山航Ｂ(200152)2005年年度报告摘要（英文）

SHANDONG AIRLINES CO., LTD. SUMMARY OF ANNUAL REPORT 2005 §1. Important Notes 1.1 The Board of Directors and the Supervisory Committee of Shandong Airlines Co., Ltd. (hereinafter referred to as the Company) and its directors hereby confirm that there are no any fictitious representations, misleading statement or material omission carried in this report, and shall take all responsibilities, individually and/or jointly, for the reality, accuracy and completeness of the whole contents. The 2005 annual report summary is abstracted from the full text of annual report. And the investors are suggested to read the full text of the Annual Report to understand more details. 1.2 No director, supervisors, and senior executives stated that they couldn’t ensure the correctness, accuracy and completeness of the contents of the Annual Report or have objection for this report. 1.3 Director Mr. Wang Mingyuan and Independent Director Mr. Fang Shaokun was absent from the Board meeting and respectively authorized Director Mr. Xiao Feng and Independet Director Mr. Wangzhi to vote on their behalf. 1.4 BDO Reanda Certified Public Accountants and Reanda Certified Public Accountants issued the standard unqualified Auditors’ Report for the Company. 1.5 Chairman of the Board Mr. Zhang Xingfu, General Manager Mr. Zeng Guoqiang, and Chief Accountant Mr. Xiao Feng of the Company hereby confirm that the Financial Report of the Annual Report is true and complete. 1.6 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. §2. Company Profile 2.1 Basic information Short form of the stock SHANHANG B Stock code 200152 Listed stock exchange Shenzhen Stock Exchange Registered address and office address Registered address: Yaoqiang International Airport, Jinan, Shandong Office address: SDA Building, No. 5746, Er Huan East Road, Jinan, Shandong 1 Post code Code of Registered address: 250107 Code of Office address: 250014 Internet web site of the Company http://www.shandongair.com.cn E-mail of the Company zqb@shandongair.com.cn 2.2 Contact person and method Authorized representative in charge of Secretary of the Board of Directors securities affairs Name Li Qing’en Huang Haiming Liaison address 19/F, SDA Building, No. 5746, Er Huan Room 1920, SDA Building, No. 5746, Er East Road, Jinan, Shandong Huan East Road, Jinan, Shandong Telephone 0531－85698966 0531－85698678 Fax 0531－85698679 0531－85698679 E-mail liqe@shandongair.com.cn huanghm@shandongair.com.cn §3. Summary of Accounting Data and Financial Indexes (According to PRC GAAP) 3.1 Major accounting data Unit: RMB Increase/decrease 2004（After 2004（Before 2003（After 2003（Before 2005 over the previous adjustment） adjustment） adjustment） adjustment） year（％） Income from main 2,891,016,605 2,229,357,012 29.68% 2,229,357,012 1,723,844,877 operation 1,723,844,877 Total profit -272,591,446 11,609,432 -2,448.02% 41,758,805 45,609,920 26,153,333 Net profit -273,637,982 11,065,238 -2,572.95% 41,214,611 45,987,630 26,531,043 Net profit after deducting non-recurring -281,356,718 10,339,721 -2,821.12% 40,489,094 40,441,698 20,985,111 gains and losses Net cash flow per share arising from operating 217,831,950 404,129,499 -46.10% 404,129,499 303,164,599 303,164,599 activities At the end of Increase/decrease At the end of 2004 At the end of 2003 At the end of At the end of 2004（After over the end of （Before （After 2003（Before 2005 adjustment） previous year（％） adjustment） adjustment） adjustment） Total assets 6,551,168,542 3,758,032,303 74.32% 3,714,318,531 3,995,653,560 3,996,247,440 Shareholder’s equity(excluding 265,865,983 562,343,519 -52.72% 593,074,974 551,278,281 551,860,363 minority interests) 2 3.2 Major financial indexes Unit: RMB Increase/decreas e than the 2005 2004 2003 previous year （％） Earnings per share -0.68 0.03 -2,366.67% 0.11 Earnings per share (Note) -0.68 - - - Return on equity -102.92% 1.97% -104.89% 8.34% Return on equity as calculated based on net profit after -68.70% 1.86% -70.56% 7.51% deducting non-recurring gains and losses Net cash flow per share arising from operating 0.54 1.01 -46.53% 0.76 activities Increase/decreas At the end of At the end of e than the end of At the end of year 2005 year 2004 previous year year 2003 （％） Net assets per share 0.66 1.41 -53.19% 1.38 Net assets per share after 0.24 1.10 -78.18% 1.10 adjustment Note: Earnings per share would be calculated based on new share capital if share capital changed from the end of the report period to disclosure date. Items of non-recurring gains and losses √Applicable □ Non-applicable Unit: RMB Non-recurring gains and losses items Amount Gains and losses from disposing long-term equity investment, fixed assets, construction in progress, -740,755.00 intangible assets and other long-term assets Other items of non-operating income and expenses after deducting impairment losses for assets normally withdrawn -1,756,049.00 according to the regulations of accounting principles Switch-back from various impairment losses withdrawn in 215,540.00 previous years Governmental subsidies 10,000,000.00 Influences on the aforesaid income tax Total 7,718,736.00 3.3 Differences in the net profit as calculated according to CAS and IAS. 3 √Applicable □ Non-applicable Unit: RMB CAS IAS Net profit -273,637,982 -264,874,475 -Adjustment on the differences of depreciation in the previous years 11,285,627 Explanation on - Difference in disposal of long-term expenses to be apportioned -2,586,589 the differences -Adjustment on increasing of capital reserve 64,469 - Influence on tax - §4. Changes in Share Capital and Particulars about the Shareholders 4.1 Statement of Changes in Share Capital Unit: share Increase/Decrease Before the change After the change in this time Amount Proportion Subtotal Amount Proportion I Unlisted shares 260,000,000 65.00% 260,000,000 65.00% i Promoters’ shares 168,800,000 42.20% 168,800,000 42.20% Including: State-owned shares 168,601,000 42.15% 168,601,000 42.15% Domestic legal person’s shares 199,000 0.05% 199,000 0.05% Foreign legal person’s shares Others ii Raised legal person’s shares iii Inner employees’ shares iv Preference shares or others 91,200,000 22.80% 91,200,000 22.80% II Listed shares 140,000,000 35.00% 140,000,000 35.00% i Ordinary RMB shares ii Domestically listed foreign shares iii Overseas listed foreign shares 140,000,000 35.00% 140,000,000 35.00% iv Others III Total shares 400,000,000 100.00% 400,000,000 100.00% 4.2 Statement of shares held by the top ten shareholders and the top ten shareholder of circulating share Unit: share Total shareholders at the end of report 20,901 Particulars about the top ten shareholders holding shares Number of non- Number of share Nature of Total amount Full name of shareholders Proportion circulating shares pledged or shareholder of shares held held frozen State-owned SHANDONG AVIATION GROUP 42.00% 168,004,000 168,004,000 84,000,000 shareholder 4 State-owned AIR CHINA LIMITED 22.80% 91,200,000 91,200,000 Unknown shareholder Foreign capital Unknown Unknown TENG HWEE CHIEN 1.06% 4,250,216 shareholder Foreign capital Unknown Unknown CHEN CHUN PENG 0.39% 1,544,271 shareholder Foreign capital Unknown Unknown XIE KE 0.29% 1,152,734 shareholder Foreign capital Unknown Unknown WU HAO YUAN 0.26% 1,045,700 shareholder Foreign capital Unknown Unknown LIU LI YA 0.25% 1,015,216 shareholder Foreign capital Unknown Unknown JOHN POSS 0.19% 756,990 shareholder Foreign capital Unknown Unknown SEUNG YEOL PARK 0.17% 690,650 shareholder Foreign capital Unknown Unknown DENG HONGWEI 0.16% 650,609 shareholder Particulars about shares held by the top ten circulation shareholders Shareholder’s name (full name) Number of circulating shares held Type of shares TENG HWEE CHIEN 4,250,216 Domestically listed foreign shares CHEN CHUNPENG 1,544,271 Domestically listed foreign shares XIE KE 1,152,734 Domestically listed foreign shares WU HAOYUAN 1,045,700 Domestically listed foreign shares LIU LIYA 1,015,216 Domestically listed foreign shares JOHN POSS 756,990 Domestically listed foreign shares SEUNG YEOL PARK 690,650 Domestically listed foreign shares DENG HONGWEI 650,609 Domestically listed foreign shares XU ZHAOHUAN 608,000 Domestically listed foreign shares SHEN HONG 604,000 Domestically listed foreign shares Explanation on associated relationship The Company is unknown whether it exists associated relationship among shareholders among the top ten shareholders of of circulation share, or whether other shareholders belong to the consistent actionist circulation share regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Companies. 4.3 Particulars about controlling shareholders and actual controller of the Company 4.3.1 Particulars about change in controlling shareholders and actual controller of the Company □Applicable √ Inapplicable 4.3.2 Introduction of concrete conditions of controlling shareholder and other actual 5 controller 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: Investment and management on aviation transportation; maintaining of aerostat and ground facilities limited by permission; conference and exhibition service; working service; maintaining on vehicles of ground passenger transportation and ground transportation; the sales of general merchandise, handicraft and souvenir; the lodgings; the dining service; retail sales of the tobacco product; lease of house (limitedly managed by branches) Registered capital: RMB 580 million The actual controller of the Company Actual controller of the Company: Air China Limited. 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. 4.3.3 Property right and controlling relationship between the actual controller of the Company and the Company is as follow: Air China Limited 48% Shandong Aviation Group 22.8% 42% Shandong Airlines Co., Ltd. 5. Particulars about Directors, Supervisors, Senior Executives 5.1 Change in shares held by directors, supervisors and senior executives and their remunerations 6 Total Draw the Shares Share remuneration remuneration Reason held held drew from the from other Name Title Sex Age Term office of at the at the Company in the shareholder units change year-begin year-end report period or associates or (RMB’0000) not Chairman April 29, 2005– Jia Fuwen of the Male 60 0 0 25.77 Yes Dec. 31, 2005 Board April 29, 2005– Li Junhai Director Male 59 0 0 12.37 Yes Dec. 31, 2005 General Dec. 25, 2002 – Zeng Guoqiang Male 52 0 0 34.27 No Manger Dec. 31, 2005 Dec. 25, 2002 – Su Zhongmin Director Male 51 0 0 26.69 No Dec. 31, 2005 Dec. 25, 2002 – Bai Weisan Director Male 48 0 0 27.00 No Dec. 31, 2005 Chief Aug.19, 2005- Xiao Feng Male 37 0 0 54.50 Yes Accountant Dec. 31,2005 April 29,2005 – Jia Tiesheng Director Male 49 0 0 0.00 Yes Dec. 31, 2005 April 29,2005 – Kou Zunxian Director Male 50 0 0 0.00 Yes Dec. 31, 2005 Independent Dec. 25, 2002 – Wang Zhi Male 63 0 0 3.68 No Director Dec. 31, 2005 Independent Dec. 25, 2002 – HU Jijian Male 63 0 0 3.68 No Director Dec. 31, 2005 Independent May 21, 2003 – Li Xiuqin Female 42 0 0 3.44 No Director Dec. 31, 2005 Independent Male Dec. 28, 2004 – Fang Shaokun 43 0 0 3.60 No Director Dec. 31, 2005 April 29,2005 – Wang Fuzhu Supervisor Male 52 0 0 0.00 Yes Dec. 31, 2005 Dec. 25, 2002 – Wang Wuping Supervisor Male 40 0 0 0.00 Yes Dec. 31, 2005 Dec. 25, 2002 – Wang Xianlin Supervisor Male 40 0 0 16.05 No Dec. 31, 2005 Dec. 25, 2002 – Li Jiemin Supervisor Male 49 0 0 12.64 No Dec. 31, 2005 Dec. 25, 2002 – Guo Caisen Supervisor Male 35 0 0 8.84 No Dec. 31, 2005 Total - - - - 0 0 - 232.53 - §6. Report of the Board of Directors 7 6.1 Discussion and analysis to the whole operation in the report period I.The Company is a civil aviation transportation enterprise. The Company realized the annual increase of 10 flights of B737 airplane in 2005, rapidly strengthen of flight scale, and several production indexes of the Company hit a all-time high; meanwhile, faced with increasingly severe operation situation and market competition, pursuant to work plan made by the Board of Directors at the year-begin, all the staff of the Company continuously took safety operation as centre, improving on schedule rate, service quality and income level as the key point, overcame so many difficulties such as sustaining rise in price of aviation oil and uprush of operation cost resulted from concentrated overhaul for aircraft engine, basically accomplished various production tasks of the Company. 1. Putting across annual safety work plan and realizing safety flights for 11 anniversaries. In the report period, the Company smoothly realized safety flights for 11 anniversaries and held over consistent safety records; aiming at rapidly expansion of flights scale and large amount increase of freight volume, and a large member of air ground crew could exert themselves and work hard for safety, to overcome many minus factors and establish normative operation regulation system so as to promote safety work to step on a new stage; there occurred no airplane crash clue caused by human errors in the whole year of 2005, the Company won the flight safety Jinyan Cup from China Civil Aviation again after winning Jinyan Cup in 1999 and Jinying Cup in 2002. 2. Further integrity flight course network and upgrade the income management level. In the report period, international and regional flight course like Seoul in Korea and Hong Kong, etc. were additionally put on, branch was built in Yantai and over night base was established in Chengdu, according to the Company’ market strategy plan, the Company increasingly put the transport availability in Jinan, Qingdao and Yantai, and so on, strengthen base advantages and further perfected flight course network; market department changed scheduled flights from decentralized control mode to centralized control mode, established system of monthly flights income analysis meeting and improved income management level; freight department paid much attention to market trends, subdivided customers and realized a large margin increase in volume and income of freight post transportation in the report period. 3. Tighten the implementation of “airliner on schedule project” so as to improve airliner on schedule rate. From August, the Company tried the best to create “airliner on schedule rate”, adopted efficient measures to improve operation quality; established airliner on schedule supervision group, arranged airliner plan and airliner schedule with science and reasons, built inner assessment mechanism of airliner nominal rating, tightened maintenance work and improved capacity of rapid fault remedy; the airliner on schedule rate of the Company maintained the top five of China Civil Aviation in the whole year and made off with the first prize in China Civil Aviation in September and November in succession. 4. To overcome pressure of rise in cost and tighten work of increasing income and reducing expenditure. In order to overcome the pressure resulted from increasingly 8 operation cost, the Company established system of responsibility for work of reducing expenditure to close restraint various costs; organized monthly dispatching meeting of efficiency analysis and increasing income and reducing expenditure by financial department, firmly supervised production and efficiency data, strengthened financial analysis work, searched for existed problems and made a suggestion for solving that from May. 5. To improve work of air & ground service and increase integral service level. Cabin department further united work process and service standard to promote the establishment of cabin service culture, extruded enterprise culture and brand idea; ground service department not only smoothly finished the airliner support business but also established relative perfect ground service support system and support process. II.In the report period, the Company completed total turnover volume of transport amounting to 439.34 million tons kilometres, an increase of 28.9% over the year 2004 and carried 4.012 million passengers in a safe way, an increase of 33.8% over the last year. In the report period, the Company realized income from main operations amounting to RMB 2,891,016,605, an increase of 29.68% compared with the corresponding period of the previous year, including revenue from passenger aviation transportation of RMB 2,759,233,297, taking 95.44 % of the total income and revenue from cargo and mail aviation transportation of RMB112,578,458, taking up 3.90 % of the total income, other income (including hotel and food service) amounting to RMB 19,204,850, accounting for,0.66% of total income. The following main factors resulted into the operating loss of RMB 273.64 million of the Company in 2005: (1) In the report period, the Company occurred aviation oil cost from main operations amounting to RMB 903 million, an increase of RMB 365 million compared with the corresponding period of the previous year. Except factors of flight scale expansion, oil cost of 2005 increased RMB 135 million compared with the price level of the start of the report period. (2) The Company realized the annual increase of 10 flights of B737 airplane in 2005,increasing most rapidly in history. Rapidly increasing of fixed cost, total asset and total debt scale resulted in rapidly increasing of interest cost. (3) Due to the delivery of two new airplane delaying and turnover volume of passenger aviation transportation and cargo transportation decreasing to a great extent in the 4th quarter of 2005, the goal of revenue didn’t reach; especially, snowy and frog weather in Shandong Province influenced the operation of the regional airlines greatly. (4) The overhaul for aircraft engine concentrated in 2005, total repairing charge RMB 138 million. (5) The Company withdrew provision for bad debts reserve for the said other account receivable amounting to RMB 123,114,616, resulted in profit decreasing. III.Overall trains of thoughts of the Company’s development in 2006: guided by scientific views of development, regarding adjustment and improvement as masterstroke, creating development scale and optimally allocating recourses, excavating potency of existed transport availability and base construction, ascending air transport quality, walk the way of safety development, creative development and intension development, to realize complete coordination and sustainable 9 development of the Company, and start with a good and sound step to implementation of 11th five year plan. 1. Further perfect legal administration structure of the Company Perfecting setting of various departments commission of the Board of Directors, fully developing special commission‘s decision-making, auditing and assessment; further safeguarding implementing duty of independent director and the Supervisory Committee and earnestly supplying necessary and convenient situation for supervision works; keeping on standardizing running of the Shareholders’ General Meeting, the Board of Directors and the Supervisory Committee to ensure the three meetings’ convening, holding, and decision-making legally and normally; standardizing general manger office meeting system, senior executives divide their functions, take responsibility on their own work and get done with operation and administration of the Company under the Board of Directors; establishing sound and complete inner auditing system to carry out inner audition independently under the Board of Directors, fully developing inner audition to supply true and objective reference for decision-making of the Board, management and operations of managers. 2. Strictly implement requirements of laws and regulations of the Company Law of PRC and Securities Laws According to new revised Company Laws of PRC and Securities Laws, combining the actual situation of the Company to accomplish the amendments of standardized documents such as Articles of Association, Rules of Procedures for the Shareholders’ General Meeting, Rules of Procedures for the Board of Directors, Rules of Procedures for the Supervisory Committee, Independent Director Schedule and Work Rules for General Manager, so as to make various operation compliance with requirements of laws and regulations of the Company Law of PRC and Securities Laws 3. To improve the normalization, scientific and democratization of decision-making Persistently modifying and standardizing process of decision-making of the Board, fully developing strategy and name commission of the Board, according to requirements of regulations of the Company Law of PRC and Securities Laws. For the events like assets disposal, foreign investment and signing of significant contract, etc., to institute feasible plan which is in accordance with the company reality, nation’s policy environment and the Company’s development plan, respectively based on decision-making permission of the Shareholders’ General Meeting and the Board of Directors, to implement legal assessment procedure so as to improve the normalization, scientific and democratization of decision-making. 4. Completely to enhance the basic work surrounding safety, on-schedule, service and benefit (1) Insisting on safety first, tamping safety base, keeping enhance safety basic construction, endlessly modifying safety administration measures, firmly seizing carry-out of safety work measure and stopping safety misadventure. Firstly to get done with engagement and education of flight crew, aircraft crew and dispatching crew; secondly based on approval of IOSA auditing, firmly carry out various handbook and regulations; thirdly tighten the implementation of building safety with science and technology, make use of technology measures to improve safety management level; fourthly establish production safety system so as to fulfil safety production’s object to people, responsibility to people and punishment to people; fifthly advance supervision and inspection, hardboiled increase safety work efficiency on rectifying and improving. (2) Upgrading service quality and creating service brand, boosting benefit with high quality service. Firstly maintaining safety and on-schedule as the most important service, continuously 10 holding flight on schedule rate on the top of national civil aviation; secondly extruding high quality service, character service and affectionate service so as to establish high quality service branch; thirdly getting done with business education, paying attention to nice service and improve service skill. (3) Enhancing earning power construction and realizing intension development so as to improve operation level. Firstly continuously implement adjustment strategy of aircraft type of the Company, speed disposal of CRJ type with severe deficit; secondly further optimize allocating resources, realize intension increase through enhancing management, controlling cost, adjusting structure and innovating technology; thirdly，earnestly according to relevant regulations, for the rest capital occupied by related party corporate aircraft, quicken research and make plan for solution and clearing measures, strive for solve the problem at the end of the 3rd quarter; fourthly reinforcing market sales, optimizing flight course network and improving earning level, fully using the flight course advantages of Air China, through enhancing corporation to start flight to high income courses like Taegu and Pusan and so on; for lower income course, adopt to stopping flight and reducing flight, etc. to arrange reasonably and dispatch transport capacity; fifthly deepening cost control, continuously penetrating into increase of income and decrease of expenditure, establishing budget assessment mechanism and make benefit from administration. (4) Clinging to administration innovation to enhance enterprise’s energy. Firstly to innovate thought and idea to study advanced management thoughts from home and abroad and put into practice of the Company; secondly to innovate talent development mechanism and promote endlessly personnel system reform; thirdly to create organization management mechanism, to improve standardized running level of the Company under standardized legal administration structure; fourthly to create remuneration distribution mechanism regard earnings power evaluation as core and perfect performance assessment system. (5) Strengthening the works of thoughts and politics, enhancing study and education among all the staff so as to realize sustainable development. revolving the main task of the Company, tightening the construction of harmonious SDA, establishing more characteristic enterprise culture, upgrading the cohesive force of staff and promoting the competitive force of the Company; calling up the whole cadre and staff into action, to combine study of theory knowledge with improvement of actual operation skill; to combine education and improvement of administration ability with training and nurturance of work style; to combine pre-job training with on the job training and to combine organized training with personnel self-training so as to completely improve work ability and general quality. 6.2 Statement of main operations classified according to industries or products Unit: RMB’0000 Statement of main operations classified according to industries Gross Increase/decrease Increase/decrease Increase/decrease Income Cost of profit ratio in income from in gross profit Classified according to in cost of main from main main of main main operations ratio from main industries or products operations over operations operations operation over the last year operations over the last year (%) (%) (%) the last year (%) Aviation transport 287,183.45 252,278.99 13.84% 28.82% 42.89% -47.32% industry Statement of main operations classified according to products 11 Income from aviation passenger transport and 287,183.45 252,278.99 13.84% 28.82% 42.89% -47.32% freight mail 6.3 Particulars about main operations classified according to areas Unit: RMB’0000 Increase/decrease in income from main Areas Income from main operations operations over the last year (%) Domestic lines 281,577.19 28.04% International lines 7,524.47 148.29% 6.4 Application of the raised proceeds □ Applicable √ Inapplicable Particulars about the changed projects □ Applicable √ Inapplicable 6.5 Application of the proceeds not raised through shares offering □Applicable √ Inapplicable 6.6 Explanation of the Board of Directors on the “Qualified Opinion” made by the CPAs □ Applicable √ Inapplicable 6.7 The preplan of profit distribution and capitalization of capital public reserve of the Board of Directors √ Applicable □ Inapplicable Audited by Reanda Certified Public Accountants Ltd. as per Chinese Accounting Standards and DBO International Certified Public Accountants as per International Accounting Standards, the Company realized net profit of RMB -273,638 thousand and RMB -264,874 thousand respectively in 2005. The Board of Directors made decision of carry out no profit distribution in 2005 due to deficit. The said profit distribution preplan should be submitted to Annual Shareholders’ General Meeting 2005 for examination and approval before its implementation. The Company didn’t appropriate share distribution preplan though the Company achieved the profit in the report period □ Applicable √ Inapplicable §7 Significant Events 7.1 Purchase of assets □ Applicable √ Inapplicable 7.2 Sales of assets 12 □ Applicable √ Inapplicable 7.3 Significant guarantees √ Applicable □ Inapplicable Unit:’0000 Particulars about the external guarantee of the Company (barring the guarantee for controlling subsidiaries ) Name of the Date of happening Complete Amount of Guarantee for related Company (date of signing Guarantee type Guarantee term Implementation guarantee party (yes or not) guaranteed agreement) or not Joint Shandong Gold March 26,2005 10,000.00 Responsibility One year No No Corporation Ltd. Guarantee Total amount of guarantee during the report period 10,000.00 Total balance of guarantee at the end of the report 10,000.00 period Guarantee of the Company for the controlling subsidiaries Total amount of guarantee for controlling 0 subsidiaries during the report period Total balance of guarantee for controlling 0 subsidiaries at the end of the report period Total amount of guarantee of the Company (including guarantee for controlling subsidiaries) Total amount of guarantees 10,000.00 Ratio of total guarantee to net assets of the Company 37.61% Including: Amount of guarantee for shareholders, actual 0 controller and its related parties The debts guarantee amount provided for the guarantee of which the assets-liability ratio 0 exceeded 70% directly or indirectly Proportion of total amount of guarantee in net 0 assets of the Company exceeded 50% Total amount of the aforesaid three guarantees 0 7.4 Significant related transaction 7.4.1 Related transaction connected to operations √Applicable □ Inapplicable Unit: RMB’0000 Selling products and providing labour Purchasing products and accepting service to related parties labour service from related parties Proportion in the Proportion in the Transaction Transaction Related parties transaction amount transaction amount amount amount of the same kind of the same kind 13 Shangdong TAECO Aircraft 0.00 0.00% 5,573.07 16.31% Engineering Co., Ltd. Shandong Jinping Aero Foods Co., Ltd and Shandong Airlines Qingdao 0.00 0.00% 4,537.41 42.32% Foods Co., Ltd Air China Limited 19,513.75 100.00% 0.00 0.00% Total 19,513.75 100.00% 10,110.48 22.52% 7.4.2 Related credits and liabilities current √Applicable □Inapplicable Unit: RMB’0000 Providing funds to related parties Getting funds from related parties Total amount Total amount Amount at the end Amount at the end During the During the Related parties of report period of report period report period report period Shandong Rainbow Jet Co., Ltd. 5,033.00 14,780.00 0.00 0.00 Total 5,033.00 14,780.00 0.00 0.00 Including: In the report period, the Company providing funds to the controlling shareholder and its subsidiaries amount to RMB 50.33million, the amount at the end of the report period RMB 147.80 million. Use of funds and plan on paying off the debt √Applicable □ Inapplicable In the report period, there occurred the expenses for transferring on the aircraft rent of two CL604 between the Company and Jet Company. And Jet Company paid according to the same rent about the transaction. Due to that the Company paid directly the rent about the CL604 aircrafts, and Jet Company was incapable of paying the full expenses for transferring within the scheduled time there objectively occurred that the funds of listed companies were occupied by the related parties. Considering that the funds of listed company were occupied by the related parties, the Company asked Jet Company return the fund using more methods and Jet Company paid RMB 10 million in cash on Dec., 2005. In the 1st quart of 2006, Jet Company repaid RMB 4 million in cash. (2) Through the hard work of every party, the Company speeded up the disposal of CL604 aircrafts with Air China and other parties to end the leasing agreement on the two aircrafts. After the two aircrafts were off rent, it will not occur that the companies paid the fund for Jet Company on their behalves. Thus, the roots for taking up the funds were eliminated. (3) Considering the owing debts of Jet Company, the Company will continue to ask Jet Company to collect funds to repay in every way (including cash and pledge capital to repaying debts); however, the problems and other aspects belonged to the matters left over by the history, for its solvency the Company withdrew provision for bad debts reserve. 14 The plan could be settled down use of funds before the end of 2006 totally or not √Yes □ No □ Inapplicable 7.5 Entrusted assets management □ Applicable √ Inapplicable 7.6 Implementation of commitments 7.6.1 Commitment on Date of Share Merger Reform □ Applicable √ Inapplicable 7.6.2 Other Commitments □ Applicable √ Inapplicable 7.7 Significant lawsuit and arbitrations □ Applicable √ Inapplicable §8. Report of the Supervisory Committee √Applicable □ Inapplicable (I) Particulars about the work of Supervisory Committee In 2005, 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 with assiduity and responsibility, 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 2005, and sent delegate to attend the work meeting of general managers of the Company. In the report period, the Supervisory Committee held totally three meetings, the average attendance of supervisors was up to 93% above. The Supervisory Committee had examined and discussed such events as the financial budget and settlement report, quarterly report, plan for production and operation and formed resolutions. As to related transactions between the Company and its controlling shareholders and subsidiaries, as well as earnings power of the Company, the Supervisory Committee held several meetings to research, and recommended the Board to pay special attention to them and to adopt active measures for solutions. The supervisory Committee also invited independent directors of the Company to attend their meetings as non-voting delegates all the time which strengthened the communications with independent directors. (II) Independent Opinions of the Supervisory Committee on relevant events in 2005 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 15 behaviours 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 behaviours 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 on finance The Supervisory Committee examined patiently and meticulously the financing situation of the Company. In the opinion of the Supervisory Committee, 2005 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. 3. 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. 4. Related transactions The Company conducted related transactions strictly according to market principle in fair and juristic way. The price of the transactions was reasonable, safeguarding the interests of the shareholders and listed companies. At the end of report period, rent amounting to RMB 0.148 billion owed by Shandong Airlines Rainbow Jet Co., Ltd. to the Company still remains un-repaid. The Supervisory Committee supervised and urged the Board of Directors and executives to pay much attention to the issue several times and to take efficient measures to recover the amount as soon as possible. §9. Financial Report 9.1 Auditor’s opinions Auditor’s opinions: standard unqualified auditor’s opinions 9.2 Financial statement (According to IAS) 16 CONSOLIDATED INCOME STATEMENT AT DECEMBER 31, 2005 2005 2004 RMB’000 RMB’000 OPERATING REVENUE Passenger 2,759,233 2,144,761 Cargo and mail 112,579 81,319 Interest income 9,731 3,283 Government grant 10,064 - Others 29,138 13,895 TOTAL OPERATING REVENUE 2,920,745 2,243,258 Business tax (86,055) (64,844) TOTAL OPERATING REVENUE (NET) 2,834,690 2,178,414 OPERATING EXPENSES Depreciation and amortization (204,742) (180,866) Take-off and landing charges (348,452) (304,783) Personnel (132,190) (88,163) Fuel (852,052) (538,631) Maintenance and overhaul (296,681) (240,122) Catering (107,216) (83,540) Rental (321,889) (247,632) Insurance (27,530) (18,353) Promotion and sales (168,103) (150,677) General and administration (158,237) (77,394) Others (306,207) (119,087) TOTAL OPERATING EXPENSE (2,923,299) (2,049,248) (LOSS) PROFIT FROM OPERATIONS (88,609) 129,166 FINANCE COSTS (176,159) (117,365) SHARE OF RESULTS OF ASSOCIATES 70 26 INCOME (LOSS) FROM INVESTMENTS 870 3,039 (LOSS) PROFIT BEFORE TAX (263,828) 14,866 INCOME TAX (464) 3,573 (LOSS) PROFIT FOR THE YEAR (264,292) 18,439 17 ATTRIBUTABLE TO: Equity holders of the parent (264,874) 18,058 Minority interest 582 381 (264,292) 18,439 RMB RMB Basic earnings per share (66.2) cents 4.5 cents CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2004 2005 2004 RMB’000 RMB’000 ASSETS Non-current assets Property, plant and equipment 4,950,982 2,165,165 Land use rights 14,884 15,201 Interests in associates 298 228 Advances on aircraft and related equipment 63,566 886,362 Other investments 101,052 91,052 Deferred tax assets 24,299 24,299 Term deposit 30,263 - 5,185,344 3,182,307 Current assets Flight equipment spare parts and other inventories 57,660 39,749 Trade and other receivables 438,726 228,626 Amount due from holding company 5,500 1,083 Amount due from related parties 47,311 100,535 Pledged deposit 664,181 - Bank balances and cash 68,097 112,794 1,281,475 482,787 TOTAL ASSETS 6,466,819 3,665,094 18 CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2005 2005 2004 RMB’000 RMB’000 LIABILITIES AND SHAREHOLDERS’ EQUITY Shareholder’s equity Share capital 400,000 400,000 Reserves (219,580) 69,294 Equity attributable to equity holders of the parent 180,420 469,294 MINORITY INTERESTS 11,621 11,345 TOTAL SHAREHOLDERS’ EQUITY 192,041 480,639 Non-current liabilities Bank loans – due after one year 1,765,570 1,200,608 Obligations under finance leases -due after one year 1,626,142 421,082 Deferred Income 8,751 9,046 3,400,463 1,630,736 Current liabilities Trade and other payables 748,682 429,706 Sales in advance of carriage 14,404 20,357 Amounts due to related parties 14,248 9,856 Tax liabilities 187 169 Bank loans-due within one year 1,915,476 962,336 Obligations under finance leases -due within one year 181,318 131,295 2,874,315 1,553,719 TOTAL LIABILITIES AND SHAREHOLDER’S 6,466,819 3,665,094 EQUITY 19 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 2005 2004 RMB’000 RMB’000 OPERATING ACTIVITES Profit before tax (263,828) 14,866 Adjustments for: Depreciation and amortization 204,742 180,866 Loss on disposal of property, plant and equipment 760 52 Interest expenses 176,159 117,365 Interest income (9,731) (3,283) Impairment loss (reversed) recognized on property, plant and equipment 122,530 (7,116) Dividend from unlisted investments (870) (3,064) Share of results if associates (70) - Operating cash flows before movements in working capital 229,692 299,686 Increase in flight equipment spare parts and others inventories (17,911) (17,482) (Increase) Decrease in trade and other receivables (210,100) 90,105 (Increase) Decrease in amounts due from holding company (4,417) 79,689 Increase in amounts due from related parties 53,224 (96,366) Increase in trade and other payables 158,846 70,256 (Decrease) Increase in sales in advance of carriage (5,953) 3,470 Increase in amounts due to related parties 4,392 891 Net cash generated from operations 430,249 207,773 Interest paid (160,205) (113,603) Income tax paid (446) (161) Interest received 9,731 3,283 Net cash generated from operating activities 56,853 319,768 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 20 2005 2004 RMB’000 RMB’000 INVESTING ACTIVITIES Purchases of aircraft and related equipment (2,949,801) (40,359) Increase in advances on aircraft and related equipment 822,794 (596,897) Advance to holding company - 13,585 Purchase of property, plant and equipment other than aircraft and related equipment (11,340) (97,609) Acquisition of unlisted investments (10,000) (11,292) Additional interest in an associate - 228 Term deposit (30,263) - Proceeds from disposal of property, plant and equipment 24 516,148 Proceeds from disposal of non-current prepayments - 1,139 Proceeds from return investment - 408 Pledged deposit (664,181) - Dividends received from unlisted investments 870 3,064 Net cash used in investing activities (2,841,897) (211,585) FINANCING ACTIVITIES New bank loans obtained 3,933,804 2,151,214 Proceed from Sales and lease back 1,440,000 - Capital contribution from minority shareholders - 613 Repayment of bank loans (2,387,765) (2,355,032) Repayment of obligations under finance leases (244,650) (163,140) Dividend paid to minority shareholder (268) (68) Net cash generated from (used in) financing activities 2,741,121 (366,413) NET DECREASE IN CASH AND CASH EQUIVALENTS (43,923) (258,230) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 112,794 371,024 EFFECT OF FOREIGN EXCHANGE RATE CHANGES (774) - CASH AND CASH EQUIVALENTS AT END OF THE YEAR 68,097 112,794 9.3 Explanation on changes of accounting policy, accounting estimation and settlement 21 method compared with the latest annual report √Applicable □ Inapplicable 1. The Company carries out calculation to high price turnovers originally according to Civil Aviation Enterprise Accounting System, which reckons high price turnovers in inventory item and its acquisition cost amortized at the beginning of putting into storage on average of five years. According to CKH [2005] No.63 Ministry of Finance Reply on Capitalized Management of High Price Turnovers in Shandong Airlines Co., Ltd. promulgated by Ministry of Finance, at the same time, in order to eliminate difference on accounting policy adopted in International Accounting Standards and China Accounting Standards, now we manage and calculate as per fixed assets and withdraw depreciation for high price turnovers within use life from 15 to 18 based on straight line method. For the influence rising from accounting policy change item, the Company carried out retroactive adjustment. 2. Fixed assets of electron device types of the Company withdrew amortization as per 6-8 years, in view of actual use and waste of electron device, changed into withdrawal of amortization as per 4 years in this period, which accounting estimate influenced accumulated amortization in the year amounting to RMB 1,080 thousand, relatively reduced net profit amounting to RMB 1,080 thousand. 9.4 Contents, correct amount, reason and its influence of significant accounting errors √Applicable □ Inapplicable Due to settlement date difference of aircraft engine overhaul, we found there was no estimation on 5 engines overhaul cost in previous 5 years, now re-estimate it and restate the 2004 accounting statement. The adjustment increased operating cost of 2004 amount to RMB 74,445,228 and decreased net profit of 2004 amount to RMB 74,445,228. Meanwhile, an adjustment of accounting policy increased net profit of 2004 amount to RMB 44,295,854.The total adjustment factors decreased net profit of 2004 amount to RMB 30,149,374; after these accounting adjustments, net profit of 2004 was RMB 11,065,238. 9.5 Explanation on change of consolidated scope compared with the latest annual report □Applicable √ Inapplicable Board of Shandong Airlines Co., Ltd. March 28, 2006 22