山航Ｂ(200152)2008年年度报告（英文版）

Shandong Airlines Co., Ltd. 2008 Annual Report 山东航空股份有限公司 2008 年年度报告 SHANDONG AIRLINES CO., LTD. 2008 ANNUAL REPORT March, 2009 Jinan · P.R.C. 0 Shandong Airlines Co., Ltd. 2008 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 ------------------------5 IV. Particulars about Directors, Supervisors, Senior Executives and Employees---------8 V. Administrative Structure ------------------------------------------------------------------------13 VI. Brief Introduction to the Shareholders’ General Meeting -------------------------------15 VII. Report of the Board of Directors ------------------------------------------------------------15 VIII. Report of the Supervisory Committee ----------------------------------------------------24 IX. Significant Events --------------------------------------------------------------------------------25 X. Financial Report ----------------------------------------------------------------------------------28 XI. Documents for Reference -----------------------------------------------------------------------84 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. Independent Director Mr Fan Shaokun was absent from the Board meeting and authorized Independent Director Mr. Hu Jijian to vote on his behalf. Reanda Certified Public Accountants issued the standard unqualified Auditors’ Report for the Company. Chairman of the Board Mr. Zhang Xingfu, General Manager Mr. Zeng Guoqiang, and Chief Accountant Mr. Xiao Feng of the Company hereby confirm that the Financial Report of the Annual Report is true and complete. 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. 2008 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 Website: 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 Website 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 Address: Room 2008 on 20/F, East District of No. 1 Building, No. 100, Xili Street, Balizhuang, Chaoyang District, Beijing 2 Shandong Airlines Co., Ltd. 2008 Annual Report 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 75,759,367.91 Total profit 108,260,827.56 Net profit attributable to the shareholders of the listed company 80,981,442.68 Net profit attributable to the shareholders of the listed company after deducting non-recurring losses/gains 92,440,296.87 Net cash flow arising from operating activities 1,059,833,106.56 (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 80,981,442.68 Add: (1) Gains and losses from the disposal of non-current asset, including the offsetting parts which was made accrual of provision for asset impairment 10,915,236.47 (2) Governmental subsidy calculated into current gains and losses, while closely related with the business of the Company, excluding the fixed-amount or fixed-proportion governmental subsidy according to the unified national standard -4,822,515.00 (3)Losses/gains from changes of fair values occurred in holding transaction financial assets and transaction financial liabilities, and investment income obtaining from the disposal of transaction financial assets and transaction financial liabilities and financial assets available for sales, excluded effective hedging business relevant with normal operations of the Company 19,293,822.87 (4) Reversal of provisions for asset impairment of account receivable which is made singly impairment test -84,834.50 (5)Other losses/gains items according with the definition of non- operational losses/gains -10,023,237.59 Subtotal 15,278,472.25 Less:Influence number of income tax of non-recurring losses/gains 3,819,618.06 Net profit after deducting non-recurring gains and losses 92,440,296.87 Less: Net profit deducted non-recurring losses/gains attributable to minority shareholder 0 Net profit attributable to shareholder of parent company after deducting non-recurring losses/gains 92,440,296.87 (III) Major accounting data and financial highlights over the previous three years as at the end of the report period 1. Main accounting data Increase/decrease this year 2007 compared with that last year 2006 Items 2008 (%) Before Before After adjustment After adjustment After adjustment adjustment adjustment Operating income 9.06% 5,049,391,116.47 4,630,130,538.19 4,630,130,538.19 4,231,057,944.71 4,231,057,944.71 3 Shandong Airlines Co., Ltd. 2008 Annual Report Total profit 108,260,827.56 57,546,814.19 98,768,111.17 9.61% 43,421,493.61 44,954,831.61 Net profit attributable to shareholders of the 80,981,442.68 37,255,985.51 68,171,958.24 18.79% 8,875,631.95 10,025,635.45 listed company Net profit attributable to shareholders of the listed company after 92,440,296.87 50,392,077.82 53,689,781.57 72.17% -77,526,808.87 -77,526,808.87 deducting non-recurring gains and losses Net cash flow arising from operating 1,059,833,106.56 44.28% 734,571,420.98 734,571,420.98 1,059,281,297.52 1,059,281,297.52 activities Increase/decrease at the end of this year compared with At the end of 2007 At the end of 2006 At the end of that at the end of last year Items 2008 (%) Before Before After adjustment After adjustment After adjustment adjustment adjustment Total assets 10.75% 7,844,104,901.47 7,039,689,367.94 7,082,444,002.92 6,035,555,283.07 6,036,705,286.57 Owners’ equity( or 550,012,296.30 17.27% Shareholders’ equity) 436,964,877.39 469,030,853.62 399,824,575.27 400,974,578.77 2. Main financial indexes Increase/decrease this year 2008 2007 compared with that last year 2006 (%) Before After Before After After adjustment adjustment adjustment adjustment adjustment Basic earnings per share 0.20 0.09 0.17 17.65% 0.02 0.03 Diluted earnings per share 0.20 0.09 0.17 17.65% 0.02 0.03 Basic earnings per share after deducting non-recurring gains 0.23 0.13 0.13 72.41% -0.19 -0.19 and losses Fully diluted return on equity 14.72% 8.53% 14.53% Up 0.19 percentage point 2.22% 2.50% Weighted average return on 15.89% 8.90% 15.67% Up 0.22 percentage point 2.25% 2.53% equity Fully diluted return on equity after deducting non-recurring 16.81% 11.53% 11.45% Up 5.36 percentage point -19.39% -19.33% gains and losses Weighted average return on equity after deducting non- 18.14% 12.04% 12.34% Up 5.8 percentage point -19.61% -19.58% recurring gains and losses Net cash flow per share arising 2.65 1.84 1.84 44.28% 2.65 2.65 from operating activities(RMB) Increase/decrease at the end At the end of this year compared with At the end of 2007 At the end of 2006 of 2008 that at the end of last year (%) Before After Before After After adjustment adjustment adjustment adjustment adjustment Net asset per share attributable to 1.38 1.09 1.17 17.27% 0.77 1.00 shareholders of listed company (IV) The Company’s return on equity and earnings per share as of the year 2008 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 4 Shandong Airlines Co., Ltd. 2008 Annual Report Profit in the report Amount in this period Amount in same period of last year Weighted Period Fully diluted Fully diluted Weighted average average Net profit attributable to common 14.72% 15.89% 14.53% 15.67% shareholders Net profit attributable to common shareholders after deducting the non- 16.81% 18.14% 11.45% 12.34% 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 0.20 0.20 0.17 0.17 shareholders Net profit attributable to common shareholders after deducting the non- 0.23 0.23 0.13 0.13 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 Conversion of Rationed Bonus Additional capital public Others Subtotal share share insurance reserve I. Unlisted shares 260000000 260000000 1. Sponsor’s shares 168780100 168780100 Including: State-owned shares 168581100 168581100 Domestic legal person’s shares 199000 199000 Foreign legal person’s shares Others 2. Raised legal person’s shares 3. Inner employees’ shares 4. Preference shares or other 91219900 91219900 Total unlisted shares 260000000 260000000 II. Listed shares 140000000 140000000 1. RMB ordinary shares 2.Domestically listed foreign shares 140000000 140000000 5 Shandong Airlines Co., Ltd. 2008 Annual Report 3. Overseas listed foreign shares 4. Other Total listed shares 140000000 140000000 III. Total shares 400000000 400000000 (II) Particulars about issuance and listing of shares 1. Issuance and listing of shares The previous three year ended by the period-end, the Company did not issue shares and derivative securities for trading. 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, 2008, the Company had totally 20,397 shareholders, including 20,391 ones of domestically listed foreign shares. The top ten shareholders of the Company are as following: Unit: Share Increase/ Number of shares Proportion Number of shares No. Shareholders’ name decrease in Type held at the year-end (%) pledged or frozen this year State-owned 1 SHANDONG 0 168004000 42 legal person’s Unknown AVIATION GROUP share State-owned 2 AIR CHINA 0 91200000 22.8 legal person’s Unknown LIMITED share GUOTAI JUNAN 3 Circulation SECURITIES(HONG -275400 1819000 0.45 Unknown share KONG) LIMITED Circulation 4 CHEN CHUN PENG 0 1544800 0.39 Unknown share Circulation 5 CHEN JING JIAN 893040 1304200 0.33 Unknown share Circulation 6 WU HAO YUAN 0 1062700 0.27 Unknown share Circulation 7 LIU LI YA 0 1015216 0.25 Unknown share Circulation 8 ZHENG WEI HUA 0 1000000 0.25 Unknown share Circulation 9 HE BIN 0 829407 0.21 Unknown share Circulation 10 XUE PEI MING 0 828400 0.21 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 6 Shandong Airlines Co., Ltd. 2008 Annual Report 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: Kong Dong 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 airplane. Registered capital: RMB 11,072,210,909 Air China Limited 49.406% Shandong Aviation Group 22.8% 22.8% 42% Shandong Airlines Co., Ltd. 4. The Company has no shareholders holding over 10% of shares of the Company except for the controlling shareholder SDA and actual controller Air China Limited. 5. Particulars about the top ten shareholders of circulation share No. Name of shareholders Number of shares held at the Type of shares 7 Shandong Airlines Co., Ltd. 2008 Annual Report year-end (share) held GUOTAI JUNAN 1 1819000 B-share SECURITIES(HONGKONG) LIMITED 2 CHEN CHUN PENG 1544800 B-share 3 CHEN JING JIAN 1304200 B-share 4 WU HAO YUAN 1062700 B-share 5 LIU LI YA 1015216 B-share 6 ZHENG WEI HUA 1000000 B-share 7 HE BIN 829407 B-share 8 XUE PEI MING 828400 B-share 9 JOHN POSS 756000 B-share 10 DENG HONG WEI 650609 B-share The Company is not aware of their associated relationship among the top ten shareholders of circulation share, and is unknown whether other circulation shareholders belong 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 year-begin year-end Vice Chairman of the June 28, 2007 Feng Gang Male Sep. 1963 0 0 Board -March 14, 2009 Chairman of the March 15, 2006 Zhang Xingfu Male Apr. 1955 0 0 Board –March 14, 2009 Director, General March 15, 2006 Zeng Guoqiang Male Oct. 1953 0 0 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 0 0 General Manager of –March 14, 2009 Qingdao Branch Director, Chief March 15, 2006 Xiao Feng Male Oct. 1968 0 0 Accountant –March 14, 2009 March 15, 2006 Wang Mingyuan Male Sep. 1965 Director 0 0 –March 14, 2009 March 15, 2006 Kou Zunxian Male Aug. 1955 Director 0 0 –March 14, 2009 March 15, 2006 Wang Jieming Female June 1958 Director 0 0 –March 14, 2009 8 Shandong Airlines Co., Ltd. 2008 Annual Report March 15, 2006 Wang Zhi Male May 1942 Independent Director 0 0 –March 14, 2009 March 15, 2006 Hu Jijian Male Nov. 1942 Independent Director 0 0 –March 14, 2009 March 15, 2006 Fang Shaokun Male Oct. 1962 Independent Director 0 0 –March 14, 2009 March 15, 2006 Wei Jincai Male Feb. 1950 Independent Director 0 0 –March 14, 2009 Chairman 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 March 15, 2006 Wang Wuping Male March 1965 Supervisor 0 0 –March 14, 2009 Supervisor, Deputy March 15, 2006 Wang Xianlin Male Nov. 1965 0 0 Chief Pilot –March 14, 2009 Supervisor, Deputy March 15, 2006 Zhou Qiaoyan Female Jan. 1975 Head of Cabin 0 –March 14, 2009 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 March 15, 2006 Li Qing’en Male Aug. 1955 Manager, Secretary 0 0 –March 14, 2009 of the Board March 15, 2006 Zhang Qingshe Male Oct. 1958 Chief Pilot 0 0 –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 remuneration and Name of the Position in the Shareholding allowance from the Name Shareholding Company Shareholding Company Company (Yes or no) Feng Gang SDA Chairman of the Board, President Yes Secretary of Party Committee, Zhang Xingfu SDA Yes Vice-president 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 General Manager of Income Gao Lihua Air China Settlement Department of Yes Commerce Commission (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 other units other than the shareholding companies Full-time or part-time posts in other units Name Main work experience other than the shareholding companies 9 Shandong Airlines Co., Ltd. 2008 Annual Report 01/2004-05/2007, General Manager and Party Secretary of China National Aviation Asset Management Co., Ltd.; Feng Gang 05/2007 till now, Chairman and President of SDA; 06/2007 till now, Director and Vice-president of the Company. 01/2004-12/2005, Deputy Mayor in Yantai; 12/2005 till now, Party Secretary, Vice-president Chairman of Taikoo Shandong Aircraft Zhang Xingfu of SDA; Engineering Co., Ltd. 03/2006 till now, Chairman of the Board of the Company. Zeng 01/2004 till now, Director and General Manager Guoqiang of the Company. 01/2004 till now, Director and Standing Deputy Chairman of the Board of Qingdao Su Zhongmin General Manager of the Company. International Logistics Centre Co., Ltd. 01/2004-12/2005, Director and Deputy General Manager of the Company; Bai Weisan 05/2005 till now, General Manager of Qingdao Branch of the Company. 01/2004-08/2005, Deputy General Manager of Financial Department of Air China ; Xiao Feng 04/2005 till now, Director of the Company; 08/2005 till now, Chief Accountant of the Company. 01/2004-06/2005, 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. 01/2004-03/2007, Director of Asset Management Department of Shandong Economic Development and Investment Company; Kou Zunxian 03/2007 till now, Deputy General Manager of Shandong Economic Development and Investment Company; 04/2005 till now, Director of the Company. 01/2004 till now, Director of Planning Financial Department of Shandong Economic Wang Jieming Development and Investment Company; 03/2006 till now, Director of the Company. President of Nanjing University of 01/2004 till now, Independent Director of the Aeronautics and Astronautics; Wang Zhi Company. Independent Director of China Southern Airlines. 01/2004 till now, Professor of Shandong Institute of Economics; Independent Director of Luyin Investment Hu Jijian 01/2004 till now, Independent Director of the Group Co., Ltd. Company. 01/2004 till now, Vice President of Yantai University; Fang Shaokun Lawyer at Shandong Sunsum Law Firm. 12/2004 till now, Independent Director of the Company. 01/2004-10/2008, Party Secretary of Civil Aviation Management Institute of China; Wei Jincai 10/2008 till now, President of Civil Aviation Management Institute of China; 10 Shandong Airlines Co., Ltd. 2008 Annual Report 03/2006 till now, Independent Director of the Company. 01/2004-04/2005, Director of the Company; 01/2004 till now, Chief Accountant of SDA; Wang Fuzhu 05/2005 till now, Chairman of Supervisory Committee of the Company. 01/2004-10/2008, Deputy General Manager of the Financial Department of Air China; 10/2008 till now, General Manager of Income Gao Lihua Settlement Department of commerce commission of Air China; 03/2006 till now, Supervisor of the Company. 01/2004 till now, Director of the Financial Wang Wuping Department of SDA; Supervisor of the Company. 01/2004-09/2007, Group Leader of NO. 2 Flying Group of the Company; Wang Xianlin 09/2007 till now, Deputy Chief Pilot of the Company; 01/2004 till now, Supervisor of the Company. 01/2004 till now, Deputy Head of Cabin Service Zhou Qiaoyan Department of the Company; 03/2006 till now, Supervisor of the Company. 01/2004-04/2005, Director of the Company; Chairwoman of the Board of Shandong 01/2004-05/2005, General Manager of Qingdao International Aero Training Co., Ltd., Song Yuxia Branch of the Company; Chairwoman of the Board of Qingdao 01/2004 till now, Deputy General Manager of Feisheng International Aero Technical the Company. Training Co., Ltd. 01/2004 till now, Deputy General Manager of Chairman of the Board of Shandong Yu Haitian the Company. Xiangyu Aero Technical Services Co., Ltd. 01/2004-08/2005, Chief Accountant of the Company; Li Qing’en 01/2005 till now, Deputy General Manager and Secretary of Board of Directors of the Company. Zhang 01/2004 till now, Chief Pilot of the Company. Qingshe 01/2004 till now, General Engineer of the He Guobin Company. (II) Particulars about annual payment The payments of the directors, supervisors and senior executives of the Company were determined according to the performances 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 55.53 Su Zhongmin Director, Standing Deputy General Manager 48.90 Director, Deputy General Manager, General Bai Weisan 47.92 Manager of Qingdao Branch of the Company Xiao Feng Director, Chief Accountant 39.43 11 Shandong Airlines Co., Ltd. 2008 Annual Report 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, Deputy Chief Pilot 26.47 Supervisor, Deputy Head of Cabin Service Zhou Qiaoyan 18.06 Department Song Yuxia Deputy General Manager 49.70 Yu Haitian Deputy General Manager 47.34 Deputy General Manager, Secretary of Board of Li Qing’en 42.98 Directors Zhang Qingshe Chief Pilot 47.35 He Guobin General Engineer 46.96 Total 494.24 Director Mr. Feng Gang and Director Mr. Zhang Xingfu, together with Supervisor Mr. Wang Fuzhu and Supervisor Mr. Wang Wuping drew their remunerations from SDA, the controlling shareholder, not from the Company; Director Mr. Wang Mingyuan, and Supervisor 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 In the report period, there were no changes of directors, supervisors and senior executive. Note: On March 6, 2009, Mr. Bai Weisan resigned his posts of Director and Deputy General Manager of Shandong Airlines Co., Ltd due to work change, Mr. Li Qing’en did not concurrently hold the post of Secretary of the Board of Directors of the Company due to work arrangement. With the recommendation of Air China and the nomination of General Manager Mr. Zeng Guoqiang, the Board of Directors engaged Mr. Xiao Feng and Mr. Qiu Feng as the Deputy General Managers of Shandong Airlines Co., Ltd. Chairman Mr. Zhang Xingfu will perform the duties as Secretary of the Board of Directors on behalf while the position as Secretary of the Board of Directors is vacant. (IV) About staff By the end of the report period, the Company had 3,857 employees in total, including 54 postgraduates (Master Degree and Doctor Degree) or above, 2,056 persons graduated from 3-years regular college or above. The staff structure is as follows: Type of employee Number Proportion to the total employees Flight personnel 444 11.5％ Aircraft crew and maintenance personnel 647 16.8％ Marketing personnel 822 21.3％ Air host and hostess 796 20.6％ Ground attendant 316 8.2％ Financial personnel 149 3.8％ 12 Shandong Airlines Co., Ltd. 2008 Annual Report Others 683 17.8％ By the end of the report period, there were 21 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 2008, strictly according to Company Law, Securities Law and relevant laws and regulations promulgated by CSRC, the Company continuously perfected the Company’s corporate governance structure and standardized its operation. In the report period, special governance campaign for listed companies was accomplished; the Company perfected a series of administrative and internal control system, modified and perfected the 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 were also strengthened. Compared with the standard documents issued by CSRC on governance for listed companies, the Board of Directors thinks the actual administration of the Company was basically in accordance with regulations of Code of Corporate Governance for Listed Companies. 2. Particulars about Special Governance Campaign According to the CSRC【2008】 No. 27 Notice and the requirements of Announcement on Carrying Out Further Deeply Promoting Special Campaign for Corporate Governance of Listed Companies Promulgated by CSRC issued by Shandong Securities Regulatory Bureau,, the leader team on Special Governance Campaign issued special explanation report on rectification ended as June 30, 2008 in light of the matters of self assessment in Rectification Report on Special Campaign of Governance of the COmpnay in 2007, and the explanation report was published on Juchao Website www.cninfo.com.cn. Throught self assesement and self rectification, the Company further fined and perfected the Company’s system construction, regulated governance and information disclosure of the Company, operated strictly in accordance with the laws and regulations and the rules of the Company, promoted regulated operation level, and advanced the sustainable, healthy and steady development of the Company. (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 financial status of the Company, supervised stictly 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 of Director, 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) Wang Zhi 5 5 0 0 13 Shandong Airlines Co., Ltd. 2008 Annual Report Hu Jijian 5 5 0 0 Fang Shaokun 5 4 1 0 Wei Jincai 5 5 0 0 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, have been made “Five Seperations” 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 performances. (V) Particulars about establishment and perfection of the Company’s internal control system 1. Self-assessment summary on implementation effectiveness of internal control system of the Company in this year from the board of directors: Throught establishing and effectively implementing internal control system, the operations of the Company presented better development trend, the management abilities improved further, realized the integration of security and benefit. In accordance with relevant laws and regulations and requirements of relevant department, the Company established and perfected complete and reasonable internal control, generally guaranteed the normal operation of production of the Company, reduced the management risks to somer extent, implementations of all the significant aspects relevant with accounting statement as of Dec. 31, 2008 according to the control system. The Board of Directors of the Company made self-assessment on the aforesaid aspects of internal control of this year; no significant faults in internal control design or implementation were discovered. The Board of Directors of the Company thought the internal control system of the Company was integrated and implemented effectively from Jan. 1st of this year to the end of the report period. For details, please refer the Bord of Directors’ Self Assessment Report on Internal Control of Shandong Airlines Co., Ltd. 2. Opinions given by Supervisory Committee on Self-estimation for The Company Internal Control According to Basic Standard for Enterprise Internal Control promulgated by Ministry of Finance and CSRC and the Guideline of Internal Control for the Listed Companies of Shenzhen Stock Exchange, The Company earnestly checked the internal control system of the Company in 2008, thought: (1) The internal control system basically accorded with requirements of supervision, and also went well with the present demands for the production and operation of the Company; (2)The implementation of internal control of the Company was effective; the systems should be perfected continuously in accordance with relevant regulations. 3. Independent Opinion given by Independent Board of Directors on Self-assessment for The Company Internal control In 2008, According to Basic Standard for Enterprise Internal Control promulgated by Ministry of Finance and CSRC and the Guideline of Internal Control for the Listed Companies of Shenzhen Stock Exchange, the Company checked the internal control system 14 Shandong Airlines Co., Ltd. 2008 Annual Report wholly and deeply, On the basis of independent judgment; independent directors made careful checkings on internal control of the Company in 2008 and made the following independent opinions: (1) The internal control system basically conformed to the relevant laws of the State and requirements of securities supervisory department, and also went well with the present demands for production and operation of the COmpnay; (2) The internal control methods of the Company had good effects on the control of every procedure and every part of enterprise management, and the implementation was effective. VI. Brief introduction to the Shareholders’ General Meeting In the report period, the Company held one Shareholders’ General Meeting, which was the Annual Shareholders’ General Meeting of 2007. 1. Notification, convening and holding of the Shareholders’ General Meeting On Apr. 22, 2008, at time of 10:00, the Company held its 2007 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 Po dated Mar. 26, 2008. Totally 7 shareholders and shareholder’s proxies with authorization from shareholders representing 260,939,000 shares of the Company presented at the meeting, taking 65.23% in the total amount of shares with voting rights of the Company: including 259,801,000 state-owned legal person’s shares, taking 64.95% of total shares of the Company; 199,000 domestic legal person’s shares, taking 0.05% of total shares; 939,000 domestically listed foreign share (B share), taking 0.23% 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 roll call vote in the meeting: (1) Work Report 2007 of the Board of Directors of Shandong Airlines Co., Ltd.; (2) Work Report 2007 of the Supervisory Committee of Shandong Airlines Co., Ltd.; (3) Annual Report 2007 of Shandong Airlines Co., Ltd.; (4) Financial Settlement Report 2007 of Shandong Airlines Co., Ltd.; (5) Profit Distribution Plan 2007 of Shandong Airlines Co., Ltd.; (6) Airplane Introduction Plan from 2009 to 2013; (7) Proposal on Routine Related Transaction in 2008; (8) 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 Po dated Apr. 23, 2008. VII. Report of the Board of Directors (I) Discussion and analysis to the operation The Company is a civil aviation transportation enterprise. In 2008, the Company insisted on taking the utmost interests for itself and its shareholders as the springboard, earnestly carried out responsibility endowed by Articles of Association. With the tough leaders of Shandong Provincial Party Committee, Provincial Government, Civil Aviation Administration of China, the Company made active progress, fought against difficulties with hard attitude, and successfully responded to tests of earthquake-fighting, disaster rescue and guarantee for the 15 Shandong Airlines Co., Ltd. 2008 Annual Report Olympic Games, in front of various difficulties and pressures. Meanwhile, the Company actively responded to the new challenges brought by international financial crisis; its safety quality was improved continuously; operation capability was advanced steadily; production and operation kept profit-making; organization for innovation was promoted in stable steps; enterprise culture system was constructed; development of safety, high efficiency, continuance, harmonization as well as health was realized. 1. Safety. In 2008, no non-safety incidents over symptoms of flight accidents happened to the Company due to the responsibility of the Company. The overall safety trend was stable. New improvement was made in safety management level. The team was steadier and management & control ability on safety was further advanced. 2. Transport index. In 2008, the Company totally made 127,000 hours for safety flight and 76,000 flights flied, respectively 16.5% and 8.5% up compared to those of the same period of last year; traffic mileage amounting to 800 million ton*kilometer was reached by the Company, 24.5% up compared to those of the same period of last year; and totally 6,555,000 passengers were safely delivered, 15.3% up compared to those of the same period of last year. 3. Benefit. In 2008, the Company has realized operating income of RMB 5.049 billion and total profit of RMB 108,260,900, respectively 9.06% and 19.14% up compared to those of the same period of last year; RMB 75,759,400 for operating profit; ton*kilometer level for profit from transport business increased RMB 0.04 compared to that of the same period of last year; the Company received some promotion in its ability of making profit, developing and debt repaying. 4. Market. In 2008, the flight course structure was forwardly optimized and relevant cost was greatly reduced. Assumptions of course transfixion between south and north, course of east and west being in series was primarily realized, which effectively improved return level of Chongqing and Xiamen bases and their contribution to the network. In Xiamen base, more strength was input in transport capacity and density of flight course; plane was increased to 3 ones from the original one, and cities available for flight arrival amounted to 13. The charter flight from Jinan to Niigata Japan was executed, and Qingdao-Taipei direct charter flight was available. Action was made to promote the optimization for sales network in freight area and Truck scheduled flight network was constructed with Weifang as the distributing center. 5. Service punctuality. In 2008, taking implementation of service brand as mainline, the Company made seven actions plan to promote service innovation and standard construction, which made service quality improved in some degree. Punctuality for the whole year’s scheduled flights reached at 81.73%; only 1.3 times complains were received from every 10,000 passengers, 0.01% down compared to that of the same period of last year; the satisfaction rate from passengers was 89.2%, 0.1% down compared to that of the same period of last year; and the dilapidation error rate for baggage was 0.0282%. In the activity of Civil Aviation in Eyes of Passenger for 2008, the Company was rewarded with Outstanding Award for Abnormal Service of Scheduled Flight. (II)Operation 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, ground services related to main operation. 2. Constitution of main business of the Company (1)Main business classified by industries Unit: RMB Operation Operation Operation Operation profit ratio Industry Operation income Operation cost profit income cost increased or decreased 16 Shandong Airlines Co., Ltd. 2008 Annual Report ratio (%) increased increased compared to last year or or decreased decreased compared compared to last to last year (%) year (%) Aviation Increased 0.72 transportation 4,953,048,164.35 4,101,665,962.58 17.19 9.98 9.04 percentage point service Cargo transportation Increased 2.1 6,020,693.27 1,313,169.79 78.19 -16.97 -24.27 logistics percentage points Hotel and food Decreased 6.68 22,538,565.66 15,614,100.05 30.72 -13.51 -4.28 service percentage points (2)Main business classified by areas Unit: RMB Domestic International Increased or Increased or Industry decreased decreased Operation income Operation income compared to compared to last year last year Aviation transportation service 4,776,170,383.28 0.10 176,877,781.07 0.11 Cargo transportation logistics 6,020,693.27 -0.17 - - Hotel and food service 31,801,807.87 0.22 - - 3. Operations and achievements of holding and share-join companies (1) Qingdao International Airlines Logistics Center Co., Ltd. Qingdao International Airlines Logistics Center Co., Ltd., whose shares are held by the Company, is mainly engaged in air cargo storage, ground dispatching, e-commerce, the 3rd party logistics design and implementation, logistics business consultation and other related services, with registered capital amounting to RMB 30 million. In the report period, the company realized net profit amounting to RMB2,190,600. Till the end of the report period, the total assets were RMB 45,721,700 and RMB 41,903,200 for net assets. (2) Shandong Airlines Rainbow Jet Co., Ltd. Shandong Airlines Rainbow Jet Co., Ltd., which the Company joined shares in, realized net profit of RMB -210,500 by audited in the report period. Till the end of the report period, the total assets were RMB 92,804,200. (3)Sichuan Airlines Co., Ltd. Sichuan Airlines Co., Ltd., which the Company joined shares in, has not finished the 2008 audit work till now. (4) Travelsky Technology Limited Travelsky Technology Limited, which the Company joined shares in, has not finished the 2008 audit work till now. (5) Jinan International Airport Co., Ltd. Jinan International Airport Co., Ltd., which the Company joined shares in, has not finished the 2008 audit work till now. 4. Main suppliers and customers The total purchase amount from the top five suppliers of the Company took up 40% of the total annual purchase amount (mainly purchase aviation oil, aviation materials and plane supply products); and the total amount of sales to the top five customers took up 13.68% of the total annual amount of sales of the Company. 5. Problems and difficulties occurred in operations 17 Shandong Airlines Co., Ltd. 2008 Annual Report (1)The profit-making ability of the Company still needs to be improved. In 2008, according to the profit index for transport business, the Company still appeared loss, which was similar to the general situation for the whole industry. The Company finally realized general payoff mainly by income from exchange. (2) The losses from CRJ series airplanes of the Company have not been completely solved yet. (III)Investment of the Company 1. In the report period, there was no proceeds raised or application of proceeds raised in the previous period but lasted to this report period in the Company. 2. In the report period, the Company had no investment with non-raised proceeds. (IV) Financial status of the Company in the report period 1. Change of accounting policy and accounting estimation, and correction of accounting error In order to avoid the risk of fluctuation of interest rate when financing, the Company successively signed Interest Rate Swap Contract with bank with the principal amounting to USD 309 million from 2004 to 2005. Until Dec. 31st of 2007, the Company still held the interest rate swap contract with the principal amounting to USD 179,344,000 which had not been matured. Respectively on Dec. 31st of 2007 and Dec. 31st of 2006, the market values of the interest rate swap contract were confirmed by bank to be RMB 42,754,634.98 (USD 5, 853,111.05) and RMB 1,533,338.00 (USD 190,000.00) respectively. According to cautious principle, before 2008, value for the interest rate swap contract was all reflected in off- balance sheet, value for the interest rate swap contract was expected to reflect on-balance sheet from 2008. When preparing the comparative financial statement between 2008 and 2007, the Company had already corrected errors. Since corrected, RMB 42,754,634.98 was increasely adjusted to the 2007 transaction financial assets and RMB 10,688,658.74 was increasely adjusted to the 2007 deferred income tax liability, and RMB 32,065,976.23 was increasely adjusted to the 2007 retained earnings: Amount involved in retrospective adjustment Items Amount 2007 Year-begin of 2007 accumulatively influenced Income from change of fair 41,221,296.98 1,533,338.00 42,754,634.98 value Income tax expense 10,305,324.25 383,334.50 10,688,658.75 Undistributed profit 30,915,972.73 1,150,003.50 32,065,976.23 Surplus reserve 0.00 0.00 0.00 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 Item Dec. 31st of 2008 Dec. 31st of 2007 Increase Scope of 18 Shandong Airlines Co., Ltd. 2008 Annual Report or change in decrease proportion scope in amount Amount Proportion Amount Proportion compared to that of last year (%) Transaction financial assets 23,460,812.11 0.30% 42,754,634.98 0.60% -45.13 -0.30% Accounts receivable 126,118,032.09 1.61% 208,349,054.20 2.94% -39.47 -1.33% Accounts paid in advance 29,124,244.97 0.37% 20,788,886.80 0.29% 40.10 0.08% Inventory 74,347,529.57 0.95% 52,238,139.37 0.74% 42.32 0.21% Notes payable 10,000,000.00 0.13% 15,000,000.00 0.21% -33.33 -0.08% Tax payable 113,610,355.47 1.45% 86,739,296.55 1.22% 44.44 0.37% Non-current liability due within one year 615,589,677.22 7.85% 302,623,652.29 4.27% 103.42 3.57% Deferred earnings 18,319,557.83 0.23% 4,871,343.11 0.07% 276.07 0.16% (2)Reason for change Item Explanations Transaction financial assets Mainly due to change of fair value Accounts receivable Mainly due to great shortening of BSP settlement period Mainly due to increase of 3 planes in this report period, which caused a great Accounts paid in advance increase in account paid in advance for flight materials Mainly due to increase of 3 planes in this report period, which caused a great Inventory increasing demand for flight materials Mainly due to that commercial acceptance bill was matured and payment was Notes payable made Mainly due to the increase in profit of the Company which led to increase in Tax payable income tax Non-current liability due Mainly due to that long-term loans matured in 2009 were more than those in 2008 within one year Mainly due to that the Company adopted incentive plan for regular passengers in Deferred earnings this year, and confirmed the un-honored part among the account obtained from passengers as deferred earnings 3. Change and corresponding explanation on the period expense of the Company occurred in the report period (1)Change in main financial data Unit: RMB Increase or decrease Item 2008 2007 scope(%) Sales tax and extra charges 132,823,862.65 137,305,155.03 -3.26% Sales expense 236,554,096.88 211,372,665.37 11.91% Administration expense 187,022,654.78 171,407,025.30 9.11% Financial expense 253,541,156.57 219,325,967.84 15.60% (2)Explanation for the above changes Item Explanation Due to derating of fuel extra operation tax regulated by national policy in Sales tax and extra charges the report period 19 Shandong Airlines Co., Ltd. 2008 Annual Report Sales expense Due to increase of sales Administration expense Due to increase of personnel and hand-in proportion for labor insurance Financial expense Due to expansion of loan scale and decrease of income from exchange 4. Measurement attributes adopted for the main assets The Company started to implement the new Accounting Standard for Enterprise since Jan. 1st of 2007. In the report period, no significant change had happened to the measurement attributes adopted for the main assets of the Company. Details of the measurement attributes are available in Notes to Financial Report. 5. Constitution of cash flow of the Company, and particulars about the items which received 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 2008 2007 compared to that of last year(%) Net cash flow arising from operating activities 1,059,833,106.56 734,571,420.98 44.28% Net cash flow arising from investment activities -1,285,932,710.29 -1,278,473,770.97 0.58% Net cash flow arising from financing activities 229,614,517.64 519,998,016.04 -55.84% Influence on cash and cash equivalents from change of exchange rate -709,703.85 -2,220,419.94 -68.04% Net increase in cash and cash equivalents 2,805,210.06 -26,124,753.89 -110.74% (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 occurred in Item 2008 2007 this year Explanation compared to that of last year(%) Mainly due to decrease in Cash received from income from transacting obtaining investment 11,211,668.70 23,774,225.14 -52.84% financial assets(interest rate income swap contract) in this year Cash paid for distributing Mainly due to increase in dividends, profit and 262,317,177.48 186,766,834.35 40.45% long-term loans in this report repaying interest period Mainly due to the Influence on cash and comprehensive influence cash equivalents from -709,703.85 -2,220,419.94 -68.04% brought by change in deposit change of exchange rate structure of foreign currency and exchange rate Mainly due to increase of cash inflow arising from Net increase in cash and operation activities and 2,805,210.06 -26,124,753.89 -110.74% cash equivalents decrease of account paid in advance for airplane in this year 20 Shandong Airlines Co., Ltd. 2008 Annual Report (V)Influence on the Company brought by change in operation environment, macro-policy and laws and regulations 1. Drastic drop in market demand led by global economic recession will be the grimmest challenge. It is predicted that growth step of the global passenger & goods transport by aviation would slow down. Even in some region, negative growth will appear. The global aviation will continue to remain bad situation with severe loss. 2. It is predicted that growth scope of the domestic civil aviation market would be lower than that of transport capacity. In future, contradiction of overmuch transport capacity would be prominent. 3. Support policy conducted by superintending departments of the industry will bring positive influences to the Company, and the drastic drop in international oil price also provides condition for the Company to lower down its cost for aviation oil. (VI) Explanation of the Board of Directors on interpretative explanatory paragraph in the auditors’ report Reanda Certified Public Accountants audited Financial Report 2008 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 2009 The year 2009 is 60th anniversary of the founding of People's Republic of China, also an essential year for implementation of the 11th Five Year Plan, and also the key year for us to meet challenge, make pioneering efforts, optimize and improve. The Board of Directors determined the work concept in this year was that: deeply carry out and practise Scientific Development View to ensure constant safety as primary task, thus entirely complete safety management system construction; scientifically meet the financial crisis, and entirely implement Overwinter strategy to ensure constant profit-making; take safeguarding National Games as opportunity, and exert to improve service level; deepen management reform and construction and completely improve the management level of the Company; strengthen team building and ideological and political work, ensure stability, agglomerate the force of all employees, overcome new challenge, hold new opportunity, ensure the Company’s constant development, and open new prospect of scientific development of Shandong Airlines. 1. Continue to perfect corporate governance structure and strengthen the construction of internal control system Fully exert the functions of decide-making, audit and examination of each special committee of the Board of Directors; further ensure that independent directors, each special committee and supervisory committee fulfill their duties and actually provide necessary and convenient conditions for supervisory work; according to basic criterion and specific criterion of enterprises’ internal control issued by relevant department, continue to complete and perfect internal control system and improve management level of internal control. 2. To realize the annual task and aim, the Company should find effort points to implement key breakthrough. According to the present facts, the following five points should be done well in this year. (1) Entirely complete the building of safety management system to ensure constant safety. Start activity of Year for Fulfilling Safety Responsibility; perfect SMS system, and improve management level of the system; strengthen flight safety management to actually improve flight quality; improve navigability level of the flight team; strengthen process control and advance flight quality; especially grasp the safeguard work; increase safety training force to lift training quality. 21 Shandong Airlines Co., Ltd. 2008 Annual Report (2) Entirely implement Overwinter strategy to ensure constant profit-making. Implement active Overwinter strategy, and grasp the initiative of work. Take capital management as the most important thing in operation management, strengthen cash flow management, adjust debts structure, rationally arrange capital demand of production and operation activities, and prudentially arrange capital investment to effectively consolidate capital chain; accurately put in transport capacity to actual optimize network structure; lean sale strategy and innovate sale mode; fine products designation and improve competition of products; make revenue management, exact to improve revenue level; entirely fulfill the work measures of lowering cost and improving efficiency. (3) Take safeguarding National Games as opportunity, and exert to improve service level. Standardize basic services. on the basis of benchmark with Air China, further fine and perfect present service criterion standard, and entirely arrange the contact points between customers and the Company; according to the brand strategy plan of the Company, continue to perfect the management system of brand construction; entirely fulfill the plan of whole transport service safeguard to improve service quality; take various measures to improve flight punctuality rate; improve service in the air, baggage transport, abnormal flight service and guarantee out of station; strengthen and reform service management work. (4) Deepen management reform and construction, and completely improve the management level of the Company. Speed up the adjustment of strategy and layout timely; continue to deepen innovation of organization; build scientific and perfect performance management system; strengthen basic management work. (5) Take deeply study and practise Scientific Development View as motivity; entirely promote harmonious construction of Shandong Airlines. Seriously sort the activity of studying and practicing Scientific Development View; perfect leaders’ cultivation mechanism; constantly advance the cohesion of organization; perfect systems of discipline inspect and supervisory to further strengthen incorruptness building, actively promote building enterprise’s culture to create a steady and harmonious atmosphere; continue to strengthen four safety teams constructions including flight, maintenance, operation and aviation security officer; fully exert the function of Labor Union and Youth League, protrude the function of maintaining legal rights and interests of employees and join in democracy management and supervisory. (VIII) Capital needs in realizing operation plan, using plan and capital source In 2009, the existed financial structure and loans arrangement from bank could satisfy capital need in normal operations of the Company. (IX) Routine work of the Board of Directors 1. The Board of Directors of the Company totally held five meetings in 2008. (1) On Mar. 21, 2008, the Company held the 11th 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. 25, 2008. (2) On Apr. 22, 2008, the Company held the 1st Extraordinary Meeting of the 3rd Board of Directors 2008. The public notice of the resolutions of the Meeting was published on China Securities, Securities Times and Hong Kong Wen Wei Po dated Apr. 23, 2008. (3) On Jul. 24, 2008, the Company held the 2nd Extraordinary Meeting of the 3rd Board of Directors 2008. The public notice of the resolutions of the Meeting was published on China Securities, Securities Times and Hong Kong Wen Wei Po dated Jul. 25, 2008. (4) On Aug. 22, 2008, the Company held the 12th meeting of the 3rd Board of Directors by voting. The public notice of the resolutions of the Meeting was published on China Securities, Securities Times and Hong Kong Wen Wei Po dated Aug. 26, 2008. 22 Shandong Airlines Co., Ltd. 2008 Annual Report (5) On Oct. 24, 2008, the Company held the 13th 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 Oct. 27, 2008. 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 2007 In order to make up the losses in previous year, the Company didn’t carry out profit distribution in 2007. (2) The Board of Directors of the Company strictly implemented other various resolutions approved by Shareholders’ General Meeting, actively arranged the production and 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, the Company realized net profit attributable to shareholders of listed company of RMB 80.98 million in 2008. After offsetting the losses in the previous years, the profit available for distribution for investors till Dec. 31, 2008 was 36.47 million. The Board of Directors decided not to carry out profit distribution or conversion from capital public reserve into share capital in 2008. The profit distribution preplan would be handed into the 2008 General Shareholders’ Meeting of the Company for examination and discussion. (XI) Reason for why not presenting cash profit distribution preplan though made profit during the report period, and usage of the undistributed profit Due to most of the realized profit in 2008 came from the exchange income of the Company, and this part was mainly the income of the present foreign currency debts brought by RMB appreciation, which could not bring relevant cash inflow, while the main business of the Company still appeared loss. The undistributed profit was used for satisfying daily production and operation demand. (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 periodic reports and event about the reengagement of certified public accountant. The Audit Committee of the Board of Directors has done lots of work during the 2008 auditing period of the Company. According to the requirements of Articles of Association, Work System of Annual Report for Independent Directors of Shandong Airlines Co., Ltd. and Work Rules of Audit Committee of Shandong Airlines Co., Ltd., the Audit Committee makes the following summary on the 2008 auditing work: 1. Ensured the general audit plan and examined the financial statements of the Company With negotiation among the independent directors of the Company, the Audit Committee and Reanda Certified Public Accountants, the audit work arrangement for 2008 of the Company was confirmed. At the same time, the independent directors and the Audit Committee examined the 2008 financial statements formed by the Company and considered that: the Company made financial calculation in compliance with the regulation of the new accounting standards and no significant untrue contents was carried in the annual report 23 Shandong Airlines Co., Ltd. 2008 Annual Report materials; the 2008 financial statements preprared by the Company basically reflected the assets, liabilities and production and operation achievements of the Company till Dec. 31, 2008 and it was agreed to take this financial statement as the basis to carry out the 2008 financial audit work. 2. Kept normal negotiations with the Certified Public Accountants and paid attention to the progress of auditing During the audit period, the Audit Committee consistently kept negotiations with the financial department and the Certified Public Accountants. Meanwhile, the Committee took close eyes to the progress of auditing and examines the financial reports. 3. Called in the Audit Committee to examine and approve the proposals related to Annual Report Reanda Certified Public Accountants 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 2008 Financial Settlement Report, the 2008 Profit Distribution Preplan, the 2008 Annual Report, and Reengagement of Certified Public Accountant. (XIII) Duty implementation of the Remuneration Committee of the Board of Directors The Remuneration Committee made examination on the remuneration of the directors, supervisors and senior executives of the Company disclosed in the 2008 Annual Report and offered the following opinions: the present remuneration system of the Company was made according to the regulated decision-making procedure; the remuneration of the directors, supervisors and senior executives of the Company was in compliance with relevant regulations; the remuneration of relevant personnel disclosed in the 2008 Annual Report of the Company was real and accurate. VIII. Report of the Supervisory Committee (I) Particulars about the work of Supervisory Committee In 2008, 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, actively implemented supervision functions on the Company’s operating decision-making, financial status, the responsibility and behaviors of directors and senior managers in the period and tried to safeguard the rights and interests of the shareholders. The Supervisory Committee had hold one meetings of the Supervisory Committee and attended all Shareholders’ General Meetings and meetings of the Board in 2008. In the report period, the Supervisory Committee totally held the following meetings: 1. On Mar. 21st of 2008, the 8th 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 2007 Annual Report and Summary of Shandong Airlines Co., Ltd; (2) The 2007 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. 25th of 2008. 2. On Aug. 22nd of 2008, the Meeting of the Supervisory Committee was held in the conference room of SDA Building. The meeting examined and approved the 2008 Semi- annual Report and its Summary of Shandong Airlines Co., Ltd. (II) Independent Opinions of the Supervisory Committee on relevant events in 2008 24 Shandong Airlines Co., Ltd. 2008 Annual Report The Supervisory Committee conducted serious inspection and supervision on such conditions as the Company’s finance, implementing resolutions of Shareholders’ General Meeting, operating decision-making, operation according to laws, operating behaviors of directors, managers and senior executives and related transactions, etc; 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 laws 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 in Shareholders’ General Meeting with a view to protect the shareholders’ interests. There was no behaviors found that directors or senior executives broke the laws, regulations, or Articles of Association or harmed the interests of the Company in their office terms. 2. Finance management of the Company The Supervisory Committee carefully examined the financing situation of the Company. In the opinion of the Supervisory Committee, 2008 Financial Report of the Company reflected the financial situation and operation results 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 interests of shareholders’ equity and the listed companies. 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) No purchase and sale of assets and merger of the Company in the report period (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, price and efficiency of the services and goods provided by the related parties and 25 Shandong Airlines Co., Ltd. 2008 Annual Report also made analysis and comparison on the market environment. The independent directors of the Company presented opinions on the related transactions which believed that the Company and the related parties made the deals with market principles of open, equality and justice, the transaction price was fair and there was 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 61.21 million has occurred between the Company and Taikoo (Shandong) Aircraft Engineering Co., Ltd. This transaction amount took proportion of 17.68% 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 96.046 million has occurred between the Company and Air China. 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 2008 Unit: RMB’0000 Classification of the Anticipated Actual Related parties related transactions amount amount Taikoo (Shandong) Aircraft Engineering Co., Ltd 7,027 6,121 1.Maintenance of Shandong Xiangyu Aero Technical Services Co., Ltd. 357 1,107 aircraft and fittings Subtotal 7,384 7,228 Qingdao Feisheng International Aero Technical Training Co., 759 501 Ltd. 2.Training expense Shandong International Aero Training Co., Ltd. 955 1,092 Subtotal 1,714 1,593 Shandong Aviation Group(Rent for office land) 678 583 3.Rent for office land, and daily Shandong Aviation Group (Daily Accommodation) 512 514 accommodation Subtotal 1,190 1,097 Air China Limited (aircraft lease) 50,451 60,019 Air China Limited (joint owned operation in South Korea flight 4. Aircraft lease and course) 9,999 9,605 market cooperation Air China Limited (labour service support) 1200 595 Subtotal 60,960 70,219 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 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. 26 Shandong Airlines Co., Ltd. 2008 Annual Report 4. Other significant contracts Up tp the end of the report period, the accumulated amount of long-term and short-term borrowings of the Company amounted to RMB 4,653,389,700. The Company had no other significant contracts which were 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. 2007 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 2008 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 5th 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 behaviors 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 The received The received parties Contents discussed and materials date place way supplied News media, organization Financial status and operations April, 2008 Jinan Spot research investors and investors of B- plan in 2008, provide the 2007 share Annual Report of the Company Telephone Organization investors and Operating situations and Jan.-Dec., 2008 Jinan interview, investors of B-share significant events of the Company communication 27 Shandong Airlines Co., Ltd. 2008 Annual Report X. Financial Report Auditors' Report To the Shareholders of Shandong Airlines Co., Ltd 山东航空股份有限公司 We have audited the accompanying financial statements of Shandong Airlines Co., Ltd. (“The Company”), which comprise the consolidated balance sheet as at December 31, 2008, 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 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 Shandong Airlines Co., Ltd as at December 31, 2008, and the results of its operations and its cash flows for the year then ended. Reanda Certified Public Accountants Co., Ltd. March 27, 2009 28 Shandong Airlines Co., Ltd. 2008 Annual Report Consolidated Balance Sheet December 31st, 2008 Name of the company ： Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan Liabilities and Asset Note 31/12/2008 31/12/2007 Shareholders' Note 31/12/2008 31/12/2007 equities Current Current liability: assets: Monetary IX(1) Short-term loan IX(16) funds 71,872,933.88 69,524,098.82 1,006,887,514.55 1,205,230,000.00 Tradable Tradable financial financial IX(2) 23,460,812.11 42,754,634.98 liabilities assets Note Notes payable IX(17) receivable 10,000,000.00 15,000,000.00 Accounts IX(3) Accounts payable IX(18) receivable 126,118,032.09 208,349,054.20 875,319,060.11 760,365,588.12 Advance to Advance from IX(4) IX(19) suppliers 29,124,244.97 20,788,886.80 customers 87,735,493.54 89,600,059.23 Interests Payroll payable IX(20) receivable 91,119,967.07 73,407,937.88 Dividend Tax payable IX(21) receivable 111,337,241.37 86,739,296.55 Other accounts IX(5) Interests payable IX(22) 144,978,136.24 160,626,933.07 9,634,990.00 12,429,380.48 receivables Inventories IX(6) Dividend payable 74,347,529.57 52,238,139.37 11,940.00 11,940.00 Non-current assets due Other accounts IX(23) within one payable 161,736,748.70 135,360,048.66 year Other current Non-current liabilities IX(24) assets due within one year 615,589,677.22 302,623,652.29 Total Other current current 469,901,688.86 554,281,747.24 liabilities assets Non-current Total current assets: liabilities 2,969,372,632.56 2,680,767,903.21 Available- for-sale Non-current liabilities: financial assets Held-to- maturity Long-term borrowings IX(25) 3,159,333,277.39 2,600,391,847.97 investment Long-term accounts Bonds payable receivable Long-term Long-term accounts equity IX(7) IX(26) 88,352,100.00 89,459,196.91 payable 1,114,459,905.38 1,304,559,910.24 investment Investment Deferred income IX(27) property 18,319,557.83 4,871,343.11 Fixed assets IX(8) Accrued liabilties 5,684,074,945.46 4,995,005,633.80 Construction Deferred income tax IX(9) IX(28) in process 1,277,744,153.32 1,154,132,471.11 liabilities 19,816,576.46 10,688,658.74 Construction Other non-current materials liabilities Liquidation Total non-current of fixed IX(10 833,029.86 liabilities 4,311,929,317.06 3,920,511,760.06 assets 29 Shandong Airlines Co., Ltd. 2008 Annual Report Production biology Total liabilities 7,281,301,949.62 6,601,279,663.27 assets Oil and gas Shareholders' equity: assets Intangible IX(11) Share capital IX(29) assets 46,945,074.17 43,412,609.06 400,000,000.00 400,000,000.00 Development Capital reserve IX(30) expenses 84,050,162.84 84,050,162.84 Goodwill Less: inventory shares Long-term deferred IX(12) Surplus reserve IX(31) 208,312,781.55 172,330,090.76 29,490,727.77 24,919,586.71 assets Deferred - income tax IX(13) Retained earnings IX(32) 68,774,158.11 72,989,224.18 36,471,405.69 39,938,895.93 assets Exchange difference Other non- of foreign currency current financial statements assets translation Total non- Shareholders' equity current attributable to parent 7,374,203,212.61 6,528,162,255.68 550,012,296.30 469,030,853.62 assets company: Minority interests 12,790,655.55 12,133,486.03 Total shareholders’ equities 562,802,951.85 481,164,339.65 Total liabilities and Total assets shareholders’ 7,844,104,901.47 7,082,444,002.92 7,844,104,901.47 7,082,444,002.92 equities Consolidated Income Statement For the year 2008 Name of the company ： Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan Item Note 31/12/2008 31/12/2007 1. Total operating income IX(33) 5,049,391,116.47 4,630,130,538.19 Minus: operating cost IX(33) 4,156,123,366.72 3,836,749,656.28 Business taxes and surtax IX(34) 132,823,862.65 137,305,155.03 Selling expense 236,554,096.88 211,372,665.37 Administration expense 187,022,654.78 171,407,025.30 Financial expenses IX(35) 253,541,156.57 219,325,967.84 Impairment loss of assets IX(36) -551,458.89 670,094.39 Add: profits from the fair value changes (The loss is IX(37) -19,293,822.87 41,221,296.98 listed beginning with “-“) Investment income (The loss is listed beginning IX(38) 11,175,753.02 23,333,345.80 with “-“) Including: the investment income from associated and joint ventures enterprises II. Operating profit 75,759,367.91 117,854,616.76 Add: non-operating income IX(39) 43,893,809.88 11,362,190.18 Less: non-operating expense IX(40) 11,392,350.23 30,448,695.77 30 Shandong Airlines Co., Ltd. 2008 Annual Report Including: loss from disposal of non-current assets 10,915,236.47 21,736,311.72 III. Total profits (The loss is listed beginning with 108,260,827.56 98,768,111.17 “-“) Less: income tax expense IX(41) 26,622,215.36 29,862,834.65 IV. Net profits (the net loss is listed beginning 81,638,612.20 68,905,276.52 with “-”) Net profits attributable to parent company 80,981,442.68 68,171,958.24 Minority interests 657,169.52 733,318.28 V. Earnings per share 1.Basic earnings per share 0.20 0.17 2.Diluted earnings per share 0.20 0.17 Consolidated Cash Flow Statement For the year 2008 Name of the company ： Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan Item Note 31/12/2008 31/12/2007 I. Cash flows from operating activities Cash received from sales of goods or rendering of services 5,142,461,900.44 4,614,996,501.55 Tax refund Cash received related to other operating activities IX(43) 79,525,658.45 62,474,713.49 Subtotal of cash inflow from operating activities 5,221,987,558.89 4,677,471,215.04 Cash received from sales of goods or rendering of services 3,362,644,381.56 3,245,072,652.98 Cash paid to and on behalf of employees 543,461,203.22 382,490,652.80 Tax payments 176,555,377.04 240,417,165.04 Other cashes paid to operating activities IX(44) 79,493,490.51 74,919,323.24 Subtotal of Cash outflow from operating activities 4,162,154,452.33 3,942,899,794.06 Net cash flow from operating activities 1,059,833,106.56 734,571,420.98 II. Cash flow from investment activities: Cash received from investments Cash dividents received from investment 11,211,668.70 23,774,225.14 Net cash received from disposal of fixed assets, intangible assets and other long- 23,995.00 term assets Net cash amount received from the disposal of subsidiaries an other business units 912,019.23 750,000.00 Cash received related to other investment activities Subtotal of cash inflow from the investment activities 12,147,682.93 24,524,225.14 Cash paid to acquire and construct fixed assets, intangible assets and other long-term 1,298,080,393.22 1,299,602,794.39 assets Cash paid to acquire investments Net cash amount paid to acquire the subsidiaries and other business units Cash paid related to other investment activities IX(45) 3,395,201.72 Subtotal of Cash outflow from investment activities 1,298,080,393.22 1,302,997,996.11 Net cash flow from investment activities -1,285,932,710.29 -1,278,473,770.97 III. Cash flow from financing activities: 31 Shandong Airlines Co., Ltd. 2008 Annual Report Cash received from investors Cash received from loans 2,578,478,035.95 3,096,874,737.10 Cash received related to other financing activities Subtotal of cash inflow from the financing activities 2,578,478,035.95 3,096,874,737.10 repayment of loans 1,812,750,241.19 2,281,783,413.74 Cash dividends, profits and interests paid 262,317,177.48 186,766,834.35 Cash payments related to other financing activities IX(46) 273,796,099.64 108,326,472.97 Sub-total of cash outflow from the financing activities 2,348,863,518.31 2,576,876,721.06 Net cash flow from finacing activities 229,614,517.64 519,998,016.04 IV. Effect of Foreign Exchange Rate Changes on Cash and cash equivalents -709,703.85 -2,220,419.94 V. Net increase in cash and cash equivalents 2,805,210.06 -26,124,753.89 Add: beginning balance of cash and cash equivalents 42,131,848.82 68,256,602.71 VI ending balance of cash and cash equivalents 44,937,058.88 42,131,848.82 32 Shandong Airlines Co., Ltd. 2008 Annual Report Consolidated statement of changes in the shareholders' equity For the year 2008 Name of the company ： Shandong Airlines Co., Ltd 31/12/2008 shareholders' equity belongs to parent company Item minus: Capital Shares Undistributed Share capital Capital surplus Other reserve at Profit stock I. Balance at the end of previous 24,919,586.71 -39,938,895.93 year 400,000,000.00 84,050,162.84 plus(I): changes of accounting policies (II)Correction of errors in previous years II. Balance at the beginning of 24,919,586.71 -39,938,895.93 this year 400,000,000.00 84,050,162.84 III. Increase or decrease of change amount in this year(the 4,571,141.06 decrease is listed beginning with 76,410,301.62 “-”) (I)Net profits in the year 80,981,442.68 (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 3． Income tax effect related to the projects accrued to owner's euity 4. Others Shandong Airlines Co., Ltd. 2008 Annual Report Subtotal of (I)and (II) 80,981,442.68 (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 4,571,141.06 -4,571,141.06 Withdrawal of surplus reserve 4,571,141.06 -4,571,141.06 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 29,490,727.77 period 400,000,000.00 84,050,162.84 36,471,405.69 Consolidated statement of changes in the shareholders' equity For the year 2007 Name of the company ： Shandong Airlines Co., Ltd Item 31/12/2007 shareholders' equity belongs to parent company Shandong Airlines Co., Ltd. 2008 Annual Report minus: Capital Shares Undistributed Share capital Capital surplus Other reserve at Profit stock I. Balance at the end of 25,001,281.34 -109,226,868.91 previous year 400,000,000.00 84,050,162.84 plus(I): changes of accounting policies (II)Correction of errors in previous years 1,150,003.50 II. Balance at the beginning of - 25,001,281.34 this year 400,000,000.00 84,050,162.84 108,076,865.41 III. Increase or decrease of change amount in this year(the -81,694.63 decrease is listed beginning 68,137,969.48 with “-”) (I)Net profits in the year 68,171,958.24 (II)Profit and loss directly accrued to owners’ equities 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 Subtotal of (I)and (II) 68,345,638.02 (III) Capitals invested by the owners 1.Capital investment by owners in current period Shandong Airlines Co., Ltd. 2008 Annual Report 2. Repurchase of shares at stock in the year 3.others (IV)Profit distribution in the 207,668.54 -207,668.54 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 -289,363.17 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 -289,363.17 IV. Balance at the end of this 24,919,586.71 -39,938,895.93 period 400,000,000.00 84,050,162.84 Shandong Airlines Co., Ltd. 2008 Annual Report Shandong Airlines Co., Ltd Notes to Financial Statements For the year of 2008 （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 JULY 29, 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 Shandong Aviation Group 山东航空集团有限公司 (formerly Shandong Airlines Limited 山东航空集团有限公司), a company also established in the PRC.. The company 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 financial statements of the company are prepared on the assumption of going concern and actual transactions and items ,in accordance with the Enterprise Accounting Standards issued by the Ministry of Finance in February 2006 and accounting policy ,accounting estimation which presented in the Part four of the accounting Notes. 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. Within the reporting period，financial assets and liabilities measured at fair value through profit and loss, available for sale financial assets and financial derivative instrument are measured at fair value; for the payment terms of purchased inventory and fixed assets are more than more than normal credit terms, these 37 Shandong Airlines Co., Ltd. 2008 Annual Report inventory and fixed assets are measured at their purchase price; if impairment Loss occurs on inventory, the inventory is measured at net realizable value; if impairment Loss occurs on other assets ,they are measured at recoverable value; Asset inventory surplus are measured at replacement cost, other items of financial statement are measured at historical cost. (4) Standard of cash equivalents 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. 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. (6) Financial assets and financial liabilities (1) The recognition of the financial instruments: The company should recognize a financial asset or a financial liability on its balance sheet when, and only when the entity becomes a party to the contractual provision of the instrument. (2) Classification of financial assets and financial liabilities: Financial assets and liabilities include financial assets and liabilities held for trading, and financial asset or financial liability at fair value through profit or loss; held-to-maturity investments; loans and accounts receivable; available-for-sale financial assets; and other financial liabilities. 1. Financial asset or financial liabilities at fair value through profit or loss which including tradable financial assets or liability and designated financial asset or financial liability at fair value through profit or loss. The tradable financial asset or liability is financial assets or liability meets one of the following criteria: a. The purpose of the obtaining the financial asset or liability is for sale or repurchase in the near future. b. Forming a part of the identifiable combination of financial instruments which are managed in a centralized way and for which there are objective evidences proving that the enterprise may manage the combination by way of short term profit making in the near future; 38 Shandong Airlines Co., Ltd. 2008 Annual Report c. Being a derivative instrument, excluding the designated derivative instrument which are effective hedging instruments, or derivative instruments to financial guarantee contracts, and the derivative instruments which are connected with the equity instrument investments for which there is no quoted price in the active market, whose fair value cannot be reliably measured, and which shall be settled by delivering the said equity instruments. The financial assets or financial liabilities meeting any of the following requirements can be designated, when they are initially recognized, as financial assets or financial liabilities as measured at its fair value and of which the variation is included in the current profits and losses: (1) The designation is able to eliminate or obviously reduce the discrepancies in the recognition or measurement of relevant gains or losses arisen from the different basis of measurement of the financial assets or financial liabilities; (2) The official written documents on risk management or investment strategies of the enterprise concerned have recorded that the combination of said financial assets, the combination of said financial liabilities, or the combination of said financial assets and financial liabilities will be managed and evaluated on the basis of their fair values and be reported to the key management personnel. 2. held-to-maturity investment" refers to a non-derivative financial asset with a fixed date of maturity, a fixed or determinable amount of reportable price and which the enterprise holds for a definite purpose or the enterprise is able to hold until its maturity. 3. Loans and accounts receivable" refers to the non-derivative financial assets for which there is no quoted price in the active market and of which the repo amount is fixed or determinable. 4. The "sellable financial assets" refers to the non-derivative financial assets which are designated as sellable when they are initially recognized as well as the financial assets other than those as described below: (1) Loans and accounts receivables; (2) Investments held until their maturity; and (3) Financial assets measured at their fair values and of which the variation is recorded into the profits and losses of the current period. 5. Other financial liability refers to financial liability are not measured at fair value through profit and loss. (3) Measurement of Financial Instruments The financial assets and financial liabilities initially recognized by an enterprise shall be measured at their fair values. For the financial assets and liabilities measured at their fair values and of which the variation is recorded into the profits and losses of the current period, the transaction expenses thereof shall be directly recorded into the profits and losses of the current period. The subsequent measurement of the financial assets and financial liability: 1. The financial asset and liability at fair value through profit and loss are subsequently measured at fair value, the profit and loss caused by changes in the fair value and de-recognition of the financial asset and liability should be recorded in the profit and loss accounts. 39 Shandong Airlines Co., Ltd. 2008 Annual Report 2. The investments held until their maturity, are measured on the basis of the post-amortization costs by adopting the actual interest rate method; the profit and loss caused by de-recognition, impairment or amortization are recorded in the profit and loss account of the current period. 3. The accounts receivable are measured on the basis of the post-amortization costs by adopting the actual interest rate method; the profit and losses caused by de-recognition, impairment or amortization is recorded in the profit and loss account of the current period. 4. Available for sale financial asset, subsequently measured at fair value, the profit and losses caused by changes in fair value are recorded in the Capital reserve. The differences between purchase value and book value as disposal of available for sale financial asset should be recognized in the profit and loss on investments. At the same time, roll out the amount of the disposal part corresponding with the cumulative amount of the changes in the fair value recognized in the owner’s equity into the Capital reserve. The interest and cash dividend received during hold for available for sale financial asset, are recognized in the profit and loss on investments. 5. Other financial liability , the derivative instruments which are connected with the equity instrument investments for which there is no quoted price in the active market, whose fair value cannot be reliably measured, and which shall be settled by delivering the said equity instruments For the financial guarantee contracts which are not designated as a financial liability measured at its fair value and the variation thereof is recorded into the profits and losses of the current period, and for the commitments to grant loans which are not designated to be measured at the fair value and of which the variation is recorded into the profits and losses of the current period and which will enjoy an interest rate lower than that of the market, a subsequent measurement shall be made after they are initially recognized according to the higher one of the following: i. the amount as determined according to the Accounting Standards for Enterprises No. 13 - Contingencies; or ii. The surplus after accumulative amortization as determined according to the principles of the Accounting Standards for Enterprises No. 14 - Revenues is subtracted from the initial recognized amount Other financial liabilities are measured on the basis of the post-amortization costs by adopting the actual interest rate method; the profit and losses caused by de-recognition, impairment or amortizations are recorded in the profit and loss account of the current period. 6. The "fair value" refers to the amount, at which both parties to a transaction who are familiar with the condition exchange their assets or clear off their debts under fair conditions. In a fair transaction, both parties to it shall be enterprises in continuous operation, and do not plan or do not need to carry out any liquidation, significantly reduce their operational scale or carry out transactions notwithstanding the unfavorable conditions they face. 7. Amortized cost Preferred term for the apportionment (charging or writing off) of the cost of an intangible asset as an operational cost over the asset's estimated useful life. It is identical to depreciation, the preferred term for tangible assets. The purpose of both terms is to (1) reflect reduction in the book value of the asset due to usage and/or obsolescence, (2) spread a large expenditure proportionately over a fixed period, and thereby (3) reduce the taxable income (not the actual or cash income) of a firm. In effect, it is a process by which invested capital of a firm is recovered by gradual sale of the firm's asset(s) to its customers over the years. 40 Shandong Airlines Co., Ltd. 2008 Annual Report 8. Effective interest methods refers to a financial Asset (including a group of financial assets) or financial liability (including a group of financial liabilities), means a method of— calculating the amortized cost of the asset or liability, as the case may be; and allocating the interest income and interest expense of the asset or the interest income and interest expense of the liability, as the case may be, over the expected life of the asset or liability, as the case may be. (4) Termination of recognition of financial assets 1. Where a financial asset satisfies any of the following requirements the recognition of it shall be terminated: a. Where the contractual rights for collecting the cash flow of the said financial asset are terminated; b. Where the said financial asset has been transferred and meets the conditions for recognizing the termination of financial assets as provided for in Accounting Standards for Enterprises No. 23 - Transfer of Financial Assets 2. When conditions of entire transferred assets de-recognition 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) 3. If the transfer of partial financial assets satisfies the conditions of de-recognition, the entire book value of the transferred financial asset shall, between the portion whose de-recognition and the recognized portion (under such circumstance, the service asset retained shall be deemed as a portion of financial asset whose de-recognition), 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 de-recognition. b. The sum of consideration of the portion whose de-recognition 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). 4. If the Company fails to satisfy the conditions of de-recognition 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. 5. 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. 41 Shandong Airlines Co., Ltd. 2008 Annual Report 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. 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. (7) Inventory 1. Inventories category: aircraft consumable parts, low-value consumable supplies for airplanes. 2. Inventories stock taking system: perpetual inventory method. 3. 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. 4. low-value consumable products amortization method The low–value consumable supplies are amortized at one time. 5. 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 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 or 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. （8）Recognition and measurement of Long-term Equity Investment 42 Shandong Airlines Co., Ltd. 2008 Annual Report 1. Initial measurement Long-term Equity Investment Including the company's investment that was able to exercise control, joint control or equity investment which may have significant influence on the invested company or the Company’s investment does not have control, joint control or significant influence on the invested company, and there is no active market quotation, the fair value can not be reliably measured. a. For the merger of enterprises under the same control, if the consideration of the merging enterprise is that it makes payment in cash, transfers non-cash assets or bear its debts, it shall, on the date of merger, regard the share of the book value of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. The difference between the initial cost of the long-term equity investment and the payment in cash, non-cash assets transferred as well as the book value of the debts borne by the merging party shall offset against the capital reserve. If the capital reserve is insufficient to dilute, the retained earnings shall be adjusted. If the consideration of the merging enterprise is that it issues equity securities, it shall, on the date of merger, regard the share of the book value of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. The total face value of the stocks issued shall be regarded as the capital stock, while the difference between the initial cost of the long-term equity investment and total face value of the shares issued shall offset against the capital reserve. If the capital reserve is insufficient to dilute, the retained earnings shall be adjusted. 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. other types of long-term equity investment Besides the long-term equity investments formed by the merger of Enterprises, the initial cost of a long-term equity investment obtained by other means shall be ascertained in accordance with the provisions as follows: (1) The initial cost of a long-term equity investment obtained by making payment in cash shall be the purchase cost which is actually paid. The initial cost consists of the expenses directly relevant to the obtainment of the long term equity investment, taxes and other necessary expenses. (2) The initial cost of a long-term equity investment obtained on the basis of issuing equity securities shall be the fair value of the equity securities issued. (3) The initial cost of a long-term equity investment of an investor shall be the value stipulated in the investment contract or agreement except the unfair value stipulated in the contract or agreement. (4) The initial cost of a long-term investment obtained by the exchange of nonmonetary assets shall be ascertained in accordance with the Accounting Standards for Enterprises No. 7 – Exchange of Non-monetary Assets. (5) The initial cost of a long-term equity investment obtained by recombination of liabilities shall be ascertained in accordance with Accounting Standards for Enterprises No. 12 – Debt Restructuring. 2. Subsequent measurement 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. 43 Shandong Airlines Co., Ltd. 2008 Annual Report The Company uses cost method for the following conditions: a long-term equity investment where the 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. a. 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. b. 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. The impairment of a long-term equity investment which is measured by employing the cost method as prescribed in these Standards, for which there is no offer in the active market and of which the fair value cannot be reliably measured, its impairment shall be disposed in accordance with the Accounting Standards for Enterprises No. 22 – Recognition and Measurement of Financial Instruments. The impairment of any other long-term equity investment measured in accordance with these Standards shall be disposed in accordance with the Accounting Standards for Enterprises No. 8 – Asset Impairment. （9）Recognition and measurement of fixed asset 1. Fixed assets refer to simultaneously have the following characteristics of tangible assets: for the production of merchandise, and providing labor services, lease or operation and management of holdings; life of more than one fiscal year. 2. 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 flows to the enterprise; (b) The cost of fixed asset may be reliably measured. 3. Fixed assets are measured in accordance with initial cost, the value of the financing leased fixed assets are measured at the lower of the fair value of the start date of the leasing and the present value of minimum lease payments, depreciation policy is in accordance with its own policy 4. 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) Residual value (%) Annual depreciation rate Buildings and structures 27-33 5.00 2.88-3.52 LLP and APU 15-20 5.00 4.75-6.33 44 Shandong Airlines Co., Ltd. 2008 Annual Report Aircraft frame replaceable parts 6-8 - 2.5-16.67 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 5. The fixed asset would be recognized as idle fixed assets if the fixed asset be unused in 6months (except for seasonal disable), the deprecation method of idle fixed assets is in line with other types of fixed assets. 6. The high price rotables were classified into fixed assets according to the Ministry of Finance CAIKUAIHAN [2004] No. 54 Ministry of Finance regarding the reply for the expansion of scope for civil aviation capitalization flow management 7. At balance sheet date, if there is evidence indicates that the fixed asset has been impaired, the provision for the impairment is prepared in accordance with methods described in14, note 4. （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 1. The intangible assets shall be initially measured according to its cost 2. As for the intangible assets with limited service life, the enterprise shall estimate the years of its service life, or the amount of the output or any other similar measurement unit, which constitutes its service life. If it is unable to forecast the period when the intangible asset can bring economic benefits to the enterprise, it shall be regarded as an intangible asset with uncertain service life 3. To determine the useful life for the intangible assets with limited useful life, the following factors would be considered: a. the life cycle of the product which produced by the intangible assets. b. present technical, technological, and the trend of future development c. market demand for the products or services that produced by that asset. d. what action the Present or potential competitors will take in the future e. estimated maintenance expenditures for the maintenance of that asset as well as the company ‘s ability to pay for the expenditure. f. the relevant laws and regulations or similar constraints for the duration of that asset. g .the connection with other relevant asset’s useful life which hold by the company. 4. With regard to intangible assets with limited service life, its amortization amount shall be amortized within its service life systematically and reasonably. An enterprise shall amortize intangible assets from the time when it is available for use to the time when it is not confirmed as the intangible assets any more. The method chosen by an enterprise for the amortization of intangible assets shall reflect the expected realization 45 Shandong Airlines Co., Ltd. 2008 Annual Report pattern of the economic benefits which relevant to the intangible assets. If it is unable to determine the expected realization pattern reliably, intangible assets shall be amortized by the straight-line method 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 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 amortized at 20 years according to their benefit period respectively. (14)Impairment of Assets 1. No matter whether there is any sign of possible assets impairment, the goodwill formed by the merger of enterprises and intangible assets with uncertain service lives shall be subject to impairment test every year. Fixed assets, construction in progress, intangible assets, the investment properties measured by cost method and long-term equity investments, if there is any indication for impairment at balance sheet date then impairment test need to be taken Where any evidence shows that there is possible assets impairment, the recoverable amount of the assets shall be estimated. The recoverable amount shall be determined in light of the higher one of the net amount of the fair value of the assets minus the disposal expenses and the current value of the expected future cash flow of the assets. The disposal expenses shall include the relevant legal expenses, relevant taxes, truck age as well as the direct expenses for bringing the assets into a marketable state. Where there is any evidence indicating a possible impairment of assets, the enterprise shall, on the basis of single item assets, estimate the recoverable amount. Where it is difficult to do so, it shall determine the recoverable amount of the group assets on the basis of the asset group to which the asset belongs. 2. The recognition of the impairment a. The current market price of assets falls, and its decrease is obviously higher than the expected drop over time or due to the normal use; b. The economic, technological or legal environment in which the enterprise operates, or the market where the assets is situated will have any significant change in the current period or in the near future, which will cause adverse impact on the enterprise; c. The market interest rate or any other market investment return rate has risen in the current period, and thus the discount rate of the enterprise for calculating the expected future cash flow of the assets will be affected, which will result in great decline of the recoverable amount of the assets; 46 Shandong Airlines Co., Ltd. 2008 Annual Report d. Any evidence shows that the assets have become obsolete or have been damaged substantially; e. The assets have been or will be left unused, or terminated for use, or disposed ahead of schedule; f. Any evidence in the internal report of the enterprise shows that the economic performance of the assets have been or will be lower than the expected performance, for example, the net cash flow created by assets or the operating profit (or loss) realized is lower (higher) than the excepted amount, etc.; and Other evidence indicates that the impairment of assets has probably occurred. 3. The recognition of an asset group shall base on whether the main cash inflow generated by the asset group is independent of those generated by other assets or other group assets. Simultaneously, when recognizing an asset group, the enterprise shall take into consideration how its managers manage the production and business activities (for example, according to the production lines, business varieties or according to the regions or areas), and the ways of decision-making for the continuous use or disposal of the assets, etc Where there is an active market for the products manufactured by (or other outputs of) a combination of several assets, even if some or all of these products (or other outputs) are provided for the internal use, the enterprise shall also recognize this combination of assets as an asset group on the condition that the provisions of the preceding paragraph are accorded with Where the cash inflow of the asset group is affected by the internal transfer price, the future cash flow of the asset group shall be determined on the basis of the best available estimate made by the managers of the enterprise for the future price in the fair transaction. Once an asset group is recognized, it shall be kept consistent during different accounting periods, and not be changed at will. (15) Measurement and recognition of employee Compensation 1. Employee Compensation Employee compensation refers to all kinds of payments and other relevant expenditures given by enterprises in exchange of the services offered by the employees. The employee compensation shall include: a. Wages, bonuses, allowances and subsidies for the employees; b. Welfare expenses for the employees; c. Medical insurance, endowment insurance, unemployment insurance, work injury insurance, maternity insurance and other social insurances; d. Housing accumulation fund; e. Labor union expenditure and employee education expenses; f. Non-monetary welfare; g. Compensations for the cancellation of the labor relationship with the employees; and h. Other relevant expenditures of services offered by the employees 2. If an enterprise cancels the labor relationship with any employee prior to the expiration of the relevant labor contract or brings forward any compensation proposal for the purpose of encouraging the employee to accept a layoff, and the following conditions are met concurrently, the enterprise shall recognize the expected liabilities incurred due to the compensation for the cancellation of the labor relationship with the employee, and shall simultaneously record them into the profit or loss for the current period: a. Where the enterprise has formulated a formal plan on the cancellation of labor relationship or has brought forward a proposal on voluntary layoff and will execute it soon. This plan or proposal shall 47 Shandong Airlines Co., Ltd. 2008 Annual Report include the department at which the employee to be laid off works, the post of the employee and the number of the employees to be laid off, the amount of compensation for the cancellation of labor relationship or for layoff as determined on the basis of the job category or post according to the relevant provisions, and the planned time for the cancellation of labor relationship or layoff. b. The enterprise is unable to unilaterally withdraw the plan on the cancellation of labor relationship or the layoff proposal. (16) Principle of accrued liabilities 1. Principle of accrued liabilities The obligations related to some items that meet the following conditions at the same time will be confirmed 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. 2. The measurement of accrued liabilities The accrued liabilities are initially measured in accordance with the best estimated outflow of economic benefits to fulfill the current obligation as well as related risks regarding the contingencies, uncertainties and time value of money. Significant impact on the time value of money the best estimation is determined through the related discounted future cash outflows. The increase of book value of accrued liability caused due to the passage of time is recognized as interest. 3. 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 of 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, then such amounts shall be separately recognized. The confirmed compensation amounts shall not exceed book values of confirmed liabilities. (17) Revenue recognition 1. Offering labor a. The Company recognizes revenue based on passenger transport services provided or not based on the use of expired ticketed through, rather than as the basis to ticket through sales. The unused tickets will expiry in one year after sale. In addition, the company and other airlines signed code-sharing agreement; under the code-sharing agreements one party's carrier's flight No. classes can use designated code of the other air carrier. 48 Shandong Airlines Co., Ltd. 2008 Annual Report The revenue generated from code-sharing is allocated between parties in accordance with ode-sharing agreements; the revenue is confirmed as the provision of passenger transport services. b. In the provision of other aviation services, revenue is confirmed as at the completion of service 2. The company ascertains the amount of revenues from the alienating of right to use assets based on the following circumstances, respectively: (1) The amount of interest revenue should be measured and confirmed in accordance with the length of time for which the company's cash is used by others and the actual interest rate; or (2) The amount of royalty revenue should be measured and confirmed in accordance with the period and method of charging as stipulated in the relevant contract or agreement. (18) Government Subsidies 1. No government subsidy may be recognized unless the following conditions are met simultaneously as follows: a. The enterprise can meet the conditions for the government subsidies; and b. The enterprise can obtain the government subsidies. 2. a. If a government subsidy is a monetary asset, it shall be measured in the light of the received or receivable amount. If a government subsidy is a non-monetary asset, it shall be measured at its fair value. If its fair value cannot be obtained in a reliable way, it shall be measured at its nominal amount. b. The government subsidies pertinent to assets shall be recognized as deferred income, equally distributed within the useful lives of the relevant assets, and included in the current profits and losses. But the government subsidies measured at their nominal amounts shall be directly included in the current profits and losses. The government subsidies pertinent to incomes shall be treated respectively in accordance with the circumstances as follows: (1) Those subsidies used for compensating the related future expenses or losses of the enterprise shall be recognized as deferred income and shall included in the current profits and losses during the period when the relevant expenses are recognized; or (2) Those subsidies used for compensating the related expenses or losses incurred to the enterprise shall be directly included in the current profits and losses. 3. If it is necessary to refund any government subsidy which has been recognized, it shall be treated respectively in accordance with the circumstances as follows: a. If there is the deferred income concerned, the book balance of the deferred income shall be offset against, but the excessive part shall be included in the current profits and losses; and b. If there is no deferred income concerned to the government subsidy, it shall be directly included in the current profits and losses. (19) Measurement and recognition of borrowing cost 1. 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 borrowing costs 49 Shandong Airlines Co., Ltd. 2008 Annual Report shall be recognized as expenses when incurred and accounted for 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 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. 2. Capitalization period 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. 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. 3. Where a general borrowing is used for the acquisition and construction or production of assets eligible for capitalization, the enterprise shall calculate and determine the to-be-capitalized amount of interests on the general borrowing by multiplying the weighted average asset disbursement of the part of the accumulative asset disbursements minus the general borrowing by the capitalization rate of the general borrowing used. The capitalization rate shall be calculated and determined in light of the weighted average interest rate of the general borrowing. The capitalization period shall refer to the period from the commencement to the cessation of capitalization of the borrowing costs, excluding the period of suspension of capitalization of the borrowing costs. During the period of capitalization, the amount of interest capitalized during each accounting period shall not exceed the amount of interest actually incurred to the relevant borrowings in the current period. During the period of capitalization, the exchange balance on foreign currency borrowings shall be capitalized, and shall be recorded into the cost of assets eligible for capitalization. For the ancillary expense incurred to a specifically borrowed loan, those incurred before a qualified asset under acquisition, construction or production is ready for the intended use or sale shall be capitalized at the incurred amount when they are incurred, and shall be recorded into the costs of the asset eligible for capitalization; those incurred after a qualified asset under acquisition and construction or production is ready for the intended use or sale shall be recognized as expenses on the basis of the incurred amount when they are incurred, and shall be recorded into the profits and losses of the current period. The ancillary expenses arising from a general borrowing shall be recognized as expenses at their incurred amount when they are incurred, and shall be recorded into the profits and losses of the current period. 50 Shandong Airlines Co., Ltd. 2008 Annual Report (20) Measurement and recognition of income taxes 1.The company uses deferred income tax liability method in calculation of income taxes 2. Where the company obtains assets or liabilities, it shall determine its tax base. Where there is difference between the carrying amount of the assets or liabilities and its tax base, the deferred income tax assets or the deferred income tax liabilities shall be determined. 3. The recognition of the deferred income tax assets a. The company should recognize the deferred income tax liabilities arising from a deductible temporary difference to the extent of the amount of the taxable income which it is most likely to obtain and which can be deducted from the deductible temporary difference. However, the deferred income tax assets, which are arising from the initial recognition of assets or liabilities during a transaction which is simultaneously featured by the following, shall not be recognized: (a) The transaction is not business combination; (b) At the time of transaction, the accounting profits will not be affected, nor will the taxable amount (or the deductible loss) be affected b. Where the deductible temporary difference related to the investments of the subsidiary companies, associated enterprises and joint enterprises can meet the following requirements simultaneously, the enterprise shall recognize the corresponding deferred income tax assets: (a) The temporary differences are likely to be reversed in the expected future; and (b) It is likely to acquire any amount of taxable income tax that may be used for making up the deductible temporary differences. c. As for any deductible loss or tax deduction that can be carried forward to the next year, the corresponding deferred income tax assets shall be determined to the extent that the amount of future taxable income to be offset by the deductible loss or tax deduction to be likely obtained 4. 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 initial recognition of assets or liabilities arising from the following transactions which are simultaneously featured by the following: (1) The transaction is not business combination; (2) At the time of transaction, the accounting profits will not be affected, nor will the taxable amount (or the deductible loss) be affected. c. The taxable temporary differences related to the investments of subsidiary companies, associated enterprises and joint enterprises shall recognize corresponding deferred income tax liabilities. However, those that can simultaneously meet the following conditions shall be excluded: (1) The investing enterprise can control the time of the reverse of temporary differences; and (2) The temporary differences are unlikely to be reversed in the excepted future. 5.The carrying amount of deferred income tax assets shall be reexamined on balance sheet day. If it is unlikely to obtain sufficient taxable income taxes to offset the benefit of the deferred income tax assets, the carrying amount of the deferred income tax assets shall be written down. When it is probable to obtain sufficient taxable income taxes, such write down amount shall be subsequently reversed. 51 Shandong Airlines Co., Ltd. 2008 Annual Report (21) Basis of Consolidation 1. The recognition scope of the consolidation The consolidated financial statements prepared are in accordance with the No. 33 Enterprise Accounting Standards – Consolidated Financial Statement issued in February, 2006. The recognition of the scope of the consolidated financial statement based on control bases the consolidation including the company, subsidiaries directly or indirectly controlled by the company and special-purpose financial statements of the entity. Control refers to the Company has the right to decide financial and operating policies of the invested company, and to obtain benefits from the business activities. Company is not included in the scope of consolidation if there is evidence shows that the parent company can not exercise control over it. 2. Purchase or sale of subsidiary share holding The purchase and sale date will be confirmed with the time that major related risks and rewards of equity ownership have been transferred. For the acquisition or sale of a subsidiary under the different control of the consolidation, the operating results and cash flows have been properly included in the consolidated Income Statement and Consolidated Statements of Cash Flows before the sales day and after the purchase day. For the acquisition or sale of a subsidiary under the same control of the consolidation the operating results and cash flows have been properly included in the consolidated Income Statement and Consolidated Statements of Cash Flows and shown separately. The corresponding adjustments have been made for Comparative figures of the consolidated financial statements 3. 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. If the accounting policy and accounting period of the subsidiary are inconsistent with the Company, financial statements of subsidiaries have been adjusted accordingly in accordance with the Company's accounting policies as preparation consolidated financial statements, for the subsidiary acquired under different control consolidation, financial statements of subsidiaries have been adjusted accordingly in accordance with fair value of subsidiary's identifiable assets, liabilities and contingent liabilities at purchase day. 4. The method of consolidation All significant intercompany transaction and balances between group enterprises are eliminated on consolidation. The part of net assets of consolidated subsidiaries belongs to the part of minority interests should be reported separately in equity of consolidated financial statements. V．Changes of Accounting Policies and Accounting Estimates and Error Correction In order to avoid the risk of interest rate volatility, from 2004 to 2005, the company signed the interest rate swaps with banks which amounted to 309 million U.S. dollars. Up to 31/12/2007, the total amount of immature interest rate swaps of the company was 179,344,000 U.S. dollars。At 31/12/2007 the banks confirmed the fair value of the interest rate swaps of the company is 42,754,634.98 Yuan (5,853,111.05. dollars); At 31/12/2006 the banks confirmed the fair value of the interest rate swaps of the company is 1,533,338.00 Yuan (190,000.00. dollars). According to the principle of caution, prior to 2008 the value of the interest rate swaps be presented out of the financial statement. Since year 2008 the value of the interest rate swaps should be presented in the financial statement according to the requirement of the CSRC. In the preparation of 2008 and 2007 comparative financial 52 Shandong Airlines Co., Ltd. 2008 Annual Report statements, adjustments have been made. After the adjustments, the total amounts of the tradable financial assets of 2007 has been increased 42,754,634.98 Yuan; the total amounts of Deferred income tax liabilities of 2007 has been increased 10,688,658.74 Yuan; the retained earning of 2007 has been increased 32,065,976.24 Yuan Retrospective adjustment Item 2007 Opening balance of 2007 The cumulative effects Income from Changes In fair Value 41,221,296.98 1,533,338.00 42,754,634.98 Income tax expense 10,305,324.24 383,334.50 10,688,658.74 undistributed profit 30,915,972.74 1,150,003.50 32,065,976.24 Surplus reserves 0.00 0.00 0.00 VI. Taxation 1、Company applies to the following major types of taxes and tax rates： Types of tax Tax basis Tax rate Business tax Passenger, cargo transportation business or commissions, lease business 3%or5% Income tax Taxable income 25% Note: According to CAISHUI [2008] NO.178 Document, from 1/1/2008 to 31/12/2010 fuel surcharge are exempted from sales tax for airline company. 2、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 aviation fund is calculated based on classification of airline, maximum take off weight, airline mileage etc. and related regulation. VII. Corporate consolidate and the scope of consolidated financial statements 1、Subsidiaries were not obtained through combination Company Name Registered Address Business nature Business scope Transportation and Aviation cargo warehousing, ground allocation; Electronic Qingdao Int'l Aviation Logistics Center Co., Ltd Qingdao warehousing commerce and so on Subsidiaries were not obtained through combination（continued） Actual investment at Proportion of shares Proportion of voting Whether consolidated Company Name Registered capital year end held by the company rights or not Qingdao Int'l Aviation Logistics Center Co., Ltd. 3,000.00 2,381.00 70.00% 70.00% Yes 2. Minority interest of subsidiaries Minority Minority shareholder The proportion of The excess losses by Profit and loss shareholder Company Name interests at Net profits of shares held by Minority shareholders attribute to minority interests at 31/12/2007 subsidiaries minority that parent company shareholders 31/12/2008 shareholders has to beared Qingdao Int'l Aviation Logistics Center Co., 12,133,486.03 2,190,565.09 30.00% 657,169.52 0.00 12,790,655.55 Ltd. 53 Shandong Airlines Co., Ltd. 2008 Annual Report VIII. Joint venture and associated enterprises List of joint ventures and key financial information： Registered Holding Proportion of voting Company Name Registered Address Business nature capital(Million) Proportion rights Shandong Airlines Rainbow Jet Co., Jinan General aviation transportation 50.00 45% 45% Ltd. List of joint ventures and key financial information(continued)： Total assts at the end of Total liabilities at the Total net assets at the Company Name Total income Net profits balance date end of balance date end of balance date Shandong Airlines Rainbow Jet Co., Ltd. 92,804,133.65 241,500,785.58 -148,696,651.93 6,092,211.17 -210,411.57 IX. Main items of consolidated financial statements 1. Monetary Funds Items Closing balance Opening balance Cash on hand 220,541.02 924,974.06 Bank deposit 44,716,517.86 41,206,874.76 Other monetary fund 26,935,875.00 27,392,250.00 Total 71,872,933.88 69,524,098.82 Closing balance Opening balance Items Original Exchange Equivalent to Original Exchange Equivalent to currency rate RMB currency rate RMB Cash on hand RMB 168,989.78 1.00 168,989.78 828,873.93 1.00 828,873.93 HKD 1,559.60 0.8819 1,375.43 5,930.00 0.9364 5,552.86 USD 1,520.92 6.8346 10,394.89 7,901.92 7.3046 57,720.36 GBP 82.80 9.8798 818.04 1,652.80 14.5807 24,098.99 CAD 10.00 5.6146 56.15 10.00 7.4419 74.42 JPY 135,000.00 0.07565 10,219.50 135,000.00 0.0641 8,653.50 EUR 2,970.00 9.6590 28,687.23 0.00 0.00 0.00 Sub total 220,541.02 924,974.06 Bank deposit RMB 44,483,350.50 1.00 44,483,350.50 40,274,001.87 1.00 40,274,001.87 USD 34,117.08 6.8346 233,167.36 127,710.33 7.3046 932,872.89 Sub total 44,716,517.86 41,206,874.76 Other monetary fund RMB 26,935,875.00 1.00 26,935,875.00 0.00 0.00 0.00 54 Shandong Airlines Co., Ltd. 2008 Annual Report USD 0.00 0.00 0.00 3,750,000.00 7.3046 27,392,250.00 Sub total 26,935,875.00 27,392,250.00 Total 71,872,933.88 69,524,098.82 Note ：Other monetary funds are due to aircraft and engine security deposit, the amount is RMB 26,935,875.00 at the year end 2008. 2. Tradable financial assets Items fair value at the end of the year fair value at the beginning of the year Derivative financial Assets 23,460,812.11 42,754,634.98 Total 23,460,812.11 42,754,634.98 Note：In order to avoid the risk of interest rate volatility, from 2004 to 2008, the company has signed the interest rate swaps with banks which amounted to 384 million U.S. dollars, these interest rate swaps contract are matched with contract of airplane finance leasing and long-term borrowing contract, therefore the risks arise from interest payment of the financing can be avoided, and to prevent the losses in financing costs in the fluctuation of interest rates. Up to 31/12/2008, the total amount of immature interest rate swaps of the company is 164,297,045.74 U.S. dollars, of which redeemable interest rate swaps is 5,806,476.14 U.S. dollars。The bank has confirmed the fair value of the interest rate swaps of the company is 23,460,812.11 Yuan (3,432,653.28 U.S. dollars)。 3 .Accounts receivable Composition of Accounts Receivable 2008.12.31 2007.12.31 Items Bad debt Bad debt Balance Proportion Book value Balance Proportion Book value provision provision Individual transaction with significant amount 115,826,770.70 91.46% 0.00 115,826,770.70 189,588,286.65 89.54% 0.00 189,588,286.65 Credit risk portfolio 0.00 0.00% 0.00 0.00 2,608,298.83 1.23% 2,608,298.83 0.00 Other transaction with no significant amount 10,812,993.42 8.54% 521,732.03 10,291,261.39 19,538,120.58 9.23% 777,353.03 18,760,767.55 Total 126,639,764.12 100.00% 521,732.03 126,118,032.09 211,734,706.06 100.00% 3,385,651.86 208,349,054.20 （1） Individual accounts receivable with significant amount Items Amount Bad debt provision reason balance due to the settlement method, all amount after Air China Limited 55,089,147.43 0.00 period are received balance due to the settlement method, all amount after BSP 39,640,732.64 0.00 period are received Accounts receivable from China balance due to the settlement method, all amount after aviation settlement center 21,096,890.63 0.00 period are received Total 115,826,770.70 0.00 55 Shandong Airlines Co., Ltd. 2008 Annual Report （2） Age analysis of accounts receivable Closing balance Opening balance Age Bad debt Bad debt Balance proportion Net value Balance proportion Net value provision provision Within 1 year 125,431,572.82 99.05% 445,258.73 124,986,314.09 208,993,647.58 98.70% 770,715.04 208,222,932.54 1 to 2 years 1,157,864.08 0.91% 75,222.25 1,082,641.83 307,308.50 0.15% 206,030.43 101,278.07 2 to 3 years 26,524.80 0.02% 60.93 26,463.87 1,200,577.98 0.57% 1,175,785.69 24,792.29 3 to 4 years 23,802.42 0.02% 1,190.12 22,612.30 929,258.00 0.44% 929,206.70 51.30 4 to 5 years 0.00 0.00% 0.00 0.00 303,914.00 0.14% 303,914.00 0.00 Total 126,639,764.12 100.00% 521,732.03 126,118,032.09 211,734,706.06 100.00% 3,385,651.86 208,349,054.20 （3） the first five accounts of account receivable Closing balance Opening balance Items Amounts proportion Amounts proportion Total amounts of the first five accounts of account receivable 117,636,799.77 92.89% 191,137,479.60 90.27% (4) at the end the year the balance of the accounts receivable decreased 39.47% in comparison with the opening balance , this is mainly caused by BSP significantly shorten the billing cycle。 (5) As at December 31, 2008, the outstanding amounts of the shareholders who hold over 5% voting rights (including 5%) see "Note 11, Related Party Relationships and transactions. 1. Advance payable (1) Age analysis of advance payable Age Closing balance Proportion Opening balance Proportion Within 1 year 28,449,390.88 97.68% 20,787,499.32 99.99% 1-2years 674,854.09 2.32% 1,387.48 0.01% Total 29,124,244.97 100.00% 20,788,886.80 100.00% (2) At the end of year the significant amount of advance payments are as follows： Amounts Proportion Details 17,451,742.86 59.92% Payment for the rental of operating lease (3) The closing balance of the advanced payments has been increased 40.10% in comparison with the opening balance, this mainly caused by significant increasing in prepaid payment of the aviation materials for 3 newly added aircrafts. (4) Up to 31 Dec 2008, the account balance did not contain any debt owned by major shareholders who owns 5% or over 5% of voting shares 56 Shandong Airlines Co., Ltd. 2008 Annual Report 2. Other account receivable (1)Composition of other account receivable 2008.12.31 2007.12.31 Items Bad debt Bad debt Balance Proportion Book value Balance Proportion Book value provision provision Individual transaction with significant amount 203,908,540.13 79.66% 109,051,717.65 94,856,822.48 228,111,849.89 83.89% 109,136,552.15 118,975,297.74 Other transaction with no significant amount 52,065,571.90 20.34% 1,944,258.14 50,121,313.76 43,806,896.86 16.11% 2,155,261.53 41,651,635.33 Total 255,974,112.03 100.00% 110,995,975.79 144,978,136.24 271,918,746.75 100.00% 111,291,813.68 160,626,933.07 (2)Other individual account receivable with significant amount Debtor Balance bad debts provision Reason Shandong Airlines Rainbow-Jet Co. ,Ltd (SARJ) Long-term accounts receivable, the company could 109,051,717.65 109,051,717.65 not repay debts due to its financial difficulty Deposit for engine maintenance and purchase of Deposit of aircraft engine 94,856,822.48 0.00 aircraft, all amounts is receivable in the future. Total 203,908,540.13 109,051,717.65 (3)Age analysis of other account receivable 2008.12.31 2007.12.31 Age Balance Proportion Bad debt provision Net value Balance Proportion Bad debt provision Net value Within 1 year 42,992,690.15 16.80% 2,038,542.29 40,954,147.86 45,332,097.75 16.67% 1,339,820.64 43,992,277.11 1 to 2 years 31,169,427.89 12.18% 669,245.45 30,500,182.44 29,195,356.30 10.74% 11,280,098.16 17,915,258.14 2 to 3 years 17,263,584.49 6.74% 10,698,669.47 6,564,915.02 137,151,532.65 50.44% 80,385,813.40 56,765,719.25 3 to 4 years 133,052,336.46 51.98% 80,329,246.11 52,723,090.35 23,496,543.29 8.64% 18,138,057.20 5,358,486.09 4 to 5 years 23,398,644.42 9.14% 17,195,422.39 6,203,222.03 24,265,824.29 8.92% 77,624.20 24,188,200.09 Above 5 years 8,097,428.62 3.16% 64,850.08 8,032,578.54 12,477,392.47 4.59% 70,400.08 12,406,992.39 Total 255,974,112.03 100.00% 110,995,975.79 144,978,136.24 271,918,746.75 100.00% 111,291,813.68 160,626,933.07 (4)List of significant debtors Name of debtors Balance Nature or content Age Proportion SARJ 109,051,717.65 Disbursement fee 1-5years 42.60% GuoYin finance lease company 41,354,563.28 Deposit of aircraft 3-4years 16.16% Singapore Aircraft Leasing Enterprise 19,136,880.00 Deposit of aircraft 1-3years 7.48% RainierAircraft Leasing(Ireland)Limited 16,762,866.90 Deposit of aircraft 3-6years 6.55% Huaxia Airlines Ltd. 14,979,716.58 Aircraft rental and maintenance reserve. 3-4years 5.85% 57 Shandong Airlines Co., Ltd. 2008 Annual Report Total 201,285,744.41 78.64% (5) As at December 31, 2008, the outstanding amounts of the shareholders who hold over 5% voting rights (including 5%) see "Note 11, Related Party Relationships and transactions 6. INVENTORY (1) Details of inventories 2008.12.31 2007.12.31 Items Impairment loss Balance Impairment loss Net value Balance Net value provision provision Aviation consumable material 73,263,438.33 353,539.79 72,909,898.54 51,137,472.47 353,539.79 50,783,932.68 Low value consumable 762,731.56 0.00 762,731.56 943,633.30 0.00 943,633.30 Material 605,146.87 0.00 605,146.87 497,251.68 0.00 497,251.68 Others 69,752.60 0.00 69,752.60 13,321.71 0.00 13,321.71 Total 74,701,069.36 353,539.79 74,347,529.57 52,591,679.16 353,539.79 52,238,139.37 (2) The closing balance of the inventories has increased 42.32% in comparison with the opening balance, this mainly caused by increasing of consumption of Aircraft Materiel for three new Aircraft. (3) Inventories impairment loss provision The opening Impairment loss The closing Proportion of current reversal to Items Reversal Write off balances provision balances inventories closing balance Aviation consumable material 353,539.79 0.00 0.00 0.00 353,539.79 0.00 Total 353,539.79 0.00 0.00 0.00 353,539.79 0.00 (4) Up to 31 Dec 2008, the company did not use any inventories for guarantee. 7. Long-term equity investment (1) Long-term equity investment and impairment loss provision 2008.12.31 2007.12.31 Items Impairment loss Impairment loss Balance Book value Balance Book value provision provision Long-term Equity Investment 110,852 ,100.00 22,500,000.00 88,352,100.00 111,959,196.91 22,500,000.00 89,459,196.91 Include: Investment in Subsidiary 0.00 0.00 0.00 1,107,096.91 0.00 1,107,096.91 Joint Venture 22,500,000.00 22,500,000.00 0.00 22,500,000.00 22,500,000.00 0.00 Investment in Other Companies 88,352,100.00 0.00 88,352,100.00 88,352,100.00 0.00 88,352,100.00 （2）Long-term equity investments measured with cost method Initial investment Investee The opening balances Increment Decrement The closing balances cost China Civil aviation information network Co., Ltd 6,690,000.00 6,690,000.00 0.00 0.00 6,690,000.00 SiChuan airlines Co. Ltd 35,000,000.00 35,000,000.00 0.00 0.00 35,000,000.00 JiNan International Airport Co. Ltd 46,662,100.00 46,662,100.00 0.00 0.00 46,662,100.00 Total 88,352,100.00 88,352,100.00 0.00 0.00 88,352,100.00 58 Shandong Airlines Co., Ltd. 2008 Annual Report (3) Long-term equity investments measured with equity method Initial The opening Cash The closing Accumulate Investee Increment Decrement Other decrement investment cost balances dividend balances Cash dividend SARJ 22,500,000.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Union Express Service Shangdong Airline Co.Ltd 650,000.00 1,107,096.91 0.00 0.00 0.00 1,107,096.91 0.00 0.00 Total 23,150,000.00 1,107,096.91 0.00 0.00 0.00 1,107,096.91 0.00 0.00 (4) Long-term equity investments impairment loss provision Investee The opening balances Increment Decrement The closing balances SARJ 22,500,000.00 0.00 0.00 22,500,000.00 Total 22,500,000.00 0.00 0.00 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. 8. Fixed assets and accumulated depreciation （1） Classify Details Item The opening balances Increment Decrement The closing balances 1.Fixed asset original price total 6,414,070,753.88 1,157,673,816.56 98,964,361.31 7,472,780,209.13 Building 143,576,494.34 687,902.20 2,863,767.75 141,400,628.79 Aircraft and engine 5,780,373,131.37 1,092,664,929.56 71,219,604.78 6,801,818,456.15 High price rotables 373,394,501.78 47,763,311.39 20,100,479.13 401,057,334.04 Vehiclest 32,712,599.99 2,494,949.55 651,819.91 34,555,729.63 Machinery and equipment and other office equipment 84,014,026.40 14,062,723.86 4,128,689.74 93,948,060.52 2.Accumulated depreciation total 1,419,065,120.08 436,398,118.13 66,757,974.54 1,788,705,263.67 Building 18,166,198.34 4,669,557.31 442,109.07 22,393,646.58 Aircraft and engine 1,245,587,703.83 398,454,013.01 59,309,003.03 1,584,732,713.81 High price rotables 100,420,352.91 22,070,425.39 2,717,323.31 119,773,454.99 Delivery equipment 15,702,027.57 3,102,565.27 509,913.98 18,294,678.86 Machinery and equipment and other office equipment 39,188,837.43 8,101,557.15 3,779,625.15 43,510,769.43 3. Fixed asset net book value total 4,995,005,633.80 0.00 0.00 5,684,074,945.46 Building 125,410,296.00 0.00 0.00 119,006,982.21 Aircraft and engine 4534785427.54 0.00 0.00 5,217,085,742.34 High price rotables 272,974,148.87 0.00 0.00 281,283,879.05 Delivery equipment 17,010,572.42 0.00 0.00 16,261,050.77 Machinery and equipment and other office equipment 44,825,188.97 0.00 0.00 50,437,291.09 （2） Current year completed construction in progress transferred to fixed asset is 937,546,706.41 Yuan. （3） Finance leases Accumulated Items Book value Impairment provision Net book value depreciation Aircraft and engine 2,505,052,608.99 746,338,680.70 0.00 1,758,713,928.29 Total 2,505,052,608.99 746,338,680.70 0.00 1,758,713,928.29 59 Shandong Airlines Co., Ltd. 2008 Annual Report （4）up to December 31, 2008, there is nothing indicates that fixed assets have been impaired therefore no impairment provision is provided. 9. Construction in progress (1) Construction in progress The opening Title Increment Transferred into fixed asset Decrement The closing balances balances B737-800 (2008) 527,446,403.69 583,993,120.09 937,028,602.41 0.00 174,410,921.37 B737-800 (2009) 454,857,420.33 445,713,491.54 0.00 0.00 900,570,911.87 B737-800 (2012) 104,366,795.48 -4,384,233.99 0.00 0.00 99,982,561.49 ARJ700 60,778,195.00 0.00 0.00 0.00 60,778,195.00 Qingdao Maintenance garage 4,820,907.63 34,890,249.98 423,604.00 0.00 39,287,553.61 Other construction 1,862,748.98 945,761.00 94,500.00 0.00 2,714,009.98 Total 1,154,132,471.11 1,061,158,388.62 937,546,706.41 0.00 1,277,744,153.32 (2) Capitalization of borrowing for construction in progress to 31 Dec 2008 Title The opening balances Increment Transferred into fixed asset The closing balances Sources of funding B737-800 8,278,547.28 8,895,278.34 6,738,227.35 10,435,598.27 Loans from financial institutions ARJ21-700 487,587.70 0.00 0.00 487,587.70 Loans from financial institutions Total 8,766,134.98 8,895,278.34 6,738,227.35 10,923,185.97 Note ：The current increase in the capitalization containing interest on borrowings 53,035,614.64 Yuan, and exchange earning 44,140,336.30 Yuan (3) Up to December 31, 2008, there is nothing indicates that construction in progress have been impaired therefore no impairment provision is provided. 10. Liquidation of fixed assets Items The opening balances Increment Decrement The closing balances Reason for liquidation Building 833,029.86 1,856,220.69 2,689,250.55 0.00 scraped High price rotables 0.00 6,080,908.85 6,080,908.85 0.00 scraped Aircraft and engine 0.00 1,211,274.75 1,211,274.75 0.00 scraped Total 833,029.86 9,148,404.29 9,981,434.15 0.00 11. Intangible assets and accumulated amortization (1) Intangible assets Items The opening balances Increment Decrement The closing balances 1、Total original value 44,850,133.13 4,194,563.36 0.00 49,044,696.49 land Use right 44,850,133.13 4,194,563.36 0.00 49,044,696.49 2.Totalaccumulated amortization 1,437,524.07 662,098.25 0.00 2,099,622.32 land Use right 1,437,524.07 662,098.25 0.00 2,099,622.32 3. Total accumulated impairment loss provision for intangible assets 0.00 0.00 0.00 0.00 land Use right 0.00 0.00 0.00 0.00 60 Shandong Airlines Co., Ltd. 2008 Annual Report 4.Total book value of intangible assets 43,412,609.06 3,532,465.11 0.00 46,945,074.17 land Use right 43,412,609.06 3,532,465.11 0.00 46,945,074.17 (2) Up to December 31, 2008, there is nothing indicates that Intangible assets have been impaired therefore no impairment provision is provided. 12. Long-term deferred expenses accumulated The closing Items Original value The opening balances Increment Decrement transfer out amortization balances Expenses of recruitment and training for pilots 284,348,225.82 172,330,090.76 49,682,027.42 13,699,336.63 0.00 76,035,444.27 208,312,781.55 Total 284,348,225.82 172,330,090.76 49,682,027.42 13,699,336.63 0.00 76,035,444.27 208,312,781.55 The amortization period for expenses of recruitment and training for pilots is 20 years, The remaining period is16-19 years。 13. Deferred income tax assets (1) Recognized deferred income tax assets deductible temporary differences deferred income tax assets Items The closing balances The opening balances The closing balances The opening balances deductible temporary differences arising from Provision for impairment of assets 111,461,696.80 114,677,465.48 27,865,424.20 28,669,366.37 Inventory impairment provision 353,539.79 353,539.79 88,384.95 88,384.95 Withholding costs for assets repairing 156,828,874.32 99,334,110.52 39,207,218.58 24,833,527.63 Employee wage payable 6,424,516.00 64,949,603.00 1,606,129.00 16,237,400.75 Deductible difference resulting from loss remedy 0.00 12,552,438.48 0.00 3,138,109.62 Launch fee amortization 28,005.52 89,739.44 7,001.38 22,434.86 Total 275,096,632.43 291,956,896.71 68,774,158.11 72,989,224.18 Note: According to the history of sales and Prediction of future market of the company, deferred income tax assets recognized in each period can be written back in the following period 14. Provision for asset impairment Decrement Items The opening balances Increment The closing balances written back Written off (1) Accounts receivable bad debt provision 3,385,651.86 0.00 255,621.00 2,608,298.83 521,732.03 (2) Other account receivable bad debt provision 111,291,813.68 0.00 295,837.89 0.00 110,995,975.79 (3) Provision of inventory impairment loss 353,539.79 0.00 0.00 0.00 353,539.79 (4) impairment provision of the long term equity investment 22,500,000.00 0.00 0.00 0.00 22,500,000.00 Total 137,531,005.33 0.00 551,458.89 2,608,298.83 134,371,247.61 61 Shandong Airlines Co., Ltd. 2008 Annual Report 15. Restricted assets (1) Restricted assets Item The opening balances Increment Decrement The closing balances Net worth of pledged assets Self owned aircraft 2,656,919,630.14 1,007,972,763.24 206,520,579.33 3,458,371,814.05 Finance leased aircraft 1,877,865,797.40 13,472,561.55 132,624,430.66 1,758,713,928.29 Total 4,534,785,427.54 1,021,445,324.79 339,145,009.99 5,217,085,742.34 (2) The obtaining of bank loans and finance leasing aircraft cause the accessing of the above assets to be restricted. 16. Short-term loans （1）Types of short-term loan Types The closing balances The opening balances Credit bank loan 70,503,800.00 36,523,000.00 Pledged bank loan 126,383,714.55 0.00 Guaranteed bank loan 810,000,000.00 1,168,707,000.00 Total 1,006,887,514.55 1,205,230,000.00 （2）Details of short-term loan Types Amount(RMB) Start Date Maturity Date Remarks Credit bank loan： Everbright Bank,Qingdao branch 50,000,000.00 2008-11-24 2009-11-23 Bank of China (Hong Kong) Branch 20,503,800.00 2008-1-10 2009-1-10 Three million U.S. dollars in original currency Total 70,503,800.00 Pledged bank loan： SH Nordbank AG 50,619,781.44 2008-7-25 2009-4-30 7,406,400.00 U.S. dollars in original currency SH Nordbank AG 25,144,151.67 2008-7-31 2009-2-28 3,678,950.00 U.S. dollars in original currency SH Nordbank AG 50,619,781.44 2008-9-25 2009-4-30 7,406,400.00 U.S. dollars in original currency Total 126,383,714.55 Guaranteed bank loan： China Construction Bank Jinan shizhong branch 40,000,000.00 2008-12-16 2009-12-15 Shandong airline co. ltd as guarantor China Construction Bank Jinan shizhong branch 40,000,000.00 2008-12-18 2009-12-17 Shandong airline co. ltd as guarantor China Merchants Bank, Jinan branch 40,000,000.00 2008-7-3 2009-7-3 Shandong airline co. ltd as guarantor China Merchants Bank, Qingdao branch 80,000,000.00 2008-6-16 2009-6-16 Shandong airline co. ltd as guarantor China Merchants Bank, Qingdao branch 90,000,000.00 2008-7-9 2009-7-9 Shandong airline co. ltd as guarantor Agriculture bank of China, MingHu branch 150,000,000.00 2008-1-23 2009-1-22 Shandong airline co. ltd as guarantor Agriculture bank of China, MingHu branch 60,000,000.00 2008-11-5 2009-11-4 Shandong airline co. ltd as guarantor Agriculture bank of China, MingHu branch 50,000,000.00 2008-11-12 2009-11-11 Shandong airline co. ltd as guarantor Agriculture bank of China, MingHu branch 60,000,000.00 2008-11-19 2009-11-18 Shandong airline co. ltd as guarantor Bank of China (Jinan) Branch 80,000,000.00 2008-12-31 2009-12-30 Shandong airline co. ltd as guarantor Chinese Foreign Economic and Trade Trust Ltd. 120,000,000.00 2008-4-18 2009-4-17 Shandong airline co. ltd as guarantor 62 Shandong Airlines Co., Ltd. 2008 Annual Report Subtotal 810,000,000.00 Total 1,006,887,514.55 (3) As of December 31, 2008 there are no overdue outstanding loans. 17. Notes payable (1) Details Items The closing balances The opening balances bank acceptance 10,000,000.00 15,000,000.00 Total 10,000,000.00 15,000,000.00 (2) The closing balance of the notes payable has decreased 33.33% in comparison with the opening balance, this mainly caused by the payment made to the maturity bank acceptance. 18. Accounts payable (1). Age Age The closing balances The opening balances Within 1 year 866,216,091.36 760,092,700.15 Above I year 9,102,968.75 272,887.97 Total 875,319,060.11 760,365,588.12 (2) Up to 31 Dec 2008, there are no payables due from shareholders who own 5% or over 5% of voting rights 19. Advanced from customers (1). Age Age The closing balances The opening balances Within 1 year 87,709,493.54 89,541,466.63 Above 1 year 26,000.00 58,592.60 Total 87,735,493.54 89,600,059.23 (2) Up to 31 Dec 2008, there are no advanced payments received from shareholders who own 5% or over 5% of voting rights 20. Payroll payable Items The opening balances Increment Decrement The closing balances 1、Salary, bonus and allowance 65,167,874.92 421,945,772.48 402,717,604.43 84,396,042.97 2、Employee benefit 0.00 17,523,387.97 17,523,387.97 0.00 3、Social insurance fee 105.82 52,379,543.13 52,379,397.71 251.24 Include：1. medical insurance 28.69 216,467.20 216,495.89 0.00 2.Basic retirement insurance 65.92 32,116,354.30 32,116,168.98 251.24 3.Annuity fee 0.00 14,835,012.40 14,835,012.40 0.00 4.Unemployment fee 6.59 3,344,146.38 3,344,152.97 0.00 5.Injury insurance 1.65 716,916.41 716,918.06 0.00 6.Procreation insurance premium 2.97 1,150,646.44 1,150,649.41 0.00 4、Housing accumulation fund 236,614.70 59,218,648.96 59,452,221.42 3,042.24 63 Shandong Airlines Co., Ltd. 2008 Annual Report 5、Labor union fee and employee education fee 8,003,342.44 10,101,229.39 11,383,941.21 6,720,630.62 6. Non-monetary benefit 0.00 0.00 000 0.00 7、Redemption of termination of labor contract 0.00 4,650.48 4,650.48 0.00 8、Others 0.00 0.00 0.00 0.00 Include：share payment by cash 0.00 0.00 0.00 0.00 Total 73,407,937.88 561,173,232.41 543,461,203.22 91,119,967.07 21. Tax payable Types The closing balances The opening balances VAT & Custom tax 42,093,679.29 32,283,139.01 Sales tax 4,783,260.78 11,655,870.96 City maintenance construction fee 1,017.73 3,780.64 Enterprise Income tax 7,878,180.11 81,547.63 Property tax 1,174,020.58 1,160,007.23 Tenure tax 3,468.00 766,030.00 Personal income tax 1,846,373.79 1,107,868.53 Stamp duty 3,099,249.32 2,649,751.77 Civil aviation infrastructure construction fund 9,223,996.01 8,348,032.19 Civil aviation airport administration fee 26,114,804.00 22,865,399.00 Income tax in advance 15,119,191.76 5,817,869.59 Total 111,337,241.37 86,739,296.55 Note：The closing balance of the tax payable has increased 28.36% in comparison with the opening balance; this mainly caused by the company has not carried out the Final Settlement and Payment of Enterprise Income Taxes. 22. Interest payable Items The closing balances The opening balances interest on short and long-term borrowings 9,634,990.00 12,429,380.48 Total 9,634,990.00 12,429,380.48 23. Other accounts payable (1). Age Age The closing balances The opening balances Within 1 year 117,844,706.36 78,174,526.56 Above 1 year 43,892,042.34 57,185,522.10 Total 161,736,748.70 135,360,048.66 64 Shandong Airlines Co., Ltd. 2008 Annual Report (2).Details of significant Other accounts payable with age more than one year Name Amount owed age The reasons for arrears Air China prepaid 20 million Yuan for aircraft wet renting on December 10, 2007. Both Air China Ltd. 20,000,000.00 1-2years parties agreed that the settlement should base on the actual operation of these aircrafts and shall settle the payment in the last month before the contract terminated. （3）The total amount of the top five of other account payable is 126,480,258.45 Yuan which is taken 78.20% of the total amount of other account payable. （4）Up to 31 Dec 2008, amounts due to shareholders who own 5% or over 5% of voting rights see “Note 11, Related parties and transactions” 24. Non-current liabilities due within one year (1). Types Items The closing balances The opening balances Long-term borrowing within 1 year 487,168,908.19 190,810,617.13 Long-term account payable within 1 year 227,593,094.74 161,580,345.90 Total 714,762,002.93 352,390,963.03 Less: Unrecognized financing liabilities 99,172,325.71 49,767,310.74 Total 615,589,677.22 302,623,652.29 (2). List of creditors The closing balances Items Interest rate Remark Currency Original currency Equivalent to RMB Commerz bank, New York branch USD 5,674,365.85 38,782,020.84 6.0100%-6.0150% pledge Shenzhen Financial lease company RMB 89,638,748.19 89,638,748.19 8.1500% pledge China Minsheng Bank Jinan branch RMB 50,000,000.00 50,000,000.00 6.1200% pledge Industry and commercial bank Jinan Dongjiao branch RMB 188,000,000.00 188,000,000.00 5.5080% pledge Bank of China, Jinan branch RMB 21,376,000.00 21,376,000.00 7.8300% pledge Bank of China, Jinan branch USD 8,400,000.00 57,410,640.00 4.3900% pledge Bank of Communication Co.,Ltd,JiNan Tianqiao branch RMB 57,160,950.00 57,160,950.00 5.5100%-7.0470% Guarantee Shanghai Pudong Development Bank Co.,Ltd,JiNan branch RMB 70,000,000.00 70,000,000.00 6.8040% pledge Bank of Communication Co.,Ltd,JiNan Tianqiao branch USD 2,183,510.00 14,923,417.45 3.8200%-4.1800% Guarantee SH Nordbank AG USD 4,140,388.72 28,297,900.74 4.5000% pledge Total 615,589,677.22 (3) As of December 31, 2008 there are no overdue outstanding loans. 65 Shandong Airlines Co., Ltd. 2008 Annual Report 25. Long-term borrowing (1) Types Types The closing balances The opening balances Pledge bank loan 1,157,489,900.59 1,487,075,281.45 Guaranteed bank loan 2,001,843,376.80 1,113,316,566.52 Total 3,159,333,277.39 2,600,391,847.97 (2) List of creditors Creditor Original currency Equivalent to RMB Start date Maturity date Interest rate Remark Construction Bank of China Jinan Shizhong branch 27,600,000.00 27,600,000.00 2007-12-3 2022-3-28 5.5080% Shandong airline co. ltd as guarantor Construction Bank of China Jinan Shizhong branch 83,000,000.00 83,000,000.00 2008-1-2 2022-3-28 7.0470% Shandong airline co. ltd as guarantor Construction Bank of China Jinan Shizhong branch 54,000,000.00 54,000,000.00 2008-3-3 2022-3-28 7.0470% Shandong airline co. ltd as guarantor Construction Bank of China Jinan Shizhong branch 53,000,000.00 53,000,000.00 2008-4-1 2022-3-28 7.0470% Shandong airline co. ltd as guarantor Construction Bank of China Jinan Shizhong branch 26,500,000.00 26,500,000.00 2008-4-29 2022-3-28 7.0470% Shandong airline co. ltd as guarantor Construction Bank of China Jinan Shizhong branch 52,300,000.00 52,300,000.00 2008-6-2 2022-3-28 7.0470% Shandong airline co. ltd as guarantor Construction Bank of China Jinan Shizhong branch 51,500,000.00 51,500,000.00 2008-7-1 2022-3-28 7.0470% Shandong airline co. ltd as guarantor Construction Bank of China Jinan Shizhong branch 120,000,000.00 120,000,000.00 2008-7-15 2022-3-28 7.0470% Shandong airline co. ltd as guarantor construction bank of china Jinan Shizhong branch $6,039,200.00 41,275,516.32 2007-3-29 2022-3-28 4.6763% Shandong airline co. ltd as guarantor Construction Bank of China Jinan Shizhong branch $3,749,800.00 25,628,383.08 2007-4-30 2022-3-28 4.2800% Shandong airline co. ltd as guarantor Construction Bank of China Jinan Shizhong branch $6,765,620.00 46,240,306.45 2007-5-31 2022-3-28 3.3675% Shandong airline co. ltd as guarantor Construction Bank of China Jinan Shizhong branch $17,954,820.00 122,714,012.77 2007-7-2 2022-3-28 3.9088% Shandong airline co. ltd as guarantor Construction Bank of China Jinan Shizhong branch $3,749,800.00 25,628,383.08 2007-8-1 2022-3-28 3.9863% Shandong airline co. ltd as guarantor Construction Bank of China Jinan Shizhong branch $12,000,000.00 82,015,200.00 2007-8-29 2010-8-28 3.8169% Aircraft as pledge Construction Bank of China Jinan Shizhong branch $1,300,000.00 8,884,980.00 2007-9-10 2010-8-28 3.6925% Aircraft as pledge construction bank of china Jinan Shizhong branch $700,000.00 4,784,220.00 2007-9-21 2010-8-28 3.2975% Aircraft as pledge Construction Bank of China Jinan Shizhong branch $14,908,900.00 101,896,367.94 2007-9-28 2022-3-28 3.4319% Shandong airline co. ltd as guarantor industrial and commercial bank Dongjiao branch 100,000,000.00 100,000,000.00 2006-12-18 2018-12-17 5.5080% Shandong airline co. ltd as guarantor Industrial and Commercial Bank Dongjiao branch 2,200,000.00 2,200,000.00 2008-6-5 2018-12-17 5.5080% Shandong airline co. ltd as guarantor Industrial and Commercial Bank Dongjiao branch 2,100,000.00 2,100,000.00 2008-6-18 2018-12-17 5.5080% Shandong airline co. ltd as guarantor Industrial and Commercial Bank Dongjiao branch 123,000,000.00 123,000,000.00 2008-6-19 2018-12-17 5.5080% Shandong airline co. ltd as guarantor Industrial and Commercial Bank Dongjiao branch 13,500,000.00 13,500,000.00 2008-7-1 2018-12-17 6.9660% Shandong airline co. ltd as guarantor Industrial and Commercial Bank Dongjiao branch 30,000,000.00 30,000,000.00 2008-8-19 2018-12-17 5.8320% Shandong airline co. ltd as guarantor Industrial and Commercial Bank Dongjiao branch $3,671,400.00 25,092,550.44 2007-5-31 2018.12.17 3.7675% Shandong airline co. ltd as guarantor Industrial and Commercial Bank Dongjiao branch $3,671,400.00 25,092,550.44 2007-9-4 2018.12.17 3.9194% Shandong airline co. ltd as guarantor Industrial and Commercial Bank Dongjiao branch $3,671,400.00 25,092,550.44 2007-12-3 2018.12.17 3.4063% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd Jinan Tianqiao branch 132,750,000.00 132,750,000.00 2006-5-30 2016-12-30 5.7510% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd Jinan Tianqiao branch 101,707,125.00 101,707,125.00 2007-11-12 2016-12-30 6.4800% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd Jinan Tianqiao branch 102,000,000.00 102,000,000.00 2007-12-3 2016-12-30 5.5080% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd Jinan Tianqiao branch 86,100,000.00 86,100,000.00 2008-1-14 2016-12-30 7.0470% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd Jinan Tianqiao branch $2,746,050.00 18,768,153.33 2006-10-31 2016-12-30 3.8163% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd Jinan Tianqiao branch $2,754,112.50 18,823,257.29 2006-11-30 2016-12-30 3.3213% Shandong airline co. ltd as guarantor 66 Shandong Airlines Co., Ltd. 2008 Annual Report Bank of Communication Co.,Ltd Jinan Tianqiao branch $2,746,050.00 18,768,153.33 2007-1-31 2016-12-30 4.1275% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd Jinan Tianqiao branch $2,712,675.00 18,540,048.56 2007-5-31 2016-12-30 3.3213% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd Jinan Tianqiao branch $2,704,762.50 18,485,969.78 2007-4-29 2016-12-30 4.2125% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd Jinan Tianqiao branch $2,712,675.00 18,540,048.56 2007-5-31 2016-12-30 3.8163% Shandong airline co. ltd as guarantor Bank of China Jinan branch $1,469,733.60 10,045,041.26 2005-4-29 2019-4-28 3.0638% Aircraft as pledge Bank of China Jinan branch $469,200.00 3,206,794.32 2005-6-23 2019-4-28 3.0638% Aircraft as pledge Creditor Original currency Equivalent to RMB Start date Maturity date Interest rate Remark Bank of China Jinan branch $25,656,600.00 175,352,598.36 2005-7-15 2019-4-28 3.0638% Aircraft as pledge Bank of China Jinan branch $26,071,798.00 178,190,310.61 2005-10-19 2019-4-28 3.0638% Aircraft as pledge Bank of China Jinan branch $26,213,260.00 179,157,146.80 2005-12-21 2019-4-28 3.0638% Aircraft as pledge Bank of China Jinan branch $923,467.00 6,311,527.56 2005-12-23 2019-4-28 3.0638% Aircraft as pledge Bank of China Jinan branch $525,000.00 3,588,165.00 2006-4-27 2019-4-28 3.0638% Aircraft as pledge China Minsheng Bank Jinan branch 270,000,000.00 270,000,000.00 2005-4-7 2014-6-29 6.1200% Aircraft as pledge China Development Bank Shandong branch $3,735,500.00 25,530,648.30 2008-7-1 2023-6-30 2.5913% Aircraft as pledge China Development Bank Shandong branch $18,292,500.00 125,021,920.50 2008-7-11 2023-6-30 2.5913% Aircraft as pledge China Development Bank Shandong branch $7,481,350.00 51,132,034.71 2008-9-2 2023-6-30 2.5913% Aircraft as pledge China Development Bank Shandong branch $3,735,500.00 25,530,648.30 2008-9-26 2023-6-30 2.5913% Aircraft as pledge China Development Bank Shandong branch $7,481,350.00 51,132,034.71 2008-12-8 2023-6-30 2.5913% Aircraft as pledge HSH Nordbank AG $36,228,401.10 247,606,630.15 2008-7-25 2018-7-25 4.8713% Aircraft as pledge Total 3,159,333,277.39 Note：As of December 31, 2008 there are no overdue outstanding loans. 26. Long-term account payable (1) Details Balance due within following dates The closing balance The opening balance First year after balance sheet date 227,593,094.76 266,014,982.84 Second year after balance sheet date 227,593,094.76 219,714,595.69 Third year after balance sheet date 184,513,291.73 219,714,595.69 Over there years 1,217,418,343.07 1,341,366,941.63 Total minimum lease payment 1,857,117,824.32 2,046,811,115.85 Less: unrecognized financing fee 614,237,149.91 630,438,170.45 Finance lease payable 1,242,880,674.41 1,416,372,945.40 Include: finance lease payable within 1 year 128,420,769.03 111,813,035.16 Total 1,114,459,905.38 1,304,559,910.24 (2) List of long-term payable The closing balance Item Loan condition Interest rate maturity date Currency Original currency Equivalent to RMB Commerzbank, New USD Finance lease 6.010%-6.015% 2010.7.15 6,355,783.14 43,439,235.45 York Branch Guoying finance lease RMB Finance lease 8.1500% 2020.6.15 1,071,020,669.93 1,071,020,669.93 company 67 Shandong Airlines Co., Ltd. 2008 Annual Report Total 1,114,459,905.38 27. Deferred Income The opening Accumulative The closing Items Original value balance Increment Amortization amortization balance CRJ leaseback profit 9,741,746.00 4,871,343.11 0.00 1,392,193.00 6,262,595.89 3,479,150.11 Bonus earnings 9,840,407.72 0.00 9,840,407.72 0.00 0.00 9,840,407.72 Special funds of subsidies for post-disaster reconstruction 5,000,000.00 0.00 5,000,000.00 0.00 0.00 5,000,000.00 Total 24,582,153.72 4,871,343.11 14,840,407.72 1,392,193.00 6,262,595.89 18,319,557.83 Note: Bonus earning arises from the application of the frequent customer bonus plan; members’ customers of the company can accumulate mileage points as they take the flight of the Company or flight of the China airline 28. Deferred income tax liabilities Recognized deferred income tax liabilities taxable temporary differences deferred income tax liabilities Items The closing balance The opening balance The closing balance The opening balance changes in fair value of tradable financial assets 23,460,812.12 42,754,634.96 5,865,203.03 10,688,658.75 Unrealized exchange gain 55,805,493.72 0.00 13,951,373.43 0.00 Total 79,266,305.84 42,754,634.96 19,816,576.46 10,688,658.75 29. Share Capital Increase/Decrease （+、－） Unit: shares The opening Issuance Bonus Capitalization Others Sub-total The closing balance Items balance of new shares of public shares reserve (1) Shares subject to trading moratorium ①founder's shares 260,000,000.00 0.00 0.00 0.00 0.00 0.00 260,000,000.00 Including： Shares held by the state 259,801,000.00 0.00 0.00 0.00 0.00 0.00 259,801,000.00 Shares held by state-owned legal persons 199,000.00 0.00 0.00 0.00 0.00 0.00 199,000.00 Shares held by overseas legal persons 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Others 0.00 0.00 0.00 0.00 0.00 0.00 0.00 ② Raised legal person’s shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 ③ Inner employees’ shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 68 Shandong Airlines Co., Ltd. 2008 Annual Report ④ Preference shares or other 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Include: transferred/allotted shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total unlisted shares 260,000,000.00 0.00 0.00 0.00 0.00 0.00 260,000,000.00 Listed shares ①RMB ordinary shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Increase/Decrease （+、－） Unit: shares The opening Issuance Bonus Capitalization Others Sub-total The closing balance Items balance of new shares of public shares reserve Including：Shares hold by management 0.00 0.00 0.00 0.00 0.00 0.00 0.00 ②Domestically listed foreign shares 140,000,000.00 0.00 0.00 0.00 0.00 0.00 140,000,000.00 Total listed shares 140,000,000.00 0.00 0.00 0.00 0.00 0.00 140,000,000.00 (3)sell limited shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (4) Total shares 400,000,000.00 0.00 0.00 0.00 0.00 0.00 400,000,000.00 1、The aforesaid listed shares are listed on B shares at RMB1 each。 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. 30. Capital Reserve Items The opening balance Increment Decrement The closing balance Premium on share capital 76,258,081.68 0.00 0.00 76,258,081.68 Other capital reserve 7,792,081.16 0.00 0.00 7,792,081.16 Total 84,050,162.84 0.00 0.00 84,050,162.84 31. Surplus Reserve Items The opening balance Increment Decrement The closing balance Statutory surplus reserve 24,919,586.71 4,571,141.06 0.00 29,490,727.77 Total 24,919,586.71 4,571,141.06 0.00 29,490,727.77 32. Retained Earnings Items 2008 2007 Balance at the beginning of the year -39,938,895.93 -108,076,865.41 Add：Consolidated net profit 80,981,442.68 68,171,958.24 Other transfer-in 0.00 173,679.78 Less：Withdrawal of statuary surplus reserve 4,571,141.06 207,668.54 Withdrawal of employee incentive and welfare fund 0.00 0.00 Withdrawal of reserve fund 0.00 0.00 Withdrawal reserve for business expansion 0.00 0.00 Profits capitalized on return of investment 0.00 0.00 Less：Preference dividends payable 0.00 0.00 Withdrawal of Unspecified surplus reserve 0.00 0.00 69 Shandong Airlines Co., Ltd. 2008 Annual Report Ordinary dividends payable 0.00 0.00 Ordinary share dividend transfer to capital(or share) 0.00 0.00 Undistributed profits at end of year 36,471,405.69 -39,938,895.93 33. Operating Revenue and Operating Cost (1) Operating Revenue Items 2008 2007 Main operating revenue 4,985,950,205.16 4,536,790,226.62 Other operating Revenue 63,440,911.31 93,340,311.57 Total 5,049,391,116.47 4,630,130,538.19 (2) Operating Cost Items 2008 2007 Main operating cost 4,122,612,353.88 3,779,784,586.76 Other operating cost 33,511,012.84 56,965,069.52 Total 4,156,123,366.72 3,836,749,656.28 (3) Main operation income, main operation cost and gross profit of segment 2008 2007 Segment Operating Income Operating Cost Gross profit Operating Income Operating Cost Gross profit Aviation transportation service 4,953,048,164.35 4,101,665,962.58 851,382,201.77 4,503,661,260.70 3,761,738,252.60 741,923,008.10 Logistic transportation service 6,020,693.27 1,313,169.79 4,707,523.48 7,250,905.82 1,733,971.61 5,516,934.21 Hospitality and Catering service 22,538,565.66 15,614,100.05 6,924,465.61 26,059,386.92 16,312,368.49 9,747,018.43 Lease service 31,801,807.87 35,128,834.04 -3,327,026.17 49,549,336.89 52,470,312.13 -2,920,975.24 Others 35,981,885.32 2,401,300.26 33,580,585.06 43,609,647.86 4,494,751.45 39,114,896.41 Total 5,049,391,116.47 4,156,123,366.72 893,267,749.75 4,630,130,538.19 3,836,749,656.28 793,380,881.91 (4) Top five customers 2008 2007 Name Proportion of the total Proportion of the total Sales amount Sales amount sales% sales% Total amount of Sales revenue of the top five customers 712,142,468.82 14.10% 373,431,310.83 8.06% 34. Business tax and surtax Item Applicable tax rate 2008 2007 Business tax 3%、5% 132,823,862.65 137,305,155.03 Total 132,823,862.65 137,305,155.03 35. Financial expenses Items 2008 2007 Interest expenses 328,596,797.15 283,408,485.31 Less: Interest income 5,839,812.54 1,219,055.29 70 Shandong Airlines Co., Ltd. 2008 Annual Report Exchange gains -78,963,306.70 -66,751,899.20 Others 9,747,478.66 3,888,437.02 Total 253,541,156.57 219,325,967.84 36. Impairment loss of assets Items 2008 2007 Bad debts provision -551,458.89 670,094.39 Total -551,458.89 670,094.39 37. Earnings from changes in fair value Sources of Earnings from changes in fair value 2008 2007 Tradable financial assets -19,293,822.87 41,221,296.98 Total -19,293,822.87 41,221,296.98 Note：Earnings from changes in fair value is -19,293,822.87 Yuan, this is losses result in the changes in fair value of the Interest rate swaps. 38. Investment income The origin of the investment income 2008 2007 Realized profit from Financial assets trading 10,081,058.70 22,379,236.48 Increase income by equity method -35,915.68 -2,560.68 Income from equity investment 1,130,610.00 956,670.00 Total 11,175,753.02 23,333,345.80 39. Non-operating income （1）Non-operating income Items 2008 2007 Government Grant 42,232,215.00 10,000,000.00 Other 1,661,594.88 1,362,190.18 Total 43,893,809.88 11,362,190.18 (2) Government Grant Items 2008 Approval documents Approval authority Regional aviation East China Electricity Council FAMINGDIAN【2008 】No. 16,580,300.00 Chinese Civil Aviation Authority in East China subsidies 1522 Airline subsidy 14,067,100.00 JIFAMINGDIAN 【2008】 No. 1022 Southwest China's civil aviation authority Earthquake relief subsidies 3,000,000.00 JUFAMINGDAIN【2008】NO.4444 Civil Aviation Administration of China Others 8,584,815.00 Total 42,232,215.00 40. Non-operating expenses Items 2008 2007 Loss on disposal of non-current assets 10,915,236.47 21,736,311.72 Include: Loss on disposal of fixed assets 10,915,236.47 21,348,892.09 Donation 0.00 215,000.00 Extra-ordinary loss 0.00 8,482,707.78 Others 477,113.76 14,676.27 71 Shandong Airlines Co., Ltd. 2008 Annual Report Total 11,392,350.23 30,448,695.77 41. Income taxes expense Items 2008 2007 Income tax for current period 13,279,231.57 298,883.01 Deferred income tax 13,342,983.79 29,563,951.64 Total 26,622,215.36 29,862,834.65 42. Net profit after deduction of Non-recurring gains and losses Items 2008 2007 Net profit 80,981,442.68 68,171,958.24 Plus： (1) Minus: Profit and loss in disposal of non-circulation assets 10,915,236.47 21,736,311.72 (2) Governmental allowance accrued to the current profit and loss Gain or loss from combination - 4,822,515.00 -10,000,000.00 (3) gains and losses arising from changes in fair value of tradable financial assets and tradable financial liabilities and financial liabilities and investment income arising form disposal of tradable financial assets ,tradable financial liabilities and available for sale financial assets 19,293,822.87 -41,221,296.98 (4) transferred back of individually impairment tested receivables -84,834.50 0.00 (5) Non-operating income and expenses other than above items 0.00 7,370,706.97 (6) other Non-recurring gains and losses -10,023,237.59 498,594.46 Subtotal 15,278,472.25 -21,615,683.83 less：Amount influenced due to income tax 3,819,618.06 -7,133,175.66 Net profit after deduction of non-recurring gain/loss 92,440,296.87 53,689,450.07 less：non-recurring gain/loss attributable to minority shareholders 0.00 -331.50 Net profit after deduction of non-recurring gain/loss attributable to shareholders of parent company 92,440,296.87 53,689,781.57 43. Cash received relating to other operating activities Items 2008 2007 Government grant 47,232,215.00 10,000,000.00 Interest incomes 5,839,812.54 667,658.52 Cash received from non-operating activities 1,661,594.88 1,362,190.18 Cash received from payable and receivable 24,792,036.03 50,444,864.79 Total 79,525,658.45 62,474,713.49 44. Cash paid relating to other operating activities Items 2008 2007 Bank commission charge 9,747,478.66 3,888,437.02 Cash Paid for non-operating activities 477,113.76 229,676.27 Cash paid for current fund 4,898,582.20 15,017,209.45 Marketing cost, administration cost and cash paid for operating activities 64,370,315.89 55,784,000.50 Total 79,493,490.51 74,919,323.24 72 Shandong Airlines Co., Ltd. 2008 Annual Report 45. Cash paid relating to other investment activities Items 2008 2007 Decrease of cash in subsidiaries for reconciliation 00 3,395,201.72 Total 00 3,395,201.72 46. Cash received relating to other financing activities Item 2008 2007 Interest expenses for leased aircrafts 273,796,099.64 108,326,472.97 Total 273,796,099.64 108,326,472.97 47. Adjusting net profit to cash flow from operating activities 1.Adusting net profit to cash flow from operating activities： 2008 2007 Net profit 81,638,612.20 68,905,276.52 Add: Impairment loss provision of assets -551,458.89 670,094.39 Depreciation of fixed assets、oil and gas assets and consumable biological assets 436,398,118.13 405,262,347.38 Amortization of intangible assets 662,098.25 613,539.74 Amortization of Long-term deferred and prepaid expenses 13,699,336.63 10,720,417.07 Loss on disposal of fixed assets、intangible assets and other long-term deferred assets（Loss/Gain +/－） -19,700.00 387,419.63 Loss from written off assets（Loss/Gain +/－） 10,915,236.47 21,348,892.09 Loss of fair value fluctuation on assets（Loss/Gain +/－） 19,293,822.87 -41,221,296.98 Financial cost（Loss/Gain +/－） 252,838,009.68 283,408,485.31 Loss on investment（Loss/Gain +/－） -11,175,753.02 -23,333,345.80 Decrease of deferred income tax assets（Loss/Gain +/－） 4,215,066.07 19,258,627.39 Decrease of deferred income tax liabilities（Loss/Gain +/－） 9,127,917.72 10,305,324.25 Decrease of inventories（Loss/Gain +/－） -22,109,390.20 -12,792,299.74 Decrease of operating receivables（Loss/Gain +/－） 83,801,585.12 -98,303,411.61 Increase of operating payables（Loss/Gain +/－） 181,099,605.53 89,341,351.34 Others 0.00 0.00 Net cash flows arising from operating activities 1,059,833,106.56 734,571,420.98 2.Significant investment and financing activities that without cash flows Liability transfer to capital 0.00 0.00 Convertible corporate bond due within 1 year 0.00 0.00 Finance lease-fixed assets 0.00 0.00 3.Net increase (decrease) of cash and cash equivalents Ending balance of cash 44,937,058.88 42,131,848.82 Less: Beginning balance of cash 42,131,848.82 68,256,602.71 Add : Ending balance of cash equivalents 0.00 0.00 Less: Beginning balance of cash equivalents 0.00 0.00 Net increase of cash and cash equivalents 2,805,210.06 -26,124,753.89 73 Shandong Airlines Co., Ltd. 2008 Annual Report 48. Relating information for acquired or disposal of subsidiaries and other business units for current period Items 2008 2007 Relating information for acquired or disposal of subsidiaries and other business units： 1．Price of disposal of subsidiaries and other business unit 1,071,181.23 2,592,379.24 2．Cash and cash equivalent received from disposal of subsidiaries and other business unit 912,019.23 750,000.00 Less：Cash and cash equivalent held by subsidiaries and other business unit 0.00 1,138,731.24 3．Net cash received from disposal of subsidiaries and other business unit 912,019.23 -388,731.24 4．Net assets from disposal of subsidiaries 1,071,181.23 2,592,379.24 Current assets 912,019.23 2,592,379.24 Non-current assets 159,162.00 0.00 Current liabilities 0.00 0.00 Non-current liabilities 0.00 0.00 49. Cash and cash equivalents Items 2008 2007 1.Cash 44,937,058.88 42,131,848.82 Including: Cash on hand 220,541.02 924,974.06 Non restricted bank deposit 44,716,517.86 41,206,874.76 Non restricted other monetary fund 0.00 0.00 2.Cash equivalents 0.00 0.00 Including: Bond investment within three month 0.00 0.00 3.Ending balance of cash and cash equivalents 44,937,058.88 42,131,848.82 Inculding: restricted cash and cash equivalents for parent or group ubsidiaries 0.00 0.00 X. Notes to financial statement for parent company 1. Accounts Receivable (1) Details of accounts receivable The closing balance The opening balance Proportion Provision for bad Proportion Provision for bad Item Balance debts Net book value Balance debts Net book value Individual transaction with significant amount 115,826,770.70 92.24% 0.00 115,826,770.70 189,588,286.65 90.17% 0.00 189,588,286.65 portfolio credit risk 0.00 0.00% 0.00 0.00 2,608,298.83 1.24% 2,608,298.83 0.00 Other transaction with no significant amount 9,747,897.58 7.76% 469,172.93 9,278,724.65 18,050,269.68 8.59% 777,353.03 17,272,916.65 74 Shandong Airlines Co., Ltd. 2008 Annual Report Total 125,574,668.28 100.00% 469,172.93 125,105,495.35 210,246,855.16 100.00% 3,385,651.86 206,861,203.30 (2) Individual significant accounts receivable Name Amount Provision for bad debts Reason Air China 55,089,147.43 0.00 Settlement difference, all are received in subsequent date BSP 39,640,732.64 0.00 Settlement difference, all are received in subsequent date China Aviation Settlement Centre 21,096,890.63 0.00 Settlement difference, all are received in subsequent date Total 115,826,770.70 0.00 （3）Age The closing balance The opening balance Age Balance % Bad debt provision Net Value Balance % Bad debt provision Net Value Within one year 124,366,476.98 99.04% 392,699.63 123,973,777.35 207,505,796.68 98.70% 770,715.04 206,735,081.64 1-2 years 1,157,864.08 0.92% 75,222.25 1,082,641.83 307,308.50 0.15% 206,030.43 101,278.07 2-3 years 26,524.80 0.02% 60.93 26,463.87 1,200,577.98 0.57% 1,175,785.69 24,792.29 3-4 years 23,802.42 0.02% 1,190.12 22,612.30 929,258.00 0.44% 929,206.70 51.30 4-5 years 0.00 0.00% 0.00 0.00 303,914.00 0.14% 303,914.00 0.00 Total 125,574,668.28 100% 469,172.93 125,105,495.35 210,246,855.16 100.00% 3,385,651.86 206,861,203.30 （4）Details of top five debtors for accounts receivable The closing balance The opening balance Items Balance Percentage Balance Percentage Total amounts for top five debtors 117,636,799.77 93.68% 191,137,479.60 90.91% (5) Up to 31 Dec 2008, amounts due to shareholders who own 5% or over 5% of voting rights see “Note 11, related parties and transactions” 2. Other accounts receivable (1) Details of other accounts receivable The closing balance The opening balance Items Balance % Bad debt Net Value Balance % Bad debt Net Value provision provision Individual transaction with significant amount 203,908,540.13 79.59% 109,051,717.65 94,856,822.48 228,111,849.89 83.93% 109,136,552.15 118,975,297.74 Other transaction with no significant amount 52,282,091.05 20.41% 1,940,806.24 50,341,284.81 43,684,552.87 16.07% 2,155,261.53 41,529,291.34 Total 256,190,631.18 100.00% 110,992,523.89 145,198,107.29 271,796,402.76 100.00% 111,291,813.68 160,504,589.08 (2) Bad debt provision for individual accounts receivable with significant amount. 75 Shandong Airlines Co., Ltd. 2008 Annual Report Percentage of bad debts Debtor Balance provision Reason the company could not repay debts due to its Shandong Airline Rainbow Jet Co., Ltd 109,051,717.65 100.00% financial difficulty Deposit for engine maintenance and purchase of Security deposit for airplane engine 94,856,822.48 0.00 aircraft, all amounts is receivable in the future Total 203,908,540.13 109,051,717.65 (3) Age The closing balance The opening balance Ages Balance % Bad debt Net Value Balance % Bad debt provision Net Value provision Within one year 43,209,209.30 16.87% 2,035,090.39 41,174,118.91 45,220,181.76 16.64% 1,339,820.64 43,880,361.12 1-2 years 31,169,427.89 12.17% 669,245.45 30,500,182.44 29,184,928.30 10.74% 11,280,098.16 17,904,830.14 2-3 years 17,263,584.49 6.74% 10,698,669.47 6,564,915.02 137,151,532.65 50.46% 80,385,813.40 56,765,719.25 3-4 years 133,052,336.46 51.93% 80,329,246.11 52,723,090.35 23,496,543.29 8.64% 18,138,057.20 5,358,486.09 4-5 years 23,398,644.42 9.13% 17,195,422.39 6,203,222.03 24,265,824.29 8.93% 77,624.20 24,188,200.09 Above 5 years 8,097,428.62 3.16% 64,850.08 8,032,578.54 12,477,392.47 4.59% 70,400.08 12,406,992.39 Total 256,190,631.18 100.00% 110,992,523.89 145,198,107.29 271,796,402.76 100.00% 111,291,813.68 160,504,589.08 (4) Details of top five debtors for other accounts receivable Name of debtors Balance Nature or content Age Proportion Shandong Airline Rainbow Jet Co., Ltd 109,051,717.65 Disbursement fee 1-5years 42.57% Shenzhen finance lease company 41,354,563.28 Deposit of aircraft 3-4years 16.14% SingaporeAircraft Leasing Enterprise 19,136,880.00 Deposit of aircraft 1-3years 7.47% RainierAircraftLeasing(Ireland)Limited 16,762,866.90 Deposit of aircraft 3-6years 6.54% Huaxia Airlines Ltd 14,979,716.58 Aircraft rental and maintenance reserve 3-4years 5.85% Total 201,285,744.41 78.57% (5) Up to 31 Dec 2008, amounts due to shareholders who own 5% or over 5% of voting rights see “Note 11, related parties and transactions. 3. Long-term equity investment (1). Long-term equity investment and provision for impairment loss The closing balance The opening balance Items Balance Provision for impairment loss Book value Balance Provision for impairment loss Book value Long-term equity investment 134,665,305.97 22,500,000.00 112,165,305.97 135,315,305.97 22,500,000.00 112,815,305.97 Include: Investment in Subsidiary 23,813,205.97 0.00 23,813,205.97 24,463,205.97 0.00 24,463,205.97 Joint-venture investment 22,500,000.00 22,500,000.00 0.00 22,500,000.00 22,500,000.00 0.00 Investment in Other Companies 88,352,100.00 0.00 88,352,100.00 88,352,100.00 0.00 88,352,100.00 (2) Long-term equity investment measured by cost method 76 Shandong Airlines Co., Ltd. 2008 Annual Report Compay The initial amount The opening balance Increment Decrement The closing balance ①Subsidiaries: Qingdao International Aviation Logistic center Co., Ltd 23,813,205.97 23,813,205.97 0.00 0.00 23,813,205.97 Union Express Service Shandong Airline Co., Ltd 650,000.00 650,000.00 0.00 650,000.00 0.00 Sub-total 24,463,205.97 24,463,205.97 0.00 650,000.00 23,813,205.97 ②Other long-term equity investment China Civil aviation information network Co., Ltd 6,690,000.00 6,690,000.00 0.00 0.00 6,690,000.00 Sichuan airlines Co. Ltd 35,000,000.00 35,000,000.00 0.00 0.00 35,000,000.00 JiNan International Airport Co. Ltd 46,662,100.00 46,662,100.00 0.00 0.00 46,662,100.00 Sub-total 88,352,100.00 88,352,100.00 0.00 0.00 88,352,100.00 Total 112,815,305.97 112,815,305.97 0.00 650,000.00 112,165,305.97 (3) Long-term equity investment measured by equity method Opening Increment Adjustment for Cash Other The closing Accumulate Cash Company Initial investment balance current year profit dividend decrement balances dividend and loss SARJ 25,000,000.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total 25,000,000.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (4) Impairment loss provision of long-term investment Investee The opening balances Increment Decrement The closing balances SARJ 22,500,000.00 0.00 0.00 22,500,000.00 Total 22,500,000.00 0.00 0.00 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. 4. Operating income and operating cost (1) Operating income Items 2008 2007 Main business income 4,979,929,511.89 4,530,329,258.69 Other business income 63,440,911.31 93,220,311.57 Total 5,043,370,423.20 4,623,549,570.26 (2) Operating cost Items 2008 2007 Main business cost 4,121,299,184.09 3,778,757,204.89 Other business cost 33,511,012.84 56,965,069.52 Total 4,154,810,196.93 3,835,722,274.41 (3) The main businesses are listed as per product or category. 77 Shandong Airlines Co., Ltd. 2008 Annual Report 2008 2007 Product or category Operating income Operating cost Gross profit Operating income Operating cost Gross profit Aviation shipping service 4,953,048,164.35 4,101,665,962.58 851,382,201.77 4,503,661,260.70 3,761,738,252.60 741,923,008.10 Logistic service 0.00 0.00 0.00 789,937.89 706,583.80 83,354.09 Catering service 22,538,565.66 15,614,100.05 6,924,465.61 26,059,386.92 16,312,368.49 9,747,018.43 Leasing service 31,801,807.87 35,128,834.04 -3,327,026.17 49,549,336.89 52,470,312.13 -2,920,975.24 Others 35,981,885.32 2,401,300.26 33,580,585.06 43,489,647.86 4,494,757.39 38,994,890.47 Total 5,043,370,423.20 4,154,810,196.93 888,560,226.27 4,623,549,570.26 3,835,722,274.41 787,827,295.85 (4)Top five accounts for sales income 2008 2007 Customer Proportion of the total Proportion of the total sales amount sales amount sales% sales% Total amounts of the top five accounts for sales income 712,142,468.82 14.12% 373,431,310.83 8.08% 5. Investment income The origin of the investment income 2008 2007 Realized profit from Financial assets trading 10,081,058.70 22,379,236.48 Profit distributed by the disposal of shareholder’s right 421,181.23 0.00 Profit distributed by shareholding company 1,130,610.00 956,670.00 Total 11,632,849.93 23,335,906.48 XI. 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 (1) The relationship of related parties ①related party with controllable relationship Registered Legal Business name Main business Business nature ADD Relationship representative air passenger transport, freight transport and Air China Limited Beijing Controlled party Corp. Dongkong related service etc Aircraft and ground equipment repair and Limited liability Shandong Aviation Group Controlled Jinan maintenance, air passenger transport, freight company Gang feng Co. Ltd. shareholder transport and related service etc The registered capital and changes the related parties with controllable relationship Business name The opening balance Increment Decrement The closing balance 78 Shandong Airlines Co., Ltd. 2008 Annual Report Air China Limited 9,433,210,909.00 1,639,000,000. 0.00 11,072,210,909.00 Shandong Aviation Group Co. Ltd. 580,000,000.00 0.00 0.00 580,000,000.00 Changes in share capital and particular about related party with controllable relationship Business name The opening balance Proportion Increment Decrement The closing balance Proportion Air China Limited 91,200,000.00 22.80% 0.00 0.00 91,200,000.00 22.80% Shandong Aviation Group Co. Ltd. 168,004,000.00 42.00% 0.00 0.00 168,004,000.00 42.00% ② Subsidiaries of the company The information about Subsidiaries of the company, see Note 7.1 （2）The related party with uncontrollable relationship ①The joint ventures and associates of the company The information about joint ventures and associates of the company, see Note8 ②The related party with uncontrollable relationship Name The relationship with company Shandong Taeco Aircraft Engineering Co., Ltd Subsidiary which under the same control of holding company Aviation building management limited company Subsidiary which under the same control of holding company Shandong xiaoyu technology service ltd Subsidiary which under the same control of holding company Qingdao Feisheng international Aviation Training Co., Ltd Subsidiary which under the same control of holding company Shandong International Aviation Training Co., Ltd. Subsidiary which under the same control of holding company SARJ associate 3、 Related party transactions （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。 （2） Related party transactions ① Offering service 2008 2007 Related party Pricing principle Transaction detail Amount proportion Amount proportion Air China Limited Protocol Price Payment for service 5,950,000.00 43.44% 12,390,700.00 100.00% Total 5,950,000.00 43.44% 12,390,700.00 100.00% ② Acceptance service 2008 2007 Pricing Related party Transaction detail principle Amount proportion Amount proportion 79 Shandong Airlines Co., Ltd. 2008 Annual Report Shandong Taeco Aircraft Engineering Co., Ltd Marketing price Expenditure for aircraft maintenance 61,209,045.29 17.68% 56,344,238.51 32.11% Rental charges in respect of Shandong Aviation Group Co. Ltd. Marketing price land and buildings 5,834,547.95 21.43% 6,207,465.77 22.13% Shandong Aviation Group Co. Ltd. Marketing price Room and restaurant service charges 5,135,401.66 0.00% 4,911,669.10 0.00% Qingdao Feisheng international Aviation Training Co., Ltd Marketing price Training fee 5,010,748.92 6.17% 5,879,227.00 7.50% Shandong International Aviation Training Co., Ltd. Marketing price Training fee 10,917,712.53 13.48% 7,933,074.50 10.12% Shandong xiaoyu technology service ltd Marketing price Repairs and maintenance charges 11,073,497.62 3.63% 3,323,330.44 1.89% Total 99,180,953.97 84,599,005.32 ③ Other transaction Pricing 2008 2007 Related party Transaction detail principle Amount proportion Amount proportion SARJ Settlement of debt 84,834.5 0.00 498,594.46 0.00 Air China Limited Protocol Price Leasing of aircraft and engine 600,186,086.00 94.97% 259,180,758.50 83.95% Air China Limited Protocol Price Joint venture route 96,046,056.93 100.00% 85,833,974.37 100.00% Shandong Aviation Group Co. Ltd. Protocol Price Guarantee fee 4,445,800.00 100.00% 0.00 0.00 ④ Guarantee Shandong Aviation Group Co. Ltd. Provides guarantee for the company as following: Maturity Interest Types of borrowing Creditors currency Amount Start date date rate Industrial and Commercial Bank Dongjiao branch RMB 100,000,000.00 2006-12-18 2018-12-17 5.5080% Industrial and Commercial Bank Dongjiao branch RMB 2,200,000.00 2008-6-5 2018-12-17 5.5080% Industrial and Commercial Bank Dongjiao branch RMB 2,100,000.00 2008-6-18 2018-12-17 5.5080% Industrial and Commercial Bank Dongjiao branch RMB 123,000,000.00 2008-6-19 2018-12-17 5.5080% Industrial and Commercial Bank Dongjiao branch RMB 13,500,000.00 2008-7-1 2018-12-17 6.9660% Long-term borrowing Industrial and Commercial Bank Dongjiao branch RMB 30,000,000.00 2008-8-19 2018-12-17 5.8320% Industrial and Commercial Bank Dongjiao branch USD $3,671,400.00 2007-5-31 2018-12-17 3.7675% Industrial and Commercial Bank Dongjiao branch USD $3,671,400.00 2007-9-4 2018-12-17 3.9194% Industrial and Commercial Bank Dongjiao branch USD $3,671,400.00 2007-12-3 2018-12-17 3.4063% China Construction Bank Jinan Shizhong branch RMB 27,600,000.00 2007-12-3 2022-3-28 5.5080% China Construction Bank Jinan Shizhong branch RMB 83,000,000.00 2008-1-2 2022-3-28 7.0470% Maturity Interest Types of borrowing Creditors currency Amount Start date date rate Long-term borrowing China Construction Bank Jinan Shizhong branch RMB 54,000,000.00 2008-3-3 2022-3-28 7.0470% China Construction Bank Jinan Shizhong branch RMB 53,000,000.00 2008-4-1 2022-3-28 7.0470% China Construction Bank Jinan Shizhong branch RMB 26,500,000.00 2008-4-29 2022-3-28 7.0470% 80 Shandong Airlines Co., Ltd. 2008 Annual Report China Construction Bank Jinan Shizhong branch RMB 52,300,000.00 2008-6-2 2022-3-28 7.0470% China Construction Bank Jinan Shizhong branch RMB 51,500,000.00 2008-7-1 2022-3-28 7.0470% China Construction Bank Jinan Shizhong branch RMB 120,000,000.00 2008-7-15 2022-3-28 7.0470% China Construction Bank Jinan Shizhong branch USD $6,039,200.00 2007-3-29 2022-3-28 4.6763% China Construction Bank Jinan Shizhong branch USD $3,749,800.00 2007-4-30 2022-3-28 4.2800% China Construction Bank Jinan Shizhong branch USD $6,765,620.00 2007-5-31 2022-3-28 3.3675% China Construction Bank Jinan Shizhong branch USD $17,954,820.00 2007-7-2 2022-3-28 3.9088% China Construction Bank Jinan Shizhong branch USD $3,749,800.00 2007-8-1 2022-3-28 3.9863% China Construction Bank Jinan Shizhong branch USD $14,908,900.00 2007-9-28 2022-3-28 3.4319% Bank of Communication Co.,Ltd JiNan Tianqiao branch RMB 150,450,000.00 2006-5-30 2016-12-30 5.7510% Bank of Communication Co.,Ltd JiNan Tianqiao branch RMB 115,268,075.00 2007-11-12 2016-12-30 6.4800% Bank of Communication Co.,Ltd JiNan Tianqiao branch RMB 115,600,000.00 2007-12-3 2016-12-30 5.5080% Bank of Communication Co.,Ltd JiNan Tianqiao branch RMB 98,400,000.00 2008-1-14 2016-12-30 7.0470% Bank of communications Tianqiao branch USD $3,112,190.00 2006-10-31 2016-12-30 3.8163% Bank of communications Tianqiao branch USD $3,121,327.50 2006-11-30 2016-12-30 3.3213% Bank of communications Tianqiao branch USD $3,112,190.00 2007-1-31 2016-12-30 4.1275% Bank of communications Tianqiao branch USD $3,074,365.00 2007-5-31 2016-12-30 3.3213% Bank of communications Tianqiao branch USD $3,065,397.50 2007-4-29 2016-12-30 4.2125% Bank of communications Tianqiao branch USD $3,074,365.00 2007-5-31 2016-12-30 3.3213% Agricultural Bank of China Minghu branch RMB 150,000,000.00 2008-1-23 2009-1-22 6.7230% Agricultural Bank of China Minghu branch RMB 60,000,000.00 2008-11-5 2009-11-4 5.9940% Agricultural Bank of China Minghu branch RMB 50,000,000.00 2008-11-12 2009-11-11 5.9940% Agricultural Bank of China Minghu branch RMB 60,000,000.00 2008-11-19 2009-11-18 5.9940% China Merchants Bank Jinan branch RMB 40,000,000.00 2008-7-3 2009-7-2 6.7230% Short-term loans China Merchants Bank Qingdao branch RMB 80,000,000.00 2008-6-16 2009-6-16 7.0218% China Merchants Bank Qingdao branch RMB 90,000,000.00 2008-7-9 2009-7-9 7.0218% Bank of China Jinan branch RMB 80,000,000.00 2008-12-31 2009-12-30 5.0445% China Construction Bank Jinan Shizhong branch RMB 40,000,000.00 2008-12-16 2009-12-15 5.0220% China Construction Bank Jinan Shizhong branch RMB 40,000,000.00 2008-12-18 2009-12-17 5.0220% （3）The balance of payables and receivables for related party. The opening balance The closing balance Business name Amounts proportion Amounts proportion Trade receivables ： Air China Limited 50,081,251.95 23.65% 55,089,147.43 43.50% Total 50,081,251.95 23.65% 55,089,147.43 43.50% 81 Shandong Airlines Co., Ltd. 2008 Annual Report Other receivables ： Air China Limited 2,550,000.00 0.94% 1,100.00 0.00% Shandong International Aviation Training Co., Ltd. 80,342.04 0.03% 780,969.77 0.31% Qingdao Feisheng international Aviation Training Co., Ltd 41,041.70 0.02% 0.00 0.00 Shandong xiaoyu technology service ltd 1,201.25 0.00% 706,431.65 0.28% SARJ 109,136,552.15 40.14% 109,051,717.70 42.60% Total 111,809,137.14 41.12% . 110,540,219.12 43.19% Trade payables： Shandong Taeco Aircraft Engineering Co., Ltd 717,414.49 0.09% 717,414.49 0.08% Total 717,414.49 0.09% 717,414.49 0.08% Other payables： Air China Limited 20,000,000.00 14.77% 20,000,000.00 12.37% Shangdong Aviation Group Co. Ltd. 1,019,818.83 0.75% 5,551,323.91 3.43% Qingdao Feisheng international Aviation Training Co., Ltd 1,150,179.77 0.85% 3,827,607.16 2.37% Shandong Taeco Aircraft Engineering Co., Ltd 6,554,109.84 4.84% 24,756,728.86 15.31% Shandong International Aviation Training Co., Ltd. 1,417,927.19 1.05% 0.00 0.00% Total 30,142,035.63 22.26% 54,135,659.93 33.48% XII 、Financial instruments and risk management The financial instruments of the company include financial derivative instrument and bank borrowings, finance lease liabilities, monetary funds, etc. The main purposes of these financial instruments are in order to finance the operation of the Company which directly arise from the operation activities of the company, such as accounts receivable and accounts payable, etc. The derivative instrument of the company is interest rate swaps; the purpose of interest rate swaps is to avoid the risk of interest rate volatility, these interest rate swaps contract are matched with contract of airplane finance leasing and long-term borrowing contract, therefore the risks arise from interest payment of the financing can be avoided, and to prevent the losses in financing costs in the fluctuation of interest rates. In order to strengthen the Company's financial derivative transaction management and control the risk, the control procedures of the financial derivative instruments has been approved by the board. XIII 、Contingency The pledged assets are listed as in the Note 9 of the 16, 24, and 25 of the financial statements; there is no other significant contingency that needs to be disclosed. XIV、Commitment Up to 31/12/2008, the uncompleted commitments are as following: 82 Shandong Airlines Co., Ltd. 2008 Annual Report The closing balance(000) Item Within one year 1-2years 2-3years Above 3 years Total Lease commitments 344,967.74 329,927.55 298,427.91 1,043,131.27 2,016,454.47 Capital Commitments 936,212.73 522,152.09 1,076,484.56 3,497,611.76 6,032,461.15 Total 1,281,180.47 852,079.64 1,374,912.47 4,540,743.03 8,048,915.62 XV. Non-adjusting events occurring after the balance sheet date By 31/12/2008 the company has no non-adjusting events occurring after the balance sheet date that need to be disclosed. XVI. Supplementary Information Return on equity and earnings per share Return on equity（%） earnings per share（Yuan/Share） Profit in the report period Weighted Basic profit Profit per share Full dilution average per share after dilution Net profit attributable to ordinary shareholders 80,981,442.68 14.72 15.89 0.20 0.20 Net profit attributable to the ordinary shareholders after deduction of non-recurring 92,440,296.87 16.81 18.14 0.23 0.23 Calculation of earning per share: ： （1）Basic earning per share: 2008 2007 after deduction Items calculation after deduction Amount of non- Amount of non-recurring recurring Net profit attributable to ordinary shareholder of the Company (1) 80,981,442.68 92,440,296.87 68,171,958.24 53,689,781.57 The number of shares issued to the public at the beginning of the period (2) 400,000,000.00 400,000,000.00 400,000,000.00 400,000,000.00 The number of shares newly issued in the current period (3) 0.00 0.00 0.00 0.00 The number of shares repurchase in the current period (4) 0.00 0.00 0.00 0.00 The weighted average number of ordinary shares issued to the public (5)=(2)+(3)-(4) 400,000,000.00 400,000,000.00 400,000,000.00 400,000,000.00 Basic earning per share (6)=(1)÷(5) 0.20 0.23 0.17 0.13 （2）Diluted earning per share: 2008 2007 Items calculation after deduction of after deduction of Amount Amount non-recurring non-recurring Net profit attributable to ordinary shareholder of (1) the Company 80,981,442.68 92,440,296.87 68,171,958.24 53,689,781.57 The interest of the potential diluted ordinary shares determined to be expenses in the current (2) period 0.00 0.00 0.00 0.00 The gains or expenses to be resulted from (3) 0.00 0.00 0.00 0.00 83 Shandong Airlines Co., Ltd. 2008 Annual Report conversion of diluted ordinary shares Income tax rate (4) 0.25 0.25 0.33 0.33 The adjustment of the net profit attributable to (5)=(1)+[(2)-(3)]×[1- ordinary shareholder of the Company (4)] 80,981,442.68 92,440,296.87 68,171,958.24 53,689,781.57 Total number of ordinary shares (6) 400,000,000.00 400,000,000.00 400,000,000.00 400,000,000.00 Assumed that the dilution of potential ordinary shares converted into ordinary shares in issue (7) increased the weighted average number of ordinary shares 0.00 0.00 0.00 0.00 Total number of diluted ordinary shares (8)=(6)+(7) 400,000,000.00 400,000,000.00 400,000,000.00 400,000,000.00 Diluted earning per share (9)=(5)÷(8) 0.20 0.23 0.17 0.13 XVII. Approval of financial statements This financial statement is approved and authorized for issuance by the Board of Directors on March 27, 2009. XI. Documents Available for Reference 1. Financial statements carrying the personal signatures and seals of Chairman of the Board, Chief Accountant and Person in Charge of Accounting Department; 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 2008; 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. Board of Directors of Shandong Airlines Co., Ltd. March 27, 2009 84