Relevant public notices were published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Apr. 23, May 27, and Jul. 9, 2004. After the implementation of the above-mentioned transaction, the debt structure of the Company had been further optimized and more reasonable, and equity-debt ratio had decreased and refunding capability of the Company had increased. All these facilitate the sustainable healthy development of the Company. 3. According to the Proposal on Selling stock of Shandong Airline Rainbow International Travel Agency co., Ltd. examined and approved by the 9th meeting of the Board of Directors,the Company sold 49% share equity of travel agency to natural person shareholders including personnel upper than department managers of Shandong Airline Rainbow International Travel Agency co., Ltd..Transferring price was base on appraisal value. Relevant public notices were published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Apr. 23, 2004. The aforesaid purchases or sales of assets bore no negative impact on the consistent business of the Company or the stability of the management. (III) Material related transactions At present, there exist certain related transactions between the Company and controlling shareholders and its subsidiaries in the need of the Company, belonging to unavoidable related transactions. The Company took elements including quality, price and efficiency etc. of the service and product provided by the transaction party into full consideration and conducted analysis and comparison on the market environment before transactions. The independent directors, independent financing consultant expressed opinions respectively on the related transaction and considered that the Company and related party abided by the principle of publicity, fairness and honesty, and the trading price was fair and there existed no behaviors harmful to the interests of shareholders. 1.Purchase and sales of goods, providing and receiving labor services (1) In the report period, there occurred an amount of RMB 48,855,068 paid to Taikoo Shandong Aircraft Engineering Co., Ltd. for aircraft maintenance, taking 30.26% of the same kind of transactions. The Company paid in cash according to the market price about the transaction. (2) In the report period, there occurred an amount of RMB 16,460thousand and RMB 11,865thousand paid to Shandong Jinping Foods Co., Ltd and Shandong Airlines Qingdao Foods Co., Ltd. for catering, taking 33.9% of the same kind of transactions. The Company paid in cash according to the price a bit lower than market price about the transaction. (3) In the report period, there occurred an amount of RMB 8,362.8thousand and RMB 5,671thousand paid to Qingdao Feisheng International Aviation Technology Training Co., Ltd. and Shandong International Aviation Training Co.,Ltd. for training, taking 50.9% of the same kind of transactions. The Company paid in cash according to the price a bit lower than market price about the transaction. The above transaction of related parties include aircraft maintenance,catering and traning,which would consistantly happen in the future. 2.The Company and its controlling shareholder’s cooperative investment In compliance with the Proposal on Increasing Investment to Taikoo Shandong Aircraft Engineering Co., Ltd., examined and approved by the 10th meeting of the 2nd Board of Directors, the Company increased investment to Taikoo Shandong Aircraft Engineering Co., Ltd. with an amount of RMB 4,200 thousand. This transaction was made through the joint investment of the Company and its controlling shareholder. The details were as follows: - - 25 Co-investor: SDA Company invested: Taikoo Shandong Aircraft Engineering Co., Ltd. Main business: civil aircraft maintenance (with Maintenance License) and other relevant services Registered capital: RMB 86 million Assets amount: By Dec. 31, 2004, the total assets of Taikoo Shandong Aircraft Engineering Co., Ltd. were amounted to RMB154,945,890; net assets were amounted to RMB129,298,345; net profit in 2004 was amounted to RMB14,159,828. 3.Credits and liabilities between the Company and related parties (1) In the report period, there occurred capital current amounting to RMB 205,124thousand between SDA and the Company. By the end of the report period, SDA had returned RMB 284,813 thousand to the Company using the money gained from rights transfer, remaining RMB1,083 thousand, which belonged to normal related transaction. In the report period, there occurred capital current amounting to RMB319,690 thousand between the related party, Jet Company and the Company. By the end of the report period, Jet Company had paid RMB 224,177 thousand out of its own capital for expenses including the aircraft rent etc., still remaining RMB 97,475 thousand. The Board of Directors of the Company is in negotiation with SDA and Air China about solutions to the arrearages of the Jets Company. (IV) Significant contracts and implementation 1. Assets entrustment, contract and lease In Sep., 2004, the Company and Hong Kong Zhongfu Airlines Co., Ltd. signed the contract of subleasing a CRJ-200 airplane and the term of one year. The Civil Aviation Administration of China had approved the item. The aircraft was handed over in Jan., 2005. 2. Significant guarantee. The Company didn’t provided guarantee for others. 3. In the report period, the Company had no entrusted financing. 4. Other significant contracts Ended the report period, the accumulated amount of long-term and short-term borrowings of the Company was RMB 2,162,754,730. The Company had no other significant contracts not disclosed. (V) The Company had not entrusted anyone to manage its cash assets in the report period. (VI) Commitment Events On Dec. 15, 2003. SDA promised to repay the whole amount owed to the Company in payment from equity transfer before June 30, 2004. On Mar. 26, 2004, SDA, Air China Group and the Company signed supplementary agreement. The three parties decided that Air China Group would pay share equity transfer payment directly to the Company at the rate of share equity transfer based on arrearage of SDA. In the report period, SDA had paid back all the arrearages owed to the Company according to its commitment. In the report period, the Company or shareholders holding over 5% equity had no significant commitment events necessary to be disclosed. (VII) Engagement of Certified Public Accountants In the report period, the Company did not continue to engage Deloitte Touche Tohmatsu Certified Public Accountants Ltd. and Deloitte Touche Tohmatsu Certified Public Accountants as the Company’s auditing organizations. According to the Proposal on Engaging Reanda Certified Public Accountants and BDO International as Auditing Organizations of the Company examined and approved by the 2004 1st provisional Shareholders’ General Meeting, the Company engaged Reanda Certified Public Accountants and BDO International as the 2004 auditing organizations of the Company. The Company should pay an annual auditing fee of RMB 800 thousand during the report period. The aforesaid auditing organizations signed a contract with the Company, providing auditing services to the Company for the first time. (VIII) No punishment was imposed on the Company, its directors or senior executives by the supervisory authorities in the report period. - - 26 (IX) The Company experienced neither material events as stated in Article 62 of Securities Law and Article 17 of Detailed Rules for Information Disclosure of Company Publicly Issuing Shares (Trial) nor material events decided by the Board to disclose. (X) Other Material Events The Company had no other significant events necessary to be disclosed. - - 27 X. Financial Report AUDITORS' REPORT TO THE SHAREHOLDERS OF SHANDONG AIRLINES CO., LTD. 山东航空股份有限公司 (Established in the People's Republic of China) We have audited the accompanying balance sheet of Shandong Airlines Co., Ltd. as of December 31, 2004 and the related statements of income, cash flows and changes in equity for the year then ended. These financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2004 and the results of its operations and its cash flows for the year then ended, in accordance with International Financial Reporting Standards. BDO Reanda Certified Public Accountants Beijing, China March 26, 2005 - - 28 CONSOLIDATED INCOME STATEMENT AT DECEMBER 31, 2004 NOTES 2004 2003 RMB’000 RMB’000 OPERATING REVENUE 4 Passenger 2,144,761 1,626,941 Cargo and mail 81,319 78,982 Interest income 3,283 3,261 Leasing income 418 47,366 Government grant 6 - 4,200 Others 13,477 11,056 TOTAL OPERATING REVENUE 2,243,258 1,771,806 OPERATING EXPENSES Depreciation and amortization 180,866 184,495 Take-off and landing charges 304,783 200,163 Personnel 88,163 87,619 Fuel 538,631 348,285 Maintenance and overhaul 172,987 148,942 Catering 83,540 63,606 Rental 247,632 245,601 Insurance 18,353 25,960 Promotion and sales 150,677 108,122 General and administration 77,394 59,937 Others 183,931 97,057 TOTAL OPERATING EXPENSE 2,046,957 1,569,787 PROFIT FROM OPERATIONS 7 196,301 202,019 FINANCE COSTS 8 (117,365) (136,539) SHARE OF RESULTS OF ASSOCIATES 26 11 INCOME (LOSS) FROM INVESTMENTS 9 3,039 314 PROFIT (LOSS) BEFORE TAX 82,001 65,805 INCOME TAX (EXPENSE) CREDIT 10 3,573 (1,728) PROFIT (LOSS) AFTER TAX 85,574 64,077 MINORITY INTERESTS (381) (82) NET PROFIT (LOSS) FOR THE YEAR 85,193 63,995 RMB RMB Basic earning (loss) per share 12 21.3 cents 16.0 cents - - 29 CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2004 2004 2003 NOTES RMB’000 RMB’000 ASSETS Non-current assets Property, plant and equipment 13 2,165,165 2,696,747 Intangible assets 14 - - Land use rights 15 15,201 15,453 Interests in associates 17 228 1,082 Advances on aircraft and related equipment 886,361 289,463 Unlisted investments 18 91,052 80,190 Deferred tax assets 27 24,299 20,563 3,182,306 3,103,498 Current assets Flight equipment spare parts and other inventories 19 39,749 22,267 Trade and other receivables 228,626 318,731 Amount due from holding company 20 1,083 80,772 Amount due from related parties 21 100,535 4,169 Bank balances and cash 112,794 371,024 482,787 796,963 TOTAL ASSETS 3,665,093 3,900,461 - - 30 CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2004 2004 2003 RMB’000 RMB’000 LIABILITIES AND SHAREHOLDERS’ EQUITY Shareholder’s equity Shareholder’s capital 22 400,000 400,000 Reserves 23 143,739 58,546 543,739 458,546 MINORITY INTERESTS 11,345 10,848 Non-current liabilities Bank loans – due after one year 24 1,200,608 389,616 Obligations under finance leases-due after one year 25 421,082 555,564 1,621,690 945,180 Current liabilities Trade and other payables 364,306 361,184 Sales in advance of carriage 20,357 16,887 Amounts due to related parties 26 9,856 8,965 Tax liabilities 169 139 Bank loans-due within one year 24 962,336 1,977,146 Obligations under finance leases-due within one year 25 131,295 121,566 1,488,319 2,485,887 TOTAL LIABILITIES AND SHAREHOLDER’S 3,665,093 3,900,461 EQUITY The financial statements on pages 2 to 31 were approved by the board of directors and authorised for issue on March 26, 2005 and are signed on its behalf by: _______Jia Fuwen_________ _______Su Zhongmin__________ DIRECTOR DIRECTOR - - 31 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2004 Statutory Statutory Retained Share Share Capital surplus public earnings capital premium reserve reserve welfare fund (deficits) Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Balance as at January 1, 2003 As previously reported 400,000 76,258 (40,886) 15,215 7,607 (19,451) 438,743 Prior year adjustment - - - - - (44,192) (44,192) Restated balance 400,000 76,258 (40,886) 15,215 7,607 (63,643) 394,551 Net profit for the year(restated) - - - - - 63,995 63,995 Transfer to statutory surplus reserve - - - 33 - (33) - Transfer to statutory public welfare fund - _______ - _______ - _______ - _______ 11 _______ (11) _______ - _______ Balance as at December 31, 2003 400,000 _______ 76,258 _______ (40,886) _______ 15,248 _______ 7,618 _______ 308 _______ 458,546 _______ Balance as at January 1, 2004 As previously reported 400,000 76,258 (40,886) 15,248 7,618 51,873 510,111 Prior year adjustment - - - - - (51,565) (51,565) Restated balance 400,000 76,258 (40,886) 15,248 7,618 308 458,546 Net profit for the year - - - - - 85,193 85,193 Transfer to statutory surplus reserve - - - 4,145 - (4,145) - Transfer to statutory public welfare fund - _______ - _______ - _______ - _______ 2,072 _______ (2,072) _______ - _______ Balance as at December 31, 2004 400,000 _______ 76,258 _______ (40,886) _______ 17,488 _______ 9,690 _______ 79,284 _______ 543,739 _______ - - 32 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 2004 2003 RMB’000 RMB’000 OPERATING ACTIVITES Profit before tax 82,001 65,805 Adjustments for: Depreciation and amortization 180,866 184,495 Adjustment of intangible assets - 7,373 Loss on disposal of property, plant and equipment 52 388 Interest expenses 117,365 136,539 Interest income (3,283) (3,261) Impairment loss (reversed) recognized on property, plant and equipment (7,116) (6,900) Impairment loss on investments in associates/non- current prepayments - 500 Dividend from unlisted investments (3,064) (835) Share of results if associates - (11) Negative goodwill released to income - (183) Operating cash flows before movements in working capital 366,821 383,910 Decrease (increase) in flight equipment spare parts and others inventories (17,482) 13,619 Increase in trade and other receivables 90,105 (74,775) Decrease (increase) in amounts due from holding company 79,689 - Decrease (increase) in amounts due from related parties (96,366) 10,408 Increase in trade and other payables 3,122 97,063 Increase (decrease) in sales in advance of carriage 3,470 7,014 Increase in amounts due to related parties 891 84 Net cash generated from operations 430,250 437,323 Interest paid (113,603) (138,175) Income tax paid (161) 1,474 Interest received 3,283 3,261 Net cash generated from (used in) operating activities 319,769 303,883 - - 33 2004 2003 RMB’000 RMB’000 INVESTING ACTIVITIES Purchases of aircraft and related equipment (40,359) (560,732) Increase in advances on aircraft and related equipment (596,897) (207,739) Advance to holding company 13,585 (79,836) Purchase of property, plant and equipment other than aircraft and related equipment (97,609) (31,323) Purchase of land use rights - (1,680) Acquisition of unlisted investments (11,292) (14,250) Additions of intangible asset - (9,996) Additional interest in an associate 228 (500) Acquisition of investment in an associate - (740) Deregistration of a subsidiary - (180) Proceeds from disposal of property, plant and equipment 516,148 91,442 Proceeds from disposal of non-current prepayments 1,139 - Proceeds from return investment 408 - Dividends received from unlisted investments 3,064 835 Net cash used in investing activities (211,585) (814,699) FINANCING ACTIVITIES New bank loans obtained 2,151,214 2,035,769 Capital contribution from minority shareholders 613 4,937 Repayment of bank loans (2,355,032) (1,355,203) Repayment of obligations under finance leases (163,140) (150,034) Dividend paid to minority shareholder (68) (148) Net cash generated from (used in) financing activities (366,413) 535,321 NET INCREASE IN CASH AND CASH EQUIVALENTS (258,229) 24,505 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 371,024 346,519 CASH AND CASH EQUIVALENTS AT END OF THE YEAR 112,794 371,024 - - 34 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004 1. GENERAL Shandong Airlines Co., Ltd. (the "Company") was established in the People's Republic of China ("PRC") on December 13, 1999 and is responsible for its own operations, subject to the supervision and regulation of the Civil Aviation Administration of China ("CAAC"), a regulatory authority of the civil aviation industry in the PRC. Its B shares are listed on the Shenzhen Stock Exchange (the "Stock Exchange") with effect from September 12, 2000. Its holding company is Shandong Aviation Group 山东航空集团有限公司 (formerly Shandong Airlines Limited 山东航空集团有限公司), a company also established in the PRC. The Company maintains its accounting records and prepares its statutory financial statements in Renminbi, in which the majority of the Company's transactions are denominated. The statutory financial statements are prepared in accordance with accounting standards and regulations applicable to enterprises in the PRC ("PRC GAAP"). However, these financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") for the shareholders of the Company's B shares listed on the Stock Exchange. Differences between IFRS and PRC GAAP are stated in note 35. The Company is engaged in the provision of domestic passenger and cargo air transportation services. The principal activities of subsidiaries and associates are set out in notes 16 and 17. The Company and its subsidiaries are hereinafter collectively referred to as "the Group". 2. BASIS OF PREPARATION The financial statements have been prepared in accordance with IFRS. 3. SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared under the historical cost convention. The principal accounting policies adopted are set out below: Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and enterprises controlled by the Company ("its subsidiaries") made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee enterprise so as to obtain benefits from its activities. - - 35 3. SIGNIFICANT ACCOUNTING POLICIES - continued On acquisition, the assets and liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess (deficiency) of the cost of acquisition over (below) the fair values of the identifiable net assets acquired is recognised as goodwill (negative goodwill). The interest of minority shareholders is stated at the minority's proportion of the fair values of the assets and liabilities recognised. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by other members of the Group. All significant intercompany transactions and balances between group enterprises are eliminated on consolidation. Interests in associates An associate is an enterprise over which the Group is in a position to exercise significant influence, but not control, through participation in the financial and operating policy decisions of the investee. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Investments in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the associate, less any impairment in the value of individual investments. Any excess (deficiency) of the cost of acquisition over (below) the Group's share of the fair values of the identifiable net assets of the associate at the date of acquisition is recognised as goodwill (negative goodwill). Where a group enterprise transacts with an associate of the Group, unrealised profits and losses are eliminated to the extent of the Group's interest in the relevant associate, except to the extent that unrealised losses provide evidence of an impairment of the asset transferred. Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group's interest in the fair value of the identifiable assets and liabilities of a subsidiary or associate at the date of acquisition. Goodwill is recognised as an asset and is tested for impairment at least annually. Goodwill arising on the acquisition of an associate is included within the carrying amount of the associate. Goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet. On disposal of a subsidiary or associate, the attributable amount of unamortised goodwill is included in the determination of the profit or loss on disposal. - - 36 3. SIGNIFICANT ACCOUNTING POLICIES - continued Negative goodwill Negative goodwill represents the excess of the Group's interest in the fair value of the identifiable assets and liabilities of a subsidiary and associate at the date of acquisition over the cost of acquisition. Negative goodwill is recognized immediately in the income statement as a gain. Negative goodwill arising on the acquisition of an associate is deducted from the carrying amount of that associate. Negative goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet as a deduction from assets. Revenue recognition Passenger and cargo sales are recognised as operating revenue when the transportation service is provided rather than when a ticket is sold. Such revenue is reported net of sales tax and business tax. The value of unflown passenger and cargo sales is recorded as a current liability in the sales in advance of carriage account. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. Dividend income from investments is recognised when the shareholder's rights to receive payment have been established. Rental income from operating leases is recognised on a straight-line basis over the terms of the relevant leases. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Group as lessor Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. - - 37 3. SIGNIFICANT ACCOUNTING POLICIES - continued The Group as lessee Assets held under finance leases are recognised as assets of the Group at their fair value at the date of acquisition or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group's general policy on borrowing costs (see below). Rentals payable under operating leases are charged to income on a straight-line basis over the tem of the relevant lease. Foreign currencies Transactions in currencies other than Renminbi are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in such currencies are retranslated at the rates prevailing on the balance sheet date. Profits and losses arising on exchange are included in net profit or loss for the period. Capitalisation of borrowing costs Interest on advances made in connection with the acquisition of aircraft is capitalised as an additional cost of the aircraft. Interest is capitalised at the weighted average interest rate on the total borrowings or, where applicable, the actual interest rate applicable to the specific borrowings. Capitalisation of interest ceases when the aircraft is placed into revenue earning service. All other borrowing costs are recognised in net profit or loss in the period in which they are incurred. Government grants Government grants are recognised as income over the periods necessary to match them with the related costs. Retirement scheme The Group participates in a defined contribution retirement scheme organised by the municipal government of the province in which it operates. The contributions to the scheme are charged to operating expenses as they fall due. - - 38 3. SIGNIFICANT ACCOUNTING POLICIES - continued Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction which affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation or amortisation and any recognised impairment loss. Depreciation and amortisation are charged so as to write down the cost of property, plant and equipment to their estimated residual values over their estimated useful lives. Useful lives and residual values are reviewed annually in the light of experience and changing circumstances. - - 39 3. SIGNIFICANT ACCOUNTING POLICIES - continued Property, plant and equipment - continued (i) Aircraft and related equipment Aircraft are depreciated, using the straight-line method, over their estimated useful lives of 12 to 20 years with a residual value of 5% of the original cost. Related equipment is depreciated, using the straight-line method, over 12 to 18 years. (ii) Buildings Buildings are depreciated, using the straight-line method, over their estimated useful lives of 27 to 33 years with a residual value of 5% on the original cost. (iii) Other equipment Other equipment are depreciated, using the straight-line method, over their estimated useful lives of 5 to 10 years with a residual value of 5% on the cost of the property, plant and equipment. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the terms of the relevant leases. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in net profit or loss in the period. Construction in progress Construction in progress, being equipment under construction and equipment pending installation in the aircraft, is carried at cost less any identified impairment loss. Cost comprises the direct cost of construction, the cost of equipment as well as finance charges from borrowings used to finance these assets during the construction or installation period. No depreciation is provided on construction in progress until the asset is completed and put into use. Intangible assets Intangible assets are measured initially at purchase cost and amortised on a straight-line basis over their estimated useful lives. Land use rights Land use rights are measured initially at purchase cost and amortised on a straight-line basis over their lease term. - - 40 3. SIGNIFICANT ACCOUNTING POLICIES - continued Impairment At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of it recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately. Flight equipment spare parts and other inventories Flight equipment spare parts and other inventories are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average method. Manufacturers' credits In connection with the acquisition of certain aircraft and related equipment, various credits are received from the manufacturers. These credits are applied as a reduction of the acquisition costs of the related aircraft and related equipment. Aircraft maintenance and overhaul costs Costs for routine maintenance and overhaul of aircraft and related equipment are charged to operating expenses when incurred. Financial instruments Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument. Trade and other receivables, amount due from holding company and amounts due from related parties are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. - - 41 3. SIGNIFICANT ACCOUNTING POLICIES - continued Financial instruments - continued Investments are recognised on a trade-date basis and are measured at cost, including transaction costs less any identified impairment losses. Trade and other payables and amounts due to related parties are stated at their nominal value. Interest-bearing bank loans and other loans are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. 4. OPERATING REVENUE Operating revenue represents revenue earned principally from the carriage of passengers, cargo and mail. Operating revenue from other services represents services provided to third parties as well as commission income earned on tickets sold by the Group for which the carriage is provided by other airlines. Operating revenue is net of sales tax which are calculated at the following rates: Tax Applicable rates on revenues Sales tax 3% traffic revenue from domestic flights Sales tax 5% on other revenue, except for interest income 5. BUSINESS AND GEOGRAPHICAL SEGMENTS The Group is mainly engaged in the provision of domestic passenger, cargo and mail air transportation services and it contributes over 90% of the Group's operations, and identifiable assets, sales revenue and profit for the year. The operations of the Group are all located in PRC. 6. GOVERNMENT GRANT The government grant represented interest subsidy to specific loans advanced to the Group for relief of the financial impact as a result of the Severe Acute Respiratory Syndrome attack during the year. In 2002, the grant was obtained specifically for the maintenance of the aviation security system. Both were recognised as income when, and only when, the government grant became receivable and the required conditions were met. - - 42 7. PROFIT FROM OPERATIONS 2004 2003 RMB'000 RMB'000 Profit from operations has been arrived at after charging (crediting): Depreciation and amortization 180,866 184,495 Rental expenses under operating leases Aircraft and related equipment 237,314 245,601 Land and buildings 5,396 5,251 Impairment loss (reversed) recognised on property, plant and equipment (included in operating expenses - others) - (6,900) Retirement scheme contributions 42,073 13,568 Loss on disposal of property, plant and equipment 52 388 Net foreign exchange loss 809 114 Release of negative goodwill to income (included in operating revenue - others) _______- (183) _______ 8. FINANCE COSTS Finance costs comprise the following: 2004 2003 RMB'000 RMB'000 Interest on bank loans 113,602 92,361 Interest on obligations under finance leases 37,448 45,814 Interest on other loans _______- _______- 151,050 138,175 Less: Amounts included in the cost of qualifying assets (33,685) _______ (1,636) _______ 117,365 _______ 136,539 _______ Finance costs included in the cost of qualifying assets during the year arose on bank loans utilised in financing the acquisition of aircraft and related equipment by applying a capitalisation rate of 5% per annum. 9. INCOME (LOSS) FROM INVESTMENTS 2004 2003 RMB'000 RMB'000 Income from write-off of the investment 6 - Loss on deregistration of a subsidiary - (21) Dividends from unlisted investments 3,033 835 Impairment loss on non-current prepayments _______- (500) _______ 3,039 _______ 314 _______ - - 43 10. INCOME TAX (EXPENSE) CREDIT 2004 2003 RMB'000 RMB'000 The (charge) credit comprises: PRC income tax - the Group (163) (49) Deferred tax credit (note 27) 3,736 _______ (1,679) _______ 3,573 _______ (1,728) _______ 11. DIVIDENDS The Directors proposed a final gross dividend on ordinary shares of six cents (contain tax) per share, amounting to RMB 24,000,000 in respect of the financial year ended 31 December 2004 subject to the approval of members at the forthcoming Annual General Meeting. 12. BASIC EARNINGS (LOSS) PER SHARE (As previously (Restated) reported) 2004 2003 2003 RMB’000 RMB’000 RMB’000 Net profit for the year 85,193 63,995 71,368 No. of shares in issue 400,000 400,000 400,000 Basic Earnings per share 21.3 cents 16.0cents 17.8 cents No diluted earnings per share has been presented as there were no potential ordinary shares in issue in either 2004 or 2003. 13. PROPERTY, PLANT AND EQUIPMENT - - 44 Aircraft and related Other Motor Construction Buildings equipment equipment vehicles in progress Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 COST At January 1, 2004 129,272 2,857,866 43,236 31,948 12,997 3,075,319 Transfer from CIP 16,612 - - - (16,612) - Additions 21,731 29,526 14,718 4,958 102,794 173,727 Reclassification (19,345) - - - - (19,345) Disposals (15,831) _______ (509,064) _________ (344) _______ _______- - _______ (525,239) _________ At December 31, 2004 132,439 _______ 2,378,328 _________ 57,610 _______ 36,906 _______ 99,179 _______ 2,704,462 _________ DEPRECIATION AND AMORTISATION At January 1, 2004 3,687 346,847 13,210 14,828 - 378,572 Charge for the year 3,782 164,282 9,672 2,878 - 180,614 Eliminated on disposals (899) _______ (18,806) _________ (184) _______ _______- - _______ (19,889) _________ At December 31, 2004 6,570 _______ 492,323 _________ 22,698 _______ 17,706 _______ - _______ 539,297 _________ NET BOOK VALUES At December 31, 2004 125,869 _______ 1,886,006 _________ 34,911 _______ 19,200 _______ 99,179 _______ 2,165,165 _________ At December 31, 2003 125,585 _______ 2,511,019 _________ 30,026 _______ 17,120 _______ 12,997 _______ 2,696,747 _________ The net book value of aircraft and related equipment held under finance leases at December 31, 2004 amounted to approximately RMB 909,586,000 (2003: 978,669,000). 14. INTANGIBLE ASSETS In previous years intangible assets which represent recruitment and initial training costs incurred for pilots, which are measured at purchase cost and amortised on a straight-line basis over the average years of services of the pilots of 20 years. In 2004, the Group has changed its policy to expense the cost in the year incurred. The effect of this change is disclosed in note 32. 15. LAND USE RIGHT RMB'000 Balance at December 31 15,453 AMORTISATION Charge for the year and balance at December 31, 2004 252 _______ CARRYING AMOUNT At December 31, 2004 15,201 _______ At December 31, 2003 15,453 _______ Land use rights are measured initially at purchase cost and amortised on a straight-line basis over 50 years. 16. SUBSIDIARIES Details of the Company's subsidiaries at December 31, 2004 are as follows: - - 45 Place of incorporation Proportion Proportion (or registration) of ownership of voting Name of subsidiary and operation interest power held Principal activity % % Qingdao Int'l Aviation Logisitics Center Co., Ltd. 青岛国际航空物流中心有限公司 PRC 70 70 Transportation agency Union Express Service Shandong Airlines Co., Ltd. 山东航空联合快运有限公司 PRC 65 65 Cargo agency SDA-Hangchi Cargo Co., Ltd. 深圳市山航恒驰航空货运有限公司 (Formerly SDA-SEG Cargo Co., Ltd. 深圳市山航赛格航空货运有限公司) ("SDA-Hangchi") PRC 75 75 Cargo agency 17. INTERESTS IN ASSOCIATES 2004 2003 RMB'000 RMB'000 Share of net assets 228 _______ 1,082 _______ Details of the Group's associates at December 31, 2004 are as follows: Place of Proportion Proportion incorporation of ownership of voting Name of associate and operation interest power held Principal activity % % Shandong Aviation Rainbow PRC 49 49 Inbound and International Travel Service local tours Co., Ltd. 山东航空彩虹国际旅行社有限公司 ("SARITS") (Note) Shanghai Airlines Rainbow - Jet Co., Ltd. 山东航空彩虹公务机有限公司 ("SARJ") PRC 45 45 Business jet Qingdao SDA Union Express Co., Ltd. PRC 40 40 Cargo agency 青岛山航联合快运有限公司 Note: The remaining 51% interest in SARITS is held by Shandong Aviation Group. 18. UNLISTED INVESTMENTS 2004 2003 RMB'000 RMB'000 Legal person share, at cost (Note i) 6,690 6,690 Unlisted shares, at cost (Note ii) 84,362 _______ 73,500 _______ - - 46 91,052 _______ 80,190 _______ Note: (i) In the opinion of the directors, the investment held by the Group is in the form of legal person share in PRC, which is not freely transferable in the market. Accordingly, it is not practical to determine the fair value and thus the investment is stated at cost. (ii) In the opinion of the directors, the fair value of the investments are not materially different from their costs. 19. FLIGHT EQUIPMENT SPARE PARTS AND OTHER INVENTORIES 2004 2003 RMB'000 RMB'000 Flight equipment spare parts 37,816 21,578 Other inventories 1,933 _______ 689 _______ 39,749 _______ 22,267 _______ Included above are flight equipment spare parts of approximately RMB37,816,000 (2003: RMB21,578,000), which are carried at net realisable value. 20. AMOUNT DUE FROM HOLDING COMPANY The amount due from Shandong Aviation Group is unsecured, interest-free and repayable on demand. 21. AMOUNT DUE FROM RELATED PARTIES 2004 2003 RMB'000 RMB'000 Shandong International Aviation Training Co., Ltd. 山东国际航空培训有限公司 ("SIATC") 1,327 452 SARITS - 3 山东航空大厦管理有限公司 - 233 - - 47 山东翔宇航空技术服务有限公司 - 37 SARJ 97,475 1,962 青岛飞圣国际航空技术培训有限公司 1,733 1,084 山东航空青岛食品有限公司 _______- 398 _______ 100,535 _______ 4,169 _______ All the above-mentioned companies are subsidiaries of Shandong Aviation Group while SARITS and SARJ are associates of the Company. The amounts are unsecured, non-interest bearing and repayable on demand. 22. SHARE CAPITAL 2004 & 2003 RMB'000 Registered, issued and fully paid 260,000,000 shares of domestic shares of RMB 1 each 260,000 140,000,000 shares of B shares of RMB 1 each 140,000 _______ 400,000 _______ 23. RESERVES Statutory surplus reserve and statutory public welfare fund, which consist of appropriations from the profit after tax, form part of the shareholders' equity. Statutory surplus reserve In accordance with the PRC Company Law and the Company's Articles of Association, the Company is required to appropriate 10% of its profit after tax as reported in its PRC statutory financial statements to the statutory surplus reserve. The appropriation to statutory surplus reserve may cease to apply if the balance of the statutory surplus reserve has reached an amount equal to 50% of the Company's registered capital. Surplus reserves can be used to offset prior year accumulated losses, to expand the Company's operations or for conversion into share capital. The Company may, upon the approval by a resolution at the Annual General Meeting, convert its surplus reserve into share capital and issue new shares to existing shareholders in proportion to their original shareholdings to increase the nominal value of each share. When converting the Company's statutory surplus reserves into share capital, the amount of such reserves remaining unconverted must not be less than 25% of the registered capital. 23. RESERVES- continued Statutory public welfare fund In accordance with the PRC Company Law and the Company's Articles of Association, the Company is required to appropriate 5% to 10% of the profit after tax as reported in its PRC statutory financial statements to the statutory public welfare fund. The appropriation in the current year to the statutory public welfare fund is made at 5%. The statutory public welfare fund shall only be applied to collective welfare of staff and workers and welfare facilities remain as property of the Company. - - 48 Capital reserve Capital reserve arose from the reorganisation, in which the Company took over the air transportation service business from the holding company, Shandong Aviation Group 山东航空 集团有限公司(formerly Shandong Airlines Limited. 山东航空集团有限公司), by issuing the Company's shares to the holding company. The transfer of the Company's assets under the reorganisation was calculated based on the financial statements prepared in accordance with accounting standards and regulations applicable to enterprises in the People's Republic of China. Profits available for distribution The profit of the Company available for appropriations will be the lesser of the profit reported in its financial statements prepared under PRC GAAP or under IFRS. 24. BANK LOANS 2004 2003 RMB'000 RMB'000 The bank loans are repayable as follows: Within one year 962,336 1,977,146 In the second year - 76,376 In the third to fifth year, inclusive 73,330 175,240 After five years 1,127,278 _________ 138,000 _________ 2,162,944 2,366,762 Less: Amounts due within one year shown under current liabilities (962,336) _________ (1,977,146) _________ Amounts due after one year 1,200,608 _________ 389,616 _________ Secured 1,293,944 465,992 Unsecured 869,000 _________ 1,900,770 _________ 2,162,944 2,366,762 _________ _________ 24. BANK LOANS - continued The terms of secured bank loans are summarised as follows: 2004 2003 RMB’000 RMB’000 Denominated in RMB for Fixed interest rate at 5.76% per annum, the acquisition of aircraft repayable in 10 years with final maturity in and related equipment 2012 240,000 308,000 Denominated in RMB for Fixed interest rate at 5.76% per annum with the acquisition of aircraft final maturity in 2005 50,960 - - - 49 and related equipment Denominated in RMB for Interest at market rate, repayable in 5 years the acquisition of aircraft with final maturity in 2019 and related equipment 200,000 - Denominated in RMB for Fixed interest rate at 5.76% per annum with the acquisition of aircraft final maturity in 2014 and related equipment 576,040 - Denominated in USD for Interest at market rate, repayable in 5 years the acquisition of aircraft with final maturity in 2019 and related equipment 111,238 - Denominated in USD for Fixed interest rate at 3.5% per annum with the acquisition of aircraft final maturity in 2005 and related equipment 42,376 - Denominated in USD for Interest at market rate, repayable in 5 years the acquisition of aircraft with final maturity in 2007 and related equipment 73,330 157,992 1,293,944 465,992 Less: Amounts due within one year shown under current liabilities (93,336) (76,376) Amounts due after one year 1,200,608 389,616 Of the unsecured bank loans, RMB 554,000,000 (2003:RMB 1,202,833, 000) is guaranteed by Shandong Aviation Group and RMB 315,000,000 (2003: RMB540, 000,000) is guaranteed by two other unrelated companies. Bank loans bear interest rates ranging from 3.5 % to 5.76% per annum. 25. OBLIGATIONS UNDER FINANCE LEASES Present value Minimum of minimum lease payments lease payment 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 Amounts payable under finance leases: Within one year 160,458 162,353 120,147 121,566 In the second to fifth years inclusive 417,753 526,058 368,919 459,795 Over five years 52,171 _______ 104,172 _______ 63,311 _______ 95,769 _______ 630,382 792,583 552,377 677,130 - - 50 Less: future finance charges (78,005) _______ (115,453) _______ N/A _______ N/A _______ Present value of lease obligations 552,377 _______ 677,130 _______ 552,377 677,130 Less: Amount due for settlement within twelve months (shown under current liabilities) (120,147) _______ (121,566) _______ Amount due for settlement after twelve months 432,230 _______ 555,564 _______ The Group leased five Boeing 737 aircraft under finance leases. The average lease term is 6 - 8 years. For the year ended December 31, 2004, the average effective borrowing rate was 6.44%. Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. All lease obligations are denominated in United States Dollars. The fair value of the Group's lease obligations approximates their carrying amount. The Group's obligations under finance leases are secured by the lessor's charge over the leased assets. 26. AMOUNTS DUE TO RELATED PARTIES 2004 2003 RMB'000 RMB'000 Shandong Taeco Aircraft Engineering Co., Ltd. 山东太古飞机工程有限公司 ("SDTAE") 5,900 6,726 Shandong Shengping Catering Co., Ltd. 山东金平航空食品有限公司 ("SDSCC") 2,402 2,089 SARITS - 150 山东翔宇航空技术服务有限公司 266 - Shandong Qingdao Catering Co.,Ltd 山东航空青岛食品有限公司厂 1,200 - 山东航空大厦管理有限公司 88 - _______ _______ 9,856 _______ 8,965 _______ - - 51 The above companies are subsidiaries of Shandong Aviation Group. The amounts are unsecured, non-interest bearing and repayable on demand. 27. DEFERRED TAX ASSETS 2004 2003 RMB'000 RMB'000 At January 1 20,563 22,242 Credit for the year(note 10) 3,736 (1,679) At December 31 24,299 20,563 Deferred tax assets (liabilities) recognised are made up of the tax effect of: Depreciation of aircraft and related Deferred equipment expenditure Total RMB'000 RMB'000 RMB'000 (note i) (note ii) At January 1, 2004 3,935 16,628 20,563 Credit (charge) for the year (14,636) ______ 18,372 ______ 3,736 _____ At December 31, 2004 10,701 35,000 24,299 (i) The amount represents the tax effect of temporary differences attributable to the excess of depreciation charges over depreciation allowances. 27. DEFERRED TAX ASSETS - continued (ii) The amount represents the tax effect on training costs where under PRC GAAP, which is the basis for the PRC tax computation, the training costs are capitalised and amortised, while under IFRS, such costs are charged to the income statement . 28. CONTINGENT LIABILITIES In accordance with the regulations of the Ministry of Finance and CAAC, the Group was required to pay domestic aviation infrastructure levies to CAAC, calculated at the rate of 5% on the traffic revenue. The Finance Department of Shandong Province agreed on August 30, 1999 that it would make every endeavour to settle the payment of domestic aviation infrastructure levies on behalf of the Group. At the same time, Shandong Aviation Group has also undertaken to compensate the Group for any payment of such levies. Under such an arrangement, in the opinion of the directors, the Group has been released from the requirement to pay domestic aviation infrastructure levies to CAAC. Accordingly from January to February in 2004, no accrual has been made in the financial statements accordingly. - - 52 In accordance with Ministry of Finance about civil aviation basic establishment construction fund collection temporary means, the nation reform civil aviation basic establishment construction fund means, commencing from April 1, 2004, made the revenue of using the flight course resource to constitute civil aviation fund. Accordingly the obligation of Finance Department of Shandong Province and Shandong Aviation Group replace the company pay civil aviation basic establishment construction fund was exempted. From April to December in 2004, the company according to the means collection civil aviation basic establishment construction fund. 29. COMMITMENTS The Group had the following commitments at the balance sheet date: (i) Capital commitments 2004 2003 RMB'000 RMB'000 Aircraft and related equipment 4,814,082 3,493,082 Land and buildings 420 2,854 Unlisted investments 25,000 - Capitalised training costs 27,228 _________ 5,583 _______ 4,866,730 _________ 3,501,519 _______ Apart from the above, the Group has committed to place refundable deposits to manufacturers for intended purchases of aircrafts. 29. COMMITMENTS - continued (ii) Lease commitments At the balance sheet date, the Group had outstanding commitments under non-cancellable operating leases which fall due as follows: 2004 2003 RMB'000 RMB'000 Aircraft and related equipment Within one year 281,110 217,206 In the second to fifth year inclusive 1,316,040 674,165 Over five years 26,000 _________ 109,433 _________ 1,623,150 _________ 1,000,804 _________ Land and buildings Within one year 4,609 4,755 In the second to fifth year inclusive 5,035 4,340 Over five years 1,983 _________ 480 _________ 11,627 _________ 9,575 _________ - - 53 (iii) The outstanding commitments under operating leases are entered into with independent third parties. Leases are negotiated for an average term of 1 to 8 years for aircraft and related equipment and 1 to 5 years for land and buildings, respectively. The rentals are fixed throughout the lease periods, except that an annual increment of 6% has been imposed on one of the lease arrangements in respect of land and buildings. The company entered into an agreement with Jinan Branch, Bank of China and Shenzhen Branch, Bank of China to obtained loans of amount US$ 148.4 millions in total on purpose of purchasing 3 piece of Boeing 737-700 aircraft. Due to these aircrafts was contracted to be delivered on the second half of 2005, the company was committed that the ownership of these 3 piece of Boeing 737-700 aircraft will be pledged to Jinan Branch, Bank of China and Shenzhen Branch, Bank of China to secure bank loans granted to the company. Additionally, the company was committed that the insurance interests of these 3 piece of Boeing 737-700 aircraft will be pledged to Jinan Branch, Bank of China and Shenzhen Branch, Bank of China to secure bank loans until the loan has been repaid. 30. RETIREMENT SCHEME CONTRIBUTIONS The Group participates in a defined contribution retirement scheme organised by the municipal government of Shandong Province. All qualifying employees of the Group are participants of the scheme. Under this scheme, the Group is required to make contributions to the scheme at 23% of the employee salaries, and the employees are required to contribute at 4% of their salaries. The average number of employees for the year is 1,679 (2003: 1,309). 31. RELATED PARTY TRANSACTIONS In addition to the disclosure elsewhere in the financial statements, during the year, the Group entered into the following transactions with related parties: Name of related party Nature of transaction 2004 2003 RMB'000 RMB'000 Shandong Aviation Group Operating lease charges in respect of aircraft and related equipment - 1,002 General service charges - 3,125 Rental charges in respect of land and buildings 1,840 1,577 Room and restaurant service charges 2,393 4,523 Interest income - 1,154 Rental income in respect of buildings - 841 Purchase of property, plant and equipment - 2,320 Purchase of unlisted investments in SDTAE - 4,250 Payments for investment in SARJ 500 Guarantee fee 3,101 - SDTAE Repairs and maintenance charges 48,855 31,542 Purchase of property, plant and equipment - 2,557 SDSCC Air catering services and purchase of other supplies 16,460 10,762 - - 54 SARITS Sales of airtickets - 5,263 SARJ Rental income in respect of aircraft 46,282 47,366 山东航空大厦管理有限公司 Rental charges in respect of buildings 3,222 1,674 Room and restaurant service charges - 山东航空青岛食品有限公司 Air catering services and purchase 11,865 6,007 of other supplies 山东国际航空培训有限公司 Training fee 5,671 8,824 青岛飞圣国际航空技术 培训有限公司 Training fee 8,363 9,430 山东翔宇航空技术服务有限公司 Repairs and maintenance charges 2,918 _______ - _______ In the opinion of the directors, all the above transactions were carried out in the Company's ordinary course of business and with reference to the market rates. Shandong Aviation Group is the holding company of the Group while SARITS and SARJ or associates of the Company. The other companies are subsidiaries of Shandong Aviation Group. 32. PRIOR YEAR ADJUSTMENT In previous years intangible assets which represent recruitment and initial training costs incurred for pilots, which are measured at purchase cost and amortised on a straight-line basis over the average years of services of the pilots of 20 years. In 2004, the Group has changed its policy to expense the cost in the year incurred. As previously Prior year As reported adjustment restated RMB’000 RMB’000 RMB’000 January, 1 2004 Intangible assets 51,565 (51,565) - Retained profit 51,873 (51,565) 308 Profit for 2003 71,368 (7,373) 63,995 33. PLEDGE OF ASSETS Aircraft and related equipment of the Group with a net book value of approximately RMB1,687,064,000 (2003: RMB1,820,627,000 ) have been pledged to banks to secure bank loans granted to the Group. 34. FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK Financial assets of the Group include bank balance and cash, trade and other receivables, amount due from holding company and amounts due from related parties. Financial liabilities of the Group include bank loans, other loan, trade and other payables and amounts due to related companies. - - 55 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 companies in the United States of America and Western European companies. These include risks associated with, among others, the political, economic and legal environment, competition in the passenger and cargo air transportation services, and influence of CAAC on pricing of air tickets, take-off and landing charges at certain PRC airports, commission rates and the adjustment on fuel prices. Interest rate risk The interest rates and terms of repayment of the borrowings made to the Group are disclosed in note 24 and 25. Foreign currency risk Certain of the Group's bank loans and other loan are denominated in United States dollars but the group's revenue is denominated in Renminbi. The Group is exposed to foreign currency risk. 34. FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK - continued Credit risks (i) Bank balances and cash Substantially all of the Company's bank balance and cash are deposited with PRC financial institutions. (ii) Trade receivables These are mainly ticket sale receivables from sale agents and receivables related to uplifts by the Group on behalf of other carriers. These receivables are spread among numerous parties. (iii) Other receivables The amounts mainly comprise outstanding balances due from third parties which is non- interest bearing. The carrying amount of financial assets best represent their maximum credit risk exposure at the balance sheet date. Other financial liabilities Trade and other payables The amounts principally comprise amounts outstanding for trade purchases and ongoing costs. Fair value The fair value of bank balances and cash, trade and other receivables, amount due from holding company, amount due from related companies, bank loans, other loan, obligations under finance - - 56 lease, trade and other payables and amounts due to related parties are not materially different from their carrying amounts. Fair value estimates are made at specific point in time and are based on relevant market information. The estimate is subjective in nature and involved uncertainties and matters of significant judgement and therefore cannot be determined with precision. 35. SUMMARY OF DIFFERENCES BETWEEN IFRS AND PRC GAAP These financial statements are prepared in conformity with IFRS, which differ from the Company's statutory financial statements prepared in accordance with the PRC GAAP. The statutory financial statements for the year ended December 31, 2004 reported profit for the year of RMB 41,214,000 (2003: profit of RMB 26,531,000) and net assets of RMB 593,075,000 (2003: RMB551,860,000). A reconciliation between profit (loss) for the year and net assets reported under PRC GAAP and those reported under IFRS are as follows: Profit (loss) for the year Net assets 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 As reported under PRC GAAP 41,214 26,531 593,075 551,860 Adjustments to conform with IFRS: Difference in depreciation charges of aircraft and related equipment 44,353 38,245 32,428 (11,924) Difference in deferred expenditure recognition (4,110) 7,748 (106,063) (50,388) Deferred tax 3,736 (1,679) 24,299 20,563 Pre-operating expense of subsidiaries - 523 - - Prior year adjustment - (7,373) - 51,565 As reported under IFRS 85,193 _______ 63,995 _______ 543,739 _______ 458,546 _______ XI. Documents Available for Reference 1. Financial statements carrying the personal signatures and seals of Chairman of the Board, general accountants and accounting departments; 2. Original of Auditors’ Report carrying the seals of Certified Public Accountants as well as personal signatures and seals of certified public accountants; 3. Originals of all documents and notices publicly disclosed on newspapers designated by CSRC in the report period in 2004; The Company will offer above documents for reference timely provided that CSRC or Stock Exchange demands or shareholders requires according to the regulations and Articles of Association. Chairman of the Board: Li Junhai - - 57