山航Ｂ(200152)2007年年度报告（英文版）

SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 山东航空股份有限公司 2007 年年度报告 SHANDONG AIRLINES CO., LTD. 2007 ANNUAL REPORT March，2008 Jinan · PRC 0 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Contents and Important Notes Ⅰ. Company Profile ------------------------------------------------------------------------------ 2 Ⅱ. Summary of Financial Highlight and Business Highlight -----------------------------3 Ⅲ. Changes in Capital Shares and Particulars about Shareholders --------------------6 Ⅳ. Particulars about Directors, Supervisors, Senior Executives and Employees-----9 Ⅴ. Administrative Structure --------------------------------------------------------------------15 Ⅵ. Brief Introduction to the Shareholders’ General Meeting --------------------------- 19 Ⅶ. Report of the Board of Directors ---------------------------------------------------------- 20 Ⅷ. Report of the Supervisory Committee ----------------------------------------------------32 Ⅸ. Significant Events -----------------------------------------------------------------------------33 Ⅹ. Financial Report ------------------------------------------------------------------------------ 37 Ⅺ. Documents for Reference -------------------------------------------------------------------109 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 fictitious statements，misleading information or important omissions carried in this report, and shall take all responsibilities, individual and/or joint, for the reality, accuracy and completion of the whole contents. All Directors attended the Board meeting. 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 2007 is true and complete. Paraphrases: The Company: Shandong Airlines Co., Ltd. SDA: Shandong Aviation Group; the controlling 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 controlling shareholder of Air China 1 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 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 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 Designated by the Company: Domestic: China Securities and Securities Times Overseas: Hong Kong Wen Wei Po 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: June 14, 2007 Registration address: Industrial and Commercial Administration Bureau of Shandong 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: Reanda Certified Public Accountants 2 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Address: Room 2008 on 20/F, East District of No. 1 Building, No. 100, Xili Street, Balizhuang, Chaoyang District, Beijing II. Summary of Financial Highlight and Business Highlight Unit: RMB (I)Main profit index of the Company as of the report year Items Amount Operating profit 76,633,320 Total profit 57,546,814 Net profit attributable to shareholders of the listed company 37,255,986 Net profit attributable to shareholders of the listed company after deducting non-recurring gains and losses 50,392,078 Net cash flow arising from operating activities 734,571,421 (II) Items of deducting non-recurring gains and losses and the involved amounts are as following: Items of non-recurring gains and losses Amount Net profit 37,255,985.51 Minus: Profit and loss in disposal of non-circulation assets -21,736,311.72 Tax return and tax deduction over examination right or without formal document Governmental allowance accrued to the current profit and loss Gain or 10,000,000.00 loss from combination cost and fair value of identifiable net assets when the enterprise combination gain or loss from exchange non-monetary assets Provisions for the impairment of asset due to act of god -498,594.46 Gain/loss form debt restructuring Expenses of enterprise restructuring Profit/loss form that of trading price higher than fair value Gain/loss from projected liabilities without -7,370,706.97 relationship with main operation Subtotal -19,605,613.15 Plus：non-recurring gain/loss attributable 331.50 to minority shareholders Amount influenced due to income tax -6,469,852.34 Net profit after deduction of non-recurring gain/loss 50,392.077.82 (III) Major accounting data and financial highlights over the previous three years as at the end of the report period 1. Main accounting data 3 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Increase/decrease in this year 2006 2005 compared with 2007 Items last year (%) Before After Before After After adjustment adjustment adjustment adjustment adjustment Operating income 4,630,130,538 4,231,057,945 4,231,057,945 9.43% 2,903,537,096 2,903,537,096 Total profit 57,546,814 45,711,710 43,421,494 32.53% -272,591,445 -272,591,445 Net profit attributable to 37,255,986 44,017,784 8,875,632 319.76% -273,637,981 -171,456,745 shareholders of the listed company Net profit attributable to shareholders of the listed company after 50,392,078 -42,384,657 -77,526,809 165.00% -281,356,718 -179,175,481 deducting non-recurring gains and losses Net cash flow arising from 734,571,421 1,059,281,298 1,059,281,298 -30.65% 217,831,950 217,831,950 operating activities Increase/decrease at the end of this year compared At the end of 2006 At the end of 2005 At the end of with that at the Items 2007 end of last year (%) Before After Before After After adjustment adjustment adjustment adjustment adjustment Total assets 7,039,689,368 5,943,307,431 6,035,555,283 16.64% 6,551,168,542 6,676,188,686 Owners’ equity(Shareholders’ 436,964,877 309,883,766 399,824,575 9.29% 265,865,982 390,886,126 equity) 2. Main financial indexes Increase/decrease in this 2007 2006 year compared with last 2005 year (%) Before After Before After After adjustment adjustment adjustment adjustment adjustment Basic earnings per share 0.09 0.11 0.02 350.00% -0.68 -0.43 Diluted earnings per share 0.09 0.11 0.02 350.00% -0.68 -0.43 Basic earnings per share after 0.13 -0.11 -0.19 168.42% -0.70 -0.45 4 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT deducting non-recurring gains and losses Fully diluted return on equity 8.53% 14.20% 2.22% Increase 6.31percent -102.92% -43.86% Weighted average return on 8.90% 15.29% 2.24% Increase 6.66percent -66.82% -35.46% equity Fully diluted return on equity after deducting non-recurring 11.53% -13.68% -19.39% Increase 30.92percent -105.83% -45.84% gains and losses Weighted average return on equity after deducting non-recurring gains and losses 12.04% -14.72% -19.61% Increase 31.65percent -68.70% -37.06% Net cash flow arising from 1.84 2.65 2.65 -30.57% 0.54 0.54 operating activities per share Increase/decrease at the At the end end of this year compared At the end of 2006 At the end of 2005 of 2007 with that at the end of last year (%) Before After Before After After adjustment adjustment adjustment adjustment adjustment Net asset per share attributable to 1.09 0.77 1.00 9.00% 0.66 0.98 shareholders of listed company (IV) The Company’s return on equity and earnings per share as of the year 2007 as calculated based on fully diluted method and weighted average method taking Requirements on the Information Disclosure of Companies Publicly Issuing Shares No. 9 as the reference 1. Return on Equity Amount in this period Amount in same period of last year Profit in the report Weighted period Fully diluted Fully diluted Weighted average average Net profit attributable to common 8.53% 8.90% 2.22% 2.24% shareholders Net profit attributable to common shareholders after deducting the 11.53% 12.04% -19.39% -19.61% non-recurring losses and gains 2. Earnings per Share Amount in this period Amount in same period of last year Profit in the report Diluted Basic earnings Basic earnings Diluted earnings period earnings per per share per share per share share Net profit attributable to common 0.09 0.09 0.02 0.02 shareholders Net profit attributable to common 0.13 0.13 -0.19 -0.19 shareholders after deducting the 5 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT non-recurring losses and gains 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 Capitalization Rationed Bonus Additional of public Others Subtotal share share insurance reserve I. Unlisted shares 260,000,000 260,000,000 1. Sponsor’s shares 168,800,000 -19,900 -19,900 168,780,100 Including: 68,601,000 -19,900 -19,900 168,581,100 State-owned shares Domestic legal person’s 199,000 199,000 shares Foreign legal person’s shares Others 2. Raised legal person’s shares 3. Inner employees’ shares 4. Preference shares or 91,200,000 199,000 199,000 91,200,000 other Total unlisted shares 260,000,000 260,000,000 Ⅱ. Listed shares 140,000,000 140,000,000 1. RMB ordinary shares 2.Domestically listed 140,000,000 140,000,000 foreign shares 3. Overseas listed foreign shares 4. Other Total listed shares 140,000,000 140,000,000 Ⅲ. Total shares 400,000,000 400,000,000 6 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Note: In the report period, 199,000 sponsors’ shares held by Shandong Fishery Enterprises Group Corporation have been auctioned judicially and transferred the ownership to Qingdao Zhenyuan Shipyard Co., Ltd., which are state-owned legal person’s shares in nature. (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 and derived securities 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 Up to Dec. 31, 2007, the Company had totally 19,009 shareholders, including 19,003 ones of domestically listed foreign shares. The top ten shareholders of the Company are as following: Unit: Share Increase/ Number of Number of decrease Proportion No. Shareholders’ name shares held at Type shares pledged in this (%) the year-end or frozen year State-owned SHANDONG 84,000,000 1 0 168,004,000 42 legal person’s AVIATION GROUP shares pledged share State-owned AIR CHINA 2 0 91,200,000 22.8 legal person’s Unknown LIMITED share CREDIT SUISSE Circulation 3 (HONG KONG) Unknown 4,000,000 1 Unknown share LIMITED GUOTAI JUNAN Circulation 4 SECURIES HONG 1,680,736 2,094,400 0.52 Unknown share KONG LIMITED Circulation 5 CHEN CHUN PENG -71 1,544,800 0.39 Unknown share Circulation 6 ZHENG WEI HUA Unknown 1,488,000 0.37 Unknown share Circulation 7 LI YI JUN Unknown 1,167,338 0.29 Unknown share Circulation 8 FANG RUI Unknown 1,102,600 0.28 Unknown share 7 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Circulation 9 WU HAO YUAN 17,000 1,062,700 0.27 Unknown share Circulation 10 LIU LI YA 0 1,015,216 0.25 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. 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. 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 controlling shareholder of the Company Name of the controlling shareholder: Shandong Aviation Group Legal representative: Feng Gang 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 (has not changed yet) 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, London and Shanghai. Air China Group holds its 43.59% equity. Date of Foundation: Sep. 30, 2004 Business scope: It was engaged in the domestic and overseas transportation business such as periodic and aperiodic aviation passenger, cargo, letter and baggage; domestic and overseas official flight business; aeroplane management business; repairing of aerostat; business agent among air companies; ground service and air courier services related with the main operations (excluding letter and articles with the nature of letters); tax-free commodities in 8 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT airplane. Registered capital: RMB 9,433,210,909 Air China Limited 49.406% Shandong Aviation Group 22.8% 42% Shandong Airlines Co., Ltd. 4. The Company has no shareholders holding over 10% of shares of the Company except for the controlling shareholder SDA and actual controller Air China Limited. 5. Particulars about the top ten shareholders of circulation share Name of Number of shares held at the Name of Type of shares held shareholders year-end (share) shareholders CREDIT SUISSE (HONG 1 4,000,000 B-share KONG) LIMITED GUOTAI JUNAN SECURIES 2 2,094,400 B-share HONG KONG LIMITED 3 CHEN CHUN PENG 1,544,800 B-share 4 ZHENG WEI HUA 1,488,000 B-share 5 LI YI JUN 1,167,338 B-share 6 FANG RUI 1,102,600 B-share 7 WU HAO YUAN 1,062,700 B-share 8 LIU LI YA 1,015,216 B-share 9 JOHN POSS 756,000 B-share 10 DENG HONG WEI 650,609 B-share The Company is not aware of their associated relationship among the top ten shareholders of circulation share, whether belongs to the consistent actionist regulated by the Management Regulation of Information Disclosure on Change of Shareholding for Listed Companies. IV. Particulars about Directors, Supervisors, Senior Executives and Employees (I) Directors, Supervisors and Senior Executives Amounts Amounts Name Sex Birthday Title Office term at the at the 9 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT year-begin year-end Vice Chairman of June 28, 2006 Feng Gang Male Sep., 1963 0 0 the Board -March 14, 2009 Chairman of the March 15, 2006 Zhang Xingfu Male Apr., 1955 0 0 Board –March 14, 2009 Zeng Director, General March 15, 2006 Male Oct., 1953 0 0 Guoqiang Manger –March 14, 2009 Director, Standing March 15, 2006 Su Zhongmin Male March, 1954 Deputy General 0 0 –March 14, 2009 Manager Director, Deputy General Manager, March 15, 2006 Bai Weisan Male Oct., 1957 General Manager 0 0 –March 14, 2009 of Qingdao Branch Director, Chief March 15, 2006 Xiao Feng Male Oct., 1968 0 0 Accountant –March 14, 2009 Wang March 15, 2006 Male Sep., 1965 Director 0 0 Mingyuan –March 14, 2009 March 15, 2006 Kou Zunxian Male Aug., 1955 Director 0 0 –March 14, 2009 Wang March 15, 2006 Female June, 1958 Director 0 0 Jieming –March 14, 2009 Independent March 15, 2006 Wang Zhi Male May, 1942 0 0 Director –March 14, 2009 Independent March 15, 2006 Hu Jijian Male Nov., 1942 0 0 Director –March 14, 2009 Fang Independent March 15, 2006 Male Oct., 1962 0 0 Shaokun Director –March 14, 2009 Independent March 15, 2006 Wei Jincai Male Feb., 1950 0 0 Director –March 14, 2009 President of the March 15, 2006 Wang Fuzhu Male June, 1953 Supervisory 0 0 –March 14, 2009 Committee March 15, 2006 Gao Lihua Male May, 1969 Supervisor 0 0 –March 14, 2009 Wang March 15, 2006 Male March, 1965 Supervisor 0 0 Wuping –March 14, 2009 Supervisor, Team March 15, 2006 Wang Xianlin Male Nov., 1965 Leader of the 2nd 0 0 –March 14, 2009 flying Team Zhou Supervisor, March 15, 2006 Female Jan., 1975 0 Qiaoyan Deputy Head of –March 14, 2009 10 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Cabin Service Department Deputy General March 15, 2006 Song Yuxia Female Jan., 1956 0 0 Manager –March 14, 2009 Deputy General March 15, 2006 Yu Haitian Male Sep., 1969 0 0 Manager –March 14, 2009 Deputy General Manager, March 15, 2006 Li Qing’en Male Aug., 1955 0 0 Secretary of the –March 14, 2009 Board Zhang March 15, 2006 Male Oct., 1958 Chief Pilot 0 0 Qingshe –March 14, 2009 March 15, 2006 He Guobin Male July, 1949 Chief Engineer 0 0 –March 14, 2009 Note: 1. There was no change in the number of shares held by directors, supervisors and senior executives in the report period. 2. Particulars about directors, supervisors holding the post in Shareholding Company Draw payment and Name of the Position in the Shareholding allowance from the Name Shareholding Company Shareholding Company Company (Yes or no) Chairman of the Board, Feng Gang SDA Yes President Zhang Xingfu SDA Party Secretary, Vice-president Yes Wang Fuzhu SDA Chief Accountant Yes Wang Wuping SDA Head of Financial Department Yes Commissary of Commerce Commission, Wang Mingyuan Air China Yes General Manager of Network Proceedings Department Deputy General Manager of Gao Lihua Air China Yes Financial Department (II) Main work experiences in the near five years 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 companies other Name Main work experience than the shareholding companies 01/2003-2/2003, Assistant to President of Air Feng China; Gang 02/2003-2/2007, General Manager and Party Secretary of China National Aviation Asset 11 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Management Co., Ltd.; 05/2007 till now, Chairman and President of SDA; 06/2007 till now, Director and Vice-president of the Company 01/2003-12/2005, Deputy Mayor in Yantai; 12/2005 till now, Party Secretary, Vice-president of Chairman of Taikoo Shandong Aircraft Zhang SDA; Engineering Co., Ltd. Xingfu 03/2006 till now, Chairman of the Board of the Company. Zeng 01/2003 till now, Director and General Manager of Guoqiang the Company. Su 01/2003 till now, Director and Standing Deputy Chairman of the Board of Qingdao Zhongmin General Manager of the Company. International Logistics Centre Co., Ltd. 01/2003-12/2005, Director and Deputy General Bai Manager of the Company; Chairman of the Board of Shandong Airlines Weisan 05/2005 till now, General Manager of Qingdao Rainbow Jets Co., Ltd. Branch of the Company. 01/2003-04/2003, Manger of Cash Management of the Financial Department of Air China; 04/2003-08/2005, Deputy General Manager of Xiao Feng Financial Department of Air China ; 04/2005 till now, Director of the Company; 08/2005 till now, Chief Accountant of the Company. 01/2003-06/2005, Deputy General Manager of Sales & Marketing Department of Air China; Wang 06/2005 till now, Commissary of Commerce Mingyuan Commission, General Manager of Network Proceedings Department of Air China ; 03/2006 till now, Director of the Company. 01/2003-03/2007, Director of Asset Management Department of Shandong Economic Development and Investment Company; Kou 03/2007 till now, Deputy General Manager of Zunxian Shandong Economic Development and Investment Company; 04/2005 till now, Director of the Company. 2003 till now, Director of Planning Financial Wang Department of Shandong Economic Development Jieming and Investment Company; 03/2006 till now, Director of the Company. President of Nanjing University of Aeronautics and Astronautics; Wang Zhi 2003 till now, Independent Director of the Company. Independent Director of China Southern Airlines; 12 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Independent Director of Hainan Airlines. 01/2003 till now, member of CPPCC Committee of Shandong Province and professor of Shandong Independent Director of Luyin Investment Hu Jijian Institute of Economics; Group Co., Ltd. 01/2003 till now, Independent Director of the Company. 01/2003-12/2003, Dean of Law School of Yantai University; Lawyer at Shandong Sunsum Law Firm; Fang 12/2003 till now, Vice President of Yantai Independent Director of Yantai Oriental Shaokun University; Electronics Information Industry Group Co., 12/2004 till now, Independent Director of the Ltd. Company. 01/2003 till now, Party Secretary of Civil Aviation Management Institute of China; Wei Jincai 03/2006 till now, Independent Director of the Company. 01/2003-04/2005, Director of the Company; Wang 01/2003 till now, Chief Accountant of SDA; Fuzhu 05/2005 till now, Chairman of Supervisory Committee of the Company. 01/2003-04/2003, Manager of Accounting Calculation of Financial Department of Air China; Gao Lihua 04/2003 till now, Deputy General Manager of the Financial Department of Air China; 03/2006 till now, Supervisor of the Company. Wang 01/2003 till now, Director of the Financial Wuping Department of SDA; Supervisor of the Company. 01/2003-09/2007, Group Leader of NO. 2 Flying Group of the Company; Wang 09/2007 till now, Deputy Chief Pilot and Xianlin concurrently Minister of Operations & Standards Department of the Company; 01/2003 till now, Supervisor of the Company. 01/2003-03/2003, Deputy Squadron Leader of Crew Safeguarding Squadron; Zhou 03/2003 till now, Deputy Head of Cabin Service Qiaoyan Department of the Company; 03/2006 till now, Supervisor of the Company. 01/2003-04/2005, Director of the Company; Chairwoman of the Board of Shandong 01/2003-05/2005, General Manager of Qingdao Song International Aero Training Co., Ltd., Branch of the Company; Yuxia Chairman of the Board of Qingdao Feisheng 01/2003 till now, Deputy General Manager of the International Aero Technical Training Co., Ltd. Company. 13 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 01/2003-03/2003, General Engineer of the Company; Yu Chairman of the Board of Shandong Xiangyu 03/2003 till now, Deputy General Manager of the Haitian Aero Technical Services Co., Ltd. Company. 01/2003-08/2005, Chief Accountant of the Company; Li 01/2005 till now, Deputy General Manager of the Qing’en Company, Secretary of Board of Directors. Zhang 01/2003 till now, Chief Pilot of the Company. Qingshe 01/2003-03/2003, Chairman of the Board of Taikoo He Shandong Aircraft Engineering Co., Ltd.; Guobin 03/2003 till now, General Engineer of the Company. (II) Particulars about annual payment The payments of the directors, supervisors and senior executives of the Company were determined according to the achievements and results salary system. The allowance for each independent director was RMB 50,000 per year as the basic number plus an extra allowance of RMB 600 for every working day. Total amount of annual Name Title remuneration (RMB’000, before tax) Zeng Guoqiang Director, General Manager 44.18 Su Zhongmin Director, Standing Deputy General Manager 37.85 Director, Deputy General Manager, General Bai Weisan 34.98 Manager of Qingdao Branch of the Company Xiao Feng Director, Chief Accountant 29.45 Wang Zhi Independent Director 5.90 Hu Jijian Independent Director 5.90 Fang Shaokun Independent Director 5.90 Wei Jincai Independent Director 5.90 Wang Xianlin Supervisor, Team Leader of the 2nd flying Team 19.56 Supervisor, Deputy Head of Cabin Service Zhou Qiaoyan 15.91 Department Song Yuxia Deputy General Manager 38.25 Yu Haitian Deputy General Manager 34.36 Deputy General Manager, Secretary of Board of Li Qing’en 34.46 Directors Zhang Qingshe Chief Pilot 35.22 He Guobin General Engineer 34.53 Total 382.34 Director Mr. Feng Gang and Director Mr. Zhang Xingfu, together with Mr. Wang Fuzhu and Mr. Wang Wuping of Supervisory Committee, drew their remunerations from SDA, the controlling shareholder, not from the Company; Director Mr. Wang Mingyuan, and Supervisor 14 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Mr. Gao Lihua drew their remunerations from Air China, not from the Company; Director Mr. Kou Zunxian and Director Ms. Wang Jieming drew their remunerations from Shandong Economic Development and Investment Company, not from the Company. (III) Particulars about changes of directors, supervisors and senior executive On May 23, 2007, original Director & Vice-chairman of the Company Mr. Sun Yude handed the resignation letter to the board of directors due to work change, in which he resigned his posts of Director & Vice-chairman of the 3rd board of directors; in the same day, Mr. Feng Gang was nominated the candidate of director of the 3rd board of directors of the Company by SDA, the controlling shareholder of the Company. On June 28, 2007, the 2006 Annual Shareholders’ General Meeting elected Mr. Feng Gang as the director of the Company; in the same day, the 8th meeting of the 3rd board of directors of the Company elected Mr. Feng Gang as the vice-chairman of the 3rd board of directors and member of Strategy & Nominations Committee of the Company. In the report period, there were no changes on other directors, supervisors and senior executives. (IV) About staff By the end of the report period, the Company had 3,304 employees in total, including 34 postgraduates (Master Degree and Doctor Degree) or above, 1,778 persons graduated from 3-years regular college or above. The staff structure is as follows: Number Proportion holding total Type of employee staff Flight personnel 383 11.59％ Aircraft crew and maintenance person 515 15.59％ Salespeople 697 21.09％ Air host and hostess 575 17.40％ Ground attendant 287 8.69％ Accountant 139 4.21％ Others 708 21.43％ By the end of the report period, there were 13 retirees in the Company. V. Administration Structure of the Company (I) Particulars about Company Administration 1. Particulars about the Company Administration in the report period In 2007, strictly according to Company Law, Securities Law and relevant laws and regulations promulgated by CSRC, the Company perfected consistently the Company’s administration structure and standardized its operation. In the report period, through the implementation of governance campaign for listed companies, the Company perfected a series of administrative and internal control system, modified rules and systems, thus providing powerful system and organization guarantee for its orderly operation. Professional committees of the board of directors carried their work step by step, and the scientific decision making level further enhanced. Working as callers of different professional committees, independent directors’ influence also strengthened. Compared to standard 15 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT documents issued by CSRC on governance for listed companies, the board of directors thinks the actual administration of the Company is basically in accordance with regulations of Code of Corporate Governance for Listed Companies. 2. Particulars about Special Governance Campaign According to requirements of Notice on the Matters Concerning Carrying out a Special Campaign to Strengthen the Corporate Governance of Listed Companies (ZGSZiNo.28 [2007]), the Company established a special campaign group which assigns the chairman of the board to be the leader and senior executors of the company to be its members to be responsible for the special governance campaign, governance activities’ plan making research and self inspection organizing for methods and work plan. From April to October of 2007, according to requirements and unified assignments of listed companies’ special administration activity, our company finished the three phase work of administrative itself checking, public commenting and implanting and improving on the whole purpose of standardizing operation of the Company and improving the administrative level objectively, publicly, fairly, fully and further . During the checking period, the Company on the principle of seeking truth from the facts, according to the Rules of The Company and other laws and administrative rules and the Articles of Association, Rules and Procedure of the Board of Directors, Rules and Procedure of the Supervisory Committee, carefully checked itself administration and made the Report and Plan on Strengthening Listed Companies’ Administration and published it after checking and getting through by the 3rd meeting of the 3rd board of directors. During the commenting period, the Company set up special phone, fax and email, assigned particular person to be responsible of picking up phones and receiving emails to hear opinions and suggestions of investors and the public and get comments from investors. According to Management Letter of auditing organization, the Company combined its actual conditions to change. 3. Shandong Stock Supervisory Bureau’s Change Suggestion to the Company and particulars about the change Problem 1: The internal control system of the Company is incomplete, and should be perfected further. Particulars about change: The Company, through hackling and comparing different internal control systems, modified and perfected Rules of Procedure of Directors’ Meeting for Shandong Airlines Co. Ltd. on the10th meeting of the 3rd Directors’ Meeting on Oct. 30th. The Company continued perfecting its internal control system according to its actual condition and development needs. Problem 2: An independent director doesn’t have qualification certificate yet. Particulars about change: Independent director Wei Jincai worked as independent director of the Company since March of 2006, and he didn’t have any training for independent director. According to arrangement by Shenzhen Security Exchange, in September of 2006, Wei Jincai took part in the 13th independent directors’ training class in Fuzhou and passed the exam to get a certificate. Problem 3: The Information Disclosure Management System needs perfecting and implementing. 16 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Particulars about change: On 28th June, the Company examined and passed the new Information Disclosure Management System of Shandong Airlines Co. Ltd. on the 8th meeting of the 3rd Directors’ Meeting, and organized senior executors to study it. The Company will strictly conform to requirements of this management system to disclose information well. Problem 4: Special Committees of the Board of Directors should further fully make their use. The Company consistently perfected responsibility limit, working procedure and rules of procedure of special committees, firstly collected opinions of different special committees on examining relevant matters, strengthened information communication at the same time, and the use of special committees was improving step by step. Problem 5: Investors relationship management needs deeply perfecting, and especially the implementation ways should be richer to strengthen the activity of information disclosure. Presently the Company has communicated with investors through regular report, temporary notice, phone call receiving, investor visit reception and special column maintenance for investor relationship on its website. As a pure B-share company, now few organization investors also influenced investors’ relationship management. The Company will continue strengthening investors’ relationship management and mutual action to further enhance the working level. What’s more, as a pure B-share company, the Company’s participation on capital market is still weak. And the Company strengthened communication with supervisory departments as well as agencies, and earnestly researched and studied related policies. Board of directors’ office is responsible for watching policies to promote its development by capital market. In Nov. 2007, after finishing all rectifications, the Company made Report on Special Governance Rectification which was disclosed after examining and passing on the 2nd temporary meeting of the 3rd Directors’ Meeting. (II) Performance of Independent Directors Since the Independent Directors of the Company, Mr. Wang Zhi, Mr. Hu Jijian, Mr. Fang Shaokun and Mr. Wei Jincai took their posts, they fulfilled their duties in an honest, diligent and responsible way, attended various meetings of the Board and Shareholders’ General Meeting on time and attended Supervisory Committee meetings as non-voting delegates; 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, offering scientific and reasonable comments and proposals for many times on the management and development of the Company by their own professional knowledge. 1. Particulars about Independent Directors’ Attending the Board of Directors: Present Times for Presenting Entrusted Absent Name the Board of in person presence (Times) Directors this year (Times) (Times) 17 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Wang Zhi 7 6 1 0 Hu Jijian 7 7 0 0 Fang Shaokun 7 6 1 0 Wei Jincai 6 5 0 1 2. Objections on the related terms of the Company offered by the independent directors: In the report period, there was no objection made by independent directors on related matters. (III) Separation of the Company and holding shareholder in business, personal, assets, organization and finance. The Company and SDA, the controlling 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. (IV) Particulars about establishment and perfection of the Company’s internal control system 1. Comprehensive description of the Company’s internal control system In the report period, in accordance with relevant regulations of Notice of Issues on Concerning Campaign to Strengthen Corporate Governance of Listed Companies (ZJGSZi[2007] No.28) made by CSRC and Guidelines for Internal Control of Listed Companies by Shenzhen Stock Exchange, combined self inspection of special governance and change campaign, the Company made Information Disclosure Management System of Shandong Airlines Co. Ltd. and modified Rules of Procedures for Directors’ Meeting of Shandong Airlines Co. Ltd.. 2. Board of directors’ self-comments on internal control system Through consistent establishing, completing and perfecting and special governance campaign of 2007, the Company made corresponding change and enhancement, and the existing internal control system is relatively complete, reasonable and effective. Every system can be fully and effectively implemented, thus adjusting requirements of existing management as well as needs of development, guaranteeing business operation in order and ensuring whole implementation and full realization of its development strategy and operation target. Systems can ensure accuracy, legality and completeness of its financial documents, security and completeness of its assets, finish information disclosure accurately, exactly, timely and completely to ensure treat all investors openly, equally and justly as well as to protect interest for the Company and its investors. In order to strengthen its overall managing and controlling ability, perfect operation, management and supervision system, and increase ability and level for preventing and controlling internal risks, the Company will further strengthen internal examination and other functions of internal control system to guarantee its health operation and promote its development. 18 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT (VI) Opinions given by Supervisory Committee on Self-estimation for The Company Internal Control According to the Guideline of Internal Control for the Listed Companies of Shenzhen Stock Exchange, The Company checked the internal control system of 2007 wholly and deeply, thought: 1. The internal control policy basically agreed with requirements of stock supervisory department, and also went well with the present particulars for company operation. 2. The internal control method of the Company had good effect on the control of every procedure and every parts of enterprise management. 3. The Company should continue perfecting its internal control steps, organization and strength. (VII)Independent Opinion given by Independent Board of Directors on Self-estimation for The Company Internal control In 2007, The Company checked the internal control system wholly and deeply, according to the Guideline of Internal Control for the Listed Companies of Shenzhen Stock Exchange. On company administration, we set up and continuously improve legal representative administration structure, promote unceasingly strict administration for board of directors, supervisory committee and shareholders’ meeting, to have a clear target on right limit, decision procedure, associated transaction, information disclosure, investors’ relationship, important investment, risk control and other management issue. On the basic management system construction, we combined the fact of operation and further improved management system to make relatively systematic management system, on emphasis of management for finance, guarantee, and information publishing and important invests. On the basis of independent judgment; independent directors made careful checking on internal control of the Company and made the following independent opinions: (1) The internal control policy conformed to the relevant laws and requirements of stock supervisory department, and also went well with the present particulars for company operation. (2) The internal control method of the Company had good effects on the control of every procedure and every parts of enterprise management. VI. Brief introduction to the Shareholders’ General Meeting In the report period, the Company held a Shareholders’ General Meeting, which is the Annual Shareholders’ General Meeting of 2006. 1. Notification, convening and holding of the Shareholders’ General Meeting On June 28, 2007 at time of 9:30, the Company held its 2006 Annual Shareholders’ General Meeting on 31/F conference room of SDA Building. The Company notified the shareholders of the meeting by means of Public Notice, and the notification of the meeting was published in China Securities, Securities Times and Hong Kong Wen Wei Pao dated June 1, 2007. There are in total 5 Shareholders and shareholder’s proxies representing 259,801,000 shares of the Company, and they authorized a foreign agency (B-share shareholder)’s trusteeship bank HSBC Shanghai branch to trusteeship secretary office of the board of directors for voting instead to the voting willingness representing 413,400 shares of the Company. The 19 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT above shares in total are 260,214,400 shares, taking 65.05% in the total amount of shares with voting rights of the Company; including 259,602,000 state-owned legal person’s shares, taking 64.90% of total shares of the Company; 199,000 domestic legal person’s shares, taking 0.05% of total shares; 413,400 domestically listed foreign share (B share), taking 0.10% of total shares of the Company. Chairman of the Board, Mr. Zhang Xingfu presided the meeting. The directors, supervisors and senior executives of the Company attended the meeting. The convening and holding of the Meeting accorded with the regulations of Company Law, Standardizing Opinions on Shareholders’ General Meeting of Listed Company and Articles of Association of the Company. 2. The resolutions passed by the Shareholders’ General Meeting and the disclosure of public notice on resolutions. Following proposals were examined item-by-item and approved by means of signed vote in the meeting: (1) Proposal on Adjusting Directors; (2) Work Report 2006 of the Board of Directors of Shandong Airlines Co., Ltd.; (3) Work Report 2006 of the Supervisory Committee of Shandong Airlines Co., Ltd.; (4) Work Report 2006 of Independent Directors of Shandong Airlines Co., Ltd.; (5) Annual Report 2006 of Shandong Airlines Co., Ltd.; (6) Financial Settlement Report 2006 of Shandong Airlines Co., Ltd.; (7) Profit Distribution Plan 2006 of Shandong Airlines Co., Ltd.; (8) Proposal on Routine Related Transaction in 2007; (9) Proposal on Allowance of Independent Directors; (10) Proposal on Enlarging Business Scope of Shandong Airlines Co., Ltd; (11) Proposal on Revising the Articles of Association of Shandong Airlines Co., Ltd; (12) Proposal on Re-engaging Certified Public Accountants and its Remunerations. The resolutions of the meeting were published in China Securities, Securities Times and Hong Kong Wen Wei Pao dated June 29, 2007. VII. Report of the Board of Directors (I) Discussion and analysis to the operation The Company is a civil aviation transportation enterprise. In 2007, the Company insisted in the start of utmost interest for itself and its shareholders, earnestly carried out responsibility in Articles of Association. In the leaders’ attention and support from Shandong Provincial Party Committee, Provincial Government, Air China Group and Air China, the Company deeply implemented scientific development, actively handled furious competition in airline industry, dealt with difficulties like increase oil price, changed the pressure of fast development into momentum for better development, and every work continues keeping activity and growth. 1. Implementing security increasing project to realize the 13th security year. (1) According to requirements of General Administration of Civil Aviation of China, the Company identified 1st security responsible person, direct security responsible staff and security persons for its subsidiaries and other places to further perfecting secure operation responsibility system. (2) The Company took management creation and specific controlling 20 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT methods, strengthened control in every procedure, increased secure operation quality. Accounting flight plan percentage realized 94%, which raised 37%. And new system was formed by the governance of mass airline delay. (3) Since the second half year of 2007, the Company earnestly implemented the “21 Suggestions” by General Administration of Civil Aviation of China, organized security neaten, and grasped security implementation. There were 12 security checks was organized, and 343 problems was cleared in the security neaten. (4) The Company further enhances the construction of flight, locomotive, dispatch and air police and consolidates the basis with safety. 2. Base arrangement and airline website kept optimizing, market sales were strengthened, and income level was increased compared to the same time of last year. The Company further strengthened operation organization management as well comprehensive use of manufacture resource, arranged flight plan and flight stop plan scientifically to increase transportation efficiency. Through strengthening rolling budget management and key index control of interest, possible contradiction was digested in advance. Price coordinate channel was established to increase income level. Agency management was strengthened to motivate sales activity. The Company developed sales decision analysis system, established sales data files and took “quantification management and target evaluation”. Direct sales and website sales channels were strengthened to explore new sales model. 3. Cost decreasing and efficiency increasing got new achievement, and profit level reached a new height. Five income increasing and cost saving groups of the Company actively digged the potentials to achieve target fully. By implementing every income increasing and cost saving method, the profit making level of the whole company had new increase. 4. Structure adjustment had its primary effects and got into good development. For one thing, the structure of airplane troops further optimized, and six 737 airplanes was add but two CRJ airplanes were cancelled leasing, profit making airplanes became the main airplanes; for another airlines structure was adjusted, and on the basis of ensuring utmost interest, the Company added long distance flights and direct flights as well as decreased short distance flight and transfer flights. 5. Phenomena effect has been reflected in integrity linkage and resources conformity has been promoted forcefully. Shandong Airlines and Air China have together enjoyed the same code of free sale pattern for 120 flight courses. The two companies conduct joint stock operation in 6 flight courses and produce many linking joint products according to the situation of bases. After the season change of scheduled flight between winter and spring on Oct 27th, the Company makes four airplanes in wet lease to Air China in succession, which is believed to make up the transport capability in low-season and add new motivity for realizing main operating income. Within a year, Shandong Airlines and Air China have made new progress in enjoying and supporting flight materials, information management, developing system, negotiation and cooperation of administration and conformity of training business. 6. Carry out the flight punctuality engineering and continuously perfect the service quality. The Company promotes the fine control system in details in 2007, emphasizes in releasing, organization and spot supervision of flight, strengthens the cooperation ability on spot, and tries to reduce the effect brought by human factors on the normal operation of flight. Meanwhile, the preplan for dealing with the abnormal flight is further perfected and ground 21 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT service network of fast reflection and complete content is established. Statistics and analysis for normal flight rate is reinforced and prize and punishment for encashing flight punctuality is practiced in time. Grasping the opportunity of the 2008 Olympic Games and the 2009 National Games, the Company focuses on the improvement of its service quality by service reform, and makes its best effort to improve the supervision in service procedure, correction, prevention and lasting progress of service quality problems. 7. Promote organization innovation and strengthen the fundamental construction of the Company. Through practical implementation of the suggestion on management presented by external audit, the Company actively improves its enterprise administration and puts forward its management level into a new step. Clearing up the function management of basic construction, the Company makes effort to boost its fundamental construction. Construction of Qingdao Hangar and Jinan Freight Warehouse are in successful progressing. And Jinan Comprehensive Building and Yantai Comprehensive Building are in prophase preparation to construct. 8. Innovate the training way and receive progress in training quality. The Company intensifies the training power in 2007, advancing the implementation of training plans of its various departments and carrying out evaluation on training quality. With various trainings, the business diathesis of its stuffs and managing diathesis of its leaders all get new improvement. (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 home to its surrounding nations and districts, hotel and food service, air machine reparation, agency business for inter airlines, related land services with main operation. In the report period, the Company completed total turnover volume of transport amounting to 650 million tons kilometers, an increase of 12.6% over the year 2006 and carried 5.767 million passengers in a safe way, an increase of 7.3% over the last year. In the report period, the Company realized income from main operations amounting to RMB 4.63 billion, an increase of 9.43% compared with the corresponding period of the previous year, including income from passenger aviation transportation of RMB 4.353 billion, taking up 94.02 % of the total income and revenue from cargo and mail aviation transportation of RMB 150 million, taking up 3.25 % of the total income, other income (including hotel and food service) amounting to RMB 126.4692 million, accounting for 2.73% of total income. In the report period, the operation profit realized RMB 76.6333 million. (1)Particulars about different industries of main operation Unit：RMB 22 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Main Main Operation operation operation profit Operation income cost proportion Operation profit Industry Operation cost increased or increased or increased or income proportion decreased decreased decreased （%） compared to compared to compared to last year（%） last year（%） last year decreased Aviation 0.83% transportation 4,503,661,260.70 3,761,738,252.60 16.47% 7.13% 8.20% percentage service points decreased Cargo 11.59% 7,250,905.82 1,733,971.61 76.09% -17.37% 60.31% transportation percentage points decreased hotel and food 38.40% 26,059,386.92 16,312,368.49 37.40% 18.41% 206.31% service percentage points (2) Particulars about different districts for main operation Unit：RMB Domestic International increased or increased or Industry Main operation decreased Main operation decreased income compared to income compared to last year last year Aviation 4,343,952,321.57 5.97% 159,708,939.13 61.74% transportation service Cargo transportation 7,250,905.82 -17.37% - - hotel and food service 26,059,386.92 18.41% - - 3. 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, the Company realized net profit amounting to RMB 2.4444 million. At the end of the report period, the total capital is RMB 45,311,900, and net capital is RMB 39,712,600. 23 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT (2)Sichuan Airlines Co., Ltd. In the report period, its share participated Sichuan Airlines Co., Ltd. realized main operation income RMB 5,343,815,800 and net profit of RMB 135,510,300 by auditing. (3) Shandong Airlines Rainbow Jet Co., Ltd. In the report period, its share participated by the Company and realized net profit amounting to RMB -4,142,000 as audited. At the end of the report period, the total capital is RMB 92,187,400. (4) Travelsky Technology Limited Its share participated by the Company and its auditing work of 2006 is not finished yet at present. (5) Jinan International Airport Co., Ltd. In the report period, its share participated by the Company and its auditing work of 2007 is not finished yet at present. 4. Particulars about major suppliers and customers The total amount of purchase of the top five suppliers of the Company took up 27. 71% 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 18.47% of the total annual amount of sales of the Company. 5. Problems and difficulties from operations and their solutions (1) In 2007, the average oil price increased consistently, and the continuous rising in aviation oil price resulted in operation cost ascending endlessly. Faced with the disadvantage phase of oil price functioning in high order, the Company continuously developed work on increasing income and reducing expenditure, went on consummate measures, put into practice the spirit of the Saving Oil Meeting of the Company, and oil saving cost reached RMB39, 310,000. In 2008, the Company will further enhance the budget enforcement, establish and consummate the monitoring and assessment mechanism, and control the increase of operation cost. (2) The losses of series of CRJ airplanes of the Company have not been solved yet. In 2007, the Company canceled release of two CRJ-200 airplanes, and profit making airlines have become its main airlines. In 2008, the Company will also cancel release of another two CRJ200 airplanes. And the Company will continue fastening airline structure adjustment, arrange lateral airline plan to meet the airline cost decreasing target. (3) At present, the profit making ability has not been improved. In 2008, the Company will take different measures to enhance its profit making ability. With the target of increasing website interest, the Company will strengthen its airline website construction. Promoting creative sales model and increasing sales competitive ability is also its target. The Company will also strengthen income management to increase seat value. Low cost management work on the emphasis of cost decrease and efficiency increase should be deeply carried out. The Company will continue implementing asset structure adjustment, as well as promote airline group adjustment to further deepen resource adjustment with Air China Limited, thus realizing better coordinate interest. (III) Investments of the Company 1. Investment of raised proceeds In the report period, there was no application of proceeds raised or application of proceeds 24 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT raised in the previous period but lasting to the report period in the Company. 2. Investment of non-raised proceeds On Oct 30th of 2007, the proposal on Establishment of Freight Warehouse in Jinan Base has been examined and approved in the 10th meeting of the 3rd session Board of Directors of the Company. It was determined to establish a freight warehouse in Jinan Base. This project is located within the area of Jinan Yaoqiang International Airport and is divided to the arrival warehouse and the departure warehouse in accordance with the standard of freight warehouse. The total area of the constructions of the project covers approximately 7,577 square meters and RMB 13,890,000 is estimated for the budget of the construction. (IV) Financial status of the Company 1. Change in accounting policy and accounting estimation The Company has implemented the Accounting Standards System and Guidance for Enterprise promulgated by the state since Jan 1st of 2007. In accordance with the following regulations and documents: No.38 of the Accounting Standards for Enterprise-First Time Adoption of Accounting Standards for Enterprises, No.1 of the Explanation of Accounting Standards for Enterprises, Notice on Disclosure of Financial and Accounting Information Related to the New Accounting Standards (ZJF2006 No.136) promulgated by the CSRC, as well as the No.7 of the Questions and Answers on the Standardization of Information Disclosure of the Companies Offering Public Issue of Securities-the Formation and Disclosure of the Financial and Accounting Information during the Transition Period between the Old and New Accounting Standards (ZJA2007 No.10) promulgated by the CSRC, the Company made retroactive adjustments to the changes of accounting policy on long-term equity investment and income tax related to the First Time Adoption of Accounting Standards for Enterprises The prospective application method was adopted by the Company for treating the other changes of accounting policy. The details are as follows: (a) Retroactive adjustment has been made by the cost method on the long-term equity investment made by parent company to its subsidiary According to the (CK2007 No.14) Notice on Publishing the No.1 of the Explanation of Accounting Standards for Enterprises promulgated by the Ministry of Finance, as to the already-existed long-term equity investment held by the parent company to its subsidiary before the first time adoption, the retroactive adjustments should be made on the first time adoption. And it should be treated as that the calculation has been made by the parent company with cost method at the first beginning. After the implementation of the new accounting standards, the investment income should be confirmed in accordance with the distributed part from the allocated cash bonus or profit announced by the subsidiary. The aforesaid changes of accounting policy have no influence upon the consolidated net assets. (b) Income tax According to the new Accounting Standards for Enterprise, if the book value of assets is less than its tax base, the Company takes the balance between the two for computation of deferred income tax assets; but if the previous one is higher than the next one, the Company should takes the balance for computation of deferred income tax liability. The retained earnings on Jan 1st of 2007 would be increased by RMB 92,247,851.58, including RMB 92,231,026.43 increased in the shareholders’ equity attributable to parent company and RMB 16,825.15 in the equity attributable to the minor shareholders. 25 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT (c) Others Due to that the employees have abandoned their holidays with pay in previous years; the Company is expected to offer compensation expenditures to the employees in the following periods according to the relevant regulations. Therefore, the retained earnings attributable to the shareholders’ equity of parent company on Jan 1st of 2007 would be decreased by RMB 2,290,216.00. 2. Assets constitution and reasons for the changes (1) Significant change in assets constitution of the Company compared to that of the same period of last year during the report period Unit: RMB Dec 31st of 2007 Dec 31st of 2006 Increase or decrease scope in Scope of Item amount change in Amount Proportion Amount Proportion compared proportion to that of last year % Accounts receivable 208,349,054.20 2.96% 158,213,884.00 2.62% 31.69 0.34% Inventory 52,238,139.37 0.74% 39,445,839.63 0.65% 32.43 0.09% Construction in process 1,154,132,471.11 16.39% 553,829,863.15 9.18% 108.39 7.22% Bills payable 15,000,000.00 0.21% 50,000,000.00 0.83% -70.00 -0.62% Accounts payable 760,365,588.12 10.80% 402,115,575.59 6.66% 89.09 4.14% Accounts received in advance 89,600,059.23 1.27% 55,034,797.28 0.91% 62.81 0.36% Wages payable 73,407,937.88 1.04% 39,620,548.34 0.66% 85.28 0.39% Other accounts payable 135,360,048.66 1.92% 301,939,818.30 5.00% -55.17 -3.08% Long-term loan 2,600,391,847.97 36.94% 1,814,701,451.78 30.07% 43.30 6.87% (2) Reasons for changes Item Explanations Accounts receivable Mainly to BSP cheque and the newly-increased joint services routes Mainly due to the increase in reserve of Inventory flight materials which are newly brought in Construction Mainly due to the increase in the expenditure accounts for in process the project of airplane introduction Mainly due to the decrease in the accounts which are in need of Bills payable payment by bills in this report period Mainly because the accrued expenses for Accounts payable big repair of airplanes have been transferred into this item for calculation Accounts received Mainly due to the intensification in recovery power 26 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT in advance in this accounts and the recovery power is faster than that of flight coupon Mainly due to the increases in the year-end bonus and Wages payable the pilots’ year amount of safety in the report period Mainly because of the transferred out of the expenses for Other accounts payable big repair of airplanes from this item in the report period Mainly because the long-term loans are increased from Long-term loan banks for the expenditure in introduction of airplanes in the report period 3. Significant changes in the main financial data compared to that of the same period of last year and reasons for the changes (1) Significant changes in the main financial data Unit: RMB Increase or decrease Item 2007 2006 scope% Operating income 4,630,130,538.19 4,231,057,944.71 9.43 Operating cost 3,836,749,656.28 3,481,368,056.47 10.21 Asset impairment 670,094.39 -14,816,307.30 -104.52 loss Investment income 954,109.32 16,413,444.68 -94.19 Non-operating 30,448,695.77 636,075.18 4,686.96 expense Income tax expense 19,557,510.41 33,081,388.72 -40.88 (2) Reasons for changes Item Explanation Mainly due to the increase in the operating routes and input Operating income transport capacity in this report period Mainly due to the increase in related cost expense brought by the Operating cost increase in income Asset impairment Mainly because the current bad debt provision has been turned back loss in the report period Mainly because the cash dividends of the joint stock companies of Investment income the Company decreased, and so did the income from the disposal of the joint stock companies Non-operating Mainly due to the increase in expense for discarded as useless of expense the high-priced turnovers of flight materials in the report period Mainly because the atonable losses resulted in the decrease in Income tax expense switching back of deferred income tax assets 4. Measurement attributes adopted for the main assets When making measurement on accounting elements, the Company usually adopts the principle of historical cost. But if the assured amount of the accounting elements is available and measured reliably, then measurement by replacement cost, net realizable value, present value and fair value would be adopted for some particular accounting elements. 27 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT With measurement by principle of historical cost, assets should be measured according to the amount of cash or cash equivalent paid for purchase, or the fair value of consideration paid out when purchasing the assets. And liabilities should be measured according to the actual received account or assets amount when bearing present duty, or contract amount when bearing present duty, or expected amount of cash or cash equivalents which is needed for repaying liabilities in daily activities. Method for confirming the fair value of financial assets and financial liabilities: As to the financial assets and financial liability existed in active market, their fair value is ensured according to the quotation offered in the active market. Quotation offered in active market includes prices acquired from exchanges, brokers, industry association, service organizations for pricing in period. Meanwhile, the kind of quotation represents the actual market transaction price in fair trading. While to the financial assets and financial liability which do not exist in active market, the fair value is ensured by adoption of estimated value technique. Estimated value technique includes the reference to the market transaction prices recently used by parties who are quite well known of market and make transaction in free will, and reference to the current fair value, discounted cash flow method and pricing model of option of other financial assets and financial liability which are almost the same. 5. Constitution of the cash flow of the Company, and particulars about the items which receive significant changes compared to those of last year and reasons for the changes (1) Constitution of the cash flow Unit: RMB Increase or decrease occurred in this year Item 2007 2006 compared to that of last year% Net cash flow from operating 734,571,420.98 1,059,281,297.52 -30.65% activities Net cash flow from investment -1,301,291,326.11 74,760,079.43 -1840.62% activities Net cash flow from financing 542,815,571.18 -1,132,731,821.27 -147.92% activities Effect of foreign exchange rate changes on cash or cash -2,220,419.94 -1,149,261.97 93.20% equivalents Net increase in cash and cash -26,124,753.89 160,293.71 -16398.05% equivalents (2) Particulars about the significant changes in cash flow compared to that of last year and reasons for the changes during the report period Unit: RMB Increase or decrease Item 2007 2006 Explanation occurred in this year 28 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT compared to that of last year% Mainly due to the purchase Net cash flow from -1,301,291,326.11 74,760,079.43 -1840.62% for airplanes in the report investment activities period Mainly because the US dollar loan business which Cash received taking - 684,750,512.65 took the RMB deposit as back from investment pledge with Bank of China has been finished in 2006 Mainly because the cash dividends of the joint stock companies of the Company Cash received obtaining 956,670.00 8,500,155.00 -88.75% decreased, and so did the the investment income income from the disposal of the joint stock companies (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 several significantly risings in price. Because the aviation oil expense takes a large proportion in main operating cost of the Company, the aforesaid risings directly bring lasting rising to the main operating cost of the Company. What’s worse, there is a possibility that the aviation oil price is continuously climbing up and keeping operation in high price, which makes quite pressure for improving the profit-making capability of the Company. 2. The National Development and Reform Commission and CAAC (General Administration of Civil Aviation of China) decide to nudge up the bunker surcharge in civil flight course in November of 2007, which brought increase in income of the Company, but the income was still not enough for meeting the balance resulting from the aviation oil price increase. (VI) Explanation of the Board on interpretative explanation paragraph in the auditors’ report Reanda International Certified Public Accountants audited Financial Report 2007 of the Company and presented standard unqualified Auditor’s Report. (VII) Prospects of the future development of the Company and work plan of the Board of Directors for year 2008 The year 2008 is the first year when implementing the spirit of the 17th Session of National People’s Congress of the People’s Republic of China and also an essential year for implementation of the 11th Five Year Plan. We are going to welcome the 30 anniversary of the Reform and Open Policy and the 2008 Beijing Olympic Games, so it is very important to do the work well for this year. The Company is facing good opportunity for development and meanwhile, the unconfirmed elements and risks are increasing. The new opportunity faced by the Company is that: the general international environment 29 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT keeps steady and the trend of global economic is developing further. It is participated that China’s economic will still keep the double-digit growth and CNY is still going to be appreciated. The implementation of the annual holiday system with pay, celebration of the Beijing Olympic Games and the 2008 Olympics Sailing Events in Qingdao will bring more market opportunities for the Company. Being one of the important brands, Shandong Airlines Co., Ltd has been considered into the general development strategic plan of Air China, thus cooperated development will bring more chances for Shandong Airlines. The new challenges in front of the Company are that: the unconfirmed elements existed in macro- economy increase the operating risks for airlines companies. The US subprime lending crisis continually impacts the economy of USA and the whole world in large. There is still overheated economy and inflation pressure in domestic market. And the expenses paid for aviation oil and landing fees are facing ascending, which presents a new challenge for improving the general income. The other airline companies are developing with quite fast growth in transport capability, so the pressure from competition within the industry is intensified day by day. To enlarge the network layout of flight course also brings forward new challenge for guarantee of safety production. The general consideration for the development of the Company in 2008 is: guided with the spirit of the 17th Session of National People’s Congress of the People’s Republic of China, leaded with scientific development view, the Company manages to set excellent targets, insist with preference for excellence and improve the managing level; also, the Company manages to do excellent work, ensure safety production, improve its operating competition ability, carry out the strategic for improving brand, further the reform for enterprise management, and perfect its systems and mechanisms; last, the Company manages to create excellent performance and realize the development of safety, efficiency, lasting, health and harmony. 1. Continue to perfect the corporate administration structure of the Company To bring into the full play on decision-making, auditing and assessing function of special commissions of the Board of Directors; further guarantee the independent directors, special commissions and Supervisory Committee implement their duties, substantially provide necessary and convenient conditions for supervising work ; continue to perfect the internal control system, improve the internal management level. 2. Particularly do well the works in the following five aspects and realize the five developments (1) Taking the systematically establishment of safety management as main line to realize development of safety. (2) Taking the exaltation of market competition ability as main line to realize development of efficiency. (3) Taking the execution of service brand strategic as main line to realize development of lasting. (4) Taking human being as essence to consolidate the management basis and realize development of health. (5) Strengthening the establishment of party and spirit civilization to realize development of harmony. (VIII) Capital needs in realizing operation plan, using plan and capital source 30 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT In 2008, 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 seven meetings in 2007. (1) On Mar 29th of 2007, the Company held the 6th meeting of the 3rd Board of Directors. The public notice of the resolutions of the Meeting was published on China Securities, Securities Times and Hong Kong Wen Wei Po dated Mar 31st of 2007. (2) On Apr 26th of 2007, the Company held the 7th meeting of the 3rd Board of Directors in way of communication. The public notice of the resolutions of the Meeting was published on China Securities, Securities Times and Hong Kong Wen Wei Po dated Apr 27th of 2007. (3) On May 31st of 2007, the Company held the 2007 1st temporary meeting of the 3rd Board of Directors in way of communication. The public notice of the resolutions of the Meeting was published on China Securities, Securities Times and Hong Kong Wen Wei Po dated Jun 1st of 2007. (4) On Jun 28th of 2007, the Company held the 8th meeting of the 3rd Board of Directors. The public notice of the resolutions of the Meeting was published on China Securities, Securities Times and Hong Kong Wen Wei Po dated Jun 29th of 2007. (5) On Aug 24th of 2007, the Company held the 9th meeting of the 3rd Board of Directors in way of communication. The public notice of the resolutions of the Meeting was published on China Securities, Securities Times and Hong Kong Wen Wei Po dated Aug 28th of 2007. (6) On Oct 30th of 2007, the Company held the 10th meeting of the 3rd Board of Directors in way of communication. The public notice of the resolutions of the Meeting was published on China Securities, Securities Times and Hong Kong Wen Wei Po dated Oct 31st of 2007. (7) On Nov 9th of 2007, the Company held the 2007 2nd temporary meeting of the 3rd Board of Directors in way of communication. The public notice of the resolutions of the Meeting was published on China Securities, Securities Times and Hong Kong Wen Wei Po dated Nov 10th of 2007. 2. The implementation of the resolutions of Shareholders’ General Meeting by the Board of Directors In the report period, according to the requirements of the relevant laws and regulations of Company Law, Securities Law and Articles of Association, the Board of Directors of the Company seriously implemented various resolutions approved by Shareholders’ General Meeting strictly in compliance with the resolutions and authorization of Shareholders’ General Meeting. (1) The implementation of profit distribution of the Company of 2006 In order to make up the losses in previous year, the Company didn’t carry out profit distribution in 2006. (2) The Board of Directors of the Company strictly implemented other various resolutions approved by Shareholders’ General Meeting, actively arranged the production, operation, investment disposal and fundamental construction etc.. (X) Profit distribution preplan or preplan on converting capital public reserve into share capital Audited by Reanda Certified Public Accountants Ltd, the Company realized net profit of RMB 37,989,000 in 2007. In order to offset the loss of the previous years, the Company decided not 31 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT to carry out profit distribution or conversion from capital public reserve into share capital in 2007. The profit distribution preplan would be handed in to the 2007 General Shareholders’ Meeting of the Company for examination and discussion. (XI) Reason for why no cash profit distribution preplan is presented though profit is made during the report period and usage of the undistributed profit According to the regulations of the Article of Association of the Company, because the profit made during the report period is insufficient to offset the accumulated losses of previous years, thus no cash profit distribution preplan is presented. (XII) Duty implementation of the Audit Committee of the Board of Directors In the report period, the Audit Committee of the Board of Directors issued opinions on the various period reports and event about the reengagement of certified public accountant. The Audit Committee of the Board of Directors has done lots work during the 2007 auditing period of the Company. According to the requirement of Notice on 2007 Annual Reports and Related Works of Listed Company (ZJGS (2007) No.235) promulgated by the CSRC, the Audit Committee makes the following summary on the 2007 auditing work: 1. Ensures the general audit plan and examines the financial statements of the Company With negotiation among the independent directors of the Company, the Audit Committee and Reanda Certified Public Accountants Ltd, the audit work arrangement for 2007 of the Company was confirmed. At the same time, the independent directors and the Audit Committee has examined the 2007 financial statements formed by the Company and considered that: the Company makes financial calculation in compliance with the regulation of the new accounting standards and no significant untrue contents has been carried in the annual report materials; the 2007 financial statements formed by the Company basically reflect the assets, liabilities and production and operation achievements of the Company till Dec 31st of 2007 and it is agreed to take this financial statement as the basis to carry out the 2007 financial audit work. 2. Keeps normal negotiation with the Certified Public Accountants Ltd and pays attention to the progress of auditing During the audit period, the Audit Committee consistently keeps negotiations with the financial department and the Certified Public Accountants Ltd. Meanwhile, the Committee takes close eyes to the progress of auditing and examines the financial reports. 3. Calls in the Audit Committee to examine and approve the proposals related to annual report Reanda Certified Public Accountants Ltd has finished its auditing work in scheduled time and issued standard unqualified Auditor’s Report. The Audit Committee held meeting to examine and approve the following proposals: the 2007 Financial Settlement Report, the 2007 Profit Distribution Preplan, the 2007 Annual Report, Reengagement of Certified Public Accountant, and Regulations of Audit Work of the Audit Committee for the Annual Financial Report. Resolution on Presentation to the Board of Directors on the Reengagement of Reanda Certified Public Accountants Ltd as the 2008 Financial Audit Organization of the Company has been formed. (XIII) Duty implementation of the Remuneration Committee of the Board of Directors The Remuneration Committee makes examination on the remuneration of the directors, supervisors and senior executives of the Company disclosed in the 2007 Annual Report and offers the following opinions: the present remuneration system of the Company is made 32 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT according to the regulated decision-making procedure; the remuneration of the directors, supervisors and senior executives of the Company is in compliance with relevant regulations; the remuneration of relevant personnel disclosed in the 2007 Annual Report of the Company is real and accurate. VIII. Report of the Supervisory Committee (I) Particulars about the work of Supervisory Committee In 2007, 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 operating decision-making, financial status, the responsibility and behaviours of directors and senior managers in the period and strictly safeguarded the rights and interests of the shareholders. The Supervisory Committee had hold two meetings of the Supervisory Committee and attended all shareholders’ general meetings and meetings of the Board in 2007. In the report period, the Supervisory Committee totally held the following meetings: 1. On Mar 29th of 2007, the 6th Meeting of the 3rd Supervisory Committee was held in the conference room of SDA Building. The meeting examined and approved the following proposals: (1) The 2006 Annual Report and Summary of Shandong Airlines Co., Ltd; (2) The 2006 Working Report of Shandong Airlines Co., Ltd. The public notice of the resolutions was published on China Securities, Securities Times and Hong Kong Wen Wei Po dated Mar 31st of 2007. 2. On Aug 24th of 2007, the 7th Meeting of the 3rd Supervisory Committee was held in the conference room of SDA Building. The meeting examined and approved the 2007 Semi-annual Report and its Summary of Shandong Airlines Co., Ltd. (II) Independent Opinions of the Supervisory Committee on relevant events in 2007 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; and believed that the operation management of the Company was in accordance with the relevant laws and regulations and the Articles of Association of the Company. 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 terms. 33 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 2. Finance management of the Company The Supervisory Committee examined meticulously the financing situation of the Company. In the opinion of the Supervisory Committee, 2007 Financial Report of the Company reflected the financial situation and operation result of the Company truthfully and fairly. The accounting vouchers, books and statements, and other accounting materials were genuine and standard. 3. Related transaction The related transactions of the Company are done in accordance with the market principle, so they are of equality and reasonable price, and also maintain the profit of shareholders’ equity and the listed company. 4. Self-estimation of the internal control The Supervisory Committee of the Company conducts careful inspection on the internal control of 2007 of the Company, according to the Guidance for Listed Company in Internal Control, and it holds that: (1) The internal control system of the Company basically complies with the requirement of supervision and meets the demand for the current production and operation of the Company. (2) The internal control measurements of the Company bring well effect in the controls of various procedures and taches in enterprise management. (3) The Company should continually to perfect the internal control taches and internal control organizations etc. IX. Significant Events (I) The Company has not been involved in significant lawsuits or arbitrations in the report period. (II) The Company has no bankruptcy and reforming in the report period. (III) The Company holds 8,697,000 shares of Chinese Information Network Incorporation of Civil Aviation which is listed in Hong Kong Exchanges and Clearing Limited. The nature of these shares is non-circulating domestic shares. The Company holds no share equity of other listed companies, or equity of financial enterprises such as joint stock commercial banks, securities companies, insurance companies, trust companies and futures companies. (IV) Purchase and sale of assets and merger of the Company in the report period According to the adjustment strategic of the Company, the 6th meeting of the 3rd session Board of Director decided to log off legally Shandong Airlines United Express Co., Ltd and Shenzhen SDA Hengchi Cargo Co., Ltd whose shares are held by the Company; and the government level of the Company has been authorized to deal with the procedures of log-out and liquidation. (The relevant notice has been published on China Securities, Securities Times and Hong Kong Wen Wei Po dated Mar 31st of 2007.) (V) The implementation of stock option incentive plan in the report period There is no implementation of stock option incentive plan of the Company in the report period. (VI) Significant related transaction The Company has some related transactions with its holding shareholders and their subordinate companies at present. These related transactions are necessity for the Company and are unavoidable. Before the transactions, the Company has already fully considered the quality, 34 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT price and efficiency of the services and goods provided by the related parties and also made analysis and comparison on the market environment. The independent directors of the Company present opinion on the related transactions which believes that the Company and the related parties make the deal with market principle of open, equality and justice, the transaction price is fair and there is no behaviour hurting profit of other shareholders. 1. Purchasing and selling merchandise, providing and accepting service (1) In the report period, airplane maintaining fee of RMB 56,344,000 has occurred between the Company and Taikoo (Shandong) Aircraft Engineering Co., Ltd. This transaction amount takes proportion of 15.01% in the same kind transactions. The Company paid for this transaction in cash according to the market price. (2) In the report period, scheduled flight cooperation amount of RMB 85,834,000 has occurred between the Company and China Airlines Co., Ltd. The transaction was priced according to the price regulated in the contract agreed by the both parties. (3) The related transactions about the routine operations in 2007 Unit: RMB’0000 Classification of the Anticipated Actual Related parties related transactions amount amount Taikoo (Shandong) Aircraft Engineering Co., Ltd 7200 5,634 1.Maintenance of Shandong Xiangyu Aero Technical Services Co., Ltd. 445 332 aircraft and fittings Subtotal 7,645 5,966 Qingdao Feisheng International Aero Technical Training Co., 700 588 Ltd. 2.Training expense Shandong International Aero Training Co., Ltd. 1320 793 Subtotal 2,020 1,381 3.Rent for office Shandong Aviation Group(Rent for office land) 450 621 land, and daily Shandong Aviation Group (Daily Accommodation) 580 491 accommodation Subtotal 1,030 1,112 Air China Limited (aircraft lease) 20,160 25,918 Air China Limited (joint owned operation in South Korea flight 4. Aircraft lease and 4,800 8,583 course) market cooperation Air China Limited (labour service support) 1,312 1,239 Subtotal 26,272 35,740 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 There are no newly increased credits and liabilities between the Company and related parties in the report period. (VII) Significant contracts and implementation 35 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 1. There are no assets entrustment, contract and lease in the report period. 2. In the report period, the Company had no external significant guarantee. 3. In the report period, the Company had no entrusted financing. 4. Other significant contracts Until the end of the report period, the accumulated amount of long-term and short-term borrowings of the Company amounts to RMB 41,082,455,000. The Company had no other significant contracts not disclosed. (VIII) The Company had not entrusted anyone to manage its cash assets in the report period. (IX) In the report period, there is no significant commitment. (X) Engagement of Certified Public Accountants In the report period, the Company continued to engage Reanda Certified Public Accountants as Auditing Organization of the Company. 2006 Annual Shareholders’ General Meeting examined and approved the Proposal on Renewal of Engaging CPA and its Remunerations, the Company engaged Reanda Certified Public Accountants as 2007 Auditing Organization of the Company. In the report period, the Company should pay the annual auditing fee of RMB 600,000. The aforesaid auditing organization has provided auditing services to the Company for the 4th year. (XI) In the report period, the Company and the Board of Directors have not received check, administrative punishment and notice of criticism from the CSRC, and public criticism from the securities exchange. (XII) In the report period, the received research and interview of the Company. In accordance with the principles of just, fair and publicity, further regulate the behaviours of information disclosure for the listed companies, the Company received the research and media interviews in standardized way according to the regulations of Guideline on Fair Information Disclosure for Listed Companies promulgated by Shenzhen Stock Exchange. In the report period, the Company received organization investors, analysts, investors of B-stock, and the research, visits and telephone communication from specialized media many times; the Company received them and replies strictly in accordance with relevant regulations; there occurred no such situations as selectively and privately reveal or leak non-public significant information to specific parties; and all these assure the fairness of information disclosure of the Company. Activities form of receiving research, communication and interview in the report period: The received The received Contents discussed and materials The received way The received parties date place supplied News media, organization Financial status and operations 2007 Jinan Spot research investors and investors of plan in 2007, provide the 2006 B-share Annual Report Telephone organization investors and Operating situations and 2007 Jinan interview, investors of B-share significant events of the Company 36 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT communication X. Financial Report Auditors' Report To the Shareholders of Shangdong Airlines Co., Ltd 山东航空股份有限公司 We have audited the accompanying financial statements of Shangdong Airlines Co., Ltd. (“The 37 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Company”), which comprise the consolidated balance sheet as at December 31, 2007, and the consolidated income statement, consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management’s Responsibility for the Financial Statements The Company’s management is responsible for the preparation of these financial statements in accordance with the Enterprises Accounting Standards of China. This responsibility includes: (1) designing, implementing and maintaining internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error; (2) selecting and applying appropriate accounting policies; (3) making accounting estimates that are reasonable in the circumstances. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Chinese Certified Public Accountants' Auditing Standards. These standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amount and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Auditing opinion 38 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT In our opinion, the financial statements have been prepared in accordance with the requirements of the Enterprises Accounting Standards promulgated by the People’s Republic of China, and present fairly, in all material respects, the financial position of Shangdong Airlines Co., Ltd as at December 31, 2007, and the results of its operations and its cash flows for the year then ended. Reanda Certified Public Accountants Co., Ltd. Certified Public Accountant: Sun Yibing Beijing, China Certified Public Accountant: Yang Ganlin March 21, 2008 Consolidated Balance Sheet December 31st, 2007 Name of the company ： Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan 31/12/2007 31/12/2006 Asset Note consolidation parent company consolidation parent company 39 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Current assets: Monetary funds VIII(1) 69,524,098.82 57,489,203.79 97,539,227.71 88,186,887.18 Tradable financial assets Note receivable Accounts receivable VIII(2) 208,349,054.20 206,861,203.30 158,213,884.00 156,305,211.47 Advance to suppliers VIII(3) 20,788,886.80 20,731,073.69 18,104,467.94 18,036,808.50 Interests receivable Dividend receivable Other accounts receivables VIII(4) 160,626,933.07 160,504,589.08 136,917,119.84 135,018,578.41 Inventories VIII(5) 52,238,139.37 52,238,139.37 39,445,839.63 39,445,839.63 Non-current assets due within one year Other current assets Total current assets 511,527,112.26 497,824,209.23 450,220,539.12 436,993,325.19 Non-current assets: Available-for-sale financial assets Held-to-maturity investment Long-term accounts receivable Long-term equity investment VIII(6) 89,459,196.91 112,815,305.97 88,694,292.04 114,732,132.51 Investment property Fixed assets VIII(7) 4,995,005,633.80 4,981,126,769.37 4,660,680,882.09 4,647,611,263.80 Construction in process VIII(8) 1,154,132,471.11 1,154,132,471.11 553,829,863.15 552,871,373.86 Construction materials Liquidation of fixed assets 833,029.86 833,029.86 Production biology assets Oil and gas assets Intangible assets VIII(9) 43,412,609.06 28,461,786.21 44,026,148.80 29,040,670.00 Development expenses Goodwill Long-term deferred assets VIII(10) 172,330,090.76 172,330,090.76 145,855,706.29 145,855,706.29 Deferred income tax assets VIII(11) 72,989,224.18 72,966,789.33 92,247,851.58 92,191,764.44 Other non-current assets Total non-current assets 6,528,162,255.68 6,522,666,242.61 5,585,334,743.95 5,582,302,910.90 Total assets 7,039,689,367.94 7,020,490,451.84 6,035,555,283.07 6,019,296,236.09 Consolidated Balance Sheet(continue ) December 31st, 2007 Name of the company ： Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan Liabilities and Shareholders' Note 31/12/2007 31/12/2006 40 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT equities consolidation parent company consolidation parent company Current liability: Short-term loan VIII(14) 1,205,230,000.00 1,205,230,000.00 1,130,000,000.00 1,130,000,000.00 Tradable financial liabilities Notes payable VIII(15) 15,000,000.00 15,000,000.00 50,000,000.00 50,000,000.00 Accounts payable VIII(16) 760,365,588.12 757,934,844.01 402,115,575.59 401,452,703.13 Advance from customers VIII(17) 89,600,059.23 87,573,432.73 55,034,797.28 53,778,267.83 Payroll payable VIII(18) 73,407,937.88 73,386,833.70 39,620,548.34 39,269,434.48 Tax payable VIII(19) 86,739,296.55 85,841,693.21 67,013,359.06 66,952,038.65 Interests payable VIII(20) 12,429,380.48 12,429,380.48 325,198.23 325,198.23 Dividend payable 11,940.00 11,940.00 111,940.00 11,940.00 Other accounts payable VIII(21) 135,360,048.66 135,408,278.25 301,939,818.30 301,327,478.57 Non-current liabilities due VIII(22) 302,623,652.29 302,623,652.29 329,198,284.79 329,198,284.79 within one year Other current liabilities Total current liabilities 2,680,767,903.21 2,675,440,054.67 2,375,359,521.59 2,372,315,345.68 Non-current liabilities: Long-term borrowings VIII(23) 2,600,391,847.97 2,600,391,847.97 1,814,701,451.78 1,814,701,451.78 Bonds payable Long-term accounts payable VIII(24) 1,304,559,910.24 1,304,559,910.24 1,426,544,652.23 1,426,544,652.23 Special accounts payable Deferred income VIII(25) 4,871,343.11 4,871,343.11 6,262,526.11 6,262,526.11 Accrued liabilties Deferred income tax liabilities Other non-current liabilities Total non-current liabilities 3,909,823,101.32 3,909,823,101.32 3,247,508,630.12 3,247,508,630.12 Total liabilities 6,590,591,004.53 6,585,263,155.99 5,622,868,151.71 5,619,823,975.80 Shareholders' equity: Share capital VIII(26) 400,000,000.00 400,000,000.00 400,000,000.00 400,000,000.00 Capital reserve VIII(27) 84,050,162.84 84,050,162.84 84,050,162.84 84,050,162.84 Less: inventory shares Surplus reserve VIII(28) 24,919,586.71 24,442,948.14 25,001,281.34 24,442,948.14 General risk reserve Retained earnings VIII(29) -72,004,872.16 -73,265,815.13 -109,226,868.91 -109,020,850.69 Exchange difference of foreign currency financial statements translation Shareholders' equity attributable to parent 436,964,877.39 435,227,295.85 399,824,575.27 399,472,260.29 company: 41 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Minority interests 12,133,486.02 12,862,556.09 Total shareholders’ equities 449,098,363.41 435,227,295.85 412,687,131.36 399,472,260.29 Total liabilities and 7,039,689,367.94 7,020,490,451.84 6,035,555,283.07 6,019,296,236.09 shareholders’ equities Consolidated Income Statement For the year ended December 31st,2007 Name of the company ： Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan 2007 2006 Item Note consolidation parent company consolidation parent company 1. Total operating income VIII(30) 4,630,130,538.19 4,623,549,570.26 4,231,057,944.71 4,222,282,928.47 Minus: operating cost VIII(30) 3,836,749,656.28 3,835,722,274.41 3,481,368,056.47 3,480,286,431.58 Business taxes and surtax VIII(31) 137,305,155.03 136,961,706.63 126,158,588.33 125,743,401.56 Selling expense 211,372,665.37 211,372,665.37 203,075,903.87 203,075,903.87 Administration expense 171,407,025.30 169,224,699.39 171,171,816.49 169,028,177.22 Financial expenses VIII(32) 196,946,731.36 197,050,639.66 249,325,498.44 249,365,380.84 Impairment loss of assets VIII(33) 670,094.39 670,094.39 -14,816,307.30 -14,816,307.30 Add: profits from the fair value changes (The loss is listed beginning with “-“) Investment income (The loss is VIII(34) 954,109.32 956,670.00 16,413,444.68 16,919,261.65 listed beginning with “-“) Including: the investment income from associated and 44,183.04 joint ventures enterprises II. Operating profit 76,633,319.78 73,504,160.41 31,187,833.09 26,519,202.35 Add: non-operating income VIII(35) 11,362,190.18 11,362,190.18 12,869,735.70 12,851,346.52 Less: non-operating expense VIII(36) 30,448,695.77 30,060,019.70 636,075.18 631,133.76 Including: loss from disposal of non-current assets 21,736,311.72 21,347,787.09 277,433.76 III. Total profits (The loss is listed beginning with “-“) 57,546,814.19 54,806,330.89 43,421,493.61 38,739,415.11 Less: income tax expense VIII(37) 19,557,510.41 19,224,975.11 33,081,388.72 32,828,379.20 42 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT IV. Net profits (the net loss is listed beginning with “-”) 37,989,303.78 35,581,355.78 10,340,104.89 5,911,035.91 Net profits attributable to parent company 37,255,985.51 35,581,355.78 8,875,631.95 5,911,035.91 Minority interests 733,318.27 1,464,472.94 V. Earnings per share 1.Basic earnings per share 0.09 0.02 2.Diluted earnings per share 0.09 0.02 Consolidated Cash Flow Statement For the Year Ended December 31st, 2007 Name of the company ： Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan 2007 2006 Item Note parent parent consolidation consolidation company company I. Cash flows from operating activities Cash received from sales of goods or rendering of 4,614,996,501.55 4,607,979,662.01 4,266,609,184.91 4,257,953,067.38 services Tax refund Cash received related to other operating activities VIII(38) 62,474,713.49 60,201,534.74 250,844,879.67 242,708,910.04 Subtotal of cash inflow from operating activities 4,677,471,215.04 4,668,181,196.75 4,517,454,064.58 4,500,661,977.42 Cash received from sales of goods or rendering of 3,245,072,652.98 3,244,937,455.55 2,882,885,125.24 2,882,872,835.95 services Cash paid to and on behalf of employees 382,490,652.80 381,146,275.72 267,905,566.37 263,272,956.91 Tax payments 240,417,165.04 239,862,229.14 128,881,447.89 127,422,872.57 Other cashes paid to operating activities VIII(39) 74,919,323.24 74,292,822.30 178,500,627.56 177,925,475.38 Subtotal of Cash outflow from operating activities 3,942,899,794.06 3,940,238,782.71 3,458,172,767.06 3,451,494,140.81 Net cash flow from operating activities 734,571,420.98 727,942,414.04 1,059,281,297.52 1,049,167,836.61 II. Cash flow from investment activities: Cash received from investments 684,750,512.65 684,750,512.65 Cash dividents received from investment 956,670.00 956,670.00 8,500,155.00 8,500,155.00 Net cash received from disposal of fixed assets, intangible assets and other long-term assets 4,267,733.98 4,249,344.80 Net cash amount received from the disposal of subsidiaries an other business units 750,000.00 750,000.00 Cash received related to other investment activities Subtotal of cash inflow from the investment activities 1,706,670.00 1,706,670.00 697,518,401.63 697,500,012.45 Cash paid to acquire and construct fixed assets, 43 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT intangible assets and other long-term assets 1,299,602,794.39 1,299,053,039.73 622,758,322.20 617,154,840.64 Cash paid to acquire investments Net cash amount paid to acquire the subsidiaries and other business units Cash paid related to other investment activities VIII(40) 3,395,201.72 Subtotal of Cash outflow from investment activities 1,302,997,996.11 1,299,053,039.73 622,758,322.20 617,154,840.64 Net cash flow from investment activities -1,301,291,326.11 -1,297,346,369.73 74,760,079.43 80,345,171.81 III. Cash flow from financing activities: Cash received from investors Including: subsidiaries received cash investment from minority shareholders Cash received from loans 3,096,874,737.10 3,096,874,737.10 2,830,450,046.87 2,830,450,046.87 Cash received related to other financing activities VIII(41) 22,817,555.14 22,817,555.14 Subtotal of cash inflow from the financing activities 3,119,692,292.24 3,119,692,292.24 2,830,450,046.87 2,830,450,046.87 repayment of loans 2,281,783,413.74 2,281,783,413.74 3,620,725,729.49 3,620,725,729.49 Cash dividends, profits and interests paid 186,766,834.35 186,766,834.35 231,394,565.31 231,394,565.31 Including: subsidiaries paid for minority shareholders with cash dividends and profits Cash payments related to other financing activities VIII(42) 108,326,472.97 108,326,472.97 111,061,573.34 111,061,573.34 Sub-total of cash outflow from the financing activities 2,576,876,721.06 2,576,876,721.06 3,963,181,868.14 3,963,181,868.14 Net cash flow from finacing activities 542,815,571.18 542,815,571.18 -1,132,731,821.27 -1,132,731,821.27 IV. Effect of Foreign Exchange Rate Changes on Cash and cash equivalents -2,220,419.94 -2,218,923.88 -1,149,261.97 -1,149,261.97 V. Net increase in cash and cash equivalents -26,124,753.89 -28,807,308.39 160,293.71 -4,368,074.82 Add: beginning balance of cash and cash equivalents 68,256,602.71 58,904,262.18 68,096,309.00 63,272,337.00 VI ending balance of cash and cash equivalents 42,131,848.82 30,096,953.79 68,256,602.71 58,904,262.18 statement of changes in the shareholders' equity (con.) Name of the company ： Shandong Airlines Co., Ltd 2007 Monetary unit : ( RMB) Yuan shareholders' equity belongs to parent company Toatl of minus: difference Item Capital Capital Undistributed Minority interest shareholder's Share capital Shares at of Foreign reserve surplus Profit equity stock Currency I. Balance at the end of 400,000,000.00 84,050,162.84 25,001,281.34 -109,226,868.91 12,862,556.09 412,687,131.36 previous year plus(I): 44 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT changes of accounting policies (II)Correction of errors in previous years II. Balance at the beginning 400,000,000.00 84,050,162.84 25,001,281.34 -109,226,868.91 12,862,556.09 412,687,131.36 of this year III. Increase or decrease of change amount in this year(the -81,694.63 37,221,996.75 -729,070.07 36,411,232.05 decrease is listed beginning with “-”) (I)Net profits in the year 37,255,985.51 733,318.27 37,989,303.78 (II)Profit and loss directly accrued to 173,679.78 173,679.78 owners’ equities 1．Net amount of fair value changes of saleable financial assets 2．Net amount about the change of fair values of cash flow arbitrage tools 3． Income tax effect related to the projects accrued to owner's euity 4. Others 173,679.78 173,679.78 Subtotal of (I)and (II) 37,429,665.29 733,318.27 38,162,983.56 45 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT (III) Capitals invested by the owners 1.Capital investment by owners in current period 2. Repurchase of shares at stock in the year 3.others (IV)Profit distribution in 207,668.54 -207,668.54 the yea Withdrawal of surplus reserve 207,668.54 -207,668.54 2．Withdrawal of general risk preparation 3. Distribution to shareholders 4．Others (V) Internal settlement and transfer of -289,363.17 -1,462,388.34 -1,751,751.51 owners’equity 1. Transfer of capital reserve to capital 2. Transfer of surplus reserve to capital 3. Surplus reserve makes up for the loss 4. others -289,363.17 -1,462,388.34 -1,751,751.51 IV. Balance at the end of this 400,000,000.00 84,050,162.84 24,919,586.71 -72,004,872.16 12,133,486.02 449,098,363.41 period 46 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT statement of changes in the owner's equity (con.) Name of the company ： Shandong Airlines Co., Ltd 2006 Monetary unit : ( RMB) Yuan shareholders' equity belongs to parent company minus: difference Toatl of Item Capital Shares Undistributed of Minority interest shareholder's Share capital Capital surplus reserve at Profit Foreign equity Stock Currency I. Balance at the end of 400,000,000.00 84,050,162.84 24,676,134.47 -117,777,353.99 11,398,083.15 402,347,026.47 previous year plus(I): changes of accounting policies (II)Correction of errors in the early stage II. Balance at the beginning 400,000,000.00 84,050,162.84 24,676,134.47 -117,777,353.99 11,398,083.15 402,347,026.47 of this year III. Increase or decrease of change amount in this year(the 325,146.87 8,550,485.08 1,464,472.94 10,014,958.02 decrease is listed beginning with “-”) (I)Net profit in the year 8,875,631.95 1,464,472.94 10,340,104.89 (II)Profit and loss directly accrued to owners’ equities 1．Net amount of fair value changes of saleable financial assets 2．Net amount about the change of fair values of cash flow arbitrage tools 47 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 3． Income tax effect related to the projects accrued to owner's euity 4. Others Subtotal of (I)and (II) 8,875,631.95 1,464,472.94 10,340,104.89 (III) Capitals invested by the owners 1.Capital investment by owners in current period 2. Repurchase of shares at stock in the year 3.others (IV)Profit distribution in 325,146.87 -325,146.87 the yea Withdrawal of surplus reserve 325,146.87 -325,146.87 2．Withdrawal of general risk preparation 3. Distribution to shareholders 4．Others (V) Internal settlement and transfer of owners’equity 1. Transfer of capital reserve to capital 2. Transfer of surplus reserve to capital 3. Surplus reserve makes up for the loss 4. others 48 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT IV. Balance at the end of this 400,000,000.00 84,050,162.84 25,001,281.34 -109,226,868.91 12,862,556.09 412,687,131.36 period statement of changes in the shareholders' equity Name of the company ： Shandong Airlines Co., Ltd 2007 Monetary unit : ( RMB) Yuan Toatl of Capital minus: Shares Capital Item Share capital Undistributed Profit shareholder's reserve at Stock surplus equity I. Balance at the end of previous year 400,000,000.00 84,050,162.84 24,442,948.14 -109,020,850.69 399,472,260.29 plus(I): changes of accounting policies (II)Correction of errors in the early stage II. Balance at the beginning of this year 400,000,000.00 84,050,162.84 24,442,948.14 -109,020,850.69 399,472,260.29 III. Increase or decrease of change amount in this year(the decrease is listed 35,755,035.56 35,755,035.56 beginning with “-”) (I)Net profit in the year 35,581,355.78 35,581,355.78 (II)Profit and loss directly accrued to owners’ equities 173,679.78 173,679.78 1．Net amount of fair value changes of saleable financial assets 2．Net amount about the change of fair values of cash flow arbitrage tools 3． Income tax effect related to the projects accrued to owner's euity 4. Others 173,679.78 173,679.78 Subtotal of (I)and (II) 35,755,035.56 35,755,035.56 (III) Capitals invested by the owners 1.Capital investment by owners in current period 2. Repurchase of shares at stock in the year 3.others (IV)Profit distribution in the 49 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT yea Withdrawal of surplus reserve 2．Withdrawal of general risk preparation 3. Distribution to shareholders 4．Others (V) Internal settlement and transfer of owners’equity 1. Transfer of capital reserve to capital 2. Transfer of surplus reserve to capital 3. Surplus reserve makes up for the loss 4. others IV. Balance at the end of this period 400,000,000.00 84,050,162.84 24,442,948.14 -73,265,815.13 435,227,295.85 statement of changes in the owner's equity Name of the company ： Shandong Airlines Co., Ltd 2006 Monetary unit : ( RMB) Yuan minus: Capital Capital Undistributed Toatl of Item Share capital Shares at Sto reserve surplus Profit shareholder's equity ck I. Balance at the end of previous year 400,000,000.00 84,050,162.84 24,442,948.14 -114,931,886.60 393,561,224.38 plus(I): changes of accounting policies (II)Correction of errors in the early stage II. Balance at the beginning of this year 400,000,000.00 84,050,162.84 24,442,948.14 -114,931,886.60 393,561,224.38 III. Increase or decrease of change amount in this year(the decrease is listed 5,911,035.91 5,911,035.91 beginning with “-”) (I)Net profit in the year 5,911,035.91 5,911,035.91 (II)Profit and loss directly accrued to owners’ equities 1．Net amount of fair value changes of saleable financial assets 50 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 2．Net amount about the change of fair values of cash flow arbitrage tools 3． Income tax effect related to the projects accrued to owner's euity 4. Others Subtotal of (I)and (II) 5,911,035.91 5,911,035.91 (III) Capitals invested by the owners 1.Capital investment by owners in current period 2. Repurchase of shares at stock in the year 3.others (IV)Profit distribution in the yea Withdrawal of surplus reserve 2．Withdrawal of general risk preparation 3. Distribution to shareholders 4．Others (V) Internal settlement and transfer of owners’equity 1. Transfer of capital reserve to capital 2. Transfer of surplus reserve to capital 3. Surplus reserve makes up for the loss 4. others IV. Balance at the end of this period 400,000,000.00 84,050,162.84 24,442,948.14 -109,020,850.69 399,472,260.29 51 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Shangdong Airlines Co., Ltd Notes to Financial Statements For the year of 2007 （All amounts are expressed in RMB yuan unless otherwise stated） I. 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 operation, 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 Shangdong Aviation Group 山东航空集团有限公司 (formerly Shangdong Airlines Limited 山东航空集团有限公司), a company also established in the PRC.. The company is engaged in the provision of domestic passenger and cargo air transportation services. The principle activities of subsidiaries and associates are set out in notes VII (1) and (2). The Company and its subsidiaries are hereinafter collectively referred to as “the Group”. II. Basis for preparation The Company and its subsidiaries maintain their accounting records and prepare their statutory financial statements in accordance with the Enterprise Accounting Standards issued by the Ministry of Finance in February 2006 which implement from January 1,2007, and with reference of Civil Aviation Accounting method. The financial statement is based on the assumption of going concern, actual transactions and items and in accordance with the latest Enterprise Accounting Standards, Zheng Jian Fa [2006] No. 136 Notice on the Improvement in Disclosing the Accounting Information Related to the New Accounting Standards issued by China Securities Regulatory Commission, Zheng Jian Kuai Ji Zi [2007] No. 10 Notice on the Improvement in Disclosing the Accounting Information Related to the New Accounting Standards issued by China Securities Regulatory Commission, No. 7 Questions and Answers about the Standardization of Information Disclosure of Companies Making Public Offering of Securities – Comparison about Preparation and Disclosure of Accounting Information in the Transition Period of New and Old Accounting Standards issued by China Securities Regulatory Commission, this 52 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT statement prepared under the following important accounting and valuation policies. The 2006 annual financial statements were originally prepared in accordance with the enterprise accounting standards and Enterprise Accounting Systems and relevant supplementary regulations. However, according to articles 5 to 19 of the No. 38 Enterprises Accounting Standard - First Implementation of Enterprise Accounting Standards and No. 1 Interpretation of Enterprises Accounting Standard which interpret the impacts of the comparable income statement and balance sheet, the Company complied with retroactive adjustment principle, and adjusted data into comparable income statement and balance sheet. III. Declaration of Compliance with the Enterprise Accounting Standards The Company’s financial statements prepared meet the requirements of the Enterprise Accounting Standards, fairly and completely presents the financial position, operation result and cash flow, and other relevant information of the company. IV. Main accounting policies and accounting estimates and m ethods of consolidation (1) Accounting Year The company employs the period of the calendar days from the January 1 to December 31 each year as the accounting year. (2) Reporting currency The Company’s reporting currency is Renminbi (“RMB”). (3) Measurement characters The Company commonly measures accounting factors by historical cost method; if the determined accounting factor amount can be obtained or reliably measured, the replacement cost, net realizable value, net value and fair value method may be employed. A. By using historical cost method, the assets are accounted for on the basis of cash or cash equivalents paid, or fair value of the considerations paid for acquired assets. The liabilities are accounted for on the basis of the actually received amount or asset amount for performing the current obligations, or the contract amount for performing the current obligations, or the cash or cash equivalent amount paid to repay the debts in daily activities. B. There is no change of measure characters of financial statement items during the report period. (4) Standard of cash equivalents 53 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT In preparing cash flow statement, cash equivalents of the company include the investments with short term (it usually expires within three months from the purchase date), highly liquidity, easy to convert into known amount of cash, and low-risk of changes in value. Equity investments shall not deem as cash equivalents. (5) Foreign currency transactions Foreign currency (currency other than the reporting currency) transactions are translated into reporting currency at spot exchange rates prevailing on the day in which the transactions take place. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are restated into the reporting currency using the spot exchange rates at that date. The exchange gains or loses are dealt with in the income statement for the year. The exchange gains or loses arising from foreign currency borrowings in relation to the acquisition or construction of fixed assets are accounted for according to the requirements of capitalization of borrowing costs. (6) Conversion of financial statement in foreign currency Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are converted into the reporting currency using the spot exchange rates at that date. Among shareholders’ equity items, all items except “undistributed profits” are converted into reporting currency at the spot exchange rate on the occurrence date. Income and expense items in Income Statement are converted into reporting currency at spot exchange rate on the occurrence date. (7) Financial assets and financial liabilities A. Classification of financial assets and financial liabilities Financial assets and liabilities include financial assets and liabilities held for trading, and designated as at fair value, and those changes of fair value are recognized in current profit and loss account; held-to-maturity investments; accounts receivable; available-for-sale financial assets; and other financial liabilities. B. Recognition and measurement of financial assets and financial liabilities (a) Financial assets and financial liabilities are measured initially with fair value (deducted with declared but not paid cash dividends and due bond interests but not paid) when are acquired or confirmed. Related transaction fees are accounted for profit and loss in current period. Interests received and cash dividends received during the period held are recognized as investment income. When dispose of financial assets or financial liabilities, the differences between fair value and book value are recognized as investment income. 54 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT (b) Held-to-maturity investments are measured with fair value (deducted with any declared but not paid cash dividends and due bond interests but not paid) and transaction fees when are acquired. Interests are measured by residual cost and actual interest rate (if actrual interest rate is less than contract rate, use contract rate) during the period held and recognized as investment income. When dispose of held-to-maturity investment, the differences between value obtained and book value are recognized as investment income. (c) Accounts receivable The contractual rights from sales of goods or services rendered are usually initially accounted for the prices in the contracts and agreements. When receive or disposal of accounts receivable, the difference between the value obtained and book value is recognized as profit and loss accounts. (d) Available-for-sale financial assets are measured with fair value (deducted with any declared but not paid cash dividends and due bond interests but not paid) and transaction fees when are acquired. Interest received and cash dividends received during the period held are recognized as investment income. Any changes of fair value of available-for-sale financial assets at the end of period are accounted for capital reserve (other capital reserve). When dispose of available-to-sale investment, the differences between value obtained and book value are recognized as investment income. At the same time, the changes of fair value that recognized in capital reserve (other capital reserve) are transferred to investment income. (e) Other financial liabilities are measured with fair value and transaction fees when are acquired. The subsequent calculations employ amortized cost method. C. Recognition and measurement of financial assets The Company shall derecognize financial assets when all the risks and rewards have been transferred to other party; if not, the Company shall recognize the financial assets. The company adopts substantial over form method while making judgment if the derecognition of financial assets meet the requirement of accounting principles. The company differentiates the transfer of financial assets into entire transfer and the partial transfer of financial asset. When derecogniziton condition of entire transferred assets has been satisfied, the differences between the amount of following two items shall be accounted for profits and losses of current period. (a)The book value of transferred financial assets; (b)The sum of consideration received from the transfer, and the accumulative amount of the changes of the fair value originally recorded in the shareholders’ equities (in the event that the financial asset involved in the transfer is a financial asset available-for-sale) If the transfer of partial financial assets satisfies the conditions of derecognition, the entire book value of the transferred financial asset shall, between the portion whose derecognition and the recognized portion 55 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT (under such circumstance, the service asset retained shall be deemed as a portion of financial asset whose derecognition), be apportioned according to their respective relative fair value, and the difference between the amounts of the following two items shall be accounted for the profits and losses of the current period . (a)The book value of the portion whose derecognition . (b)The sum of consideration of the portion whose derecognition and the portion of accumulative amount of the changes in the fair value originally recorded in the shareholders’ equity which is corresponding to the portion whose derecognized ( in the event that the financial assets involved in the transfer is a financial assets available-for-sale). If the Company fails to satisfy the conditions 0f derecognition for transferred financial assets, it shall continue to recognize the entire financial assets to be transferred and shall recognize the consideration it receives as a financial liability. D. Fair values of financial assets and financial Liabilities For active financial assets or financial liabilities in the market, the quotations shall be used for the determination of their fair values; for inactive financial instruments, the Company shall employ evaluation techniques to determine their fair values. Valuation techniques include using recent market transactions between knowledgeable, willing parties, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. E. Impairment of financial assets The Company assesses the financial assets that carry at fair value, and those financial assets which changes of fair value are recognized in profit and loss accounts at the balance sheet date. If there is objective evidence that the one or several financial assets are impaired, the Company shall determine the amount of any impairment loss. (a)Accounts receivable At the end of the period, if there is objective evidence that the accounts receivable have been impaired, the impairment loss shall be recognized based on the difference between book values and expected cash inflow values. At the end of the period, impairment test shall be made on individual accounts receivable with significant amounts. If there is objective evidence that they have been impaired, bad debt loss shall be recognized and provision for bad debts shall be made based on the difference between the expected cash inflow values and book values. 56 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT For those individual accounts receivable with not significant amounts at the end of the period, along with those accounts receivable that have been tested individually but not impaired, the Company classifies them in line with similar credit risk characteristics into several groups, and make 5% of bad debts provision on the accounts receivable balances at balance sheet date. This percentage reflects the actual impairment loss, that is, the amount of which book values of each group are over their expected inflow values. On the basis of the actual loss rate of receivable accounts, with same or similar credit risk characteristics of accounts receivable package in previous year, the Company also considers current situation and determine the percentage of bad debt provision. No bad debts provision has been made for security deposits for the operating lease aircrafts and aircraft machineries. (b) Held-to-maturity investment The measurement of impairment loss of held-to-maturity investment, please refer to impairment loss treatment of accounts receivable. (c) Available-for-sale financial assets If there is objective evidence that available-for-sale financial assets have significant depreciated, or after considering various relevant factors, this downward tendency is deemed as not temporary, the impairment loss shall be recognized based on the difference between the expected cash inflow values and book values. In case of impairment loss of available-for-sale financial assets recognized, it can not be written back. （8) Inventory A. Inventories category: aircraft consumable parts, low-value consumable supplies for airplanes B．Inventories stock taking system: perpetual inventory method C. Valuation of methods of inventories：Inventories are calculated at actual costs when acquire, and issuance of inventories is determined on first in first out basis. D. low-value consumable products amortization method The low–value consumable supplies are amortized at one time. E. Impairment loss of inventories For inventories at balance sheet date, the evaluation criteria should base on the lower value between costs and net values that can be converted into cash. When net values that can be converted into cash are lower 57 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT than costs, provision for impairment loss of inventories shall be made. For large quantity and low-unit-price inventories, provision for impairment loss of inventories shall be made based on the category of inventories; for those inventories that relate to product series which production and sale are in same areas, have same or similar final usages o r purposes, and are hard to separate calculation from other items, their impairment loss provision shall be consolidated. The net value that can be converted into cash is referred to the value after estimated the selling price subtracts the estimated finished cost and estimated sales expenses and related tax and fees in normal operating process. （9）Fixed asset and depreciation method A. Recognition of fixed assets Fixed assets are tangible assets that are held for use in production or supply of goods or services, for rental to others, or for administrative purpose, and have useful lives more than one accounting year. Fixed assets shall be recognized if they meet the following conditions: (a) The economic benefits related to fixed asset probably flow to the enterprise; (b) The cost of fixed asset may be reliably measured. B. Measurement of fixed assets Fixed assets shall be initially measured at cost. The cost of fixed asset comprises purchase price, relate tax or duties, and any directly attributable cost of bringing the asset to working condition for its intended use, such as delivery cost, insurance etc. C. The depreciation method of fixed assets: straight-line method is in used to calculate the depreciation of fixed assets (including finance leased fixed assets). The estimated useful lives, expected residual value and annual depreciation rate of various types fixed assets are listed as follows: Category Estimated useful lives (years) Annual depreciation rate Residual value(%) Buildings and structures 27-33 5.00 2.88-3.52 LLP and APU 15-20 5.00 4.75-6.33 Aircraft frame replaceable parts 6-8 - 12.5-16.67 Engine replaceable parts 3-5 - 20-33.33 Machineries, Electronics and equipments 4-10 0-5.00 9.5-23.75 High price rotables 15-18 - 5.56-6.67 Vehicles 5-10 5.00 9.5-19 58 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT D. At each of balance sheet date, the Company shall review fixed assets’ useful lives, expected residual values and depreciation method, and adjusted if necessary. （10）Construction in progress Construction in progress shall be calculated based on the classification of proposed projects. Construction in progress is measured at actual cost. Construction in progress is transferred to fixed assets when the project is substantially ready for its intended use. Borrowing costs relating to construction in progress are measured according to borrowing costs measurement method. At the end of period, the company makes judgment if any provision of impairment loss is necessary. If the project has been stopped for a long time and will not be constructed within three years, the impairment loss for such construction in progress shall be made based on the differences between recoverable amount and book values. Once impairment loss is made, it can not be written back. (11) Intangible Assets A. Recognition of intangible assets Intangible assets are intangible, held or controlled by enterprise, and can be identified non monetary assets. Intangible assets are recognized only when the following conditions are met: (a) The economic benefits related to the intangible asset probably flow to the enterprise; (b) The cost of intangible asset may be reliably determinated. B. Intangible assets are recognized initially at actual costs. C. Useful lives and amortization of intangible assets The amortization of an intangible asset with finite useful lives shall be allocated on a systematic and rational basis over its useful lives. An intangible asset with infinite useful lives, no amortization shall be made. At the end of each year, the company will review useful lives of intangible assets with finite usage lives and amortization method. In case the useful lives and amortization method are different from the previous estimations, the Company may change as necessary. The useful lives of intangible assets: Intangible assets Estimated useful lives (years) Land-use rights 50 (12) Maintenance expenses The maintenance expenses for aircraft and leased aircraft are both treated as current expenditure when 59 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT they occur. Since January 1, 2007, the occurrence of the maintenance expenses will be capitalized if the maintenance expenses satisfy the conditions for capitalization, confirm as resetting the costs of fixed assets and depreciate in the reasonable terms．For aircraft under operating lease, maintenance are required before return the aircraft to the lessor, the expenses for maintenance is estimated based on straight line method or flight hours. (13) Long-term deferred assets The Company’s long-term deferred assets refer to expense which has been paid out and the benefiting period is over one year, such as expenses for pilots’ initial trainings and subsequent trainings. Those expenses are amortised at 20 years according to their benefit period respectively. (14) Impairment of long term non-financial assets At the end of period, the Company should check carrying amounts of fixed assets, construction in process, intangible assets and investment property that recognized by cost method etc long-term non-financial assets and judge if any evidence of impairment loss for those assets. Goodwill and intangible assets with infinite useful lives, the Company shall make impairment test each year whether there are signs of possible impairment. At the end of period the company should make judgement whether there is any objective evidence that the relevant asset is impaired. If there is objective evidence that the asset is impaired, recoverable amount of the asset shall be estimated. The recoverable amount should base on the higher value between fair value less disposal expense and present value of estimated cash flow in the future. When the recoverable amount of the asset is less than its carrying amount, the differences are recognized as provision for impairment loss. Once the impairment loss is recognized, it shall not be written back in subsequent years. If there is objective evidence that an asset is impaired, recoverable amount shall be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, the company shall determine the recoverable amount of the asset group to which the asset belongs. The Company determines asset group based on whether cash flow generating from the asset group is independent with other assets or asset group. At the same 60 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT time, the company should consider administration, production and operation activities, and held-for-usage of assets or disposal decision. Once the asset group is determined, it shall not be changed in each accounting period. A product is produced by a combination of several assets, if it satisfies the condition as above, it should be confirmed as a group asset even if it is partly or fully used by internal. If the cash inflow of this group asset is influenced by the internal transfer price, then the cash flow of this group asset is determined by the best future price prediction which is made by the business management under fair trading. The goodwill reflected in the consolidated financial statement shall not include the goodwill of subsidiary attributable to the equity for the minority of shareholders; but the tests of the depreciation about relevant groups will include the goodwill attributable to the equity for the minority of shareholders; the company will adjust the book values of asset groups as compare the adjusted book values of asset groups with their receivable amounts to determine if the asset groups(including the goodwill ) are depreciated. If so, the company will deduct the equity share of the minority of shareholders from above losses to determine the deprecation losses of goodwill attributable to the parent company. (15) Long-term Equity Investment A. Long-term equity investment is measured at initial investment cost after obtained. (a) Long-term equity investment caused by the enterprise merger Long-term equity investment obtained through business combinations: for obtaining subsidiary under common control, the consideration cost can be cash payment, non-monetary assets transfer or taking over the subsidiary’s liability. Under this situation, the initial investment cost is carrying amount of shareholder’s equity of the subsidiary on the merger date. The difference between the carrying amount of the net assets obtained and initial investment cost of long-term equity investment shall be adjusted to capital reserve. If the capital reserve is not sufficient to absorb the difference, any excess shall be adjusted against retained earnings. In the case of company issues equity securities as the consideration, the initial investment cost is carrying amount of shareholder’s equity of the subsidiary on the merger date. If the book value amount of the issued shares is deemed as the capital, the difference between the carrying amount of the issued shares and initial investment cost of long-term equity investment shall be adjusted to capital reserve. If the capital reserve is not sufficient to absorb the difference, any excess shall be adjusted against retained earnings All 61 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT direct expenses related to the merger, including the auditor fee, evaluation expense, legal service expense, etc will be accrued to the current profit and loss. For obtaining subsidiary not under common control, the cost of long-term equity investment is fair value of assets paid or liabilities undertaken by the Company. Where the cost of a business combination exceeds the acquirer’s interest in the fair value of the acquiree’s identifiable net assets, the difference shall be recognized as goodwill, goodwill shall be measured at cost less accumulated impairment losses. Where the cost of combination is less than the acquirer’s interest in the fair value of the acquiree’s identifiable net assets, after reassessment, the difference shall be recognized in profit or loss for the current period. (2)Other types of long-term equity investment Long-term equity investment, which is acquired by cash consideration, the actual cash payment amount will be deemed as the initial investment cost. The initial investment cost includes the direct expenses related to the long-term equity investment, taxes and other necessary expenses. Long-term equity investment, which is acquired by equity securities, the fair value of the issued equity will be deemed as the initial investment cost. For the long-term equity investment made by the investors, the values agreed in the investment contracts or agreements will be deemed as the initial investment cost, except that the contracts or agreements provide that the values are not fair. Long-term equity investment is acquired by exchange of non-monetary assets, if this transaction has commercial substance or the fair values of exchange assets can be reliably measured, the fair values of these assets and relevant taxes will be deemed as the initial investment cost; the difference between the fair values of the assets and book values will be accrued to the current profit and loss; if the non-currency asset exchange does not satisfy these two conditions mention above, the book values of the assets and relevant taxes will be deemed as the initial investment cost. Long-term equity investment, which is acquired by the mode of liability restructure, the fair values of the obtained equities will be deemed as the initial investment cost; the difference between the initial investment cost and book values of credit will be accrued to the current profit and loss. 2. Subsequent Measurements The cost method is employed to calculate the long-term equity investment of subsidiaries and will be adjusted in accordance with the equity method in the preparation of the consolidated financial statements. The Company uses cost method for the following conditions: a long-term equity investment where the 62 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT investing enterprise can exercise control over the investee, or the investing enterprise does not have joint control or significant influence over the investee, the investment is not quoted in an active market and its fair value can’t be reliably measured. When an investing enterprise can exercise joint control or significant influence over the investee, a long-term equity investment shall be treated as a recovery of initial investment cost. (1) When using cost method, cash dividends or profit distributions declared by the investee shall be recognized as investment income in the current period. However, investment income recognized by the investing enterprise shall be limited to the amount distributed to it out of accumulated net profits of the investee arising after the investment was made. Any cash dividends or distributions received in excess of this amount shall be treated as a recovery of initial investment cost. (2) When using equity method, after the investing enterprise has acquired a long-term equity investment, it shall recognize its share of net profits or losses made by the investee as investment income or losses, and adjust the carrying amount of the investment accordingly. The carrying amount of the investment shall be reduced by the portion of any profit distributions or cash dividends declared by the investee that is attributed to the investing enterprise. (3) Provision for long-term equity investment impairment loss Company should have impairment test for any long-term equity investment on very balance sheet date. When the estimated value in use is less than its book value, it will be treated as impairment loss. And this loss should be transferred into current profit and loss account; meanwhile, the company should set up provision for the long-term equity investment impairment loss. To any long-term equity investments, which are measured by cost method, there is no price or its fair value can not be measured reliably, the impairment loss of these investments should be the difference between the book value and the present value of the future cash flow calculated by using current market rate of similar financial asset. For other long-term equity investment, if the calculation of its money return in future declared that the money return is less than its book value, the difference will be treated as impairment loss. The long-term equity investment impairment loss can not be reversed. (16) Capitalization of borrowing cost A. Principle of capitalization of borrowing cost Borrowing costs may be attributable to the construction and productions of assets and complied with the capitalization conditions, they shall be capitalized and accounted for as cost of assets; other 63 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT borrowing costs shall be recognized as expenses when incurred and a c c o u n t e d f o r current profit and loss account. The assets complying with the capitalization conditions mean assets such as fixed assets, investment properties and inventories etc, that require a long time of construction and production activities before being intended for use or for sales. The capitalization of borrowing costs shall satisfy the following conditions: (a) The expenditure of assets has been incurred; (b) The borrowing costs have been incurred; （c）Activities relating to acquisition, construction or production that are necessary to make the assets being intended for use or sales have been launched. Capitalization of borrowing costs shall be suspended during periods in which acquisition, construction or production of assets is interrupted abnormally, and is interrupted for a continuous period of three months. Capitalization of borrowing costs also shall be suspended when the acquisition, construction or production of assets are prepared being intended for use or sales. B. Capitalization period Borrowing costs which are incurred by the acquisition, construction or production of assets, and are satisfied with the aforesaid capitalization conditions, are recognized as cost of assets before those assets are intended for use or sales. Any borrowing costs incurred after those assets are intended for use or sales, are recognized as financial costs. C. During the capitalization period, the amount of interest to be capitalized for each accounting period shall be determined as following: - for a specific purpose borrowing, the amount of interest to be capitalized shall be the actual interest expenses incurred for the period less temporary deposit interests or investment income; - Where funds are borrowed under general purpose, the Company shall determine the amount of interest to be capitalized by applying capitalization rate to the weighted average of the excess amounts of cumulative expenditures on the asset over and above the amounts of specific-purpose borrowings. The capitalization rate shall be weighted average of the interest rates applicable to the general-purpose borrowings. (17) Principle of accrued liabilities A. Principle of accrued liabilities The obligations related to some items that meet the following conditions at the same time will be confirmed 64 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT as the liabilities: (a) This obligation is the current obligation of the company; (b)The performance of this obligation will probably cause the economic benefits to flow out of the company; (c) The amount of this obligation can be reliably calculated. Loss contracts and restructuring obligations of the company meet the above conditions, they shall be recognized as accrued liabilities. B. Optimum evaluation of accrued liabilities If the necessary payments have scopes, the optimum evaluation shall be determined based on the average amount between the upper and lower limit amount of scope ; if the necessary payments do not have such scopes, the optimum evaluation shall be determined in the following method: (a) If the contingent event is involved in an individual project, the optimum evaluation amount will be determined based on the possible amount; (b)If the contingent event is involved in some projects, the optimum evaluation amount shall be determined based on possible amount and occurrence probability. In case o f all or part of payments about the confirmed liquidation liabilities are expected to be compensated by the third parties or other parties, and the compensation amounts are surely received, t h e n such amounts s h a l l be separately r e c o g n i z e d . The confirmed compensation amounts s h a l l not exceed book values of confirmed liabilities. (18) Revenue recognition A. Rendering of services Passenger and cargo sales are recognized as operating revenues when the transportation service is provided rather than tickets are sold. B. Use right of transferred assets When the economic benefits related to t h e transaction a r e probably will flow into enterprise and the amounts can be reliably determined, the company shall recognize them as income by use right of transferred assets under the following situations: (a) The amount of interest income is determined by the capital usage period and actual interest rate. (b) The amount of royalties is determined by the period and method of charging as stipulated in the relevant contract or agreement. (19) Income taxes The company uses deferred income tax liability method in calculation of income taxes. 65 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT A. Deferred income tax assets Deferred income tax assets shall be recognized for deductible temporary differences to the extent that is probable that tax profits will be available against which the deductible temporary differences can be utilized, unless the deferred tax assets due to initial recognition of assets or liabilities from some special transactions. B. Deferred income tax liabilities Deferred tax liabilities shall be recognized for all taxable temporary differences, except to the extent that the deferred tax liabilities arise from: (a) the initial recognition of good will; (b) the transaction is not a business combination, at the time of the transaction, it affects neither accounting profit nor taxable profit (or deductible loss). (c) for temporary differences associated with investment in subsidiaries, associates, and interests in jointly controlled enterprises, the investing enterprise is able to control the timing of the reversal of the temporary difference, and it is probable that the temporary difference will not reverse in the foreseeable future. C. Income taxes measurement Income taxes include income taxes for the current period and deferred income taxes. Current and deferred income tax shall be recognized as income tax expenses or income that included in the profit and loss accounts, except that (a) income tax arising from a business combination; (b) income tax arising from a transaction or an event which is recognized directly in owner’s equity. (20) Basis of Consolidation The consolidated financial statements prepared are in accordance with the No. 33 Enterprise Accounting Standards – Consolidated Financial Statement issued in February, 2006. 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 recognized 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 recognized. 66 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 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 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 transaction and balances between group enterprises are eliminated on consolidation. V．Change in accounting policies, accounting estimates Since January 1, 2007, the company carried out the new enterprise accounting standards systems and guidelines promulgated by the People’s Republic of China. In accordance with the No 38 Enterprise Accounting Standard –First implementation of Enterprise Accounting, No 1 Interpretation of Enterprise Accounting Standard, Zheng Jian Fa [2006] 136 Notice on improvement in disclosing the accounting information relating to New Accounting Standards, and the circular on issuing No 7 Question and responses of information Disclosure standard of Public companies-Completion and Disclosure of the comparative Financial accounting information during the transition period between New and Old account standards and adjusted retroactively the financial statement during the comparative period, of which (1)Retroactive adjustment for long-term equity investment in subsidiaries In accordance with the Cai Kuai [2007] No. 14 notice about printing and issuing of No. 1 Interpretation of Enterprise Accounting Standards issued by the Ministry of Finance, on the first implementation date, the parent company should retroactively adjust long-term equity investment in subsidiaries that have been held by itself before such date and it is deemed that this subsidiary has employed the cost method. After the implementation of new accounting standards, the company shall recognize declared distributable cash dividends or distributable proportionate net profits as investment income. The above accounting policy change has no effect on consolidated net assets. (2) Income tax Implementation of new Enterprise Accounting Standards, the Company recognized the negative temporary difference between the book value of assets and taxable assets as deferred income tax assets, and the positive temporary difference between the book values of assets and taxable assets as deferred income tax liabilities. On January 1, 2007, the company increased retained earnings for RMB 92,247,851.58, the owner’s equity that are attributable to parent company for RMB 92,231026.43 and the owner’s equity that is attributable to the minority for RMB 16,825.15. (3) Others For those staff who gave up annual paid leaves in previous years, the Company should pay reimbursements to them in future periods in accordance with related regulation. The reimbursements have been used to offset parent company’s retained earnings for 2,290,216.00 on January 1, 2007. 67 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT VI. Taxation (1) Business tax Business tax is calculated at 3% on passenger, cargo transportation revenue, and 5% on commission and rental income. (2) Enterprises income tax Enterprises income tax is calculated at 33% on the estimated assessable profit for the year. Civil aviation basic construction fund According to Causing[2004] No 38 The notice of temporary administration method for civil aviation basic construction fund issued by the Ministry of Finance, civil fund is calculated based on classification of airline, maximum take of weight, airline mileage etc and related regulation. (3) Others Other taxes are calculated in accordance with state relevant regulations. VII. Subsidiary, joint venture and affiliated enterprises * The monetary unit is ten thousand RMBYuan, unless otherwise stated. (1) Subsidiaries were not obtained through combination Balance of net Proportiono Actual Proportion of Whether Registered Registered investment in f voting Company Name Business nature investment at shares held by consolidat Notes Address capital Business scope subsidiary in rights year end the company ed or not fact Aviation cargo Qingdao Int'l warehousing, Aviation Transportation ground allocation; Logistics Center Qingdao 3000 2381 2381 70% 70% Yes and warehousing Electronic Co., Ltd. commerce and so on Union Express Service Shandong Highway Airlines Co., Ltd. Jinan Transportation 100 65 65 65% 65% No transportation Airlines Co., Ltd 68 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Notice: The Union Express Service Shandong Airlines Co., Ltd was dismissed on July 6, 2007 upon the shareholder meeting resolution; meanwhile, the liquidation committee was established and commenced the liquidation. The Union Express Service Shandong Airlines Co., Ltd has been withdrawn from tax register till December 31, 2007. (2) joint venture and associated enterprises Company Name Registered Address Business nature Holding Proportion Proportion of voting rights SARJ Jinan Aviation shipping industry 45% 45% Union Express Service Shandong airlines Qindao Transportation 40% 40% Current financial information of joint venture and affiliated enterprises Company Name Total assts at the end of Total liabilities at Total income Total Net profit balance date the end of balance expenditure date SARJ 9,218.75 24,067.37 978.45 397.45 -414.20 Union Express Service 92.30 24.74 106.48 61.33 -0.09 Shandong airlines (3) Scope changes of consolidated financial statements In comparison with last year, the number of companies that included in the consolidated financial statement has been reduced by two. The reasons are: - According to the shareholder’s meeting resolution on March 28, 2007, SDA-Hangchi Cargo Co., Ltd. had entered into liquidation in April 2007, and the liquidation had completed on November 30, 2007. - According to the shareholder’s meeting resolution on July 6, 2007, the Union Express Service Shandong airline Co., Ltd was dismissed on July 6, 2007; meanwhile, the liquidation committee was established and commenced the liquidation. Up to December 31, 2007, the Union Express Service Shandong Airline Co., Ltd has been withdrew from tax register. (4) Minority interest of subsidiaries The excess Minority losses by Minority The proportion Profit and loss shareholder Minority shareholder Company Name Net profits of of shares held attribute to interests at shareholders interests at subsidiaries by minority minority 31/12/2006 that parent 31/12/2007 shareholders shareholders company has to beared 69 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Qingdao Int'l Aviation 1,118.04 244.44 30% 73.33 —— 1,191.38 Logisitics Center Co., Ltd. Union Express Service 59.75 -0.39 35% -0.14 —— 59.61 ShandongAirlines Co., Ltd. VIII. Main items of consolidated financial statements （1）Monetary Funds 1.1. Composition of monetary fund 2007.12.31 2006.12.31 Items Original Exchange Equivalent Original Exchange Equivalent to currency rate toRMB currency rate RMB Cash on hand RMB 828,873.93 —— 828,873.93 304,610.62 —— 304,610.62 HKD 5,930.00 0.9364 5,552.86 12,003.27 1.0047 12,059.69 USD 7,901.92 7.3046 57,720.36 1,290.85 7.8087 10,079.86 EUR —— —— —— 37.07 10.2665 380.58 AUD —— —— —— 42.63 6.1599 262.60 GBP 1,652.80 14.5807 24,098.99 2,152.80 15.3232 32,987.79 CAD 10.00 7.4419 74.42 431.88 6.6990 2,893.17 JPY 135,000.00 0.0641 8,653.50 —— —— —— Sub total —— —— 924,974.06 —— —— 363,274.31 Bank deposit RMB 40,277,417.37 - 40,274,001.87 62,726,542.36 - 62,726,542.36 HKD —— —— —— —— —— —— USD 127,710.33 7.3046 932,872.89 661,670.45 7.8087 5,166,786.04 Sub total —— —— 41,206,874.76 —— —— 67,893,328.40 Other monetary fund RMB —— —— —— —— —— —— 70 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT HKD —— —— —— —— —— —— USD 3,750,000.00 7.3046 27,392,250.00 3,750,000.00 7.8087 29,282,625.00 Sub total —— —— 27,392,250.00 —— —— 29,282,625.00 Total —— —— 69,524,098.82 —— —— 97,539,227.71 1.2. Other monetary funds are due to aircraft and engine security deposit,the amount is RMB 27,392,250.00(Original currency USD3,750,000.00) at the year end 2007. (2)Accounts receivable 2.1. Composition of Accounts Receivable 2007.12.31 2006.12.31 Items Balance Proportion Bad debt Balance Proportion Bad debt provision provision Individual transaction with 189,588,286.65 89.54% —— 144,809,355.76 89.73% —— significant amount Individual transaction with not so significant amount but significant recoverable risk 2,608,298.83 1.23% 2,608,298.83 2,608,298.83 1.62% 2,608,298.83 Other transaction with no 19,538,120.58 9.23% 777,353.03 13,966,721.09 8.65% 562,192.85 significant amount Total 211,734,706.06 100.00% 3,385,651.86 161,384,375.68 100.00% 3,170,491.68 2.2. Individual accounts receivable with significant amount Items Amount reason BSP 93,715,534.35 balance due to the settlement method,all amount after period are received Accounts receivable from China aviation settlement center 45,791,500.35 balance due to the settlement method,all amount after period are received Air China Limited 50,081,251.95 balance due to the settlement method,all amount after period are received Total 189,588,286.65 2.3. Age analysis of accounts receivable 71 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 2007.12.31 2006.12.31 Age proportion Bad debt proportion Bad debt Balance Net value Balance Net value provision provision Within one year 208,993,647.58 98.70% 770,715.04 208,222,932.54 158,089,411.68 97.95% 566,055.31 157,523,356.37 1 to 2 years 307,308.50 0.15% 206,030.43 101,278.07 1,386,848.42 0.86% 1,371,315.67 15,532.75 2 to 3 years 1,200,577.98 0.57% 1,175,785.69 24,792.29 929,258.00 0.58% 929,206.70 51.30 3 to 4 years 929,258.00 0.44% 929,206.70 51.30 978,857.58 0.61% 303,914.00 674,943.58 4 to 5 years 303,914.00 0.14% 303,914.00 —— —— —— —— —— Above 5 years —— —— —— —— —— —— —— —— Total 211,734,706.06 100.00% 3,385,651.86 208,349,054.20 161,384,375.68 100.00% 3,170,491.68 158,213,884.00 2.4. Up to 31 Dec 2007, there is 50,081,251.95 Yuan trade account receivable is due from Air China Limited, who owns 5% or over 5% of voting shares. 2.5. Details of top five accounts receivables 2007.12.31 2006.12.31 Items Balance Proportion age Balance Proportion age BSP 93,715,534.35 44.26% Within 1 year 68,240,034.35 42.28% Within 1 year Account receivable from China Aviation Settlement Center 中国结算中心票款 45,791,500.35 21.63% Within 1 year 43,069,349.28 26.69% Within 1 year Air China 中国国际航空股份有限公司 50,081,251.95 23.65% Within 1 year 33,478,831.87 20.74% Within 1 year AnHui Civil Aviation Airport Co.,Ltd —— —— —— 安徽民航机场集团有限公司 1,269,000.00 0.79% Within 1 year The Municipal Government of HeiHe City 黑河市人民政府 840,178.12 0.40% Within 1 year 779,339.00 0.48% Within 1 year Ganzhou ShengHua Industry Co.,Ltd —— —— —— 赣州胜华实业有限公司 709,014.83 0.33% 2 to 3 years Total amount and proportion of fist five account receivable 191,137,479.60 90.27% 146,836,554.50 90.98% —— （3）Advance payable 3.1. Age analysis of advance payable 72 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Age 2007.12.31 Proportion 2006.12.31 Proportion Within 1 year 20,787,499.32 99.99% 17,604,261.94 97.24% 1 to 2 years 1,387.48 0.01% 500,206.00 2.76% 2 to 3 years —— —— —— —— 3 to 4 years —— —— —— —— 4 to 5 years —— —— —— —— Above 5 years —— —— —— —— Total 20,788,886.80 100.00% 18,104,467.94 100.00% 3.2. Up to 31 Dec 2007, the account balance did not contain any debt owned by major shareholders who owns 5% or over 5% of voting shares. （4）Other account receivable 4.1. Composition of other account receivable 2007.12.31 2006.12.31 Bad debt Bad debt Items Balance Proportion provision Balance Proportion provision Individual transaction with significant amount 228,111,849.89 83.89% 109,136,552.15 227,423,720.96 91.79% 109,635,146.61 Individual transaction with not —— —— —— —— —— —— so significant amount but significant recoverable risk Other transaction with no significant amount 43,806,896.86 16.11% 2,155,261.53 20,331,910.17 8.21% 1,203,364.68 Total 271,918,746.75 100.00% 111,291,813.68 247,755,631.13 100.00% 110,838,511.29 4.2. Other individual account receivable with significant amount Debtor Balance Percentage of bad debts provision Reason Deposit of aircraft Deposit for engine maintenance and purchase of engine 118,975,297.74 —— aircraft,all amount is receivable in the future. Shandong Airlines Rainbow-Jet Co.,Ltd Long-term accounts receivable, the company (SARJ) could not repay debts due to its financial 山东航空彩虹公务机 109,136,552.15 100.00% difficulty 73 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 有限公司 Total 228,111,849.89 4.3. Age analysis of other account receivable 2007.12.31 2006.12.31 Bad debt Bad debt Balance Proportion Net value Balance Proportion Net value Age provision provision Within 1 year 45,332,097.75 16.67% 1,339,820.64 43,992,277.11 35,542,040.74 14.35% 11,656,166.06 23,885,874.68 1 to 2 years 29,195,356.30 10.74% 11,280,098.16 17,915,258.14 141,922,459.85 57.28% 80,397,791.41 61,524,668.44 2 to 3 years 137,151,532.65 50.44% 80,385,813.40 56,765,719.25 24,402,160.50 9.85% 18,657,038.61 5,745,121.89 3 to 4 years 23,496,543.29 8.64% 18,138,057.20 5,358,486.09 33,158,611.96 13.38% 82,684.05 33,075,927.91 4 to 5 years 24,265,824.29 8.92% 77,624.20 24,188,200.09 12,730,358.08 5.14% 44,831.16 12,685,526.92 Above 5 years 12,477,392.47 4.59% 70,400.08 12,406,992.39 —— —— —— —— Total 271,918,746.75 100.00% 111,291,813.68 160,626,933.07 247,755,631.13 100.00% 110,838,511.29 136,917,119.84 4.4. Last year’s total bad debt provision of SARJ is 109,635,146.61Yuan and 498,594.46Yuan has been received by the current year end. 4.5. Up to 31 Dec 2007,there is 2,550,000.00 yuan trade account receivable is dued by Air China,who owns 5% or over 5% of voting shares. 4.6.List of significant debtors Name of debtors Balance Nature or content Age Proportion SARJ 109,136,552.15 Disbursement fee 1 to 4 years 40.13% Shenzhen finance lease company 41,354,563.28 Deposit of aircraft 2 to 3 years 15.21% 深圳金融租赁有限公司 Singapore Aircraft Leasing Enterprise 20,452,880.00 Deposit of aircraft 1 to 2 years 7.52% Rainier Aircraft Leasing(Ireland) Limited 17,623,671.90 Deposit of aircraft 2 to 5 years 6.48% General Electric Capital Corporation 15,596,781.92 Deposit of aircraft 1 to 5 years 5.74% Total 204,164,449.25 75.08% (5)INVENTORY 5.1. Details of inventories 2007.12.31 2006.12.31 Impairment loss Impairment Items Balance provision Net value Balance loss provision Net value Aviation consumable material 51,137,472.47 353,539.79 50,783,932.68 38,569,622.83 353,539.79 38,216,083.04 74 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Low value consumable 943,633.30 —— 943,633.30 839,833.80 —— 839,833.80 Material 497,251.68 —— 497,251.68 297,690.98 —— 297,690.98 Others 13,321.71 —— 13,321.71 92,231.81 —— 92,231.81 Total 52,591,679.16 353,539.79 52,238,139.37 39,799,379.42 353,539.79 39,445,839.63 5.2. Inventories impairment loss provision Charge for Proportion of current reversal Items 2006.12.31 the year Reversal Write off 2007.12.31 to inventories closing balance Aviation consumable material 353,539.79 —— —— —— 353,539.79 Low value consumable —— —— —— —— —— Material —— —— —— —— —— Others —— —— —— —— —— Total 353,539.79 —— —— —— 353,539.79 5.3. Up to 31 Dec 2007, the company did not use any inventories for guarantee. (6) Long-term equity investment 6.1. Long-term equity investment and impairment loss provision 2007.12.31 2006.12.31 Items Impairment loss Impairment loss Balance Book value Balance Book value provision provision Long-term Equity 111,959,196.91 22,500,000.00 89,459,196.91 111,194,292.04 22,500,000.00 88,694,292.04 Investment Include: Investment in 1,107,096.91 —— 1,107,096.91 —— —— —— Subsidiary Joint Venture —— —— —— —— —— —— Affiliated Enterprise 22,500,000.00 22,500,000.00 —— 22,842,192.04 22,500,000.00 342,192.04 Investment in Other 88,352,100.00 —— 88,352,100.00 88,352,100.00 —— 88,352,100.00 Companies 6.2. Long-term equity investments measured with cost method Investee Initial investment cost 2006.12.31 Increment Decrement 2007.12.31 China Civil aviation information network Co.,Ltd 民航信息网络股份有限公司 6,690,000.00 6,690,000.00 —— —— 6,690,000.00 SiChuan airlines Co.Ltd 四川航空股份有限公司 35,000,000.00 35,000,000.00 —— —— 35,000,000.00 JiNan International Airport co.Ltd 济南遥墙国际机场有限责任公司 46,662,100.00 46,662,100.00 —— —— 46,662,100.00 Total 88,352,100.00 88,352,100.00 —— —— 88,352,100.00 75 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 6.3. Long-term equity investments measured with equity method Investee Initial 2006.12.31 Increment Decrement 2007.12.31 Cash investment cost dividend SARJ 22,500,000.00 —— —— —— —— —— Union Express Service Shangdong Airline co.Ltd 650,000.00 —— 1,107,096.91 —— 1,107,096.91 —— 山东航空联合快运有限公司 Qingdao SDA Union Express Co.,Ltd 240,000.00 342,192.04 —— 342,192.04 —— —— 青岛山航联合快运有限公司 6.4. Long-term equity investments impairment loss provision Investment Item 2006.12.31 Increment Decrement 2007.12.31 SARJ 22,500,000.00 —— —— 22,500,000.00 Total 22,500,000.00 —— —— 22,500,000.00 Note: Due to the insolvency of SARJ, the company decided to set up an impairment provision for this long-term investment of SARJ. (7) Fixed assets and accumulated depreciation 7.1. Classify Details Items 2006.12.31 Increment Decrement 2007.12.31 1、Fixed asset original price total 5,705,764,053.58 763,582,829.07 55,276,128.77 6,414,070,753.88 Building 141,215,252.39 2,521,841.95 160,600.00 143,576,494.34 Aircraft engine core accessories and 4,793,758,712.00 646,681,963.39 —— 5,440,440,675.39 engine aid drive equipments Airframe replace accessories 41,250,000.00 —— —— 41,250,000.00 Engine replace accessories 252,080,000.00 61,302,455.98 14,700,000.00 298,682,455.98 machinery equipments、electric 71,620,102.22 17,095,095.22 4,701,171.04 84,014,026.40 equipments and furniture Expensive turn over accessories 370,960,819.97 32,740,443.23 30,306,761.42 373,394,501.78 Transport equipments 34,879,167.00 3,241,029.30 5,407,596.31 32,712,599.99 Items 2006.12.31 Increment Decrement 2007.12.31 2、Accumulated depreciation total 1,045,083,171.49 405,262,347.38 31,280,398.79 1,419,065,120.08 Building 14,224,619.13 3,941,579.21 —— 18,166,198.34 Aircraft engine core accessories and 826,789,305.30 257,536,200.41 14,700,000.00 1,069,625,505.71 engine aid drive equipments Airframe replace accessories 13,393,578.47 13,032,478.04 —— 26,426,056.51 Engine replace accessories 46,074,328.30 103,461,813.31 —— 149,536,141.61 machinery equipments、electric 35,180,773.92 8,043,339.30 4,035,275.79 39,188,837.43 equipments and furniture 76 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Expensive turn over accessories 91,678,006.89 16,497,388.65 7,755,042.63 100,420,352.91 Transport equipment 17,742,559.48 2,749,548.46 4,790,080.37 15,702,027.57 3、Fixed asset net book value total 4,660,680,882.09 —— —— 4,995,005,633.80 Building 126,990,633.26 —— —— 125,410,296.00 Aircraft engine core accessories and 3,966,969,406.70 —— —— 4,370,815,169.68 engine aid drive equipments Airframe replace accessories 27,856,421.53 —— —— 14,823,943.49 Engine replace accessories 206,005,671.70 —— —— 149,146,314.37 Machinery equipments、electric 36,439,328.30 —— —— 44,825,188.97 equipments and furniture Expensive turn over accessories 279,282,813.08 —— —— 272,974,148.87 Transport equipments 17,136,607.52 —— —— 17,010,572.42 7.2. Current year completed construction in progress transferred to fixed asset is 651,562,578.13 Yuan. 7.3. Finance leases Items Accumulated Book value Net book value depreciation Original cost of fixed asset： —— —— —— Building —— —— —— Aircraft engine core accessories and engine aid 2,320,277,084.02 515,252,541.03 1,805,024,542.99 drive equipments Airframe replace accessories 26,250,000.00 11,426,056.51 14,823,943.49 Engine replace accessories 154,242,455.98 96,225,145.06 58,017,310.92 Machinery equipments、electric equipments —— —— —— and furniture Expensive turn over accessories —— —— —— Transport equipments —— —— —— Total 2,500,769,540.00 622,903,742.60 1,877,865,797.40 7.4. Restriction to the ownership of fixed assets and the book value of those fixed assets for pledge Net closing value of fixed assets for pledge Aircraft 4,534,785,427.54 Include：Purchase 2,656,919,630.14 pledge of long-term brorrowing Finance lease 1,877,865,797.40 pledge of long-term financial lease 77 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT (8) Construction in progress 8.1. Construction in progress 2007.12.31 2006.12.31 Title Impairment Impairment Book value Net value Book value Net value loss provision loss provision Aircraft B737-800 (Project for 2007、2008) 527,446,403.69 —— 527,446,403.69 459,291,189.30 —— 459,291,189.30 Aircraft B737-800 (Project for 2009) 454,857,420.33 —— 454,857,420.33 25,894,852.30 —— 25,894,852.30 Aircraft B737-800 104,366,795.48 104,366,795.48 (Project for 2012) —— —— —— —— Aircraft ARJ21-700 60,778,195.00 —— 60,778,195.00 60,778,195.00 —— 60,778,195.00 Qingdao Engine Service and Maintenance Garage 4,820,907.63 4,820,907.63 1,701,608.38 青岛机务维修库 —— 1,701,608.38 —— Other projects 1,862,748.98 —— 1,862,748.98 6,164,018.17 —— 6,164,018.17 Total 1,154,132,471.11 —— 1,154,132,471.11 553,829,863.15 —— 553,829,863.15 8.2. Details Transferred to Other Title 2006.12.31 Increment Fixed asset decrement 2007.12.31 Aircraft B737-800 (Project for 2007、2008) 459,291,189.30 713,483,591.66 645,328,377.27 —— 527,446,403.69 Aircraft B737-800 (Project for 2009) 25,894,852.30 428,962,568.03 —— —— 454,857,420.33 Aircraft B737-800 104,366,795.48 (Project for 2012) —— 104,366,795.48 —— —— Aircraft ARJ21-700 60,778,195.00 —— —— —— 60,778,195.00 Qingdao Engine Service and Maintenance Garage 青岛机务维修库 1,701,608.38 3,119,299.25 —— —— 4,820,907.63 Other projects 6,164,018.17 2,104,327.67 6,234,200.86 171,396.00 1,862,748.98 Total 553,829,863.15 1,252,036,582.09 651,562,578.13 171,396.00 1,154,132,471.11 8.3. Capitalization of borrowing for construction in progress to 31 Dec 2007 Transferred to fixed Other Tile 2006.12.31 Increment 2007.12.31 asset Decrement Aircraft B737-800 10,664,709.81 14,610,430.26 16,996,592.79 —— 8,278,547.28 Aircraft ARJ21-700 487,587.70 —— —— —— 487,587.70 Qingdao Engine Service and Maintenance Garage —— —— —— —— —— 青岛机务维修库 Other projects —— —— —— —— —— 78 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Total 11,152,297.51 14,610,430.26 16,996,592.79 —— 8,766,134.98 （9）Intangible assets and accumulated amortisation Items 2006.12.31 Increment Decrement 2007.12.31 1、Total original value 44,850,133.13 —— —— 44,850,133.13 land Use right 44,850,133.13 —— —— 44,850,133.13 2、Total accumulated amortisation 823,984.33 613,539.74 —— 1,437,524.07 land Use right 823,984.33 613,539.74 —— 1,437,524.07 3、Total accumulated impairment loss —— —— —— —— provision for intangible assets land Use right —— —— —— —— 4、Total book value of intangible assets 44,026,148.80 —— —— 43,412,609.06 land Use right 44,026,148.80 —— —— 43,412,609.06 （10）Long-term deferred expenses Items 2006.12.31 book value Transfer Amortization Increment 2007.12.31 Book value Expenses of recruitment 145,855,706.29 —— 10,720,417.07 37,194,801.54 172,330,090.76 and training for pilots Total 145,855,706.29 —— 10,720,417.07 37,194,801.54 172,330,090.76 a) The expenses of recruitment and training for pilots amortize over 20 years. Items Original price Amortization Remaining amortized years Expenses of recruitment and training for pilots 234,666,198.40 62,336,107.64 17 years Total 234,666,198.40 62,336,107.64 （11）Deferred income tax assets Recognized deferred income tax assets and deferred income tax assets Items 2007.12.31 2006.12.31 1、Deferred income tax Account receivable bad debt provision 28,669,366.37 28,501,842.79 Inventory impairment provision 88,384.95 88,384.95 Expense in advance 24,833,527.63 41,051,039.72 Employee wage payable 16,237,400.75 10,748,066.34 Deductible difference resulting from loss remedy 3,138,109.62 11,802,430.64 Launch fee amortization 22,434.86 56,087.14 Total 72,989,224.18 92,247,851.58 79 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT （12）Provision for asset impairment Decrement Items 2006.12.31 Increment 2007.12.31 reversal Disposal Account receivable bad debt provision 3,170,491.68 215,160.18 —— —— 3,385,651.86 Other account receivable bad debt provision 110,838,511.29 951,896.85 498,594.46 —— 111,291,813.68 Provision of inventory impairment loss 353,539.79 —— —— —— 353,539.79 Total 114,362,542.76 1,167,057.03 498,594.46 —— 115,031,005.33 （13）Restricted assets Item 2006.12.31 2007.12.31 一、Net worth of pledged assets Aircraft 4,200,831,499.93 4,534,785,427.54 Include：Purchase 2,147,744,185.77 2,656,919,630.14 pledge of long-term borrowing Finance lease 2,053,087,314.16 1,877,865,797.40 pledge of long-term finance lease （14）Short-term loan 14.1. Types of short-term loan Types 2007.12.31 2006.12.31 Credit bank loan 36,523,000.00 100,000,000.00 Pledged bank loan —— 160,000,000.00 Guaranteed bank loan 1,168,707,000.00 870,000,000.00 Total 1,205,230,000.00 1,130,000,000.00 14.2. Details of guaranteed bank loan Term of Creditors Amount(RMB) term Guarantor garanteed 100,000,000.00 2007.3.16-2008.3.15 Agriculture bank of 10,000,000.00 2007.3.28-2008.3.27 ShanDong airlines China, 1 year 100,000,000.00 2007.5.31-2008.4.21 co.ltd MingHu branch 150,000,000.00 2007.5.31-2008.5.21 China Merchants Bank, ShanDong airlines 40,000,000.00 2007.12.20-2008.12.20 1 year JiNan branch co.ltd 80,000,000.00 2007.6.14-2008.6.13 China Merchants Bank, ShanDong airlines 40,000,000.00 2007.6.18-2008.6.18 1 year QingDao branch co.ltd 40,000,000.00 2007.6.19-2008.6.19 Construction bank,city 120,000,000.00 2007.5.9-2008.5.8 ShanDong airlines 1 year 80 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT center branch 80,000,000.00 2007.12.17-2008.12.16 co.ltd 40,184,498.76 2007.7.13-2008.7.12 1 year 6,266,428.17 2007.7.18-2008.7.12 1 year 16,070,120.00 2007.7.25-2008.7.12 1 year 50,401,740.00 2007.8.15-2008.7.12 1 year 16,070,120.00 2007.8.22-2008.7.12 1 year China Development 50,107,364.62 2007.9.4-2008.7.12 ShanDong airlines 1 year bank, ShanDong branch 20,891,156.00 2007.9.13-2008.7.12 co.ltd 1 year 16,070,120.00 2007.9.25-2008.7.12 1 year 27,811,534.04 2007.9.28-2008.7.12 1 year 20,883,851.40 2007.10.15-2008.7.12 1 year 8,249,570.17 2007.10.24-2008.7.12 1 year 55,700,496.84 2007.11.30-2008.7.12 1 year China CITIC ShanDong airlines 80,000,000.00 2007.12.20-2008.12.19 1 year Bank,QingDao branch co.ltd Total 1,168,707,000.00 14.3. Details of Credit loan Borrowing Amount(original Amount(Equivalent Creditors Term of borrowing method currency,USD) to RMB) Credit Bank of 2007.1.10-2008.1.10 China(HongKong),QingDao 5,000,000.00 36,523,000.00 Credit 2007.11.14-2008.11.14 branch （15）Notes payable Maturity amount for next Items 2007.12.31 2006.12.31 accounting period bank acceptance 15,000,000.00 50,000,000.00 15,000,000.00 Total 15,000,000.00 50,000,000.00 15,000,000.00 （16）Accounts payable 16.1. Age Age 2007.12.31 2006.12.31 Within 1 year 760,092,700.15 401,320,180.14 Above I year 272,887.97 795,395.45 Total 760,365,588.12 402,115,575.59 16.2. Up to 31 Dec 2007, the account balance did not contain debt that should be paid to any major 81 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT shareholders who own more than 5% of the Company’s share capital ,and no significant accounts payable, which age is more than one year. 16.3. Accounts payable to related parties Up to 31 Dec 2007, company still own Shandong Taeco Aircraft Engineering Co., Ltd trade account payable 717,414.49 Yuan. （17）Advanced from customers 17.1. Age Age 2007.12.31 2006.12.31 Within 1 year 89,541,466.63 55,034,797.28 Above 1 year 58,592.60 —— Total 89,600,059.23 55,034,797.28 17.2. Up to 31 Dec 2007,the year end balance did not contain receivable that should be paid to any major shareholders who own more than 5% of the Company’s share capital. （18）Payroll payable Items 2006.12.31 Increment Decrement 2007.12.31 1、Salary, bonus and allowance 32,999,995.88 301,878,781.38 269,710,902.34 65,167,874.92 2、Employee benefit 91,514.72 15,206,603.87 15,298,118.59 —— 3、Social insurance fee -1,229.72 42,834,238.95 42,832,903.41 105.82 Include：1. medical insurance -293.33 173,398.43 173,076.41 28.69 2． Basic retirement insurance -799.75 25,947,947.32 25,947,081.65 65.92 3． Annuity fee —— 12,810,936.44 12,810,936.44 —— 4． Unemployment fee -83.41 2,364,494.70 2,364,404.70 6.59 5． Injury insurance -23.43 592,273.94 592,248.86 1.65 6．Procreation insurance premium -29.8 945,188.12 945,155.35 2.97 4、Housing accumulation fund 219,406.04 49,245,419.39 49,228,210.73 236,614.70 5、Labour union fee and employee education fee 6,310,861.42 7,077,041.25 5,384,560.23 8,003,342.44 6、 Non-monetary benefit —— —— —— —— 7、Redemption of termination of labor contract —— 35,957.50 35,957.50 —— 8、Others —— —— —— —— Include：share payment by cash —— —— —— —— Total 39,620,548.34 416,278,042.34 382,490,652.80 73,407,937.88 （19）Tax payable 82 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT types 2007.12.31 2006.12.31 VAT & Custom tax 32,283,139.01 —— Sales tax 11,655,870.96 16,521,052.71 City maintenance construction fee 3,780.64 2,975.41 Enterprise Income tax 81,547.63 -0.35 Property tax 1,160,007.23 499,471.47 Tenure tax 766,030.00 —— Personal income tax 1,107,868.53 889,530.25 Stamp duty 2,649,751.77 788,755.97 Vehicle and vessel usage license plate tax —— -260 Education surcharge —— 214.24 Commercial aviation infrastructure facilities fund 8,348,032.19 8,466,961.72 Civil aviation airport administration fee 22,865,399.00 38,312,448.77 Income tax in advance 5,817,869.59 1,532,208.87 Total 86,739,296.55 67,013,359.06 （20）Interest payable The year end interest payable balance is 12,429,380.48 yuan. （21）Other accounts payable 21.1. Age Age 2007.12.31 2006.12.31 Within 1 year 78,174,526.56 254,031,080.32 Above 1 year 57,185,522.10 47,908,737.98 Total 135,360,048.66 301,939,818.30 21.2. Up to 31 Dec 2007, amounts due to shareholders who own 5% or over 5% of voting rights are as following: proportion to other Name amount term reason paybale Air China prepaid 20 million Yuan for aircraft wet renting on December 10, 2007. Within 1 Air China 20,000,000.00 14.77% Both parties agreed that the settlement year should base on the actual operation of these aircrafts and shall settle the payment 83 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT in the last month before the contract terminated. ShanDong Aviation Within 1 1,019,818.83 0.75% Group Co., Ltd year 21.3. Amounts due to related parties Name Amount Proportion Air China 20,000,000.00 14.77% ShanDong Aviation Group Co., Ltd 1,019,818.83 0.75% Qingdao FeiSheng International Aviation 1,150,179.77 0.85% Training Co.,Ltd ShanDong Taeco Aircraft Engineering 6,554,109.84 4.84% co.ltd ShanDong International Aviation Training 1,417,927.19 1.05% co. ltd Total 30,142,035.63 22.26% 21.4. Top five of other account payable Name Amount term proportion account nature or content Air China prepaid 20 million Yuan for aircraft wet renting on December 10, 2007. Both parties agreed that the Within 1 Air China 20,000,000.00 14.77% settlement should base on the actual year operation of these aircrafts and shall settle the payment in the last month before the contract terminated. Above 1 Received second security deposit for 3001 HuaXia Aviation Co.,Ltd 9,603,088.57 7.09% year aircraft from HuaXia aviation Co.,Ltd Civil Aviation Information Within 1 8,689,485.56 6.42% E-booking charge Network Co.,Ltd year ShanDong Taeco Aircraft Above 1 Electric engineering fee、maintained fee 6,554,109.84 4.84% Engineering Co.,Ltd year ect. Within 1 CAAC 5,729,229.84 4.23% Charge for civil aviation airport tax year 84 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT （22）Non-current liabilities due within one year 22.1. Types Items 2007.12.31 2006.12.31 Long-term borrowing within 1 190,810,617.13 139,414,840.00 year Long-term account payable within 161,580,345.90 288,532,995.63 1 year Total 352,390,963.03 427,947,835.63 Less: Unrecognized financing 49,767,310.74 98,749,550.84 liabilities Total 302,623,652.29 329,198,284.79 22.2. List of creditors Closing balance Loan Items Original Interest rate currencies Equivalent to RMB condition currency Bank of China,JiNan branch RMB 80,000,000.00 80,000,000.00 pledge 6.60% China MinSheng Banking RMB 50,000,000.00 50,000,000.00 pledge 7.83% Co.,Ltd Bank of Communication RMB 44,860,950.00 44,860,950.00 Guarantee 7.05% Co.,Ltd JiNan branch Bank of Communication USD 2,183,510.00 15,949,667.13 Guarantee 5.51%-6.13125% Co.,Ltd,JiNan branc Commerz bank,NewYork USD 2,317,315.95 16,927,066.09 Pledge 6.01%-6.015% branch Societe Generale (SG),New USD 1,441,699.81 10,531,040.43 Pledge 6.605%-6.975% York branch ShenZhen Financial lease RMB 84,354,928.64 84,354,928.64 Pledge 7.25% company Total 302,623,652.29 85 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT （23）Long-term borrowing 23.1. Types Types 2007.12.31 2006.12.31 Credit bank loan —— 23,426,100.00 Pledge bank loan 1,487,075,281.45 1,043,349,859.89 Guaranteed bank loan 1,113,316,566.52 747,925,491.89 Total 2,600,391,847.97 1,814,701,451.78 Note: The Company’s long-term borrowing includes installment repayment of capital with interest; the first year repayment amount has been treated as long-term liability within 1 year. 23.2. List of creditors 2007.12.31 Creditor USD Equivalent to RMB Interest rate loan term Loan condition —— 277,000,000.00 7.83 2004.6.29-2014.6.29 China MingSheng Bank,JiNan branch —— 19,000,000.00 7.83 2004.11.2-2014.6.29 Aircraft as pledge —— 54,000,000.00 7.83 2005.1.31-2014.6.29 3,112,190.00 22,733,303.08 5.5313 2006.10.31-2016.12.30 3,121,327.50 22,800,048.86 5.6063 2006.11.30-2016.12.30 Bank of Communication Co.,Ltd, 3,112,190.00 22,733,303.08 6.0269 2007.1.31-2016.12.30 ShanDong airline co. JiNan branch 3,074,365.00 22,457,006.58 5.6063 2007.2.28-2016.12.30 ltd as guarantor 3,065,397.50 22,391,502.58 5.5356 2007.4.29-2016.12.30 3,074,365.00 22,457,006.58 6.1113 2007.5.31-2016.12.30 —— 150,450,000.00 6.48 2006.5.30-2016.12.30 Bank of Communication Co.,Ltd, ShanDong airline co. —— 115,268,075.00 7.047 2007.11.12-2016.12.30 JiNan branch ltd as guarantor —— 115,600,000.00 7.047 2007.12.3-2016.12.30 Industrial & Commercial Bank Of ShanDong airline co. China Co., Ltd,DongJiao branch —— 100,000,000.00 7.047 2006.12.18-2018.12.17 ltd as guarantor China Construction Bank Co.ltd,JiNan ShanDong airline co. city center branch 6,039,200.00 44,113,940.32 6.1297 2007.3.29-2022.3.28 ltd as guarantor ShanDong airline co. 3,749,800.00 27,390,789.08 6.16 2007.4.30-2022.4.29 ltd as guarantor ShanDong airline co. 6,765,620.00 49,420,147.85 6.1844 2007.5.31-2022.5.30 ltd as guarantor ShanDong airline co. 17,954,820.00 131,152,778.17 6.18 2007.7.2-2022.7.1 ltd as guarantor ShanDong airline co. 3,749,800.00 27,390,789.08 6.1125 2007.8.1-2022.7.31 ltd as guarantor 86 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 12,000,000.00 87,655,200.00 6.2113 2007.8.29-2010.8.28 Aircraft asr pledge 1,300,000.00 9,495,980.00 6.3625 2007.9.10-2010.8.28 Aircraft asr pledge 700,000.00 5,113,220.00 5.91 2007.9.21-2010.8.28 Aircraft asr pledge ShanDong airline co. 14,908,900.00 108,903,550.94 5.9425 2007.9.28-2022.9.27 ltd as guarantor 3,671,400.00 26,818,108.44 5.6625 2007.5.31-2018.12.17 Industrial & Commercial Bank Of ShanDong airline co. 3,671,400.00 26,818,108.44 6.335 2007.9.4-2018.12.17 China Ltd,DongJiao branch ltd as guarantor 3,671,400.00 26,818,108.44 5.6938 2007.12.3-2018.12.17 China Construction Bank Co.ltd,JiNan ShanDong airline co. city center branch —— 27,600,000.00 7.047 2007.12.3-2022.12.2 ltd as guarantor Industrial & Commercial Bank Of Aircraft as pledge China Ltd,DongJia —— 188,000,000.00 6.723 2006.12.18-2009.12.10 2007.12.31 Creditor USD Equivalent to RMB Interest rate Loan term Loan condition —— 12,276,000.00 7.11 2004.5.8-2019.4.28 Bank of China,JiNan branch —— 18,500,000.00 7.83 2005.12.22-2019.4.28 Aircraft as pledge —— 10,600,000.00 6.84 2006.2.16-2019.4.28 518,200.00 3,785,243.72 5.9775 2004.1.5-2019.4.28 2,840,753.60 20,750,568.75 5.9775 2005.2.1-2019.4.28 2,690,700.00 19,654,487.22 5.9775 2005.2.28-2019.4.28 1,057,280.00 7,723,007.49 5.9775 2005.4.8-2019.4.28 2,762,800.00 20,181,148.87 5.9775 2005.4.29-2019.4.28 Bank of China,JiNan branch 469,200.00 3,427,318.32 5.9775 2005.6.23-2019.4.28 Aircraft as pledge 25,656,600.00 187,411,200.36 5.9775 2005.7.15-2019.4.28 26,071,798.00 190,444,055.67 5.9775 2005.10.19-2019.4.28 26,213,260.00 191,477,379.00 5.9775 2005.12.21-2019.4.28 923,467.00 6,745,557.05 5.9775 2005.12.23-2019.4.28 525,000.00 3,834,915.00 5.9775 2006.4.27-2019.4.28 Shanghai Pudong Development Bank —— 50,000,000.00 6.723 2007.2.5-2009.2.5 Aircraft as pledge Co.,Ltd,JiNan branch —— 100,000,000.00 6.723 2007.1.9-2009.12.13 Total 2,600,391,847.97 （24）Long-term account payable 24.1. The long-term account payable is for finance lease payable, which is leased for aircraft and related equipment, the first year repayment amount has been treated as long-term liability within 1 year. Balance due within following dates 2007.12.31 2006.12.31 First year after balance sheet date 266,014,982.84 288,532,995.63 87 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Second year after balance sheet date 219,714,595.69 264,144,546.77 Third year after balance sheet date 219,714,595.69 214,648,909.56 Over there years 1,341,366,941.63 1,511,414,722.91 Total minimum lease payment 2,046,811,115.85 2,278,741,174.87 Less: unrecognized financing fee 630,438,170.45 662,413,077.85 Finance lease payable 1,416,372,945.40 1,616,328,097.02 Include: finance lease payable within 1 year 111,813,035.16 189,783,444.79 Finance lease payable above 1 year 1,304,559,910.24 1,426,544,652.23 24.2. List of long-term payable Closing balance Items Loan condition Interest rate maturity date currency Original currency Equivalent to RMB Socit Genrale, New York Branch USD 18,909,579.06 138,126,911.20 Finance lease 6.605%-6.975% 2008.8.15 Commerzbank, New York Branch USD 6,338,524.62 46,300,386.94 Finance lease 6.010%-6.015% 2010.7.15 ShenZhen finance lease company RMB 1,862,383,817.71 Finance lease 7.25% 2020.6.15 Total 2,046,811,115.85 24.3. Finance lease payable within 1 year has been explained as note 22 24.4. The year end balance did not include fiancé lease payable owe to the main shareholder, who owns more than 5% of our capital shares. （25）Deferred Income Items Original value 2006.12.31 Amortisation Accumulative amortisation 2007.12.31 CRJ leaseback profit 9,741,746.00 6,265,526.11 1,394,183.00 4,870,402.89 4,871,343.11 Total 9,741,746.00 6,265,526.11 1,394,183.00 4,870,402.89 4,871,343.11 （26）Share Capital Increase/Decrease （+、－） Unit: shares Items 2006.12.31 Issuance of Bonus Capitalization of Others Sub-total 2007.12.31 new shares shares public reserve Unlisted shares ① Shares subject to trading 260,000,000.00 260,000,000.00 moratorium —— —— —— —— —— Including： 88 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Shares held by the state 259,801,000.00 —— —— —— —— —— 259,801,000.00 Shares held by state-owned legal 199,000.00 199,000.00 persons —— —— —— —— —— Shares held by overseas legal persons —— —— —— —— —— —— —— Others —— —— —— —— —— —— —— ② Raised legal person’s shares —— —— —— —— —— —— —— ③ Inner employees’ shares —— —— —— —— —— —— —— ④ Preference shares or other —— —— —— —— —— —— —— Include: transferred/allotted shares —— —— —— —— —— —— —— Total unlisted shares 260,000,000.00 —— —— —— —— —— 260,000,000.00 Increase/Decrease （+、－） Unit: shares Items 2006.12.31 Issuance of Bonus Capitalization of Others Sub-total 2007.12.31 new shares shares public reserve Listed shares ①RMB ordinary shares —— —— —— —— —— —— —— ②Domestically listed foreign shares 140,000,000.00 —— —— —— —— —— 140,000,000.00 ③Overseas listed foreign shares —— —— —— —— —— —— —— Total listed shares 140,000,000.00 —— —— —— —— —— 140,000,000.00 Total shares 400,000,000.00 —— —— —— —— —— 400,000,000.00 26.1. The aforesaid listed shares are listed on B shares at RMB1 each； 26.2. The aforesaid share capital has been examined by Shangdong Yantai Qianju Certified Public Accountants and issued a Capital Verification Report with Yanqianzi［2000］NO.27. （27）Capital Reserve Items 2006.12.31 Increase Decrease 2007.12.31 Premium on share 76,258,081.68 —— —— 76,258,081.68 capital Other capital 7,792,081.16 —— —— 7,792,081.16 reserve Total 84,050,162.84 —— —— 84,050,162.84 （28）Surplus Reserve Items 2006.12.31 Increase Decrease 2007.12.31 Statutory surplus reserve 25,001,281.34 207,668.54 289,363.17 24,919,586.71 Total 25,001,281.34 207,668.54 289,363.17 24,919,586.71 89 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT （29）Retained Earnings Items 2007 2006 Balance at the beginning of the -109,226,868.91 -117,777,353.99 year of 2007 Add：Consolidated net profit 37,255,985.51 8,875,631.95 Other transfer-in 173,679.78 —— Less ： Withdrawal of statuary 207,668.54 325,146.87 surplus reserve Balance at the end of the year of -72,004,872.16 -109,226,868.91 2007 （30）Operating Revenue and Operating Cost 30.1. Operating revenue and operating cost 2007 2006 Items Operating Income Operating Cost Operating Income Operating Cost Income from 4,536,790,226.62 3,779,784,586.76 4,198,152,384.84 3,481,368,056.47 main operation Other 93,340,311.57 56,965,069.52 32,905,559.87 —— operating income Total 4,630,130,538.19 3,836,749,656.28 4,231,057,944.71 3,481,368,056.47 30.2. Main operation income, main operation cost and gross profit of segment 2007 2006 Segment Operating Operating Operating Operating Gross profit Gross profit Income Cost Income Cost Aviation 4,503,661,260.70 3,761,738,252.60 741,923,008.10 4,167,736,135.51 3,474,988,533.23 692,747,602.28 transportation service Logistic 7,250,905.82 1,733,971.61 5,516,934.21 8,593,552.31 1,081,624.89 7,511,927.42 transportation service Hospitality 26,059,386.92 16,312,368.49 9,747,018.43 21,822,697.02 5,297,898.35 16,524,798.67 and Catering service 90 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Lease service 49,549,336.89 52,470,312.13 -2,920,975.24 —— —— —— Others 43,609,647.86 4,494,751.45 39,114,896.41 32,905,559.87 —— 32,905,559.87 Total 4,630,130,538.19 3,836,749,656.28 793,380,881.91 4,231,057,944.71 3,481,368,056.47 749,689,888.24 （31）Business tax and surtax Item Applicable tax rate 2007 2006 Business tax 3%、5% 137,305,155.03 126,152,745.77 City maintenance and 0、7% —— 2,756.90 construction tax Educational surcharge 0、3% —— 3,085.66 Total 137,305,155.03 126,158,588.33 （32）Financial costs Items 2007 2006 Interest expenses 283,408,485.31 301,154,308.66 Less: Interest income 23,598,291.77 11,061,406.74 Exchange gains -66,751,899.20 -45,264,943.57 Others 3,888,437.02 4,497,540.09 Total 196,946,731.36 249,325,498.44 （33）Impairment loss of assets Items 2007 2006 Bad debts provision 670,094.39 -14,816,307.30 Total 670,094.39 -14,816,307.30 （34）Investment income The origin of the investment income 2007 2006 Increase income by equity method -2,560.68 44,183.03 Income from disposal of equity investment —— 7,869,106.65 Income from equity investment 956,670.00 8,500,155.00 Total 954,109.32 16,413,444.68 （35）Non-operating income 35.1. Non-operating income Items 2007 2006 Gains from disposal of non-current assets —— 26,119.18 91 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Including:Gains disposal of fixed assets —— 26,119.18 Government Grant 10,000,000.00 10,000,000.00 Other 1,362,190.18 2,843,616.52 Total 11,362,190.18 12,869,735.70 35.2. Government Grant Item 2007 2006 Airline subsidy 10,000,000.00 10,000,000.00 Total 10,000,000.00 10,000,000.00 （36）Non-operating expenses Items 2007 2006 Loss on disposal of non-current assets 21,736,311.72 277,433.76 Include: Loss on disposal of fixed assets 21,348,892.09 277,433.76 Donation 215,000.00 150,000.00 Extra-ordinary loss 8,482,707.78 —— Others 14,676.27 208,641.42 Total 30,448,695.77 636,075.18 （37） Enterprise income tax Items 2007 2006 Income tax for current period 298,883.01 219,357.23 Deferred income tax 19,258,627.40 32,862,031.49 Total 19,557,510.41 33,081,388.72 （38）Cash received relating to other operating activities Items 2007 Government grant 10,000,000.00 Interest incomes 667,658.52 Cash received from non-operating activities 1,362,190.18 Cash received from current fund 50,444,864.79 Total 62,474,713.49 （39）Cash paid relating to other operating activities Items 2007 Bank commission charge 3,888,437.02 Cash Paid for non-operating activities 229,676.27 Cash paid for current fund 15,017,209.45 92 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Marketing cost, administration cost and cash paid for operating activities 55,784,000.50 Total 74,919,323.24 （40）Cash paid relating to other investment activities Item 2007 Decrease of cash in subsidiaries for reconciliation 3,395,201.72 Total 3,395,201.72 （41）Cash received relating to other financing activities Item 2007 Interest rate swap contracts 22,817,555.14 Total 22,817,555.14 （42）Cash paid relating to other financing activities Item 2007 Interest expenses for leased aircrafts 108,326,472.97 Total 108,326,472.97 （43）Adjusting net profit to cash flow from operating activities Items 2007 2006 1.Adusting net profit to cash flow from operating activities： Net profit 37,989,303.78 10,340,104.89 Add: Impairment loss provision of assets 670,094.39 -14,816,307.03 Depreciation of fixed assets、oil and gas assets and consumable biological 405,262,347.38 313,545,682.20 assets Amortization of intangible assets 613,539.74 388,190.07 Amortization of Long-term deferred and prepaid expenses 10,720,417.07 - Loss on disposal of fixed assets、intangible assets and other long-term 387,419.63 -7,617,792.07 deferred assets（Loss/Gain +/－） Loss from written off assets（Loss/Gain +/－） 21,348,892.09 - Loss of fair value fluctuation on assets（Loss/Gain +/－） - - Financial cost（Loss/Gain +/－） 283,408,485.31 301,154,308.66 Loss on investment（Loss/Gain +/－） -954,109.32 -16,413,444.68 Decrease of deferred income tax assets（Loss/Gain +/－） 19,258,627.39 32,862,031.49 Decrease of deferred income tax liabilities（Loss/Gain +/－） - - Decrease of inventories（Loss/Gain +/－） -12,792,299.74 18,214,631.15 Decrease of operating receivables（Loss/Gain +/－） -98,303,411.61 188,048,742.63 Increase of operating payables（Loss/Gain +/－） 66,962,114.87 233,575,150.21 Others - - Net cash flows arising from operating activities 734,571,420.98 1,059,281,297.52 93 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 2.Significant investment and financing activities that withour cash flows： Liability transfer to capital - - Convertible corporate bond due within 1 year - - Finance lease-fixed assets - - 3.Net increase (decrease) of cash and cash equivalents Ending balance of cash 42,131,848.82 68,256,602.71 Less: Beginning balance of cash 68,256,602.71 68,096,309.00 Add : Ending balance of cash equivalents - - Less: Beginning balance of cash equivalents - - Net increase of cash and cash equivalents -26,124,753.89 160,293.71 （44）Relating information for acquired or disposal of subsidiaries and other business units for current period 2007 2006 Relating information for acquired or disposal of subsidiaries and other business units： 1．Price of disposal of subsidiaries and other business unit 2,592,379.24 —— 2．Cash and cash equivalent received from disposal 750,000.00 —— of subsidiaries and other business unit Less：Cash and cash equivalent held by subsidiaries and other business unit 1,138,731.24 —— 3．Net cash received from disposal of subsidiaries and other business unit -388,731.24 —— 4．Net assets from disposal of subsidiaries 2,592,379.24 —— Current assets 2,592,379.24 —— Non-current assets —— —— Current liabilities —— —— Non-current liabilities —— —— （45）Cash and cash equivalents Items 2007 2006 一、Cash 42,131,848.82 68,256,602.71 Including: Cash on hand 924,974.06 363,274.31 Non restricted bank deposit 41,206,874.76 67,893,328.40 Non restricted other monetary fund —— —— 二、Cash equivalents —— —— Including: Bond investment within three month —— —— 三、Ending balance of cash and cash equivalents 42,131,848.82 68,256,602.71 Inculding: restricted cash and cash equivalents for parent or group —— —— subsidiaries 94 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT （46）Analysis of change over 30% of financial items We conduct analysis for the financial items that change 30% or over 30% ，and the financial items that has 5% or over 5% of total assets at balance sheet date or 10% or over 10% of total net profit during the reporting period. 1、 Accounts receivable is increased of 31.69% compared with last year, it is mainly due to the increase of BSP and newly added associated airlines； 2、 Inventories are increased of 32.43% compared with last year, it is mainly due to increase of inventories for newly introduction of airline material； 3、 Contruction in progress is increased of 108.39% compared with last year，it is mainly due to the increase of introduction of airplane project； 4、 Bills payable is decreased of 70.00% compared with last year，it is mainly due to the decrease of settlement method by bills； 5、 Accounts payable is increased of 89.09% compared with last year，it is mainly due to reclassification of accrued maintenance expenses for airplanes； 6、Advance from customers is increased of 62.81% compared with last year，it is mainly due to the control of bills or accounts receivable, and advance from customers is more quick than the return of passengers’ ticket. 7、 Salaries or wages payable is increased of 85.28% of last year，it is mainly due to accrued annual bonus and safety aviation bonus； 8、 Interest payable is increased of 3,722.09%，it is mainly due to accrued interest expenses for current period； 9、 Other accounts payable is decreased of 55.17% compared with last year，it is mainly due to payment of airplane maintenance expenses. 10、 Long-term loan is increased of 43.30% compared with last year，it is mainly due to the increase of long-term loan to pay for the purchase of airplane； 11、 Loss on impairment assets is increased of 104.52% compared with last year，it is mainly due to the increase of provision of bad debts； 12、 Investment income is decreased of 94.19% compared with last year，it is mainly due to the decrease of cash dividends received and the income from disposal of investing companies； 13、 Non-operating expenses is increased of 4,686.96%，it is mainly due to the increase of disposal of high value of consumable aviation matherials； 14、 Income tax is decreased of 40.88%，it is mainly due to the redeemable loss resulting the decrease of deferred income tax assets. i. Notes to financial statement for parent company 1. Accounts Receivable 95 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 1.1. Details of accounts receivable 2007.12.31 2006.12.31 Item Balance Proportion(%) Provision for Balance Proportion(%) Provision for bad debts bad debts Individual transaction with significant amount 189,588,286.65 90.17% —— 144,809,355.76 90.80% —— Individual transaction with not so significant 2,608,298.83 1.24% 2,608,298.83 2,608,298.83 1.64% 2,608,298.83 amount but significant recoverable risk Other transaction with no significant amount 18,050,269.68 8.59% 777,353.03 12,058,048.56 7.56% 562,192.85 Total 210,246,855.16 100.00% 3,385,651.86 159,475,703.15 100.00% 3,170,491.68 1.2. Individual significant accounts receivable Name Amount Explanation BSP 93,715,534.35 Settlement difference, all are received in subsequent date China Aviation Settlement Centre 45,791,500.35 Settlement difference, all are received in subsequent date Air China 50,081,251.95 Settlement difference, all are received in subsequent date Total 189,588,286.65 1.3. Age analysis 2007.12.31 2006.12.31 Age Balance % Bad debt Net Value Balance % Bad debt Net Value provision provision Within one year 207,505,796.68 98.70% 770,715.04 206,735,081.64 156,855,682.73 98.36% 566,055.31 156,289,627.42 1-2 years 307,308.50 0.15% 206,030.43 101,278.07 1,386,848.42 0.87% 1,371,315.67 15,532.75 2-3 years 1,200,577.98 0.57% 1,175,785.69 24,792.29 929,258.00 0.58% 929,206.70 51.30 3-4 years 929,258.00 0.44% 929,206.70 51.30 303,914.00 0.19% 303,914.00 —— 4-5 years 303,914.00 0.14% 303,914.00 —— —— —— —— —— Over five years —— —— —— —— —— —— —— —— Total 210,246,855.16 100.00% 3,385,651.86 206,861,203.30 159,475,703.15 100.00% 3,170,491.68 156,305,211.47 1.4. The accounts receivable which is due from shareholders who hold 5% or over 5% voting right shares is included Air China Limited operating receivable amounting to RMB50,081,251.95； 1.5. Details of top five debtors for accounts receivable 2007.12.31 2006.12.31 Items Balance Percentage Age Balance Percentage Age BSP Within 1 Within 1 93,715,534.35 44.57% 68,240,034.35 42.79% year year China Aviation Settlement Centre 45,791,500.35 21.78% Within 1 43,069,349.28 27.01% Within 1 96 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT year year Within 1 Within 1 Air China 50,081,251.95 23.82% 33,478,831.87 20.99% year year Within 1 1,269,000.00 0.80% AnHui Civil Aviation Airport Co.,Ltd —— —— year The Municipal Government of HeiHe Within 1 Within 1 840,178.12 0.40% 779,339.00 0.49% City year year Ganzhou ShengHua Industry Co.,Ltd 709,014.83 0.34% 2 to 3 years —— —— Total 191,137,479.60 90.91% 146,836,554.50 92.08% (2)Other accounts receivable 2.1. Details of other accounts receivable 2007.12.31 2006.12.31 Items Balance % Bad debts Balance % Bad debts provision provision Individual transaction with 228,111,849.89 83.93% 109,136,552.15 227,423,720.96 92.50% 109,635,146.61 significant amount Individual transaction with —— —— —— —— —— —— not so significant amount but significant recoverable risk Other transaction with no 43,684,552.87 16.07% 2,155,261.53 18,431,736.92 7.50% 1,201,732.86 significant amount Total 271,796,402.76 100.00% 111,291,813.68 245,855,457.88 100.00% 110,836,879.47 2.2. Other individual significant accounts receivable Name Balance Percentage of bad debts Reason provision Security deposit for airplane 118,975,297.74 —— Security deposit for aircraft engine maintenance expenses engine and the purchase of aircrafit Shangdong Airline Rainbow Jet 109,136,552.15 100.00% Long-term accounts receivable, the company could not Co., Ltd repay debts due to its financial difficulty Total 228,111,849.89 —— 2.3. Age analysis 2007.12.31 2006.12.31 Age Balance % Provision for Net Value Balance % Provision for Net Value 97 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Bad debts Bad debts Within one 45,220,181.76 16.64% 1,339,820.64 43,880,361.12 33,641,867.49 13.68% 11,654,534.24 21,987,333.25 year 1-2 year 29,184,928.30 10.74% 11,280,098.16 17,904,830.14 141,922,459.85 57.73% 80,397,791.41 61,524,668.44 2-3 year 137,151,532.65 50.46% 80,385,813.40 56,765,719.25 24,402,160.50 9.92% 18,657,038.61 5,745,121.89 3-4 year 23,496,543.29 8.64% 18,138,057.20 5,358,486.09 33,158,611.96 13.49% 82,684.05 33,075,927.91 4-5 year 24,265,824.29 8.93% 77,624.20 24,188,200.09 12,730,358.08 5.18% 44,831.16 12,685,526.92 Over 5 year 12,477,392.47 4.59% 70,400.08 12,406,992.39 —— —— —— —— Total 271,796,402.76 100.00% 111,291,813.68 160,504,589.08 245,855,457.88 100.00% 110,836,879.47 135,018,578.41 2.4. last year’s total bad debt provision of SARJ is 109,635,146.61 Yuan, and 498,594.46 Yuan has been received by the current year end. 2.5. Up to 31 Dec 2007,there is 2,550,000.00 yuan trade account receivable is due by Air China, who owns 5% or over 5% of voting rights. 2.6. List of significant debtors Name of debtors Balance Nature or content Age Proportion SARJ 109,136,552.15 Disbursement fee 1 to 4 years 40.15% Shenzhen finance lease company 41,354,563.28 Deposit of aircraft 2 to 3 years 15.22% Singapore Aircraft Leasing Enterprise 20,452,880.00 Deposit of aircraft 1 to 2 years 7.53% Rainier Aircraft Leasing(Ireland) Limited 17,623,671.90 Deposit of aircraft 2 to 5 years 6.48% General Electric Capital Corporation 15,596,781.92 Deposit of aircraft 1 to 5 years 5.74% Total 204,164,449.25 75.12% (3) Long-term equity investment 3.1. Long-term equity investment and provision for impairment loss 2007.12.31 2006.12.31 Provision for Provision for Items Balance impairment Book value Balance impairment Book value loss los Long-term equity 135,315,305.97 22,500,000.00 112,815,305.97 137,232,132.51 22,500,000.00 114,732,132.51 investment Include: Investment in 24,463,205.97 24,463,205.97 26,380,032.51 26,380,032.51 Subsidiary —— —— 98 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Joint-venture 22,500,000.00 22,500,000.00 investment —— —— —— —— Affiliated enterprise 22,500,000.00 22,500,000.00 investment —— —— —— —— Investment in Other 88,352,100.00 88,352,100.00 88,352,100.00 88,352,100.00 Companies —— —— 3.2. Long-term equity investment measured by cost method Investee Beginning 2006.12.31 Increase Decrease 2007.12.31 balance Subsidiaries: Qingdao International Aviation 23,813,205.97 23,813,205.97 —— 23,813,205.97 Logistic center Co.,Ltd —— Union Express Service 650,000.00 650,000.00 650,000.00 Shangdong Airline Co.,Ltd —— —— SDA-Hangchi Cargo 1,916,826.54 1,916,826.54 1,916,826.54 —— Co.,Ltd —— Sub-total 26,380,032.51 26,380,032.51 —— 1,916,826.54 24,463,205.97 Other long-term equity investment China Civil aviation information network 6,690,000.00 6,690,000.00 6,690,000.00 Co.,Ltd —— —— SiChuan airlines co.Ltd 35,000,000.00 35,000,000.00 —— —— 35,000,000.00 JiNan International Airport 46,662,100.00 46,662,100.00 46,662,100.00 co.Ltd —— —— Sub-total 88,352,100.00 88,352,100.00 —— —— 88,352,100.00 Total 114,732,132.51 114,732,132.51 —— 1,916,826.54 112,815,305.97 3.3. Long-term equity investment measured by equity method Cost 2006.12.31 Increase Decrease 2007.12.31 Cash Investee divident Shangdong airline rain-bow 25,000,000.00 —— —— —— —— —— 99 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT jet Co., Ltd Qingdao SDA Union 240,000.00 342,192.04 342,192.04 Express Co.,Ltd —— —— —— 3.4. Impairment loss provision of long-term investment Items 2006.12.31 Increase Decrase 2007.12.31 Shangdong airline rain-bow 22,500,000.00 22,500,000.00 jet Co., Ltd —— —— Total 22,500,000.00 —— —— 22,500,000.00 (4）Operating income and operating cost 4.1. Operating income and operating cost 2007 2006 Items Operating income Operating cost Operating income Operating cost Main business 4,530,329,258.69 3,778,757,204.89 4,189,558,832.53 3,480,286,431.58 Other business 93,220,311.57 56,965,069.52 32,724,095.94 —— Total 4,623,549,570.26 3,835,722,274.41 4,222,282,928.47 3,480,286,431.58 4.2. The main business are listed as per product or category. Product or 2007 2006 category Operating income Operating cost Gross profit Operating income Operating cost Gross profit Aviation 4,503,661,260.70 3,761,738,252.60 741,923,008.10 4,167,736,135.51 3,474,988,533.23 692,747,602.28 shipping service Logistic 789,937.89 706,583.80 83,354.09 —— —— —— service Catering 26,059,386.92 16,312,368.49 9,747,018.43 21,822,697.02 5,297,898.35 16,524,798.67 service Leasing 49,549,336.89 52,470,312.13 -2,920,975.24 —— —— —— service Others 43,489,647.86 4,494,757.39 38,994,890.47 32,724,095.94 —— 32,724,095.94 Total 4,623,549,570.26 3,835,722,274.41 787,827,295.85 4,222,282,928.47 3,480,286,431.58 741,996,496.89 （5）Business tax and surtax Items Rate 2007 2006 Business tax 3%、5% 136,961,706.63 125,743,401.56 Total 136,961,706.63 125,743,401.56 100 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT (6) Investment income The origin of the investment income 2007 2006 Profit distributed by the disposal of shareholder’s —— 7,869,106.65 right Profit distributed by the equity investments 956,670.00 8,500,155.00 Cash dividend distributed by the subsidiaries —— 550,000.00 Total 956,670.00 16,919,261.65 X. Related party and related party transactions （1）confirmation standard of related part The other party which is controlled, jointly controlled or substantially influenced by the company, or controls, jointly controls or substantially influences the company, or is under the same control, joint control or substantial influence of the same parties as the company will be deemed as the associated party of the company. (2) The relationship of related parties 2.1. related party with controllable relationship Registered Business Legal Business name Main business Relationship ADD nature representive air passenger transport, freight Controlled Air China Limited BeiJing Corp. Jiaxiang Li transport and related service etc party Aircraft and ground equipment Limited Shangdong Aviation repair and maintenance, air Controlled liability Jinan Gang feng Group Co. Ltd.. passenger transport, freight transport shareholder company and related service etc 2.2 The registered capital and changes the related parties with controllable relationship Business name 2006.12.31 Increase in Decrease in 2007.12.31 the current the period current period Air China 9,433,210,909.00 —— —— 9,433,210,909.00 Shangdong Aviation Group Co. Ltd. 580,000,000.00 —— —— 580,000,000.00 101 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 2.3.changes in share capital and particular about related party with controllable relationship Business name 2007.12.31 Proportion Increase Decrease 2006.12.31 Proportion (%) (%) Air China 171,840,000.00 42.96% 2,362,080.00 —— 174,202,080.00 43.55% Shangdong Aviation 168,004,000.00 42.00% 168,004,000.00 42.00% —— —— Group Co. Ltd. 2.4.The related party with uncontrollable relationship Business name Relationship Shandong Taeco Aircraft Engineering Co., Ltd Subsidiary which under the control of holding company Aviation building management limited company Subsidiary which under the control of holding company Shandong xiaoyu technology service ltd Subsidiary which under the control of holding company Qingdao Feisheng international Aviation Training Co., Ltd Subsidiary which under the control of holding company Shandong International Aviation Training Co., Ltd. Subsidiary which under the control of holding company SARJ associate (3)Related party transactions 3.1.The pricing principle of the transaction between the company and related party: the price of the related party transaction will be settled at the market price as the similar product or service. 3.2. Related party transaction 3.2.1acceptance or provision of services, purchase of assets Related party Nature of transaction 2007 2006 Acceptance of service Shandong Taeco Aircraft Expenditure for aircraft 56,344,238.51 60,809,917.13 Engineering Co., Ltd maintenance Shangdong Aviation Group Co. Ltd. Rental charges in respect of land and 6,207,465.77 4,232,015.68 buildings Shangdong Aviation Group Co. Ltd. Room and restaurant 4,911,669.10 5,325,808.00 service charges Qingdao Feisheng international Aviation Training Co., Training fee 5,879,227.00 7,023,156.00 Ltd Shandong International Aviation Training Co., Ltd. Training fee 7,933,074.50 13,344,724.45 Shandong xiaoyu technology service ltd Repairs and maintenance 3,323,330.44 3,813,802.97 charges 102 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Air China Provision of labor 12,390,700.00 8,779,300.00 Others SARJ Rental income in respect 7,185,208.02 —— of aircraft SARJ Commute debt 498,594.46 15,684,200.00 Air China Leasing of aircraft and 259,180,758.50 282,634,851.50 engine Air China Joint flight course 85,833,974.37 19,948,035.32 3.2.2. Guarantee Shangdong Aviation Group Co. Ltd. Provides guarantee for the company as following: Type of loans Name of the bank Amount China Merchants Bank jinan branch 40,000,000.00 Agricultural Bank Of china Minghu branch 360,000,000.00 China Merchants Bank Qingdao branch 160,000,000.00 Short-term loans China Construction Bank Shizhong branch 200,000,000.00 China development bank Shandong branch 328,707,000.00 China citic bank Qingdao branch 80,000,000.00 Bank of communication Tianqiao branch 516,890,245.76 Long-term Industrial and commercial bank of china 180,454,325.32 borrowing Dongjiao branch China Construction Bank Shizhong branch 415,971,995.44 Non-current liabilities due China citic bank Qingdao branch 60,810,617.13 within one year 3.3. The balance of payables and receivables for related party. 31/12/2006 31/12/2007 Business name Amounts proportion Amount Proportion Trade receivables ： Air China 33,478,831.87 20.74% 50,081,251.95 23.65% Total 33,478,831.87 50,081,251.95 Other receivables ： Shangdong Aviation Group Co. Ltd. 871,203.72 0.35% —— —— Air China 1,154,376.29 0.47% 2,550,000.00 0.94% Shandong International Aviation 407,569.92 0.16% 80,342.04 0.03% 103 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Training Co., Ltd. Qingdao Feisheng international 195,850.98 0.08% 41,041.70 0.02% Aviation Training Co., Ltd SARJ 109,635,146.61 44.25% 109,136,552.15 40.14% Total 112,264,147.52 111,807,935.89 Trade payables： Shandong Taeco Aircraft 717,414.49 0.09% Engineering Co., Ltd Total 717,414.49 Other payables： 31/12/2006 31/12/2007 Business name Amounts proportion Amounts proportion Air China 20,000,000.00 14.77% Shangdong Aviation Group Co. Ltd —— —— 1,019,818.83 0.75% Qingdao Feisheng international —— —— 1,150,179.77 0.85% Aviation Training Co., Ltd Shandong Taeco Aircraft Engineering 16,073,838.49 5.32% 6,554,109.84 4.84% Co., Ltd Shandong International Aviation 1,575,414.43 0.52% 1,417,927.19 1.05% Training Co., Ltd. Total 17,649,252.92 30,142,035.63 Items received in advance： Air China Limited 1,645,700.00 2.99% —— Total 1,645,700.00 —— XI. Contingency 1、 Guarantee for external entity At the end of balance date, there is no guarantee for external entity that needs to be disclosed. 2. Pending Litigation At the end of balance date, there is no significant event of pending litigation that needs to be disclosed. 3. Other contingency At the end of balance date, there is no any other significant contingency that needs to be disclosed. XII．Commitment 104 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 2007.12.31 Items 1year 1-3years Above 3 years Total Unit: Thousand Yuan Lease 406,547.00 708,705.00 1,426,421.00 2,541,673.00 commitments Capital 1,357,650.00 215,618.00 6,498,218.00 8,071,486.00 Commitments Total 1,764,197.00 924,323.00 7,924,639.00 10,613,159.00 2006.12.31 Items 1year 1-3years Above 3 years Total Unit: Thousand Yuan Lease 326,496.00 687,570.00 1,729,108.00 2,743,174.00 commitments Capital 683,285.00 2,512,610.00 - 3,195,895.00 Commitment of c Total 1,009,781.00 3,200,180.00 1,729,108.00 5,939,069.00 XIII. Non-adjusting events occurring after the balance sheet date By 31/12/2007 the company has no non-adjusting events occurring after the balance sheet date that need to be disclosed. XIV. Financial derivative instrument 1、 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, the total amount is $309,000.00 thousand. 2、 At the end of balance date, contracts of forwards and interest rate swap which are held by the company is amounted to $179,344.00 thousand, in which, $66,513.80 thousand can be redeemed. i. The contracts of forwards and interest rate swap will due as following ： Expiry period of the contacts Amounts （Unit：10 thousand US dollar） 1year after balance sheet date 2,343.48 2years after balance sheet date —— 3years after balance sheet date 1,704.13 Later year 13,886.79 Total 17,934.40 105 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT ii. During the current accounting period, the net profit gained from interest rate swap is RMB 22,379.20 thousand.In which: (1)Net losses RMB 1,502.80 thousand, the corresponding value of the contracts of forward and interest swap rate is $32,018.70 thousand. (2) Net profits RMB 23,882.00 thousand, the corresponding value of the contracts of forward and interest swap rate is $147,325.30 thousand. Because of the above contracts of forward and interest rate swap were made in accordance with terms of particular financing project, it is unable to gain referenced value of similar contracts, and the company considers that the fair value of these contracts are unable to be estimated, therefore the possibly changes in the equity which caused by the contracts of forward and interest rate swap were not confirmed in the financial reports. a) Net profit after deduction of the non-recurring profit and loss Item Amount Net profit 37,255,985.51 Minus: Profit and loss in disposal of non-circulation assets -21,736,311.72 Tax return and tax deduction over examination right or without formal document Governmental allowance accrued to the current profit and loss Gain or loss from combination 10,000,000.00 cost and fair value of identifiable net assets when the enterprise combination gain or loss from exchange non-monetary assets Provisions for the impairment of asset due to act of god -498,594.46 Gain/loss form debt restructuring Expenses of enterprise restructuring Profit/loss form that of trading price higher than fair value Gain/loss from projected liabilities without -7,370,706.97 relationship with main operation Subtotal -19,605,613.15 Plus：non-recurring gain/loss attributable 331.50 to minority shareholders Amount influenced due to income tax -6,469,852.34 Net profit after deduction of non-recurring gain/loss 50,392.077.82 b) Yield Rate of Net Assets and Earnings Per Share （1）2007 Yield Rate of Net Assets and Earnings Per Share Yield Rate of Net Assets Profit in the report period Weighted Basic profit Profit per share Full dilution average per share after dilution Net profit attributable to 37,255,985.51 8.53 8.90 0.09 0.09 106 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT ordinary shareholders Net profit attributable to the ordinary shareholders after 50,392,077.82 11.53 12.04 0.13 0.13 deduction of non-recurring (2) Calculation method on return on equity and earnings per share 2.1. Fully diluted return on equity Fully diluted return on equity = P÷E Of which: P refers to Net profit attributable to common shareholder of the Company or net profit after deducting non-recurring gains and losses attributable to common shareholder of the Company; E refers to net assets at the period-end attributable to common shareholders of the Company. When the Company prepared and disclosed the consolidated statement, “Net profit attributable to common shareholder of the Company” excluded minority interest, “net profit after deducting non-recurring gains and losses attributable to common shareholder of the Company” would be calculated based on consolidated net profit after deducting minority interests; deducting non-recurring gain and loss of parent company (the Company should consider influence of income tax) and non-recurring gain and loss of each subsidiary (the Company should consider influence of income tax) ; “net assets at the period-end attributable to common shareholders of the Company” excluded minority interests. 2.2. Weighted average return on equity Weighted average return on equity =P/（E0＋NP÷2＋Ei×Mi÷M0－Ej×Mj÷M0±Ek×Mk÷M0） Of which: P refers to Net profit attributable to common shareholder of the Company or net profit after deducting non-recurring gains and losses attributable to common shareholder of the Company; NP refers to net profit attributable to common shareholders of the Company; E0 refers to net assets at the period-begin attributable to common shareholders of the Company; Ei refers to net assets increased due to issuance of new share or debts for equity swap or attributable to common shareholders of the Company; Ej refers to net assets decreased due to repurchased or dividends in cash or attributable to common shareholders of the Company; M0 refers to the number of months during the report period; Mi refers to the number of months from the next month when net assets increased to the end of the report period; Mj refers to the number of months from the next month when net assets decreased to the end of the report period; Ek refers to change of increase/decrease of net assets due to other transaction events; Mk refers to the number of months from the next month when other net assets changed the end of the report period. 107 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT 2.3. Earnings per share-basis EPS-basis=P÷S S=S0＋S1＋ Si×Mi÷M0-Sj×Mj÷M0-Sk Of which: P refers to net profit attributable to shareholders holding ordinary shares or net profit attributable to shareholders holding ordinary shares after deducting non-recurring gains and losses; S weighted average number of ordinary shares issued out; S0 refers to total number of shares at the period-begin; S1 refers to the number of shares increased due to transferring capital reserve into share capital or dividend distribution of shares during the report period; Si refers to the number of shares increased due to issuance of new shares or debt for equity swap during the report period; Sj refers to the number of shares decreased due to stock repurchase during the report period; Sk refers to the number of split-share during the report period; M0 refers to the number of months during the report period; Mi refers to the number of months from the next month to the end of the report period for increase of shares; Mj refers to the number of months from the next month to the end of the report period for decrease of shares. 2.4. Earnings per share-diluted EPS-diluted = [net profit attributable to shareholders holding ordinary shares +(potential diluted interests of ordinary shares recognized as expense－transfer fee)×(1-income tax rate)]/(S0＋S1＋ Si×Mi÷M0-Sj×Mj÷M0-Sk + weighted average amount of ordinary shares increased due to warrant, share options、convertible bond) P refers to net profit attributable to shareholders holding ordinary shares or net profit attributable to shareholders holding ordinary shares after deducting non-recurring gains and losses; S0 refers to total number of shares at the period-begin; S1 refers to the number of shares increased due to transferring capital reserve into share capital or dividend distribution of shares during the report period; Si refers to the number of shares increased due to issuance of new shares or debt for equity swap during the report period; Sj refers to the number of shares decreased due to stock repurchase during the report period; Sk refers to the number of split-share during the report period; M0 refers to the number of months during the report period; Mi refers to the number of months from the next month to the end of the report period for increase of shares; Mj refers to the number of months from the next month to the end of the report period for decrease of shares. The Company shall consider all influence on potential diluted interests of ordinary shares when the Company calculated diluted earnings per share, till to minimum diluted EPS. c) Supplementary Information (1). In comparison with the adjusted procedures of profit and loss statement 108 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Adjusted items for profit and loss statement in 2006 Item Pre-adjustment Post-adjustment Operating income 4,198,152,384.84 Operating expenses 3,481,368,056.47 Other income 31,212,135.06 Sales revenues 4,231,057,944.71 Sales cost 3,481,368,056.47 Business tax and surtax 126,158,588.33 Main business tax and surtax 124,465,163.52 Item Pre-adjustment Post-adjustment Business expenses 203,075,903.87 Sales expenses 203,075,903.87 Administration expense 154,065,293.19 171,171,816.49 Financial expenses 249,325,498.44 249,325,498.44 Losses of devaluation of asset -14,816,307.30 Gain/loss from change in fair value Gain/(loss) from investment 16,413,444.68 16,413,444.68 income from subsidy 10,000,000.00 non-business income 2,869,735.70 12,869,735.70 non-business expense 636,075.18 636,075.18 Income tax expense 219,357.23 33,081,388.72 Net profit 45,492,352.38 10,340,104.89 Net profit attributable to owner’s parent 44,017,783.75 8,875,631.95 company Gain/loss attributable to minority 1,474,568.63 1,464,472.94 shareholders (2).Net profit in simulating the implementation of new accounting standards in 2006 and the difference adjustment statement of net profit disclosed by the 2006 annual report 2006 Annual Difference Adjustment for Net Profit Item Amount Net profit in 2006 (original accounting standard) 45,492,352.38 including：Net profit attributable parent company 44,017,783.75 Minority intersests 1,474,568.63 Total amount of retroactive adjustment -35,152,247.49 109 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Including：retroactive adjustment of deferred tax -32,862,031.49 expenses Reimbursement for staff gave up the paying leave -2,290,216.00 Net profit in 2006（new accounting standard ） 10,340,104.89 including ： Net profit attributable to parent 8,875,631.95 company Item Amount Minority intersests 1,464,472.94 Assume that the company will fully implement the referenced accounting standard Total effect number of other items -71,105,105.34 Including：amortization of land use right -193,604.47 Interest capitalization 579,700.00 Adjustment for expenses of Capitalization of repair and maintenance expense for -71,491,200.87 aircrafts and engines Net profit in 2006 in simulation -60,765,000.45 including ： Net profit attributable to owner’s -62,229,473.39 parent company Gain/loss attributable to minority shareholders 1,464,472.94 (3) The shareholder equities reported in accordance with the original accounting systems are adjusted to the new enterprise accounting standard 3.1.Adjustment of shareholder equities on January 1, 2006 Item Pre-adjustment Post-adjustment Share capital 400,000,000.00 400,000,000.00 Capital reserve 84,050,163.83 84,050,162.84 Surplus reserve 24,676,134.47 24,676,134.47 Undistributed profit -242,860,316.00 -117,777,353.99 Total 265,865,982.30 390,948,943.32 3.2. Adjustment of shareholder equities on December 31, 2006 Item Pre-adjustment Post-adjustment Share capital 400,000,000.00 400,000,000.00 Capital reserve 84,050,163.83 84,050,162.84 110 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Surplus reserve 25,001,281.34 25,001,281.34 Item Pre-adjustment Post-adjustment Undistributed profit -199,167,679.34 -109,226,868.91 Total 309,883,765.83 399,824,575.27 d) The corresponding disclosure of changes in Shareholder’s equity under new and old accounting standard. Item The amounts to be The amounts to be Item name Difference reason No disclosed in 2007 disclosed in 2006 shareholder equities on December 31, 2006(original 309,883,765.83 309,883,765.83 accounting standard) Approved to offset the Losses and 1 Income tax 92,231,025.44 41,051,039.72 51,179,985.72 provision for bad debt Adjustment of the subsidiary’s 2 Minority interest 12,862,556.09 12,845,729.95 16,826.14 deferred tax 3 Others -2,290,216.00 -2,290,216.00 shareholder equities on January 1, 2007(new 412,687,131.36 361,490,319.50 51,196,811.86 accounting standard) e) Approval of financial statements This financial statement is approved and authorized for issuance by the Board of Directors on March 21, 2008. XI. Documents Available for Reference 1. Financial statements carrying the personal signatures and seals of Chairman of the Board, General Accountants and Accounting departments; 2. Original of Auditors’ Report carrying the seals of Certified Public Accountants as well as personal signatures and seals of certified public accountants; 3. Originals of all documents and notices publicly disclosed on newspapers designated by CSRC in the report period in 2007; 4. 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. 111 SHANDONG AIRLINES CO., LTD.2007 ANNUAL REPORT Chairman of the Board: Zhang Xingfu The Board of Directors of Shandong Airlines Co., Ltd. March 21, 2008 112