山航Ｂ(200152)2005年年度报告（英文）

SHANDONG AIRLINES CO., LTD. ANNUAL REPORT 2005 March，2006 Jinan · PRC Shandong Airlines Co., Ltd. Annual Report 2005 Contents and Important Notes Ⅰ. Company Profile --------------------------------------------------------------------------------2 Ⅱ. Summary Financial Highlight and Business Highlight ---------------------------------2 Ⅲ. Changes in Capital Shares and Particulars about Shareholders ---------------------5 Ⅳ. Particulars about Directors, Supervisors, Senior Executives and Employees------8 Ⅴ. Administrative Structure ---------------------------------------------------------------------15 Ⅵ. Brief Introduction to the Shareholders’ General Meeting ----------------------------16 Ⅶ. Report of the Board of Directors -----------------------------------------------------------17 Ⅷ. Report of the Supervisory Committee -----------------------------------------------------26 Ⅸ. Significant Events -----------------------------------------------------------------------------27 Ⅹ. Financial Report -------------------------------------------------------------------------------31 Ⅺ. Documents for Reference --------------------------------------------------------------------59 Important Notes: The Board of Directors and the Supervisory Committee of Shandong Airlines Co., Ltd. (hereinafter referred to as the Company) and its directors, supervisors and senior executives 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 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. BDO Reanda Certified Public Accountants and Reanda Certified Public Accountants issued the standard unqualified Auditors’ Report for the Company. 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. 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. Paraphrases: The Company,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 Shandong Airlines Co., Ltd. Annual Report 2005 I. Company Profile 1. Legal Chinese Name of the Company: 山东航空股份有限公司 Legal English Name of the Company: SHANDONG AIRLINES CO., LTD. 2. Legal Representative: Zhang Xingfu Mr. Zhang Xingfu was elected Chairman of the 3rd Board of Directors of the Company on March 15, 2006, and Mr. Jia Fuwen did not take the post of Chairman of the Company. The relevant changes on registration of industry and commerce are taken under the way. 3. Secretary of Board of Directors of the Company: 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) 531-85698678 Fax: (86) 531-85698679 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 Investment Management of Securities Dept. of the Company (Room 1920, SDA Bldg.) Liaison Tel: (86) 531-85698678 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 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 REANDA 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 (reported according to the PRC GAAP) - - 2 Shandong Airlines Co., Ltd. Annual Report 2005 (I) Financial highlights and related indexes as of the report year Items Unit: RMB Total profit -272,591,446 Net profit -273,637,982 Net profit after deducting non-recurring gains and losses -281,356,718 Income from main operation 277,868,392 Profit from other business 10,769,594 Operating profit -281,034,341 Investment income 939,698 Subsidy income 10,000,000 Non-operating net income and expense -2,496,803 Net cash flow from operating activities 217,831,950 Net increase of cash and cash equivalents -13,661,259 (II) Differences as audited by domestic and international certified public accountants respectively. The differences and reasons between net profits and net assets of the Company as calculated under Chinese Accounting Standards and System (CASS) and net profit and net asset of the Company as calculated under International Accounting Standards and System (IASS) are as follows: Equity interest dated Items Net profit of 2005 Dec.31,2005 RMB’000 RMB’000 As reported under CASS -273,638 265,866 Adjustments: -Adjustment on the differences of depreciation in the previous years 11,286 —— -Difference in disposal of long-term expenses to be apportioned -2,586 -108,649 -Adjustment on increasing of capital reserve 64 -1,096 - Influence on tax — 24,299 As reported under IFRS -264,874 180,420 (III) Items of non-recurring gains and losses Unit: RMB Non-recurring gains and losses items Amount 1. Gains and losses from disposing long-term equity investment, fixed assets, construction in progress, -740,755 intangible assets and other long-term assets 2. Other items of non-operating income and expenses after deducting impairment losses for assets normally -1,756,049 withdrawn according to the regulations of accounting principles 3. Switch-back from various impairment losses withdrawn 215,540 in previous years 4. Governmental subsidies 10,000,000 - - 3 Shandong Airlines Co., Ltd. Annual Report 2005 5. Influences on the aforesaid income tax —— Total 7,718,736 (IV)Major accounting data and financial highlights over the previous three years as at the end of the report period 2004（Before 2004（After 2003（Before 2003（After Items Unit 2005 adjustment） adjustment） adjustment） adjustment） Income from main RMB 2,891,016,605 2,229,357,012 2,229,357,012 1,723,844,877 1,723,844,877 operation Total profit RMB -272,591,446 41,758,805 11,609,432 26,153,333 45,609,920 Net profit RMB -273,637,982 41,214,611 11,065,238 26,531,043 45,987,630 Net profit after deducting non-recurring RMB -281,356,718 40,489,094 10,339,721 20,985,111 40,441,698 gains and losses Earnings per RMB / -0.68 0.10 0.03 0.07 0.11 share(Amortized) Share Return on % -102.92 6.95 1.97 4.81 8.34 equity(Amortized) Return on equity as calculated based on net profit after deducting % -68.70 7.07 1.86 3.90 7.51 non-recurring gains and losses(Weighted) Net cash flow per share arising from operating RMB 217,831,950 404,129,499 404,129,499 303,164,599 303,164,599 activities Net cash flow per share RMB / arising from operating 0.54 1.01 1.01 0.76 0.76 Share activities of per share Dec.31, 20 Dec.31, 200 Dec.31, 2003 Dec.31, 2003 Items Unit Dec.31, 2005 （Before （After ( Before （After adjustment） adjustment） adjustment） adjustment） Total assets RMB 6,551,168,542 3,714,318,531 3,758,032,303 3,996,247,440 3,995,653,560 Shareholder’s equity(excluding RMB 265,865,983 593,074,974 562,343,519 551,860,363 551,278,281 minority interests) RMB / Net assets per share 0.66 1.48 1.41 1.38 1.38 Share Net assets per share RMB / 0.24 1.18 1.10 1.10 1.10 after adjustment Share (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 in the report Return rate of net assets (%) Proceeds per share period Fully Weighted Fully amortized Weighted amortized average average Profit from main 104.51 67.85 0.69 0.69 business Operating profit -105.71 -68.62 -0.70 -0.70 Net profit -102.92 -66.82 -0.68 -0.68 - - 4 Shandong Airlines Co., Ltd. Annual Report 2005 Net profit after deducting non- -105.83 -68.70 -0.70 -0.70 recurring gains and losses (Ⅵ) Change of shareholders’ equity during the report period Statuary Total Capital Capital Surplus public Undistributed Item welfare shareholder stock surplus reserve profit fund s’ equity Amount at the 82,889,718 16,378,190 8,182,834 54,892,777 period-begin 400,000,000 562,343,519 Increase in this - 1,160,446 76,740 38,370 -273,637,982 -272,362,426 period Decrease in this - - - - 24,115,110 24,115,110 period Amount at 84,050,164 16,454,930 8,221,204 -242,860,315 period-end 400,000,000 265,865,983 Profit Reasons for Profit distribution changes distribution of this Losses of this Losses of this of this period period period period III. Changes in Shares Capital and Particulars about the Shareholders (I) Statement of changes in share Unit: shares Before After Increase/decrease in this time (+ , - ) change change Rationed Bonus Capitalization Additional Others Sub share share of public insurance total reserve I. Unlisted shares 260000000 260000000 168800000 168800000 1. Sponsor’s shares Including: 168601000 168601000 State-owned shares Domestic legal person’s 199000 199000 shares Foreign legal person’s shares Others 2. Raised legal person’s shares 3. Inner employees’ shares - - 5 Shandong Airlines Co., Ltd. Annual Report 2005 4. Preference shares or other 91200000 91200000 Total unlisted shares 260000000 260000000 Ⅱ. Listed shares 140000000 140000000 1. RMB ordinary shares 2.Domestically listed foreign 140000000 140000000 shares 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 (Preference shares or other) are the Company’s shares held by Air China, whose nature is state-owned legal person’s shares. (II) Particulars about issuance and listing of shares 1. Issuance and listing The previous three year ended by the period-end, the Company did not issue shares. 2. During the report period, there were 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, share merger, convertible company’s bonds transferring shares, disinvestments, listing of inner employees’ shares or company’s employee’s shares, etc.. There were no inner employees’ shares in the Company. (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 20,901 shareholders, including 5 sponsor shares (namely Shandong Aviation Group, Luyin Investment Group Co., Ltd., Shandong Hualu Group Co., Ltd., Shandong Fisheries Group Corp. and Langchao Group Corp.) one state-owned legal person’s shares (namely Air China Limited) and 20,895 ones of domestically listed foreign shares. Ended Dec. 31, 2005, the top ten shareholders of the Company are as following: Unit: share Increase/ Number of Number of decrease shares held Proportio shares No. Shareholders’ name Type in this at the year- n (%) pledged or year end frozen 1 SHANDONG AVIATION State-owned 84000000 GROUP 0 168004000 42 legal person’s shares share pledged 2 AIR CHINA LIMITED State-owned 0 91200000 22.8 legal person’s Unknown share 3 TENG HWEE CHIEN Circulation Unknown 4250216 1.06 Unknown share 4 CHEN CHUN PENG Circulation 1000 1544271 0.39 Unknown share - - 6 Shandong Airlines Co., Ltd. Annual Report 2005 5 XIE KE Circulation 44234 1152734 0.29 Unknown share 6 WU HAO YUAN Circulation 100000 1045700 0.26 Unknown share 7 LIU LI YA Circulation 0 1015216 0.25 Unknown share 8 JOHN POSS Circulation -162000 756990 0.19 Unknown share 9 SEUNG YEOL PARK Circulation Unknown 690650 0.17 Unknown share 10 Deng Hongwei Circulation Unknown 650609 0.16 Unknown share 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. 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: 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 3. 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 - - 7 Shandong Airlines Co., Ltd. Annual Report 2005 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 Limited 48% Shandong Aviation Group 22.8% 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 Number of shares held at No. Name of shareholders Type of shares held the year-end (share) 1 TENG HWEE CHIEN 4250216 B-share 2 CHEN CHUNPENG 1544271 B-share 3 XIE KE 1152734 B-share 4 WU HAOYUAN 1045700 B-share 5 LIU LIYA 1015216 B-share 6 JOHN POSS 756990 B-share 7 SEUNG YEOL PARK 690650 B-share 8 DENG HONGWEI 650609 B-share 9 XU ZHAOHUAN 608000 B-share 10 SHEN HONG 604000 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 - - 8 Shandong Airlines Co., Ltd. Annual Report 2005 Amounts at the Amounts at Name Sex Birth day Title Office term year-begin the year-end April 29, 2005– Jia Fuwen Male Oct.,1945 Chairman of the Board 0 0 Dec. 31, 2005 April 29, 2005– Li Junhai Male Jan.,1946 Vice Chairman of the Board 0 0 Dec. 31, 2005 Zeng Dec. 25, 2002 – Male Oct.,1953 Director, General Manger 0 0 Guoqiang Dec. 31, 2005 Director, Standing Deputy Dec. 25, 2002 – Su Zhongmin Male March,1954 0 0 General Manager Dec. 31, 2005 Director, Deputy General Dec. 25, 2002 – Bai Weisan Male Oct.,1957 Manager, General Manager of 0 0 Dec. 31, 2005 Qingdao Branch Dec. 25, 2002- Dec. 31,2005(Chief Xiao Feng Male Oct.,1968 Director, Chief Accountant 0 0 Accountant since Aug. 19,2005) April 29,2005 – Jia Tiesheng Male June,1956 Director 0 0 Dec. 31, 2005 April 29,2005 – Kou Zunxian Male Aug.,1955 Director 0 0 Dec. 31, 2005 Dec. 25, 2002 – Wang Zhi Male May,1942 Independent Director 0 0 Dec. 31, 2005 Dec. 25, 2002 – HU Jijian Male Nov.,1942 Independent Director 0 0 Dec. 31, 2005 May 21, 2003 – Li Xiuqin Female May,1963 Independent Director 0 0 Dec. 31, 2005 Male Dec. 28, 2004 – Fang Shaokun Oct.,1962 Independent Director 0 0 Dec. 31, 2005 Convener of the Supervisory April 29,2005 – Wang Fuzhu Male June,1953 0 0 Committee Dec. 31, 2005 Dec. 25, 2002 – Wang Wuping Male March,1965 Supervisor 0 0 Dec. 31, 2005 Supervisor, Team Leader of Dec. 25, 2002 – Wang Xianlin Male Nov.,1965 0 0 the 2nd flying Team Dec. 31, 2005 Supervisor, Deputy Manager Dec. 25, 2002 – Li Jiemin Male Dec.,1956 of Beijing Sales Department, 0 0 Dec. 31, 2005 Director of Beijing Station Dec. 25, 2002 – Guo Caisen Male Aug.,1970 Supervisor 0 0 Dec. 31, 2005 Dec. 25, 2002 – Song Yuxia Female Jan.,1956 Deputy General Manager 0 0 Dec. 31, 2005 Mar. 27, 2003 – Yu Haitian Male Sep.,1969 Deputy General Manager 0 0 Dec. 31, 2005 Jan. 24, 2005 – Dec. 31, 2005(Jan.1,2005- Deputy General Manager, Li Qing’en Male Aug.,1955 Aug.19,2005, 0 0 Secretary of the Board concurrently took the post of Chief Accountant) Zhang Dec. 25, 2002 – Male Oct., 1958 Chief Pilot 0 0 Qingshe Dec. 31, 2005 March 27,2003- He Guobin Male July, 1949 Chief Engineer 0 0 Dec. 31, 2005 Note 1: There was no change in the number of shares held by directors, supervisors and senior executives in the report period. Note 2: Particulars about directors, supervisors holding the post in Shareholding Company Draw payment and Name of the allowance from the Position in the Shareholding Name Shareholding Shareholding Company Company Company (Yes or no) Jia Tiesheng Air China Member of Committee on Yes - - 9 Shandong Airlines Co., Ltd. Annual Report 2005 Commerce, General Manager of China North Sales Centre Wang Fuzhu SDA Chief Accountant Yes 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. Full-time or part-time posts in Name Main work experience companies other than the shareholding companies 01/2000-10/2001, Director and General Manager of the Company; 10/2001-12/2002, Chairman of the Board of Directors of the Company; Chairman of the Board of Taikoo 04/2002-12/2005, Chairman of the Board and Jia Fuwen Shandong Aircraft Engineering President of SDA; Co., Ltd. 12/2002 -4/2005, Vice Chairman of the Board of the Company; 04/2005-12/2005. Chairman of the Board of the Company 01/2001-03/2002, Deputy Secretary of Party Committee of SDA; Chairman of the Board of 01/2000 -12/2005, director of the Company; Shangdong Jinping Aviation Food 03/2002 -12/2005, Secretary of Party Co., Ltd.; Li Junhai Committee of SDA; Chairman of the Board of 12/2002 -04/2005, Chairman of the Board of Shandong Airlines Qingdao Food Directors of the Company; Co., Ltd. 04/2005-12/2005, Vice Chairman of the Board of the Company. 01/2001-10/2001, Director, Vice General Manager and Chief Pilot; 10/2001-11/2002, Director and Vice General Zeng Guoqiang Manager of the Company; 12/2002 -12/2005, Director and General Manager of the Company. Chairman of the Board of Qingdao International Logistics Center Co., 01-10/2001, Director and General Manager of Ltd.; Qingdao Branch; Chairman of the Board of 10/2001-11/2002, Director and Vice General Su Zhongmin Shenzhen Heng Chi Forwarding Manager of the Company; Co., Ltd.; 12/2002-12/2005, Director and Standing Vice Chairman of the Board of General Manager. Shandong Air Combined Express Co., Ltd.. 01/2001-10/2001, Director of the Marketing Department of the Company; Chairman of the Board of 10/2001-12/2005, Vice General Manager of the Shandong Airlines Rainbow Jets Bai Weisan Company; Co., Ltd.. 11/2001-12/2005, Director of the Company; 05/2005-12/2005, General Manager of Qingdao Branch of the Company. 2001-2002, Director of Cash Management of the Financial Department of Air China; Xiao Feng 2002- 04/2003, Manger of Cash Management of the Financial Department of Air China; 04/2003-04/2005, Deputy Manager of - - 10 Shandong Airlines Co., Ltd. Annual Report 2005 Financial Department of Air China ; 04/2005- 12/2005, Director of the Company; 08/2005- 12/2005, Chief Accountant of the Company. 02/2001-06/2005, General Manager of Bejing Sales Department of Air China; 04/2005-12/2005, Director of the Company; Jia Tiesheng 06/2005-12/2005, Member of Committee on Commerce, General Manager of China North Sales Centre 2001 till now, Director of Asset Management Department of Shandong Economic Kou Zunxian Development and Investment Company; 04/2005-12/2005, Director of the Company. Professor of Beijing University of Aeronautics and Astronautics, Nanjing University of Aeronautics 2001-12/2002, Director of the Department of and Astronautics, Civil Aviation Planning, Science and Technology of CAAC; Wang Zhi University of China, and Shanghai 12/2002 -12/2005, Independent Director of the Tongji University; Company. Independent director of China Southern Airlines and Hainan Airlines 2001-01/2003, Secretary of Party Committee of Shandong Institute of Economics; 01/2003 till now, member of CPPCC 07/2002 till now, independent Hu Jijian Committee of Shandong Province and director of Luyin Investment professor of Shandong Institute of Economics; Group. 12/2002 -12/2005, Independent Director of the Company. 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 Li Xiuqin Company; 05/2003 -12/2005, Vice Chairwoman of the Board of Shandong Jinyang Business Management Co., Ltd. and Independent Director of the Company. 2001-12/2003, Dean of Law School of Yantai 01/2000 till now, lawyer at University; Shandong Sunsum Law Firm; 12/2003 till now, Vice President of Yantai 06/2003 till now, Independent Fang Shaokun University; Director of Yantai Oriental 12/2004 -12/2005, Independent Director of the Electronics Information Industry Company. Group Co., Ltd.. 01/2001-04/2005, Director of the Company; 2001 till now, Chief Accountant of SDA; Wang Fuzhu 05/2005-12/2005, Convener of the Supervisory Committee of the Company. 2001-01/2003, Vice Director of the Financial Department of SDA; Wang Wuping 2001 -12/2005, Supervisor of the Company ; 01/2003 till now, Director of the Financial Department of SDA. 2001-10/2002, Squadron Troop Leader of the Wang Xianlin Company; 10/2002-01/2003, Vice Group Leader of NO. 2 - - 11 Shandong Airlines Co., Ltd. Annual Report 2005 Flying Group of the Company; 01/2003 till now, Group Leader of NO. 2 Flying Group of the Company; 12/2002 -12/2005, Supervisor of the Company. 2001-12/2005, Supervisor of the Company; 2001-07/2002,Vice Manager of Beijing Sales Department of the Company; 07/2002-05/2005, Director of Beijing Station Li Jiemin as well as Vice Manager of the Beijing Sales Department of the Company; 05/2005 till now, Director of Beijing Station of Ground Service Department of the Company. 2001-01/2002, Shandong Pharmaceutical Group Corporation; 01/2002-08/2004, HR Department of SDA; 12/2002-12/2005, Supervisor of the Company; Guo Caisen 08/2004-5/2005, Financial Department of the Company; 005/2005 till now, Management and Securities of the Company. Chairwoman of the Board of 2001-04/2005, Director of the Company; Shandong International Aero 10/2001-12/2005, Vice General Manager of the Training Co., Ltd., Song Yuxia Company; Chairman of the Board of Qingdao 10/2002-05/2005, General Manager of Feisheng International Aero Qingdao Branch of the Company. Technical Training Co., Ltd. 01/2001-10/2001, Director of the Locomotive Engineering Department of the Company, Supervisor of the Company; Chairman of the Board of Yu Haitian 10/2001-03/2003, General Engineer of the Shandong Xiangyu Aero Technical Company; Services Co., Ltd. 03/2003-12/2005, Vice General Manager of the Company. 2001-12/2002, Director of Department of Planning and Finance, Deputy Chief Accountant; 01/2003-08/2005, Chief Accountant of the Li Qing’en Company; 01/2005-12/2005, Deputy Manager of the Company, Secretary of the Board of the Directors. 01/2001-10/2001, Deputy Chief Pilot and Director of the Security Supervision Zhang Qingshe Department of the Company; 10/2001 -12/2005, Chief Pilot of the Company. 2001-02/2002, General Manager of Taikoo Shandong Aircraft Engineering Co., Ltd.; 2001-11/2002, Director of the Company; 02/2002-03/2003, Chairman of the Board of He Guobin Taikoo Shandong Aircraft Engineering Co., Ltd.; 03/2003 -12/2005, 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. The allowance for each independent director - - 12 Shandong Airlines Co., Ltd. Annual Report 2005 was RMB 30 thousand per year as the basic number plus an extra allowance of RMB 400 for every working day. Total amount of annual Name Title remuneration Note (RMB’000, before tax) From Jan. to April, drawing remuneration from SDA; since Jia Fuwen Chairman of the Board 257.7 May,began to draw remuneration from. the Company From Jan. to April, drawing Vice Chairman of the remuneration from the Li Junhai 123.7 Board Company; since May, began to draw remuneration from SDA. Zeng Director, General 342.7 Guoqiang Manager Director, Standing Su Zhongmin 266.9 Deputy General Manager Director, Deputy General Bai Weisan 270.0 Manager Began to draw remuneration Director, Chief Xiao Feng 54.5 from the Company since Accountant October. Wang Zhi Independent Director 36.8 Hu Jijian Independent Director 36.8 Li Xiuqin Independent Director 34.4 Fang Shaokun Independent Director 36.0 Supervisor, Team Leader Wang Xianlin 160.5 of the 2nd flying Team Supervisor, Director of Li Jiemin 126.4 Beijing Station Supervisor, Enterprises Department of Guo Caisen 88.4 Management and Securities Yu Haitian Deputy General Manager 263.2 Song Yuxia Deputy General Manager 266.6 Deputy General Manager, Li Qing’en Secretary of the Board of 249.4 Directors Zhang Chief Pilot 269.2 Qingshe He Guobin General Engineer 249.5 Total 3132.7 Director Mr. Jia Tiesheng drew his remunerations from Aviation China Limited, not from the Company; Director Mr. Kou Zunxian drew his remunerations from Shandong Economic Development and Investment Company, not from the Company; Convener of the Supervisory Committee Mr. Wang Fuzhu, Supervisor Mr. Wang Wuping drew their payments from SDA, the shareholding company, not from the Company. (III) Particulars about changes of directors, supervisors and senior executive 1. Directors - - 13 Shandong Airlines Co., Ltd. Annual Report 2005 In March, 2005, Mr. Wang Fuzhu, Ms. Song Yuxia resigned their posts of Directors of the 2nd Board of Directors of the Company. In April, 2005, Mr. Xiao Feng, Jia Tiesheng, Kou Zunhai were elected Directors of the 2nd Board of Directors of the Company in 2004 Annual Shareholders’ General Meeting. In April, 2005, Mr. Li Junhai resigned his post of Chairman of Board of Director of the Company; with the approval of the 14th Meeting of the 2nd Board of Directors, Mr. Jia Fuwen was elected Chairman of Board of Director of the Company and Mr. Li Junhai was elected Vice Chairman of Board of Director of the Company. 2. Supervisors In March, 2005, Mr. Wang Kaixun resigned his posts of Supervisor and Convener of the 2nd Supervisory Committee. In April, 2005, Mr. Wang Fuzhu was elected Supervisor of the 2nd Supervisory Committee with the approval of 2004 Annual Shareholders’ General Meeting and Convener of the Supervisory Committee with the approval of the 9th Meeting of the 2nd Supervisory Committee. 3. Senior executives In January, 2005, the 1st Extraordinary Meeting of the 2nd Board of Directors 2005 exempted the posts of Deputy General Manager, Secretary of Board of Directors which Mr. Zheng Bao’an held, and appointed Li Qing’en as Deputy General Manager, Secretary of Board of Directors (concurrently). In August, 2005, the 15th Meeting of the2nd Board of Directors of the Company appointed Mr. Xiao Feng as Chief Accountant, and Mr. Li Qing’en did no longer concurrently hold the post as Chief Accountant. Notes: The tenure for the 2nd Board of Directors of the Company expired dated December 24, 2005, and the Company carried on the election on Changing of Board of Directors on March 15, 2006. Mr. Sun Yude, Mr. Zhang Xingfu, Mr. Zeng Guoqiang, Mr. Su Zhongmin, Mr. Bai Weisan, Mr. Xiao Feng, Mr. Wang Mingyuan, Mr. Kou Zunhai and Ms. Wang Jieming were elected Directors of the 3rd Board of Directors; Mr. Wang Zhi, Mr. Hu Jijian, Mr. Fang Shaokun, Mr. Wei Jincai were elected Independent Directors of the 3rd Board of Directors; Mr. Wang Fuzhu, Mr. Wang Wuping, Mr. Gao Lihua were elected Supervisors of the 3rd Supervisory Committee, and Mr. Wang Xianlin, Ms. Zhou Qiaoyan were elected supervisors of staff representatives in the Staff Representative Conference of the Company: the five persons were together incorporated into the 3rd Supervisory Committee of the Company. With the examination and approval of the 1st Meeting of the 3rd Board of Directors, Mr. Zhang Xingfu was elected Chairman of Board of Directors, and Mr. Sun Yude was elected Vice Chairman of Board of Directors; Mr. Wang Fuzhu was elected Chairman of the Supervisory Committee with the approval of the 1st Meeting of the 3rd Supervisory Committee. The 3rd Board of Directors appointed Mr. Zeng Guoqiang as General Manager, Mr. Su Zhongmin as Standing Deputy General Manager; Mr. Bai Weisan, Ms. Song Yuxia, Mr. Yu Haitian, Mr. Li Qing’en (concurrently) as Deputy General Manager; Mr. Zhang Qingshe as Chief Pilot; Mr. He Guobin as General Engineer; and Mr. Xiao Feng as Chief Accountant. The public notice of was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Mar. 16, 2006. (IV) About staff - - 14 Shandong Airlines Co., Ltd. Annual Report 2005 Ended the report period, the Company had 2,561 employees in total, including 19 graduate students (Master Degree and Doctor Degree) or above, 1,361 persons graduated from 3-years regular college or above. The staff structure is as follows: Type of employee Number Proportion holding total staff Flight personnel 333 13% Aircraft crew and maintenance man 363 14.17% Salespeople 504 19.68% Air host and hostess 366 14.29% Accountant 98 3.83% Others 837 32.68% At the end of the report period of the Company, there are 21 retirees in the Company. 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. (II) Performance of Independent Directors Since the Independent Directors of the Company, Mr. Wang Zhi, Mr. Hu Jijian and Mrs. Li Xiuqin, Mr. Fang Shaokun 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 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: Present Times for Presenting Entrusted Absent Name the Board of in person presence Remarks (Times) Directors this year (Times) (Times) Attend 3 times as non- Wang Zhi 5 5 0 0 voting delegate for Supervisory Committee Attend 3 times as non- Hu Jijian 5 5 0 0 voting delegate for Supervisory Committee Attend 1 time as nonvoting Li Xiuqin 5 4 0 1 delegate for Supervisory Committee Attend 3 times as non- Fang Shaokun 5 5 0 0 voting delegate for Supervisory Committee 2. Objections on the related terms of the Company offered by the independent directors: Name of the Independent Terms of Objections Contents of Remarks Directors Objections - - 15 Shandong Airlines Co., Ltd. Annual Report 2005 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. (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 on the Shareholders’ General Meeting In the report period, the Company held one Shareholders’ General Meeting as the Annul Shareholders’ General Meeting 2004. 1. Notification, convening and holding of the Shareholders’ General Meeting At a.m.9:00 on April 29, 2005, the Company held the 2004 Annual Shareholders’ General Meeting in conference room of 31/F, SDA Bulg., the Meeting made a notice by means of public notice published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Mar. 29, 2005. Shareholders and entrusted proxies who attended the Meeting totalled 11 persons, representing for 265,955,050 shares of the Company; one B-share shareholder authorized HSBC Shanghai Branch to entrust secretary office of the Board to vote on their behalf, representing for 382,000 shares of the Company, the said representing the Company’s shares totalled 266,337,050 shares, accounting for 66.5843%; including state-owned legal share amounting to 259,801,000 shares, accounting for 64.95%; domestic legal share amounting to 199,000 shares, accounting for 0.05%; domestically listed foreign shares (B shares) amounting to 6,337,050 shares, accounting for 1.58%. The Meeting was presided by current Chairman of the Board Mr. Li Junhai and directors, supervisors and senior executives attended the meeting. The convening and holding of the meeting were in accordance with regulations of the Company Laws of the PRC, the Opinion on Convening General Meetings of Listed Company and Articles of Association. 2. Resolutions approved by the Shareholders’ General Meeting and its disclosure By means of open vote, the meeting approved the following proposals item by item: (1) Annual Report 2004 and its summary of Shandong Airlines Co., Ltd.; (2) 2004 Work Report of the Board of Directors of Shandong Airlines Co., Ltd.; (3) 2004 Work Report of the Supervisory Committee of Shandong Airlines Co., Ltd.; (4) 2004 Financial Settlement Report of Shandong Airlines Co., Ltd.; (5) 2004 Plan on Profit Distribution of Shandong Airlines Co., Ltd.; (6) Proposal on Amendment of Articles of Association; (7) Proposal on Adjustment of Members and Structure of the Board of Directors; (8) Proposal on Adjustment of Members of the Supervisory Committee; (9) Proposal on Carrying out Coordinate Guarantee with Shandong Gold Corporation Ltd.; (10) Proposal on Reengagement of CPAs and its Remuneration; (11) Proposal on 2005 Routine Related Transaction; - - 16 Shandong Airlines Co., Ltd. Annual Report 2005 (12) Proposal on Amendment of Rules of Procedure for the Shareholders’ General Meeting; (13) Proposal on Amendment of Rules of Procedure for the Board of Directors; (14) Proposal on Amendment of Independent Director Work System. The resolutions of the meeting have been published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated April 30, 2005. VII. Report of the Board of Directors (I) Discussion and analysis to the operation 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 operation cost, the Company established system of responsibility for work of reducing - - 17 Shandong Airlines Co., Ltd. Annual Report 2005 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) Operations in the report period 1. Scope of main operations and their status The Company is mainly engaged in business of passenger and cargo civil aviation transportation and air traffic from initial Shandong province to Hong Kong SAR, Macao SAR and periphery countries and concurrently is engaged in hotel and food service. 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 million, resulted in profit decreasing. 2. Operations and achievements of holding and share-holding companies (1) Qingdao International Airlines Logistics Center Co., Ltd. Its share controlled by the Company and it is mainly engaged in air cargo storage, ground dispatching, e-commerce, the 3rd party logistics design and implementation, logistics business consultant and services concerned with registered capital amounting to RMB 30 million. In the report period, this company realized income from main operations amounting to RMB 3,173.51 thousand and net profit amounting to RMB 748.39 thousand. - - 18 Shandong Airlines Co., Ltd. Annual Report 2005 (2) Shenzhen Shandong Airlines Hengchi Freight Co., Ltd. Its share controlled by the Company and is mainly engaged in sales agency business of civil aviation passenger & cargo transportation, civil business and sales of materials with registered capital amounting to RMB 1.8 million. In the report period, this company realized income from main operations amounting to RMB 1,078,29 thousand and net profit amounting to RMB 360.71 thoudsand. (3) Shandong Airlines United Express Co., Ltd. Its share controlled by the Company and it is mainly engaged in common cargo freight service, freight agency, development and sales of computer soft with registered capital amounting to RMB 1 million. In the report period, this company realized income from main operations and net profit amounting to RMB 1,650.33 thousand and RMB 764.41 thousand respectively. (4) Sichuan Airlines Co., Ltd. In the report period, as audited, its share participated by the Company and it realized through auditing income from main operations amounting to RMB 3,335,504.72 thousand and net profit amounting to RMB 30,015.12 thousand. (5) Shandong TAECO Aircraft Engineering Co., Ltd. In the report period, its share participated by the Company and realized income from main operations and profit amounting to RMB 89,393,83 thousand and RMB 8,552.68 thousand respectively as audited. (6) China Civil Aviation Information Network Co., Ltd. In the report period, its share participated by the Company and its auditing work of 2005 is not finished yet at present. (7) Shandong Airlines Rainbow Jet Co., Ltd. In the report period, its share participated by the Company and realized income from main operations and profit amounting to RMB 50,115.72 thousand and RMB -46,246.95 thousand respectively as audited. (8) Jinan International Airport Co., Ltd. In the report period, its share participated by the Company and its auditing work of 2005 is not finished yet at present. 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 up 26.51 % 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 up 5.71 % of the total annual amount of sales of the Company. 4. Problems and difficulties from operations and their solutions (1) In the report period, rising in aviation oil price resulted in operation cost ascending endlessly, only lasting rise in oil has increased the operating cost of the Company amounting to RMB 135 million. Faced with the disadvantage phase of oil price functioning in high order, the Company continuously exhaustive developed work of increasing income and reducing expenditure, regarded saving energy and reducing consumption as the key task of production operation. In 2006, the Company would further enhance cost control and establish sound budget assessment mechanism, subdivide and decompose cost index into each link and combined with the annual assessment of destination responsibility for whole staff and strive for a new performance in 2006. (2) Running cost for series of CRJ airplanes of the Company was far beyond high which resulted in larger deficit of this airplane in 2005. The Company and Air China have developed Branch Flight Corporation during the period of March 2005 to March 2006, in which period the Company took charge of supplying five flights of CRJ-200 airplanes - - 19 Shandong Airlines Co., Ltd. Annual Report 2005 (actually three running) and related crew, in charge of responsibility for airworthiness, supplying airplane maintenance and its related fees. Air China was in charge of supplying flight resources, market development and events of plane ticket sales, and ensured a certain monthly mean availability for flights. Air China pay to the Company according to dated hour income. The implementation of two Parties Corporation would be favourable to realize optimizing configuration of two parties’ branch flights aviation resources, fulfilled resources complementary and reduced deficit of this flight in some certain degree. In 2006, the Company would further expand the corporation scale with Air China in branch flights; increase transport capacity put-in of branch flight; adopted measures to disposal of the left CRJ so as to reduce deficit. (3) Ended as December 31, 2005, the related party, Shandong Airlines Rainbow Jet Co., Ltd. (hereinafter referred to as Rainbow Jet), owed the Company a large amount of rent to- be-paid later amounting to RMB 147,797,516. Whereas Rainbow Jet had no actual solvency, the Company withdrew provision for bad debts reserve for the said other account receivable amounting to RMB 123,114,616 according to related regulations. At the end of March 2006, by supporting of Air China Group and Shandong Province Government, it could end lease agreement with foreign party and off hire 2 flights of CL604 Jet so as to settle capital occupied by related party resulted from disbursed in advance rent; meanwhile the Company would actively research and explore clearing plan for solving capital occupied by Jet Company and try our best to finally settle it in 2006. (III) Investments 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 but lasting to the report period in the Company. 2. Investment of non-raised proceeds In the report period, there was no investment of non-raised proceeds (IV) Financial status of the Company(According to PRC GAAP) 1. Financial status and reasons for changes Unit: RMB Changing Changing rate Items 2005 2004 amount ( + ) ( + %) monetary fund 762,540,965 112,794,444 649,746,521 576.04% Total current assets 1,311,737,232 503,614,326 808,122,906 160.46% Total assets 6,551,168,542 3,758,032,303 2,793,136,239 74.32% Original value of fixed assets 5,677,034,016 2,612,440,020 3,064,593,996 117.31% Construction in progress 89,796,313 979,381,581 -889,585,268 -90.83% Shareholders’ equity 265,865,983 562,343,519 -296,477,536 -52.72% Short-term debt 1,778,756,400 869,000,000 909,756,400 104.69% Other fund payable 97,631,669 9,527,219 88,104,450 924.77% Other payables 243,620,911 158,181,634 85,439,277 54.01% Accrued expenses 216,747,838 171,946,946 44,800,892 26.06% Total current liability 2,874,314,723 1,553,608,128 1,320,706,595 85.01% Long-term loans 1,765,570,034 1,200,608,019 564,962,015 47.06% Long-term payables 1,626,142,427 421,082,070 1,205,060,357 286.18% - - 20 Shandong Airlines Co., Ltd. Annual Report 2005 Undistributed profit -242,860,315 54,892,777 -297,753,092 -542.43% Income from main operation 2,891,016,605 2,229,357,012 661,659,593 29.68% Cost from main operation 2,527,092,534 1,765,497,319 761,595,215 43.14% Administrative cost 249,090,248 90,542,102 158,548,146 175.11% Operation profit -281,034,341 20,663,159 -301,697,500 -1460.07% Net profit -273,637,982 11,065,238 -284,703,220 -2572.95% Net additional amount of cash and cash equivalents -13,661,259 -258,229,144 244,567,885 -94.71% Items Main reason for change There occurred an amount of USD loan business pledged as RMB deposit between monetary fund Bank of China and the Company in 2005 Total current assets Influenced by increase of monetary fund Original value of Increasing 4 flights of self-purchase airplanes and 3 financing leased airplanes in the fixed assets report period Increasing 4 flights of self-purchase airplane and 3 financing leased airplanes in the Total assets report period Construction in Transferring imported airplane into fixed assets progress Shareholders’ Deficit in this period equity Increasing pledged loans amounting to USD 80 million for purchasing airplanes in Short-term debt this period Construction fund of infrastructural facilities of civil aviation payable and collecting Other fund payable airport construction fees increased in this period. Other payables Operation scale increased as well as cost payable Accrued expenses Operation scale increased as well as accrued expenses Total current Influenced by increase of short-term loans liability Long-term loans Increase of loans for purchasing airplanes in this period Signing an financing leasing agreement of three flights of B737-800 airplanes with Long-term payables Shenzhen Finance Leasing Co., Ltd. so as to increase long-term payables Undistributed profit Deficit in this period Income from main Expansion of operation scale operation Cost from main Resulting from rise in aviation oil price and increase of fright engine overhaul cost operation Resulting from withdrawing provision for bad debts of account receivable Administrative cost amounting to RMB 123,114,616 from Shandong Rainbow Jet Co., Ltd. Rise in aviation oil price, increase of overhaul cost and reserve for bad debts in this Operation profit period Rise in aviation oil price, increase of overhaul cost and reserve for bad debts in this Net profit period Net additional amount of cash and Financing activities increased cash inflows cash equivalents Items 2005 2004 Changing amount ( + ) Changing rate (+ %) Net cash flow rising from operating activities 217,831,950 404,129,499 -186,297,549 -46.10 - - 21 Shandong Airlines Co., Ltd. Annual Report 2005 Net cash flow rising from - - investing activities 2,811,635,400 181,913,566 -2,629,721,834 1,445.59 Net cash flow rising from - collecting funds 2,580,915,817 480,445,077 3,061,360,894 -637.19 Increased amount of cash - - and cash equivalents 13,661,259 258,229,144 244,567,885 -94.71 Items Reasons for changes Net cash flow rising from operating activities Cost items such as air oil cost and maintenance cost increased Net cash flow rising from investing Increasing 4 flights of self-purchase airplanes and 3 financing leased activities airplanes in the report period Net cash flow rising from collecting funds Increasing 4 flights of self-purchase airplanes and 3 financing leased airplanes in the report period Increased amount of cash and cash equivalents Increasing Cash inflows from financing 2. Changes in accounting policies and accounting estimate and their influences (1) Change in accounting policy 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) Readjustment on accounting mistake 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. (3) Influence on amount at period-begin and amount in previous year in accounting statement resulted from change in accounting policy and readjustment on accounting mistake Unit: RMB Amount at year-be Influence of Influence of Amount at year-be gin before adjustm accounting policy accounting mistake gin after adjustme Items of accounting statement ent change readjustment nt Type of assets liability Inventory 206,260,250 -151,731,463 —— 54,528,787 Original value of fixed assets 2,365,975,011 246,465,009 —— 2,612,440,020 Accumulated amortization 483,726,818 51,019,774 —— 534,746,592 Accrued cost 97,501,718 —— 74,445,228 171,946,946 Surplus public reserve 29,083,430 6,644,378 -11,166,784 24,561,024 Including: welfare reserve 9,690,303 2,214,793 -3,722,262 8,182,834 Undistributed profit 81,101,827 44,295,854 -70,504,904 54,892,777 Amount in last ye Influence of Influence of Amount in last ye ar before adjustme accounting policy accounting mistake ar after adjustment - - 22 Shandong Airlines Co., Ltd. Annual Report 2005 nt change readjustment Type of profit and profit distribution statement Cost from main operation 1,735,347,945 -44,295,854 74,445,228 1,765,497,319 Undistributed profit at the year-begin 46,104,417 -582,082 —— 45,522,335 Withdrawal of statuary surplus reserve 4,144,801 4,429,585 -7,444,522 1,129,864 Withdrawal of statuary welfare reserve 2,072,401 2,214,793 -3,722,262 564,932 3. Change in accounting evaluation and its influence 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. (V) Influence of changes in productive and operative environment, macro-policies and regulations on the Company 1. During the report period, aviation oil has experienced 4 times rising in price, the average unit price of aviation oil of the Company in 2005 increased exceeding 24% over in 2004. Aviation oil cost accounting for the most part of cost from main operation in Airlines Company so that rise in aviation oil price resulted in large margin increase of cost of main operation. 2. With decisions of National Development and Reform Commission and CAAC (General Administration of Civil Aviation of China), it is permitted that airline company in civil flight course recover to collect bunker surcharge which made increase in income of the Company. (VI) Explanation of the Board on interpretative explanation paragraph in the auditors’ report BDO Reanda International Certified Public Accountants and Reanda Certified Public Accountants audited Financial Report 2005 of the Company according to International Accountant Standards and China Accountant Standards respectively and presented standard unqualified Auditor’s Report. (VII) Work plan of the Board of Directors for year 2006 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 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 - - 23 Shandong Airlines Co., Ltd. Annual Report 2005 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 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 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; thirdly 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 - - 24 Shandong Airlines Co., Ltd. Annual Report 2005 reasonably and dispatch transport capacity; fourthly further optimize allocating resources, realize intension increase through enhancing management, controlling cost, adjusting structure and innovating technology; 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. (XIII) Capital needs in realizing operation plan and using plan and capital source In 2006, the existed financial structure and loans arrangement from bank could satisfy capital need in normal operations of the Company. (IX) Routine work of the Board of Directors 1. The Board of Directors of the Company totally held five meetings in 2005 (1) On Jan., 24, 2005, the Company held the 1st meeting of the 2nd Board of Directors for the year 2005. The public notice of the resolutions of the meeting was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Jan. 25, 2005. (2) On Mar. 26, 2005, the Company held the 13th Meeting of the 2nd Board of Directors. The public notice of the resolutions of the meeting was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Mar. 29, 2005. (3) On Apr. 29, 2005, the Company held the 14th Meeting of the 2nd Board of Directors. The public notice of the resolutions of the meeting was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Apr. 30, 2005. (4) On Aug. 19, 2005, the Company held the 15th Meeting of the 2nd Board of Directors. The public notice of the resolutions of the meeting was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Aug. 24, 2005. (5) On Oct. 28, 2005, the Company held the 2nd Extraordinary Meeting of the 2nd Board of Directors for the year 2005. The public notice of the resolutions of the meeting was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Oct. 29, 2005. 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 - - 25 Shandong Airlines Co., Ltd. Annual Report 2005 Meeting strictly in compliance with the resolutions and authorization of Shareholders’ General Meeting. (1) The implementation of profit distribution of the Company of 2004 According to Profit Distribution Preplan 2004 of SDA approved by Annual Shareholders’ General Meeting 2004 held on Apr. 29, 2005, calculated based on total share capital amounting to 40,000,000 shares, the Company distributed RMB 0.60 cash bonus (tax included) per 10 shares to the whole shareholders totalling RMB 24 million. The profit distribution has been accomplished in June 2005. (2) The Board of Directors of the Company strictly implemented other various resolutions approved by Shareholders’ General Meeting. (X) Profit distribution preplan or preplan on converting capital public reserve into share capital 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. VIII. Report of the Supervisory Committee (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. Particulars about meetings held by the Supervisory Committee in the report period: 1. On Mar. 26, 2005, the 8th meeting of the 2nd Supervisory Committee was held in the meeting room of SDA Building. The meeting examined and approved: a) Annual Report 2004 of Shandong Airlines Co., Ltd. and its summary; b) Work Report of the Supervisory Committee 2004 of Shandong Airlines Co., Ltd.; c) Proposal on Adjustment on Members of the 2nd Supervisory Committee; d) Report on Supervisory Work 2004 by Supervisory Committee of Shandong Airlines Co., Ltd. - - 26 Shandong Airlines Co., Ltd. Annual Report 2005 The public notice of the resolutions was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Mar. 29, 2005. 2. On Apr. 29, 2005, the 9th meeting of the 2nd Supervisory Committee was held in the meeting room of SDA Building. The meeting elected Mr. Wang Fuzhu as convener of the 2nd Supervisory Committee. The meeting examined and approved the 1st Quarterly Report 2005 of SDA. The public notice of the resolutions was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Apr. 30, 2005. 3. On Aug. 19, 2005, the 10th Meeting of the 2nd Supervisory Committee was held in the conference room of SDA Building. The Meeting examined and approved Semi-annual Report 2005 and its summary of SDA. The public notice of the resolutions was published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Aug. 24, 2005. (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 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. IX. Significant Events (I) The Company had no significant lawsuits or arbitrations in the report period. - - 27 Shandong Airlines Co., Ltd. Annual Report 2005 (II) Purchase and sales of assets, mergence in the report period Except delivery of new airplane disclosed, the Company had no other Purchase and sales of assets, mergence in the report period. (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 principles of publicity, fairness and honesty, and the trading price was fair and there existed no behaviours harmful to the interests of shareholders. 1. Purchase and sales of goods, providing and receiving labour services (1) In the report period, there occurred an amount of RMB 55,730,714 paid to Taikoo Shandong Aircraft Engineering Co., Ltd. for aircraft maintenance, taking up 16.31 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 45,374,095 paid to Shandong Jinping Foods Co., Ltd and Qingdao Jinping Foods Co., Ltd. for catering, taking up 16.31 of the same kind of transactions. The Company paid in cash according to the market price about the transaction. (3) In the report period, there occurred an amount of RMB 159,137,513 paid to branch flight of Air China for rent. The Company paid in negotiable price the two Parties concerned about the transaction. 2. The Company and its controlling shareholder’s cooperative investment The Company had no cooperative investment with its controlling shareholders in the report period. 3. Credits and liabilities between the Company and related parties 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. (IV) Significant contracts and implementation - - 28 Shandong Airlines Co., Ltd. Annual Report 2005 1. Assets entrustment, contract and lease In order to meet the demands of transportation, the Company transferred imported B737- 300 airplanes in operation leasing in January, April, and September of 2005. 2. Significant guarantee. 2004 Annual Shareholder’s General Meeting examined and approved the Proposal on Carrying on Coordinated Guarantee with Shandong Gold Group Co., Ltd. The Company and Shandong Gold Group Co., Ltd provided the guarantee mutually for the respective RMB 0.1 billion and the period for guarantee was one year. Shandong Gold Group Co., Ltd. has repaid off the loans in March 2006 so the agreement has been terminated. The aforesaid notices were published on China Securities dated March 29, 2005, Securities Times dated April 30, 2005 and Hong Kong Ta Kung Pao dated May 10, 2005. 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 3,544,326.43 thousand. 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 In December, 2004, Air China Group, the controlling shareholder of Air China provided the letter of guarantee for Shandong Airlines Rainbow Jet Co., Ltd to undertake the associated responsibility on the loans amounted to RMB 0.1 billion from the Company. The deadline of guarantee was December 31, 2005 and SDA provided the counter- guarantee. In the report period, the debts of Shandong Airlines Rainbow Jet Co., Ltd did not repay the Company and Air China Group did not fulfill the obligation of guarantee. (VII) Engagement of Certified Public Accountants In the report period, the Company continued to engage Reanda Certified Public Accountants and BDO Reanda Certified Public Accountants as Auditing Organizations of the Company. 2004 Annual Shareholders’ General Meeting examined and approved the Proposal on Renewal of Engaging CPA and its Remunerations, the Company engaged Reanda Certified Public Accountants and BDO REANDA Certified Public Accountants as 2005 Auditing Organizations of the Company. In the report period, the Company should pay an annual auditing fee of RMB 800 thousand. The aforesaid auditing organizations provided auditing services to the Company for the second time. (VIII) No punishment was imposed on the Company, its directors or senior executives by the supervisory authorities in the report period. (IX) The Company experienced neither material events as stated in Article 67 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. X. Financial Report - - 29 Shandong Airlines Co., Ltd. Annual Report 2005 AUDITORS' REPORT BDO REANDA [2006] No. 1025B 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, 2005 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, 2005 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 28, 2006 - - 30 Shandong Airlines Co., Ltd. Annual Report 2005 CONSOLIDATED INCOME STATEMENT AT DECEMBER 31, 2005 NOTES 2005 2004 RMB’000 RMB’000 OPERATING REVENUE 5 Passenger 2,759,233 2,144,761 Cargo and mail 112,579 81,319 Interest income 9,731 3,283 Government grant 7 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 8 (88,609) 129,166 FINANCE COSTS 9 (176,159) (117,365) SHARE OF RESULTS OF ASSOCIATES 70 26 INCOME (LOSS) FROM INVESTMENTS 10 870 3,039 (LOSS) PROFIT BEFORE TAX (263,828) 14,866 INCOME TAX 11 (464) 3,573 (LOSS) PROFIT FOR THE YEAR (264,292) 18,439 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 13 (66.2) cents 4.5 cents - - 31 Shandong Airlines Co., Ltd. Annual Report 2005 CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2004 NOTES 2005 2004 RMB’000 RMB’000 ASSETS Non-current assets Property, plant and equipment 14 4,950,982 2,165,165 Land use rights 15 14,884 15,201 Interests in associates 17 298 228 Advances on aircraft and related equipment 63,566 886,362 Other investments 18 101,052 91,052 Deferred tax assets 19 24,299 24,299 Term deposit 20 30,263 - 5,185,344 3,182,307 Current assets Flight equipment spare parts and other inventories 21 57,660 39,749 Trade and other receivables 22 438,726 228,626 Amount due from holding company 23 5,500 1,083 Amount due from related parties 24 47,311 100,535 Pledged deposit 25 664,181 - Bank balances and cash 68,097 112,794 1,281,475 482,787 TOTAL ASSETS 6,466,819 3,665,094 - - 32 Shandong Airlines Co., Ltd. Annual Report 2005 CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2005 2005 2004 RMB’000 RMB’000 LIABILITIES AND SHAREHOLDERS’ EQUITY Shareholder’s equity Share capital 26 400,000 400,000 Reserves 27 (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 28 1,765,570 1,200,608 Obligations under finance leases -due after one year 29 1,626,142 421,082 Deferred Income 30 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 31 14,248 9,856 Tax liabilities 187 169 Bank loans-due within one year 28 1,915,476 962,336 Obligations under finance leases -due within one year 29 181,318 131,295 2,874,315 1,553,719 TOTAL LIABILITIES AND SHAREHOLDER’S 6,466,819 3,665,094 EQUITY The financial statements were approved by the board of directors and authorised for issue on March 28, 2006 and are signed on its behalf by: _____Zhang Xingfu______ ______Xiao Feng________ DIRECTOR DIRECTOR - - 33 Shandong CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2005 Shareholder’s Equity Total reserves To Statutory Statutory Retained sha Share Capital Total surplus public welfare earnings cap capital reserve reserves reserve fund (deficits) an rese RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB Balance as at January 1, 2004 As previously reported 400,000 35,372 15,248 7,618 308 58,546 458 Prior year adjustment - - - - (7,310) (7,310) (7 Restated balance 400,000 35,372 15,248 7,618 (7,002) 51,236 451 Net profit for the year - - - - 18,058 18,058 18 Transfer to statutory Surplus reserve - - (2,568) (1,285) 3,853 - Balance as at December 31,2004 400,000 35,372 12,680 6,333 14,909 69,294 469 Balance as at January 1, 2005 As previously reported 400,000 35,372 19,393 9,690 79,284 143,739 543 Prior year adjustment - - (6,713) (3,357) (64,375) (74,445) (74 Restated balance 400,000 35,372 12,680 6,333 14,909 69,294 469 Net profit for the year - - - - (264,874) (264,874) (264 Transfer to statutory Surplus reserve - - 3,775 1,888 (5,663) - Distribution dividend for 2004 - - - - (24,000) (24,000) (24 Balance as at December 31,2005 400,000 35,372 16,455 8,221 (279,628) (219,580) 180 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 Shandong Airlines Co., Ltd. Annual Report 2005 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 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 - - 36 Shandong Airlines Co., Ltd. Annual Report 2005 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 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. 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 40. 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 These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The accounting policies and bases adopted in the preparation of the statutory financial statements differ in certain respects from IFRS. The differences arising from the restatement of the results of operations and the net assets for compliance with IFRS are adjusted in the consolidated financial statements but are not taken up in the accounting records of the Group. At the date of authorization of these financial statements, the following Standards and Interpretations were in issue but not yet effective: IFRS 6 Exploration for and Evaluation of Mineral Resources IFRS 7 Financial Instruments: Disclosure IFRIC 3 Emission Rights IFRIC 4 Determining whether an Arrangement contains a Lease IFRIC 5 Right to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds IFRIC 6 Liabilities Arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment - - 37 Shandong Airlines Co., Ltd. Annual Report 2005 IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies IFRIC 8 Scope of IFRS 2 The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group. These financial statements are presented in Renminbi (RMB) since that is the currency in which majority of the Group’s transactions are dominated. 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. 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 Group’s investments in its associates are accounted for under the equity method of accounting. The investments in associates are carried in the balance sheet at cost plus post-acquisition changes in the Group’s share of net assets of the associates, less any impairment in value. The income statement reflects the Group’s share of the results of operations of the associates. The Group’s - - 38 Shandong Airlines Co., Ltd. Annual Report 2005 investments in its associates include goodwill (net of accumulated amortisation and impairment) on acquisition, which is treated in accordance with the accounting policy for goodwill stated below. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless the Group has incurred obligations or made payments on behalf of the associates. 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. 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 - - 39 Shandong Airlines Co., Ltd. Annual Report 2005 Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. 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 towards rotables costs are recognised in profit or loss over the periods necessary to match them with the related costs and are deducted in reporting the related expense. 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. Taxation - - 40 Shandong Airlines Co., Ltd. Annual Report 2005 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. (i) Aircraft and related equipment Aircraft are depreciated, using the straight-line method, over their estimated useful lives of 15 to 20 years with a residual value of 5% of the original cost. (ii) Rotables - - 41 Shandong Airlines Co., Ltd. Annual Report 2005 Rotables are depreciated, using the straight-line method, over their estimated useful lives of 15 to 18 years with a residual value of 5% of the original cost. (iii) 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. (iv) 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. 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. - - 42 Shandong Airlines Co., Ltd. Annual Report 2005 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. 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. - - 43 Shandong Airlines Co., Ltd. Annual Report 2005 4. PRIOR PERIOD ERRORS Due to the difference in determination of maintenance time of aircraft engine, the maintenance and overhaul costs of five engines were not estimated in previous year and the financial statements of 2004 are restated accordingly. The effect of the errors on the relevant items in the financial statements is summarized as follows: 2004 Adjustment 2004 (Before Items Adjustment) (Restated) RMB’000 RMB’000 RMB’000 Balance sheet Trade and other payables 355,261 74,445 429,706 Reserves 143,739 (74,445) 69,294 Income statement Operating expenses- maintenance and overhaul 172,987 67,135 240,122 5. 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 6. 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. Sales revenue of domestic is 97% of total sales revenue of the Group. 7. GOVERNMENT GRANT 2005 2004 RMB’000 RMB’000 Grant for international airline 10,000 - Grant for Rotables 64 - - - 44 Shandong Airlines Co., Ltd. Annual Report 2005 10,064 - 8. (LOSS) PROFIT FROM OPERATIONS 2005 2004 RMB'000 RMB'000 Profit from operations has been arrived at after charging (crediting): Depreciation and amortization 204,742 180,866 Rental expenses under operating leases Aircraft and related equipment 313,263 242,236 Land and buildings 8,626 5,396 Retirement scheme contributions 29,111 42,073 Loss on disposal of property, plant and equipment 760 52 Net foreign exchange loss 38,473 809 9. FINANCE COSTS Finance costs comprise the following: 2005 2004 RMB'000 RMB'000 Interest on bank loans 150,036 113,602 Interest on obligations under finance leases 69,970 37,448 220,006 151,050 Less: Amounts included in the cost of qualifying assets (43,847) (33,685) 176,159 117,365 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 4.93% per annum. 10. INCOME (LOSS) FROM INVESTMENTS 2005 2004 RMB'000 RMB'000 Income from write-off of the investment - 6 Dividends from unlisted investments 870 3,033 870 3,039 11. INCOME TAX 2005 2004 RMB'000 RMB'000 The charge (credit) comprises: - - 45 Shandong Airlines Co., Ltd. Annual Report 2005 PRC income tax - the Group (464) (163) Deferred tax credit (note 19) - 3,736 (464) 3,573 12. DIVIDENDS The company announced that no dividend to be distributed for 2005. 13. BASIC EARNINGS PER SHARE 2005 2004 2004 (Before adjustment) (Restated) RMB’000 RMB’000 RMB’000 Net profit for the year (264,874) 85,193 18,058 No. of shares in issue 400,000 400,000 400,000 Basic Earnings per share (66.2)cents 21.3cents 4.5 cents No diluted earnings per share has been presented as there were no potential ordinary shares in issue in either 2005 or 2004. 14. PROPERTY, PLANT AND EQUIPMENT Construction Aircraft Rotable Machinery Vehicles Buildings in progress Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Cost At January 1, 2005 2,123,211 255,118 57,609 36,906 132,439 99,179 2,704,462 Transfer from CIP 103,565 - - - 7,436 (96,132) 14,869 2,860,313 83,568 9,111 - 23,183 2,981,968 Additions 5,793 Disposals - (6,710) (1,729) (5,405) - - (13,844) At December 31, 2005 5,087,089 331,976 64,991 37,294 139,875 26,230 5,687,455 Accumulated depreciation At January 1, 2005 436,145 56,178 22,698 17,706 6,570 - 539,297 Charge for the year 176,077 12,618 8,264 3,053 3,672 - 203,684 Eliminated on disposals - (972) (1,137) (4,399) - - (6,508) At December 31, 2005 612,222 67,824 29,825 16,360 10,242 - 736,473 NET BOOK VALUES At December 31, 2005 4,474,867 264,152 35,166 20,934 129,633 26,230 4,950,982 At December 31, 2004 1,687,066 198,940 34,911 19,200 125,869 99,179 2,165,165 The net book value of aircraft and related equipment held under finance leases at December 31, 2005 amounted to approximately RMB2,186,963,000 (2004: 909,586,000). 15. LAND USE RIGHT - - 46 Shandong Airlines Co., Ltd. Annual Report 2005 RMB'000 Cost At 1 January 15,809 Addition - At 31 December 15,809 Amortization At 1 January 608 Charge for the year 317 At 31 December 925 Carrying amount at 31 December 2005 14,884 Carrying amount at 31 December 2004 15,201 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, 2005 are as follows: 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 - - 47 Shandong Airlines Co., Ltd. Annual Report 2005 17. INTERESTS IN ASSOCIATES 2005 2004 RMB'000 RMB'000 Cost of investment 22,740 22,740 Share of net assets 58 (12) Impairment loss (22,500) (22,500) 298 228 Impairment loss has been provided for the whole amount of investment in SARJ. Details of the Group's associates at December 31, 2005 are as follows: Place of Proportion Proportion incorporation of ownership of voting Name of associate and operation interest power held Principal activity % % 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 18. OTHER INVESTMENTS 2005 2004 RMB'000 RMB'000 Unlisted investment: Legal person share, at cost (Note i ) 6,690 6,690 Unlisted shares, at cost (Note ii) 94,362 84,362 101,052 91,052 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. DEFERRED TAX ASSETS 2005 2004 RMB'000 RMB'000 At January 1 24,299 20,563 - - 48 Shandong Airlines Co., Ltd. Annual Report 2005 Credit for the year(note 11) - 3,736 At December 31 24,299 24,299 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, 2005 (10,701) 35,000 24,299 Credit (charge) for the year 10,701 (10,701) - At December 31, 2005 - 24,299 24,299 (i) The amount represents the tax effect of temporary differences attributable to the excess of depreciation charges over depreciation allowances. (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. 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. 20. TERM DEPOSIT Due date of term deposit is 5 November 2014 and bear interest at a floating rate. 21. FLIGHT EQUIPMENT SPARE PARTS AND OTHER INVENTORIES 2005 2004 RMB'000 RMB'000 Flight equipment spare parts 57,019 37,816 Other inventories 641 1,933 57,660 39,749 Included above are flight equipment spare parts of approximately RMB57,019,000 (2004: RMB37,816,000), which are carried at net realisable value. 22. TRADE AND OTHER RECEIVABLES 2005 2004 RMB'000 RMB'000 Carrying amount 444,436 234,675 Less: Allowance for bad debts (5,710) (6,049) Net amount 438,726 228,626 - - 49 Shandong Airlines Co., Ltd. Annual Report 2005 23. AMOUNT DUE FROM HOLDING COMPANY The amount due from Shandong Aviation Group is unsecured, interest-free and repayable on demand. 24. AMOUNT DUE FROM RELATED PARTIES 2005 2004 RMB'000 RMB'000 Carrying amount: Air china 中国国际航空技术服务有限公司 17,958 - Shandong International Aviation Training Co., Ltd. 山东国际航空培训有限公司 ("SIATC") 2,295 1,327 SARJ 山东航空彩虹公务机有限公司 147,798 97,475 Qingdao Feisheng international Aviation Training Co., Ltd 青岛飞圣国际航空技术培训有限公司 2,375 1,733 170,426 100,535 Less: Allowance for bad debts for SARJ (123,115) - Net amount 47,311 100,535 All the above-mentioned companies are subsidiaries of Shandong Aviation Group while SARJ is an associate of the Company. The amounts are unsecured, non-interest bearing and repayable on demand. 25. PLEDGED DEPOSIT Interest rate of pledged deposit is 2.25%. 26. SHARE CAPITAL 2005 & 2004 RMB'000 Registered, issued and fully paid 260,000 260,000,000 shares of domestic shares of RMB 1 each 140,000 140,000,000 shares of B shares of RMB 1 each 400,000 27. 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 - - 50 Shandong Airlines Co., Ltd. Annual Report 2005 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. 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. 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. 28. BANK LOANS 2005 2004 RMB'000 RMB'000 The bank loans are repayable as follows: Within one year 1,915,476 962,336 In the third to fifth year, inclusive - 73,330 After five years 1,765,570 1,127,278 3,681,046 2,162,944 Less: Amounts due within one year shown under current liabilities (1,915,476) (962,336) - - 51 Shandong Airlines Co., Ltd. Annual Report 2005 Amounts due after one year 1,765,570 1,200,608 Bank loans are summarised as follows: Secured 1,557,220 1,293,944 Unsecured - Guaranteed 1,462,070 869,000 - Pledged 645,616 - - Credit 16,140 - 2,123,826 869,000 The terms of secured bank loans are summarised as follows: 2005 2004 RMB’000 RMB’000 Denominated in RMB for Fixed interest rate at 5.76% per annum with final the acquisition of aircraft maturity in 2012 and related equipment 206,000 240,000 Denominated in RMB for Fixed interest rate at 5.76% per annum with final the acquisition of aircraft maturity in 2005 and related equipment - 50,960 Denominated in RMB for Fixed interest rate at 5.58% per annum with final the acquisition of aircraft maturity in 2006 and related equipment 200,000 - Denominated in RMB for Fixed interest rate at 5.76% per annum with final the acquisition of aircraft maturity in 2005 and related equipment 34,930 - Denominated in RMB for Interest at market rate with final maturity in 2019 the acquisition of aircraft and related equipment 236,500 200,000 Denominated in RMB for Fixed interest rate at 5.76% per annum with final the acquisition of aircraft maturity in 2014 and related equipment - 576,040 Denominated in RMB for Fixed interest rate at 6.21% per annum with final the acquisition of aircraft maturity in 2006 and related equipment 34,000 - Denominated in USD for Interest at market rate with final maturity in 2019 the acquisition of aircraft and related equipment 778,000 111,238 Denominated in USD for Fixed interest rate at 3.5% per annum with final the acquisition of aircraft maturity in 2005 and related equipment - 42,376 Denominated in USD for Interest at market rate with final maturity in 2007 the acquisition of aircraft and related equipment 67,790 - Denominated in USD for Interest at market rate with final maturity in 2007 the acquisition of aircraft and related equipment - 73,330 1,557,220 1,293,944 Less: Amounts due within one year shown under current liabilities (336,720) (93,336) Amounts due after one year 1,220,500 1,200,608 The terms of guaranteed bank loans are summarised as follows: 2005 2004 - - 52 Shandong Airlines Co., Ltd. Annual Report 2005 RMB’000 RMB’000 Total amounts 1,462,070 869,000 Less: Amounts due within one year shown under current liabilities (917,000) (869,000) Amounts due after one year 545,070 - The terms of pledged bank loans are summarised as follows: 2005 2004 RMB’000 RMB’000 Denominated in USD for Fixed interest rate at 5.0831% per annum with final the fixed deposit maturity in 2006 322,808 - Denominated in USD for Fixed interest rate at 4.85% per annum with final the fixed deposit maturity in 2006 322,808 - All amounts due within one year shown under current liabilities 645,616 - The terms of credit bank loans are summarised as follows: 2005 2004 RMB’000 RMB’000 Denominated in USD Fixed interest rate at 5.74% per annum with final maturity in 2006 16,140 - All amounts due within one year shown under current liabilities (16,140) - The guaranteed, pledged and credit bank loans bear interest rates ranging from 4.779 % to 6.21% per annum. 29. OBLIGATIONS UNDER FINANCE LEASES Present value Minimum of minimum lease payments lease payment 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Amounts payable under finance leases: Within one year 292,656 160,458 181,318 131,295 In the second to fifth years inclusive 1,158,309 417,753 760,435 369,882 Over five years 1,131,157 52,171 865,707 51,200 2,582,122 630,382 1,807,460 552,377 Less: future finance charges (774,662) (78,005) N/A N/A Present value of lease obligations 1,807,460 552,377 1,807,460 552,377 Less: Amount due for settlement within twelve months (shown under current liabilities) (181,318) (131,295) Amount due for settlement after twelve months 1,626,142 421,082 - - 53 Shandong Airlines Co., Ltd. Annual Report 2005 The Group leased eight Boeing 737 aircraft under finance leases. The average lease term is 6 - 15 years. For the year ended December 31, 2005, the average effective borrowing rate was 6.46%. 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. Almost 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. 30. DEFERRED INCOME 2005 2004 RMB'000 RMB'000 Sales and lease back of aircraft 7,655 9,046 Government grants on rotables 1,096 - 8,751 9,046 31. AMOUNTS DUE TO RELATED PARTIES 2005 2004 RMB'000 RMB'000 Shandong Taeco Aircraft Engineering Co., Ltd. 山东太古飞机工程有限公司 ("SDTAE") 7,159 5,900 Shandong Shengping Catering Co., Ltd. 山东金平航空食品有限公司 ("SDSCC") 4,426 2,402 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 2,663 1,200 山东航空大厦管理有限公司 - 88 14,248 9,856 The above companies are subsidiaries of Shandong Aviation Group. The amounts are unsecured, non-interest bearing and repayable on demand. 32. CONTINGENT LIABILITIES The Group acted as guarantor of Huangjin Group Ltd. Co,. which borrowed a loan of RMB100,000,000 from Industrial and Commercial Bank of China. At the balance sheet date, Huangjin Group has made the repayment already, so the agreement of guarantor was released. 33. COMMITMENTS - - 54 Shandong Airlines Co., Ltd. Annual Report 2005 The Group had the following commitments at the balance sheet date: (i) Capital commitments 2005 2004 RMB'000 RMB'000 Aircraft and related equipment 3,616,620 4,814,082 Land and buildings 10,653 420 Unlisted investments 13,338 25,000 3,640,611 4,839,502 Apart from the above, the Group has committed to place refundable deposits to manufacturers for intended purchases of aircrafts. (ii) Lease commitments At the balance sheet date, the Group had outstanding commitments under non-cancellable operating leases which fall due as follows: 2005 2004 RMB'000 RMB'000 Aircraft and related equipment Within one year 453,848 281,110 In the second to fifth year inclusive 1,473,581 1,316,040 Over five years 347,830 26,000 2,275,259 1,623,150 Land and buildings Within one year 8,380 4,609 In the second to fifth year inclusive 12,435 5,035 Over five years 2,319 1,983 23,134 11,627 The outstanding commitments under operating leases are entered into with independent third parties. Leases are negotiated for an average term of 1 to 9 years for aircraft and related equipment and 1 to 9 years for land and buildings, respectively. (iii) Expenses commitments 2005 2004 RMB'000 RMB'000 Training costs 19,825 27,228 34. RETIREMENT SCHEME CONTRIBUTIONS - - 55 Shandong Airlines Co., Ltd. Annual Report 2005 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 7% of their salaries. 35. 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 2005 2004 RMB'000 RMB'000 Shandong Aviation Group Rental charges in respect of land and buildings 2,476 1,840 Room and restaurant service charges 2,164 2,393 Guarantee fee - 3,101 Air China 159,138 - SDTAE Repairs and maintenance charges 55,731 48,855 SDSCC Air catering services and purchase of other supplies 28,576 16,460 SARJ Rental income in respect of aircraft 47,486 46,282 山东航空青岛食品有限公司 Air catering services and purchase 16,799 11,865 of other supplies 山东国际航空培训有限公司 Training fee 7,513 5,671 青岛飞圣国际航空技术 培训有限公司 Training fee 8,685 8,363 山东翔宇航空技术服务有限公司 Repairs and maintenance charges 4,659 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 SARJ is associate of the Company. The other companies are subsidiaries of Shandong Aviation Group. 36. THE REMUNERATION OF DIRECTORS AND OTHER MEMBERS OF KEY MANAGEMENT The remuneration of directors and key executives is determined by the remuneration committee having regard to the performance of individuals and market trends. As at December 31, 2005, there are twenty-two directors and key executives (2004: twenty) in the Company (including four directors and key executives without remuneration). The total remuneration paid (exclude subsidies paid to independent directors: - - 56 Shandong Airlines Co., Ltd. Annual Report 2005 RMB30,000/person/year and RMB400/working day) is RMB3,132,700 (2004: RMB2,218,000). 37. CHANGES OF ACCOUNTING ESTIMATE The useful lives of electronic equipment have been revised from 6-8 years to 4 years. The company adopts prospective method, the effect on depreciation of current year is RMB1,082,336, with the corresponding effect on reducing the net profit . 38. PLEDGE OF ASSETS Aircraft and related equipment of the Group with a net book value of approximately RMB4,474,866,000 (2004: RMB1,687,064,000 ) have been pledged to banks to secure bank loans granted to the Group. 39. FINANCIAL INSTRUMENTS 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. Business risk The Group conducts most of 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 28 and 29. 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. Credit risks (i) Bank balances and cash Substantially all of the Company's bank balance and cash are deposited with PRC financial institutions. - - 57 Shandong Airlines Co., Ltd. Annual Report 2005 (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 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. Financial derivatives instruments The company will make payments of foreign currency liabilities which resulting from finance lease and purchasing aircrafts. In order to reduce the risks of foreign exchange and interest rates, the company made several contracts of forwards and interest rate swaps. At 31 December 2005, the company has sixteen contracts of forwards and interest rate swaps which are based on nominal principal of USD246,770,000, all these contracts will expire by April of 2019. 40. 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, 2005 reported loss for the year of RMB (273,638,000) (2004: profit of RMB11,065,000) and net assets of RMB 265,866,000 (2004: RMB562,344,000). A reconciliation between profit (loss) - - 58 Shandong Airlines Co., Ltd. Annual Report 2005 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 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 As reported under PRC GAAP (273,638) 11,065 265,866 562,344 Adjustments to conform with IFRS: Difference in depreciation charges of aircraft and related equipment 11,286 7,366 - (11,286) Difference in deferred expenditure recognition (2,586) (4,110) (108,649) (106,063) Deferred tax - 3,737 24,299 24,299 Grant relating to rotables 64 - (1,096) - As reported under IFRS (264,874) 18,058 180,420 469,294 XI. Documents Available for Reference 1. Financial statements carrying the personal signatures and seals of Chairman of the Board, General Accountants and person in charge of 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 2005; 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: Zhang Xingfu - - 59