Air China Regulatory News (AIRC)

18 Mar 2008 07:00

Air China Ld17 March 2008 (a joint stock limited company incorporated in the People's Republic of China with limited liability) (Stock Code: 753) 2007 ANNUAL RESULTS ANNOUNCEMENT GROUP RESULTS The board of directors (the "Board") of Air China Limited (the "Company") ispleased to announce the audited consolidated financial results of the Company,its subsidiaries and joint ventures (collectively, the "Group") for the yearended 31 December 2007 with comparative figures for the corresponding year of2006 as follows: A. Prepared under International Financial Reporting Standards CONSOLIDATED INCOME STATEMENT 2007 2006 Notes RMB'000 RMB'000 TURNOVER Air traffic revenue 3 47,717,546 41,606,130Other operating revenue 4 3,612,995 3,330,476 51,330,541 44,936,606 OPERATING EXPENSES Jet fuel costs (17,201,143) (15,716,174)Take-off, landing and depot charges (5,537,907) (5,136,388)Depreciation (5,554,443) ( 5,274,033)Aircraft maintenance, repair and overhaul costs (2,076,119) (1,812,647)Employee compensation costs 5 (5,209,766) (4,313,883)Air catering charges (1,473,543) (1,320,123)Aircraft and engine operating lease expenses (2,239,359) (2,069,639)Other operating lease expenses (311,262) (323,752)Other flight operation expenses (4,232,726) (3,658,986)Selling and marketing expenses (2,708,770) (2,026,728)General and administrative expenses (951,376) (766,549) (47,496,414) (42,418,902) PROFIT FROM OPERATIONS 6 3,834,127 2,517,704 Finance revenue 7 2,376,572 1,177,871 Finance costs 7 (1,969,326) (1,876,487) Gain on disposal of an associate 8 - 1,592,633 Share of profits and losses of associates 1,364,740 517,500 PROFIT BEFORE TAX 5,606,113 3,929,221 Tax (1,484,613) (624,124) PROFIT FOR THE YEAR 4,121,500 3,305,097 2007 2006 Notes RMB'000 RMB'000 Attributable to: Equity holders of the Company 4,228,997 2,687,841 Minority interests (107,497) 617,256 4,121,500 3,305,097 Dividend: Interim - - Proposed final 837,987 602,767 837,987 602,767 Earnings per share attributable to equity holders of the Company: 12 Basic 35.6 cents 26.2 cents Diluted NA NA CONSOLIDATED BALANCE SHEET 2007 2006 RMB'000 RMB'000 NON-CURRENT ASSETS Property, plant and equipment 61,691,673 54,767,664Lease prepayments 1,046,042 1,013,529Intangible asset 75,194 -Interests in associates 9,542,677 9,255,474Advance payments for aircraft and related equipment 7,652,365 6,976,054Deposits for aircraft under operating leases 257,505 259,681Long term receivable from ultimate holding company 331,813 431,813Available-for-sale investments 1,997 6,704Deferred tax assets 626,645 1,064,157 81,225,911 73,775,076 CURRENT ASSETS Aircraft held for sale 184,728 -Inventories 1,142,050 1,015,266Accounts receivable 2,794,280 2,835,227Bills receivable 1,599 -Prepayments, deposits and other receivables 1,318,062 1,077,036Derivative financial instruments 6,493 99,935Pledged deposits 118,624 211,504Cash and cash equivalents 3,906,520 5,159,181Due from ultimate holding company 335,129 289,933Due from related companies 22,881 14,378 9,830,366 10,702,460 TOTAL ASSETS 91,056,277 84,477,536 CURRENT LIABILITIES Air traffic liabilities (2,156,104) (1,530,484)Accounts payable (5,930,800) (5,221,061)Bills payable - (651,345)Other payables and accruals (4,350,281) (4,192,887)Derivative financial instruments (14,826) (242,108)Tax payable (1,111,404) (534,273)Obligations under finance leases (2,216,680) (2,354,905)Bank and other loans (10,978,835) (11,139,021)Provision for major overhauls (83,907) (47,318)Due to related companies (45,142) (39,989) (26,887,979) (25,953,391) NET CURRENT LIABILITIES (17,057,613) (15,250,931) TOTAL ASSETS LESS CURRENT LIABILITIES 64,168,298 58,524,145 NON-CURRENT LIABILITIES Obligations under finance leases (13,328,193) (11,247,855)Bank loans, other loans and corporate bonds (16,615,291) (12,701,977)Provision for major overhauls (1,190,415) (921,929)Provision for early retirement benefits obligations (164,837) (201,199)Long term payables (190,005) (252,591)Deferred income (872,023) ( 948,966)Deferred tax liabilities (300,181) (513,935) (32,660,945) (26,788,452) NET ASSETS 31,507,353 31,735,693 2007 2006 RMB'000 RMB'000 EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Issued share capital 12,251,362 12,251,362Treasury shares (1,283,492) (1,246,955)Reserves 19,551,280 18,117,084Proposed final dividend 837,987 602,767 31,357,137 29,724,258 MINORITY INTERESTS 150,216 2,011,435 TOTAL EQUITY 31,507,353 31,735,693 Notes: 1 Basis of preparation These financial statements have been prepared in accordance with InternationalFinancial Reporting Standards ("IFRSs", which comprise standards andinterpretations approved by the International Accounting Standards Board, andInternational Accounting Standards ("IAS") and Standing InterpretationsCommittee interpretations approved by the International Accounting StandardsCommittee that remain in effect) and the disclosure requirements of the HongKong Companies Ordinance. These financial statements are presented in Renminbi("RMB") and all values are rounded to the nearest thousand (RMB'000) except whenotherwise indicated. These financial statements have been prepared on a historical cost basis, exceptfor derivative financial instruments which have been measured at fair value andaircraft held for sale which have been stated at the lower of their carryingamounts and fair values less costs to sell. Impact of New and Revised IFRSs The Group has adopted the following new and revised IFRSs for the first time forthe current year's financial statements. Except for in certain cases, givingrise to new and revised accounting policies and additional disclosures, theadoption of these new and revised standards and interpretations has had nomaterial effect on these financial statements. IFRS 7 Financial Instruments: Disclosures IAS 1 Amendment Capital Disclosures IFRIC-Int 8 Scope of IFRS 2 IFRIC-Int 9 Reassessment of Embedded Derivatives IFRIC-Int 10 Interim Financial Reporting and Impairment (a) IFRS 7 Financial Instruments: Disclosures This standard requires disclosures that enable users of the financial statementsto evaluate the significance of the Group's financial instruments and the natureand extent of risks arising from those financial instruments. The newdisclosures are included throughout the financial statements. While there hasbeen no effect on the financial position or results of operations of the Group,comparative information has been included where appropriate. (b) Amendment to IAS 1 Presentation of Financial Statements - CapitalDisclosures This amendment requires the Group to make disclosures that enable users of thefinancial statements to evaluate the Group's objectives, policies and proceduresfor managing capital. (c) IAS 27 Consolidated and Separate Financial Statements This interpretation requires IFRS2 to be applied to any arrangement in which theGroup cannot identify specifically some or all of the goods or servicesreceived, for which equity instruments are granted or liabilities (based on avalue of the Company's equity instruments) are incurred by the Group for aconsideration, and which appears to be less than the fair value of the equityinstruments granted or liabilities incurred. As the Company has not issued anyequity instruments to its employees and only incurred liabilities to itsemployees for identified services provided in accordance with its shareappreciation right arrangement, the interpretation has had no effect on thesefinancial statements. (d) IFRIC-Int 9 Reassessment of Embedded Derivatives This interpretation requires that the date to assess whether an embeddedderivative is required to be separated from the host contract and accounted foras a derivative is the date that the Group first becomes a party to thecontract, with reassessment only if there is a change to the contract thatsignificantly modifies the cash flows. As the Group has no embedded derivativerequiring separation from the host contract, the interpretation has had noimpact on the financial position or results of operations of the Group. (e) IFRIC-Int 10 Interim Financial Reporting and Impairment The Group has adopted IFRIC Interpretation 10 as at 1 January 2007, whichrequires that an impairment loss recognised in a previous interim period inrespect of goodwill or an investment in either an equity instrument classifiedas available-for-sale or a financial asset carried at cost is not subsequentlyreversed. As the Group had no impairment losses previously reversed in respectof such assets, the interpretation has had no impact on the financial positionor results of operations of the Group Impact of Issued but not yet Effective IFRSs The Group has not applied the following new and revised IFRSs, which have beenissued but are not yet effective, in these financial statements: IFRS 8 Operating Segments IFRS 2 Share-based Payments - Vesting Conditions and Cancellations IFRS 3 (Revised) Business Combinations IAS 23 (Revised) Borrowing Costs IAS 27 (Revised) Consolidated and Separate Financial Statements IAS 1 (Revised) Presentation of Financial Statements IAS 32 (Amendment) Puttable Financial Instruments IAS 1 (Amendment) Puttable Financial Instruments IFRIC-Int 11 IFRS 2: Group and Treasury Share Transactions IFRIC-Int 12 Service Concession Arrangements IFRIC-Int 13 Customer Loyalty Programmes IFRIC-Int 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (a) IFRS 8 Operating Segments This standard will become effective for annual periods beginning on or after 1January 2009. The standard specifies how an entity should report informationabout its operating segments, based on information about the components of theentity that is available to the chief operating decision maker for the purposeof allocating resources to the segments and assessing their performance. Thestandard also requires the disclosure of information about the products andservices provided by the segments, the geographical areas in which the Groupoperates, and revenue from the Group's major customers. The Group expects toadopt IFRS 8 from 1 January 2009. (b) IFRS 2 Share-based Payments - Vesting Conditions and Cancellations This amendment to IFRS 2 Share-based payments was published in January 2008 andbecomes effective for financial years beginning on or after 1 January 2009. Thestandard restricts the definition of "vesting condition" to a condition thatincludes an explicit or implicit requirement to provide services. Any otherconditions are non-vesting conditions, which have to be taken into account todetermine the fair value of the equity instruments granted. In the case thatsuch award does not vest as the result of a failure to meet a non-vestingcondition that is within the control of either the entity or the counterparty,this must be accounted for as a cancellation. The Group has not entered intoshared-based payment schemes with non-vesting conditions attached and,therefore, does not expect significant implications on its accounting forshare-based payments. (c) IFRS 3 Business Combinations The revised standards were issued in January 2008 and become effective forfinancial years beginning on or after 1 July 2009. IFRS 3 introduces a number ofchanges in the accounting for business combinations that will impact the amountof goodwill recognised., the reported results in the period that an acquisitionoccurs, and future reported results. The changes introduced by IFRS 3 must beapplied prospectively and will affect future acquisitions and transactions withminority interest. (d) IAS 23 Borrowing Costs The revised standard will become effective for annual periods beginning on orafter 1 January 2009 and requires capitalisation of borrowing costs when suchcosts are directly attributable to the acquisition, construction or productionof a qualifying asset. As the Group's current policy for borrowing cost alignswith the requirement of the revised standard, the revised standard is unlikelyto have any financial impact on the Group. (e) IAS 27 Consolidated and Separate Financial Statements IAS 27 requires that a change in the ownership interest of a subsidiary isaccounted for as an equity transaction. Therefore, such a change will have noimpact on goodwill, nor will it give raise to a gain or loss. Further more, theamended standard changes the accounting for losses incurred by the subsidiary aswell as the loss of control of a subsidiary. The changes introduced by IAS 27must be applied prospectively and will affect future acquisitions andtransactions with minority interest. (f) IAS 1 Presentation of Financial Statements The revised IFAS 1 Presentation of Financial Statements was issued in September2007 and becomes effective for financial years beginning or after 1 January2009. The Standard separates owners and non-owner changes in equity. Thestatement of changes in equity will include only details of transactions withowners, with all non-owner changes in equity presented as a single line. Inaddition, the Standard introduces the statement of comprehensive income: itpresents all items of income and expense recognized in profit or loss, togetherwith all other items of recognized income and expenses, either in one singlestatement, or in two linked statements. The Group is still evaluating whether itwill have one or two statements. (g) IAS 32 Puttable Financial Instruments Amendment to IAS 32 were issued in February 2008 and become effective for annualperiods beginning or after 1 January 2009. The amendment to IAS 32 requirescertain puttable financial instruments and obligations arising on liquidation tobe classified as equity if certain criteria are met. The Group does not expectthese amendments to impact the financial statements of the Group. (h) IAS 1 Puttable Financial Instruments Amendment to IAS 1 were issued in February 2008 and become effective for annualperiods beginning or after 1 January 2009. The amendment to IAS 1 requiresdisclosure of certain information relating to puttable instruments classified asequity. The Group does not expect these amendments to impact the financialstatements of the Group. (i) IFRIC-Int 11: IFRS 2 Group and Treasury Share Transactions This interpretation will become effective for annual periods beginning on orafter 1 March 2007. This interpretation requires arrangements whereby anemployee is granted rights to the Group's equity instruments, to be accountedfor as an equity-settled scheme, even if the Group acquires the instruments fromanother party, or the shareholders provide the equity instruments needed. Theinterpretation also addresses the accounting for share-based paymenttransactions involving two or more entities within the Group. As the Groupcurrently has no such transactions, the interpretation is unlikely to have anyfinancial impact on the Group. (j) IFRIC-Int 12 Service Concession Arrangements This interpretation will become effective for annual periods beginning on orafter 1 January 2008. The interpretation requires an operator underpublic-to-private service concession arrangements to recognise the considerationreceived or receivables in exchange for the construction services as a financialasset and/or an intangible asset, based on the terms of the contractualarrangements. The interpretation also address how an operator shall applyexisting IFRSs to account for the obligations and the rights arising fromservice concession arrangements by which a government or a public sector entitygrants a contract for the construction of infrastructure used to provide publicservices and/or for the supply of public service. As the Group currently has nosuch arrangements, the interpretation is unlikely to have any financial impacton the Group. (k) IFRIC-Int 13 Customer Loyalty Programmes This interpretation will become effective for annual periods beginning on orafter 1 July 2008. This interpretation requires that the loyalty award creditsgranted to customers as part of a sales transaction are accounted for as aseparate component of the sales transaction. The consideration received in thesales transaction is allocated between the loyalty award credits and the othercomponents of the sale. The amount allocated to the loyalty award credits isdetermined by reference to their fair value and is deferred until the awards areredeemed or the liability is otherwise extinguished. (l) IFRIC-Int 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum FundingRequirements and their Interaction This interpretation will become effective for annual periods beginning on orafter 1 January 2008. This Interpretation provides guidance on how to assess thelimit under IAS 19 Employee Benefits, on the amount of a refund or a reductionin future contributions in relation to a defined benefit scheme that can berecognised as an asset, in particular, when a minimum funding requirementexists. The Group is in the process of making an assessment of the impact if applicable,of these new and revised IFRSs upon initial application. So far, it hasconcluded that while the adoption of IFRS8 may result in new or amendeddisclosure and the adoption of IFRIC-Int 13 may result in a change in amountingpolicy,these new and revised IFRSs are unlikely to have a significant impact onthe Group's results of operations and financial position. 2 Business segments The following tables present revenue, profit and certain asset, liability andexpenditure information for the Group's business segments for the years ended 31December 2007 and 2006: Year ended 31 December 2007 Airport Airline Engineering terminal operations services services Others Eliminations Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 REVENUE Sales to external 50,028,849 487,710 509,450 304,532 - 51,330,541customers Intersegment sales - 674,123 - 190,758 (864,881) - Total revenue 50,028,849 1,161,833 509,450 495,290 (864,881) 51,330,541 PROFIT FROM OPERATIONS Segment results 3,695,437 686,601 111,793 205,177 (864,881) 3,834,127Finance revenue 2,328,035 21,791 - 26,746 - 2,376,572Finance costs (1,954,476) (13,400) - (1,450) - (1,969,326)Share of profits and 1,214,190 5,189 117,808 27,553 1,364,740losses of associates Profit before tax 5,283,186 700,181 229,601 258,026 (864,881) 5,606,113Tax (1,484,613)Minority interests 107,497Profit attributable to equity holders of the Company 4,228,997 ASSETS Segment assets 79,308,581 1,441,639 371,119 1,096,601 (1,330,985) 80,886,955Interests in associates 9,013,689 153,911 119,317 255,760 - 9,542,677Unallocated assets 626,645 Total assets 91,056,277 LIABILITIES Segment liabilities (57,441,708) (827,806) (608,978) (890,013) 1,330,985 (58,437,520)Unallocated liabilities (1,111,404) Total liabilities (59,548,924) OTHER SEGMENT INFORMATION Capital expenditure (including additions to property, plant and equipment and advance payments for aircraft, and 20,591,633 215,990 134,954 3,852 - 20,946,429related equipment) Depreciation of property, plant and equipment 5,447,151 38,594 66,324 2,374 - 5,554,443Amortisation of lease 22,478 - - - - 22,478prepayments Impairment loss on 142,800 - - - - 142,800aircraft held for sale Impairment loss on available-for-sale investments - - - 4,481 - 4,481Decrease in fair value of derivative financial instruments 133,840 - - - - 133,840Reversal of impairment (435) (884) - (92) - (1,411)for doubtful debts Recognition of deferred 76,943 - - - - 76,943income Year ended 31 December 2006 Airport Airline Engineering terminal operations services services Others Eliminations Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 REVENUE Sales to external 43,708,683 481,021 496,741 250,161 - 44,936,606customers Intersegment sales - 620,302 - 186,000 (806,302) - Total revenue 43,708,683 1,101,323 496,741 436,161 (806,302) 44,936,606 PROFIT FROM OPERATIONS Segment results 2,281,754 655,137 175,445 211,670 (806,302) 2,517,704Finance revenue 1,161,287 9,456 - 7,128 - 1,177,871Finance costs (1,863,002) (11,606) - (1,879) - (1,876,487)Gain on disposal of an 1,592,633 - - - - 1,592,633associate Share of profits and 365,639 4,797 135,169 11,895 - 517,500losses of associates Profit before tax 3,538,311 657,784 310,614 228,814 (806,302) 3,929,221Tax (624,124)Minority interests (617,256) Profit attributable to equity holders of the Company 2,687,841 ASSETS Segment assets 72,975,757 1,239,259 306,758 1,182,531 (1,546,400) 74,157,905Interests in associates 8,663,367 112,336 170,115 309,656 - 9,255,474Unallocated assets 1,064,157 Total assets 84,477,536 LIABILITIES Segment liabilities (51,130,149) (639,936) (475,015) (994,935) 1,546,400 (51,693,635)Unallocated liabilities (1,048,208) Total liabilities (52,741,843) OTHER SEGMENT INFORMATION Capital expenditure (including additions to property, plant and equipment and advance payments for aircraft, and 16,440,786 89,754 27,521 28,191 - 16,586,252related equipment) Depreciation of property, plant and equipment 5,168,367 41,834 56,088 7,744 - 5,274,033Amortisation of lease 21,495 - - - - 21,495prepayments Impairment loss on available-for-sale investments - - - 15,562 - 15,562Decrease in fair value of derivative financial instruments 268,041 - - - - 268,041Impairment/(reversal of impairment) for doubtful debts 3,536 (3,579) - (1,859) - (1,902)Recognition of deferred 76,943 - - - - 76,943income Geographical segments The following tables present the Group's consolidated revenue by geographicalsegment for the years ended 31 December 2007 and 2006: Year ended 31 December 2007 Asia Mainland Hong Kong North Japan and Pacific China and Macau Europe America Korea and Total others RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Sales to external customers and total revenue 27,702,479 2,848,675 7,616,370 4,678,276 4,475,578 4,009,163 51,330,541 Year ended 31 December 2006 Mainland Hong Kong North Japan and Pacific China and Macau Europe America Korea and Total others RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Sales to external customers and total revenue 23,868,328 2,770,579 6,203,536 3,806,678 4,256,753 4,030,732 44,936,606 3 AIR TRAFFIC REVENUE Air traffic revenue comprises revenue from the airline operations business andis stated net of business tax. An analysis of the Group's air traffic revenueduring the year is as follows: Group 2007 2006 RMB'000 RMB'000 Passenger 43,632,090 37,564,903Cargo and mail 4,085,456 4,041,227 47,717,546 41,606,130 Pursuant to the relevant PRC business tax rules and regulations, air trafficrevenue for all domestic and outbound international flights is subject tobusiness tax at a rate of 3%. All inbound international, Hong Kong and Macauregional flights are exempted from business tax. Business tax incurred and setoff against air traffic revenue for the years ended 31 December 2007 amounted toapproximately RMB1,224 million (2006: RMB1,039 million). 4 OTHER OPERATING REVENUE Group 2007 2006 RMB'000 RMB'000 Bellyhold income from a joint venture 1,579,185 1,518,925Aircraft engineering income 487,710 481,021Ground service income 509,450 496,741Air catering income 162,886 136,581Government grants: Recognition of deferred income 76,943 76,943 Others 131,136 124,420Service charges on return of unused flight tickets 152,107 110,825Cargo handling service income 62,466 63,938Sale of materials 12,648 15,055Import and export service income 7,850 10,676Training service income 20,837 17,839Aircraft and related equipment lease income 12,688 1,323Gain on disposal of property, plant and equipment, 165,311 17,353net Others 231,778 258,836 3,612,995 3,330,476 5 EMPLOYEE COMPENSATION COSTS An analysis of the Group's employee compensation costs, including the emolumentsof Directors and Supervisors, is as follows: Group 2007 2006 RMB'000 RMB'000 Wages, salaries and social security costs 4,817,539 4,037,553Retirement benefit costs 368,241 276,330Share-based benefits 23,986 - 5,209,766 4,313,883 6 PROFIT FROM OPERATIONS The Group's profit from operations is arrived at after charging/(crediting): Group 2007 2006 RMB'000 RMB'000 Auditors' remuneration 14,261 10,658Depreciation 5,554,443 5,274,033Gain on disposal of property, plant and (165,311) (17,353)equipment, net Loss on derecognition of property, plant and 37,138 70,206equipment Amortisation of lease prepayments 22,478 21,495Minimum lease payments under operating leases: Aircraft and engines 2,239,359 2,069,639 Land, buildings and others 311,262 323,752Impairment loss on available-for-sale investments 4,481 15,562Impairment loss on aircraft held for sale 142,800 -Reversal of impairment for doubtful debts (1,411) (1,902) 7 FINANCE REVENUE AND FINANCE COSTS An analysis of the Group's finance revenue and finance costs during the year isas follows: Finance revenue Group 2007 2006 RMB'000 RMB'000 Exchange gains, net 2,030,391 983,692Interest income 110,013 80,689Gains on fuel derivatives, net 235,944 113,225Dividend income from available-for-sale 224 265investments 2,376,572 1,177,871 Finance costs Group 2007 2006 RMB'000 RMB'000 Interest on bank loans, other loans and corporate 1,572,793 1,380,781bonds Interest on finance leases 650,613 601,153 Total interest 2,223,406 1,981,934Less: Interest capitalised (254,080) (105,447) 1,969,326 1,876,487 The interest capitalisation rates ranging from 4.5% to 5.9% (2006: 4.5% to 6.0%)per annum represent the cost of related borrowings during the year. 8 GAIN ON DISPOSAL OF AN ASSOCIATE The gain on disposal of an associate in 2006 relates to the sale of the Group'sequity interest in Dragonair to Cathay. 9 TAX According to the PRC Enterprise Income Tax Law ("Old CIT Law"), the Company, itssubsidiaries, joint ventures and associates established in the PRC are subjectto enterprise income tax at rates ranging from 12% to 33% (2006: 12% to 33%) ontheir taxable income. Hong Kong profits tax has been provided at a rate of 17.5% (2006: 17.5%) on theestimated assessable profits arising in Hong Kong during the year. In accordance with the Old CIT Law and an approval document issued by therelevant tax bureau on 28 November 2005 (the "Approval Document"), Air ChinaCargo Co., Ltd ("Air China Cargo") was subject to a state enterprise income taxrate of 24% and was fully exempted from state enterprise income tax for the yearended 31 December 2005, followed by a 3-year 50% reduction in state enterpriseincome tax during the period between 1 January 2006 and 31 December 2008. Inaddition, pursuant to the Approval Document, Air China Cargo has been granted a4-year local enterprise income tax exemption during the period between 1 January2005 and 31 December 2008, followed by a 5-year 50% reduction in localenterprise income tax during the period between 1 January 2009 and 31 December2013. During the 5th Session of the 10th National People's Congress, which wasconcluded on 16 March 2007, the People's Republic of China Corporate Income TaxLaw (the "New CIT Law") was approved and became effective on 1 January 2008. TheNew CIT Law introduces a wide range of changes which include, but are notlimited to, the unification of the corporate income tax rate for both domesticenterprises and foreign-invested enterprises as 25%. The New CIT Law also laysdown principles for transitional arrangements relating to tax incentive (reducedtax and tax holidays) enjoyed by enterprises under the Old CIT Law. Therefore,deferred income tax assets and liabilities of the Group are measured at the 25%tax rate or other applicable tax rates that are expected to apply to the annualperiods beginning on or after 1 January 2008 when the deferred tax asset isrealised or the deferred tax liability is settled. The determination of current and deferred income tax was based on enacted taxrates. Major components of income tax charge are as follows: Group 2007 2006 RMB'000 RMB'000 Current income tax - Mainland China 1,260,855 675,975Deferred income tax - origination and reversal of temporary differences 223,758 (51,851) Income tax charge for the year 1,484,613 624,124 The share of tax attributable to associates amounting to RMB193,915,329 (2006:RMB113,577,000) is included in the "Share of profit and losses of associates" onthe face of the consolidated income statement. A reconciliation of income tax expense applicable to profit before tax at thestatutory income tax rates in Mainland China to income tax expense at theGroup's effective income tax rate, and a reconciliation of the applicable rate(i.e., the statutory tax rate) to the effective tax rate are as follows: Group 2007 2006 RMB'000 % RMB'000 % Profit before tax 5,606,113 3,929,221 At statutory income tax rate of 33% 1,850,017 33.0 1,296,643 33.0Tax effect of share of profits and losses of associates, net (450,364) (8.0) (170,775) (4.3)Lower income tax rates of other territories 54,074 0.9 (20,718) (0.5)Income not subject to tax (27,716) (0.5) (614,323) (15.6)Expenses not deductible for tax purposes (27,247) (0.5) 125,004 3.2Tax losses not recognised 8,844 0.2 8,293 0.2Effect on opening deferred income tax due to a decrease in income tax rates 77,005 1.4 - - At the Group's effective income tax rate 1,484,613 26.5 624,124 16.0 As at 31 December 2007, there was no significant unrecognised deferred taxliability (2006: Nil) for taxes that would be payable on the unremitted earningsof certain of the Group's subsidiaries and joint ventures as the Directors ofthe Company have no intention to request remittance of any significant amount ofearnings to the Company in the foreseeable future. There are no income tax consequences attaching to the payment of dividends bythe Company to its shareholders. 10 PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY The consolidated profit attributable to the equity holders of the Company forthe year ended 31 December 2007 includes a profit of approximately RMB3,097million (2006: RMB1,226 million), which was arrived at after deducting dividendincome received from subsidiaries, joint ventures and associates aggregatingapproximately RMB91 million (2006: RMB39 million) from the Company's profit ofapproximately RMB3,188 million (2006: RMB1,265 million) that has been dealt within the financial statements of the Company. 11 APPROPRIATIONS Group 2007 2006 RMB'000 RMB'000 Proposed final dividend - RMB0.684 (2006: RMB0.492) per 10 shares 837,987 602,767 (a) The proposed final dividend of RMB0.684 (2006: RMB0.492) per 10 shares forthe year is subject to the approval of the Company's shareholders at theforthcoming annual general meeting. Cash dividends to shareholders in Hong Kong will be paid in Hong Kong dollars. (b) Under the PRC Company Law and the Company's articles of association, profitafter tax as reported in the PRC statutory financial statements can only bedistributed as dividends after allowance has been made for the following: (i) Making up prior years' cumulative losses, if any; (ii) Allocations to the statutory common reserve fund of at least 10% ofafter-tax profit, until the fund aggregates 50% of the Company's registeredcapital. For the purpose of calculating the transfer to reserves, the profitafter tax shall be the amount determined under China Accounting Standards("CAS"). The transfer to this reserve must be made before any distribution ofdividends to shareholders. The statutory common reserve fund can be used to offset previous years' losses,if any, and part of the statutory common reserve fund can be capitalised as theCompany's share capital provided that the amount of such reserve remaining afterthe capitalisation shall not be less than 25% of the share capital of theCompany; (iii) Allocations to the discretionary common reserve if approved by theshareholders. The above reserves cannot be used for purposes other than those for which theyare created and are not distributable as cash dividends. In accordance with the articles of association of the Company, the profit aftertax of the Company for the purpose of dividends payment is based on the lesserof (i) the profit determined in accordance with CAS; and (ii) the profitdetermined in accordance with IFRSs. 12 EARNINGS PER SHARE ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY The calculation of basic earnings per share for the year ended 31 December 2007is based on the profit attributable to equity holders of the Company for theyear ended 31 December 2007 of approximately RMB4,229 million, and the weightedaverage number of 11,878,992,909 ordinary shares in issue during the year, asadjusted to reffect the weighted average number of treasure shares held byCathay Pacific Airways Limited ("Cathay") through reciprocal shareholding. The calculation of basic earnings per share for the year ended 31 December 2006was based on the profit attributable to equity holders of the Company for theyear ended 31 December 2006 of approximately RMB2,688 million, and the weightedaverage number of 10,256,259,792 ordinary shares in issue during the year, asadjusted to reflect the weighted average number of treasury shares held byCathay through reciprocal shareholding. Diluted earnings per share for the years ended 31 December 2007 and 2006 havenot been disclosed because no diluting events existed during these years. B. Prepared in accordance with China Accounting Standards ("CAS") 2007 As 2006 (Restated) Revenue from operations 49,738,921 43,410,605Less: Costs of operations 40,307,624 36,727,352 Business taxes and surcharges 1,205,082 1,005,817 Selling expenses 3,290,959 2,540,147 General and administrative expenses 1,311,598 1,254,505 Finance costs (52,619) 876,888 Impairment losses in assets 52,821 19,457Add: Gains/(loss)from changes in fair value 133,840 (268,041) Investment income 1,235,655 3,525,557 Including: Share of profits and losses of associates and joint ventures 1,131,024 590,908 Profit from operations 4,992,951 4,243,955Add: Non-operating income 333,608 161,840Less: Non-operating expenses 123,424 87,192 Including: Loss on disposal of non-current 45,212 29,129 assets Profit before tax 5,203,135 4,318,603Less: Tax 1,429,284 364,253 Net profit 3,773,851 3,954,350 Attributable to: Equity holders of the Company 3,881,348 2,977,195 Minority interests (107,497) 977,155 Earnings per share (RMB): (I) Basic 0.3267 0.2903 (II) Diluted N/A N/A 31 December, 31 December,ASSETS 2007 2006 (Restated) CURRENT ASSETS: Cash and bank balances 3,787,152 4,982,844 Financial assets held for trading 6,493 99,935 Bills receivable 1,599 - Accounts receivable 2,812,327 2,662,281 Other receivables 997,205 847,272 Prepayments 311,784 298,704 Inventories 755,340 704,367 Total current assets 8,671,900 9,595,403 NON-CURRENT ASSETS: Long term receivables 255,340 293,160 Long term equity investments 11,404,643 11,387,551 Fixed assets 55,000,376 49,243,169 Construction-in-progress 10,967,888 9,309,266 Intangible assets 1,396,620 1,291,905 Goodwill 131,945 131,945 Deferred tax assets 385,843 578,625 Long-term deferred expenses 80,684 67,931 Total non-current assets 79,623,339 72,303,552 Total assets 88,295,239 81,898,955 31 December, 31 December, 2007 2006 (As restated) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term loans 6,546,088 8,016,656 Financial liabilities held for trading 14,826 242,108 Bills payable - 610,545 Accounts payable 6,338,341 5,869,229 Domestic air traffic liabilities 437,473 383,851 International air traffic liabilities 1,702,490 1,147,204 Receipts in advance 53,778 14,770 Employee compensations 254,073 193,641 Taxes payable 1,906,067 1,700,858 Interest payable 273,824 177,946 Other payables 2,221,096 1,648,457 Non-current liabilities repayable within one year 6,344,212 5,205,258 Total current liabilities 26,092,268 25,210,523 NON-CURRENT LIABILITIES: Long-term loans 12,938,092 9,130,330 Corporate bonds 3,000,000 3,000,000 Long-term payables 1,301,844 1,140,234 Obligations under finance leases 13,328,193 11,247,855 Provisions 191,533 149,021 Deferred tax liabilities 5,000 7,000 Total non-current liabilities 30,764,662 24,674,440 Total liabilities 56,856,930 49,884,963 SHAREHOLDERS' EQUITY Share capital 12,251,362 12,251,362 Capital reserve 11,852,408 13,044,987 Reserve fund 1,299,214 716,612 Retained earnings 6,888,843 4,192,864 Including: Discretionary reserve fund proposed by Board of Directors 264,700 317,902Dividend proposed by Board of Directors 837,987 602,767 Foreign exchange translation reserve (1,003,732) (203,151) Equity attributable to equity holders of the Company 31,288,095 30,002,674 Minority interests 150,214 2,011,318 Total shareholders' equity 31,438,309 32,013,992 Total liabilities and shareholders' equity 88,295,239 81,898,955 C. Effects of significant differences between IFRS and CAS The consolidated income statement and consolidated balance sheet set out inSection A were prepared in accordance with IFRS. The significant differences between the consolidated financial statementprepared under CAS and the consolidated financial statement prepared under IFRSof the Group are as follows: 2007 2006 RMB'000 RMB'000 (Restated) Net profit under CAS 3,881,348 2,977,195Deferred taxes (40,916) (232,066)Additional depreciation from restatement of costs of fixed assets (149,060) (159,746)Reversal of depreciation and amortisation arising on revaluation 446,936 490,369Government grant 16,900 (10,987)Effect of component accounting 57,635 234,344Gain on disposal of an associate - (627,761)Others 16,154 16,493 Profit attributable to equity holders of the Company under IFRS 4,228,997 2,687,841 2007 2006 RMB'000 RMB'000 Shareholders' equity under CAS 31,288,095 30,002,674Deferred taxes (62,319) (21,403)Restatement of costs of fixed assets 743,768 892,828Reversal of revaluation surplus (972,848) (1,419,784)Government grant (410,242) (427,142)Effect of component accounting 603,038 545,403Gain on disposal of an associate 139,919 139,919Others 27,726 11,763 Equity interest attributable to equtiy holders of the Company under IFRS 31,357,137 29,724,258 2007 REVIEW In 2007, China's economy continued to maintain the trend of a rapid but steadygrowth and the market demand for air transportation remained robust. The Companyhas, while ensuring its flight safety, improved the service quality and realizedthe steady growth through economies of scale and a stable increase of therelevant profits as well. In December 2007, the Company was formally admitted to the Star Alliance, thelargest alliance in the world, and thereafter the route network coverage of theStar Alliance extended to 155 countries and regions and 895 destinations. Bytaking the advantages of its admission to the alliance, the Company is able tofully explore its geographical market. In 2007, the Company was enlisted in the "World's Top Five Hundred Brands" andthe "2007 Top 20 Most Competitive Chinese Companies in the World", and wasranked No.27 in the "Top 500 Most Valuable Chinese Brands". The Company's brandvalue was further enhanced. 1. Business review of passenger service operation In 2007, the Company's passenger traffic reached 67,000 million RPKs,representing an increase of 11.10% from 2006. Passenger traffic frominternational routes, Mainland China routes and Hong Kong and Macau routesincreased by 12.10%, 10.80% and 2.70% respectively. The higher growth ininternational routes compared with Mainland China and Hong Kong and Macau routesreflected the robust growth potential of the international aviation markets. Thenumber of passengers carried was increased by 10.60% from 2006 to 34.841 millionwith an average passenger load factor of 78.60%, representing an increase of 2.6percentage points from 2006. The available seat kilometres of the Company wasincreased by 7.30% from 2006 to 85,270 million kilometers. The revenue per RPKwas increased by 5.08% from 2006 to RMB0.62. Air Macau Company Limited ("Air Macau"): For 2007, while the available seatkilometres reached 3,964 million representing a decrease of 2.14% from 2006,passenger traffic decreased by 0.43% from 2006 to 3,026 million RPKs, and thenumber of passengers carried decreased by 2.10% from 2006 to 2.415 million.Passenger load factor for 2007 was 76.35%, representing an increase of 1.3percentage points from 2006. 2. Business review of cargo service operation In 2007, the cargo and mail traffic of the Company's joint venture Air ChinaCargo Co., Ltd ("Air China Cargo") and the bellyhold space of the Company'spassenger aircraft increased by 12.30% from 2006 to 3,690 million RFTKs. Cargoand mail carried increased by 10.60% from 2006 to 934,000 tonnes while cargo andmail load factor increased by 2.1 percentage points from 2006 to 55.80%. Theavailable freight tonne kilometres increased by 8.20% from 2006 to 6,620million, and cargo yield per tonne kilometer decreased by 7.20% from 2006 toRMB1.80. Air Macau: For 2007, while the available fright tonne kilometres reached 249million representing a decrease of 13.30% from 2006, turnover volume of cargoand mail decreased by 3.75% from 2006 to 185 million RFTKs, and cargo and mailcarried decreased by 2.81% from 2006 to 169,800. Fright and mail load factor for2007 was 74.31%, representing an increase of 7.4 percentage points from 2006. 3. Business review of the Company's investment in airlines (1) Shandong Airlines Company Limited ("Shandong Airlines") The Company holds 22.8% of the share capital of Shandong Airlines, and 49.4% ofthe share capital of Shandong Aviation Group Corporation, which in turn holds42% of the share capital of Shandong Airlines. During 2007, the total trafficturnover of Shandong Airlines increased by 9.10% from 2006 to 600 million tonnekilometres, while passengers carried increased by 6.40% from 2006 to 5.36million. (2) Shenzhen Airlines Company Limited ("Shenzhen Airlines") The Company holds 25% of the share capital of Shenzhen Airlines. During 2007,the total traffic turnover of Shenzhen Airlines increased by 34% from 2006 to1.42 billion tonne kilometers, while passengers carried increased by 33.70% from2006 to 9.52 million. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OFOPERATIONS The following discussion and analysis are based on the Group's consolidatedfinancial statements prepared in accordance with International FinancialReporting Standards ("IFRS"), and are designed to assist the readers inunderstanding the information provided in this report further so as to fullycomprehend the financial performance of the Group as a whole. ANALYSIS OF THE PROFITABILITY In 2007, the profit before tax realized by the Group was RMB5.606 billion,representing an increase of RMB1.677 billion or 42.68%, in which the Group'sprofit from operations was RMB3.834 billion, representing an increase ofRMB1.316 billion or 52.29% compared with 2006, and the net exchange gains wasRMB2.030 billion, representing an increase of RMB1.046 billion or 106.41%, andthe share of profits of associates was RMB 1.365 billion, representing anincrease of RMB847 million or 163.72% as compared with 2006. The profitstructure of the Group was further improved. The pie chart below shows the profit before tax of the Group: The bar charts below show the change in profit from operations, profitattributable to equity holders of the parent company and earnings per share: TURNOVER In 2007, the Group's total turnover was RMB51.330 billion, representing a 14.23%growth over 2006. REVENUE CONTRIBUTION BY GEOGRAPHICAL SEGMENT (in RMB'000) 2007 2006 Change Amount percentage Amount percentage Mainland China 27,702,479 53.97% 23,868,328 53.12% 16.06%Hong Kong and Macau 2,848,675 5.55% 2,770,579 6.17% 2.82%Europe 7,616,370 14.84% 6,203,536 13.81% 22.77%North America 4,678,276 9.11% 3,806,678 8.47% 22.90%Japan and Korea 4,475,578 8.72% 4,256,753 9.47% 5.14%Other Asia Pacific 4,009,163 7.81% 4,030,732 8.97% -0.54%regions Total 51,330,541 100% 44,936,606 100% 14.23% REVENUE CONTRIBUTION BY BUSINESS SEGMENT (in RMB'000) 2007 2006 Change Amount percentage Amount percentage Air passenger 43,632,090 85.00% 37,564,903 83.60% 16.15%Air cargo 4,085,456 7.96% 4,041,227 8.99% 1.09%Engineering services 487,710 0.95% 481,021 1.07% 1.39%Airport terminal services 509,450 0.99% 496,741 1.11% 2.56%Others 2,615,835 5.10% 2,352,714 5.24% 11.18% Total 51,330,541 100% 44,936,606 100% 14.23% AIR PASSENGER REVENUE In 2007, the Group's air passenger revenue was RMB43.632 billion, representingan increase of RMB6.067 billion or 16.15% as compared with 2006, which wasmainly affected by factors in respect of the increase in traffic capacity,passenger load factor and revenue per seat kilometer as follows: 2007 2006 Change Available seat kilometres (million) 89,233.74 83,492.25 6.88%Passenger load factor (%) 78.47 75.89 2.59%Passenger yield per kilometre (RMB) 0.62 0.59 5.08% As compared with those factors attributable to the revenue growth in 2006, theincrease in traffic capacity, passenger load factor and revenue levelcontributed to an increase of revenue of RMB2.583 billion, RMB1.368 billion andRMB2.116 billion in 2007 respectively. Air Passenger revenue contributed by geographical segment (in RMB'000) 2007 2006 Change Amount percentage Amount percentage Mainland China 23,486,436 53.83% 20,051,081 53.38% 17.13%Hong Kong and Macau 2,288,552 5.25% 2,239,280 5.96% 2.20%Europe 6,437,813 14.75% 5,145,804 13.70% 25.11%North America 3,680,386 8.44% 2,785,877 7.42% 32.11%Japan and Korea 4,173,935 9.57% 3,890,891 10.36% 7.27%Other Asia Pacific 3,564,968 8.16% 3,451,970 9.18% 3.27%regions Total 43,632,090 100% 37,564,903 100% 16.15% SIGNIFICANT REVENUE GROWTH CONTRIBUTED BY EUROPE AND US ROUTES The Company increased its efforts in developing the air passenger markets inEurope and the US in 2007. By targeting at the right markets and initiating theappropriate marketing strategies together with deploying the proper aircraftmodels, business from the overall Europe and US regions became profitable duringthe year. At the same time, there was also an improvement in the operatingperformance of the large-capacity aircraft serving long-haul routes. AIR CARGO REVENUE In 2007, the Group's air cargo and mail revenue was RMB4.085 billion,representing an increase of RMB44 million or 1.09% compared with 2006. 2007 2006 Change Available freight tonne kilometres (million) 6,868.1 6,404.4 7.24%Load factor (%) 56.43 54.30 2.13%Cargo yield per tonne kilometre (RMB) 1.98 2.16 -8.33% Air cargo revenue contributed by geographical segment (in RMB'000) 2007 2006 Change Amount percentage Amount percentage Mainland China 603,048 14.76% 486,771 12.05% 23.89%Hong Kong and Macau 560,123 13.71% 531,299 13.15% 5.43%Europe 1,178,557 28.85% 1,057,732 26.17% 11.42%North America 997,890 24.43% 1,020,801 25.26% -2.24%Japan and Korea 301,643 7.38% 365,862 9.05% -17.55%Other Asia Pacific 444,195 10.87% 578,762 14.32% -23.25%regions Total 4,085,456 100% 4,041,227 100% 1.09% OPERATING EXPENSES In 2007, the Group recorded an aggregate operating expenses of RMB47.496billion, representing an increase of 11.97% compared with RMB42.419 billion in2006. The elements comprising the operating expenses as well as the ratio andchange of each of those elements are set out below: Jet fuel costs Jet fuel costs increased by 9.45% to RMB17.201 billion in 2007 from RMB15.716billion in 2006 and accounted for 36.22% of operating expenses compared with37.05% in 2006. Factors affecting the jet fuel costs include the jet fuel priceand the consumption level of jet fuel, and in which the rise in jet fuel priceand increase in the consumption of jet fuel caused an increase in operating costof RMB0.383 billion and RMB1.102 billion respectively. • Take-off, landing and depot charges increased by 7.82% to RMB5.538 billion in2007 from RMB5.136 billion in 2006, primarily due to the increase in the numberof flights operated. The percentage of the take-off, landing and depot chargesto the operating expenses decreased from 12.11% to 11.66%. • Due to the business needs during the year, there was an increase in the numberof aircraft ranging from the self-owned aircraft to those under finance leasesand operation leases, which resulted in an increase in the aircraft maintenance,repair and overhaul costs accordingly. • Employee compensation costs were increased due to the increase in the numberof flight hours, number of employees and employees' basic income. • The increase in the air catering charges was primarily due to an increase inthe number of passengers carried. • The increase in the sale commission and the royalty from the sales of therelevant IT systems was brought by the increase in business revenue. Themarketing expenses were increased to RMB2.709 billion in 2007 from RMB2.027billion in 2006, representing an increase of 33.65%, and their percentage to theprofit from operations was up from 4.78% to 5.70%. • General and administrative expenses were increased primarily due to businessgrowth and more frequently incurred donation expenses for Olympic Games in 2007. • Other operating expenses mainly include the aircraft and engines operatinglease expenses, civil aviation infrastructure construction fund and the dailyexpenses arising from core air traffic business not included in the aforesaiditems. The growth of business inevitably drove such expenses upwards. PROFIT CONTRIBUTION BY BUSINESS SEGMENT (RMB'000) 2007 2006 Change Air businesses 3,695,437 2,281,754 61.96%Engineering services 12,478 34,835 -64.18%Airport terminal services 111,793 175,445 -36.28%Others 14,419 25,670 -43.83% Total 3,834,127 2,517,704 52.29% ANALYSIS OF ASSETS STRUCTURE As at 31 December 2007, the total assets of the Group amounted to RMB91.056billion, representing an increase of 7.79% from 31 December 2006, of which thecurrent assets accounted for RMB9.830 billion, representing 10.80% of the totalassets, while non-current assets accounted for RMB81.226 billion, representing89.20% of the total assets. Among the current assets, cash and cash equivalents were RMB3.907 billion,decreased by 24.28% compared with those recorded as at 31 December 2006, whileaccounts receivable decreased by 1.44% to RMB2.794 billion compared with thoserecorded as at 31 December 2006. Among the non-current assets, the net bookvalue of property, plant and equipment as at 31 December 2007 was RMB61.692billion, representing an increase of 12.64% compared with those recorded as at31 December 2006. DEBT STRUCTURE ANALYSIS (RMB'000) Bank loans, other loans and Obligation corporate bonds under finance lease 31 December 31 December 31 December 31 December 2007 2006 2007 2006 Within one year 10,978,835 11,139,021 2,216,680 2,354,905In the second year 4,039,529 2,649,697 2,821,518 1,996,954In the third to fifth years (inclusive) 8,181,988 5,581,186 5,484,352 6,061,709After five years 4,393,774 4,471,094 5,022,323 3,189,192 Total 27,594,126 23,840,998 15,544,873 13,602,760 ASSETS MORTGAGE As at 31 December 2007, the Group mortgaged certain aircraft and premises withan aggregate net book value of approximately RMB34.240 billion (compared withRMB34.251 billion as at 31 December 2006) pursuant to certain bank loans andfinance lease agreements. In addition, certain bank deposits of the Group in thesum of approximately RMB119 million (compared with approximately RMB212 millionas at 31 December 2006 ) were pledged against the obligations in respect ofcertain bank loans, operating leases and financial derivatives of the Group. TheGroup also pledged certain number of shares in an associated company with anaggregate market value of approximately RMB7.609 billion as at 31 December 2007(compared with approximately RMB7.695 billion as at 31 December 2006). COMMITMENTS AND CONTINGENT LIABILITIES As at 31 December 2007, capital commitments of the Group increased substantiallyfrom RMB42.944 billion in 2006 to approximately RMB58.878 billion, primarilyused for the purchase of certain aircraft and relevant flight equipment to bedelivered in the coming years and the construction of certain properties. As at 31 December 2007, the Group had contingent liabilities in respect of bankloans and other guarantees and other matters arising in the ordinary course ofbusiness. Details of contingent liabilities of the Group are set out in note 46to the Group's 2007 annual consolidated financial statements. CAPITAL EXPENDITURE In 2007, the capital expenditure of the Company amounted to RMB15.293 billion intotal. Among the capital expenditure of the Company, the total investment inaircraft and engines was RMB10.026 billion, including prepayments of RMB3.824billion for the purchases of aircraft for 2007 and onwards. Other capital expenditure amounted to RMB5.267 billion, which mainly involvedthe improvement of first class and business class cabins of certain aircraft,investment in the ancillary project in the Third Terminal of Beijing CapitalInternational Airport, preparation for the 11th Five Years Plan as well asinvestment in certain long-term external investment projects. CASH FLOW ANALYSIS In 2007, the Group's net cash inflow from operating activities increased by17.55% to RMB7.302 billion from RMB6.212 billion in 2006, primarily due to theincrease in business revenue. Net cash outflow from investment activities duringthe year decreased by 15.94% to RMB10.212 billion from RMB12.148 billion in2006, primarily due to the relatively substantial cash outflow arising out ofthe acquisition of the Cathay Pacific's equity interests in 2006. The Grouprecorded a net cash inflow from financing activities of RMB1.839 billion,representing a decrease of RMB5.470 billion from RMB7.309 billion in 2006,primarily due to the proceeds of approximately RMB8.570 billion raised by way ofthe A shares initial public offering and the additional issue of H shares in2006. The Group experienced a higher increase in the net operating cash flow of theGroup for the current period, which secured the Group to enhance its cashstructure. RISKS ANALYSIS • Analysis of the long-term solvency As at 31 December 2007, the Group's gearing ratio, which represents totalliabilities divided by total assets, was 65.40%, representing an increase of2.97 percentage points from 62.43% as at 31 December 2006, primarily due to theintroduction of additional aircraft and the increase of debt financingactivities. Although the gearing ratio of the Group for the current periodslightly moved upwards, its solvency position in the long term was relativelystrong insofar as it continued to dominate a leading position in the industrywhile the prevailing gearing ratios of other air carriers stood at a relativelyhigh level. • Analysis of the short-term solvency and the long- and short-term debtstructure As at 31 December 2007, the Group's current ratio, which represents currentassets divided by current liabilities, was 0.36, representing a decrease of 0.05percentage point from 0.41 as at 31 December 2006, while its EBITDA interestcover was 4.78 times, representing an increase of 18.12% from 4.16 times as at31 December 2006, resulting that the Group maintained a relatively sufficientoperating cash flow position. The Company is in the process of optimizing bothits long-term and short-term debt structures step by step to align with thechanges in the financial market. The Group had already obtained bank facilitieswith an aggregate amount of up to RMB80.172 billion from a number of banks inthe PRC and was therefore in a position to fully meet its own demand on currentcapital. • Foreign exchange and interest rate exposure As at 31 December 2007, foreign currency denominated loans, mainly thosedenominated in US dollars, Hong Kong dollars and Japanese Yen, constitute alarge proportion of the Group's loans. The Group basically maintained a balanceof its foreign currency denominated incomes and expenditures. The Group willcontinue to effectively eliminate any foreign exchange risk by means offinancial derivative products based on the major trend of foreign exchange andin accordance with its forecast on its overall incomes and expenditures. For managing risks associated with interest rates, the Company will attempt tomake use of the swap transactions and other derivative products and torationalize the ratios between the fixed and floating interest rates relating tothe interest-bearing debts so as to eliminate any risks arising from interestrate. • Investment risk As at 31 December 2007, regarding the air carriers that the Group had investedin, except for Shandong Airlines and Shenzhen Airlines, neither Air Macau norAir China Cargo generated any profit from operations. Further efforts are neededto promote the consolidation and optimization of the businesses of the companiesthat the Group had made its investment in. There is also room for a substantialimprovement in their financial position and operating results. • Risk associated with the fluctuation in the jet fuel price The Group is exposed to the fluctuations in jet fuel price in its dailyoperation. International jet fuel prices have been historically, and will in thefuture continue to be, subject to price volatility and fluctuation in supply anddemand. The Group's strategy for managing its jet fuel price risk aims toprotect itself against sudden and significant price increases. To the extent aspermitted by the relevant laws in the PRC, the Group has been engaging in fuelhedging transactions since March 2001. The hedging instruments used were mainlyderivatives of Singapore Kerosene together with Brent crude oil and New Yorkcrude oil, which are closely linked to the price of jet fuel. In 2007, the netgain on fuel derivatives achieved by the Group was RMB236 million, representingan increase of 108.85% compared with RMB113 million in 2006. Information on financial risk management objectives and polices in other aspectsof the Group's operations are set out in note 47 to the Group's 2007 annualconsolidated financial statements. OUTLOOK FOR 2008 Looking ahead in 2008, the Company believes that China's economy and the airtransport market will continue to grow. However, competition in the airtransportation market has become increasingly fierce, especially with theimplementation of the liberalization policy, the Chinese aviation industry willface more severe challenges. In response to the changing market situation, theCompany has to adjust its corporate strategies from time to time. Therefore, theCompany has re-adjusted its future strategic objectives to "build up aworld-class competitive strength, continuously improve its expansion capability,offer unique experience for its customers by delivering the most excellentservices and realize a steady increase in the relevant revenues". SHARE CAPITAL As at 31 December 2007, the total share capital of the Company wasRMB12,251,362,273, divided into 12,251,362,273 shares with a par value ofRMB1.00 each. The following table sets out the share capital structure of theCompany as at 31 December 2007: Category of Shares Number of shares Percentage of the total share capital A Shares 7,845,678,909 64.04%H shares 4,405,683,364 35.96% Total 12,251,362,273 100% PURCHASE, SALE OR REDEMPTION OF SHARES During the year ended 31 December 2007, neither the Company nor any of itssubsidiaries had purchased, sold or redeemed any of the Company's listedsecurities. CORPORATE GOVERNANCE 1. Compliance with the Code on Corporate Governance Practices The Company has complied with the code provisions set out in the Code onCorporate Governance Practices contained in Appendix 14 to the Rules Governingthe Listing of Securities on The Stock Exchange of Hong Kong Limited ("ListingRules") throughout the year of 2007. 2. Compliance with the Model Code for Securities Transactions by Directors ofListed Issuers The Company has adopted and established a code of conduct on no less exactingterms than the Model Code for Securities Transactions by Directors of ListedIssuers (the "Model Code") as set out in Appendix 10 of the Listing Rules.Having made specific enquiry by the Company, all Directors and Supervisors haveconfirmed their compliance with the required standards of the Model Codethroughout the period of the first half of 2007. The code of the Company is alsoapplicable to Supervisors and relevant employees. DIVIDENDS The Board recommends the payment of a final dividend of RMB0.684 per 10 sharesfor the year ended 31 December 2007, totalling approximately RMB837.987 million.A resolution for the dividend payment will be submitted for consideration at theannual general meeting. The dividend will be denominated and declared inRenminbi. Dividends on domestic shares will be paid in Renminbi, whereas foreignshares will be paid in Hong Kong dollars. The relevant exchange rate will be themean of the average rate of Renminbi to Hong Kong dollars as announced by thePeople's Bank of China for the week prior to the date of declaration ofdividends. PRE-EMPTIVE RIGHTS Neither the Articles of Association of the Company nor the laws of the PRCprovide for any preemptive rights requiring the Company to offer new shares toexisting shareholders in proportion to their existing shareholdings. SERVICE CONTRACTS OF THE DIRECTORS Each of the Directors was appointed by the Company on 30 October 2007 for a termof three years. None of the Directors has any existing or proposed service contract with anymember of the Group which is not expiring or terminable by the Group within oneyear without payment of compensation (other than statutory compensation). ANNUAL REPORT The Annual Report for the year ended 31 December 2007 containing all informationrequired by Appendix 16 of the Listing Rules will be despatched to shareholdersand will be published on the website of The Stock Exchange of Hong Kong Limited(www.hkex.com.hk) as well as the website of the Company (www.airchina.com.cn) indue course. FORWARD-LOOKING STATEMENT We would like to caution readers of this announcement that the airlineoperations are substantially influenced by global political and economicaldevelopments. Accidental and unexpected incidents may have a material impact onour operations or the industry as a whole. This 2007 Annual Results Announcementof the Group contains, inter alia, certain forward-looking statements, such asforward-looking statements on the global and Chinese economies and aviationmarkets. Such forward-looking statements are subject to some uncertainties andrisks. AUDIT COMMITTEE The annual results of the Company have been reviewed by the audit committee ofthe Board of Directors of the Company. By order of the Board Air China Limited Kong Dong Acting Chairman of the Board Beijing, PRC, 17 March 2008 As at the date of this announcement, the Directors of the Company are Kong Dong,Wang Shixiang, Yao Weiting, Christopher Dale Pratt, Chen Nan Lok Philip, MaXulun, Cai Jianjiang, Fan Cheng, Hu Hung Lick, Henry*, Wu Zhipan*, Zhang Ke* andJia Kang*. * Independent non-executive Director of the Company END This information is provided by RNS The company news service from the London Stock Exchange