Air China Regulatory News (AIRC)

12 Jul 2006 07:01

Air China Ld12 July 2006 THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION If you are in any doubt as to any aspect of this circular, you should consult a stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser. If you have sold or transferred all your shares of Air China Limited,you should at once hand this circular to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale waseffected for transmission to the purchaser or the transferee. The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss however arising from or in reliance upon thewhole or any part of the contents of this circular. AIR CHINA LIMITED (a joint stock limited company incorporated in the People's Republic of China with limited liability) (Stock Code: 753) Proposed Pre-Conditional Privatisation of China National Aviation Company Limited by way of a Scheme of Arrangement under Section 166 of the Companies Ordinance DISCLOSEABLE TRANSACTION Exclusive financial advisers to Air China Limited China International Capital Merrill LynchCorporation (Hong Kong) Limited (Asia Pacific) Limited 12 July 2006 CONTENTS Page Definitions............................................... 1 Letter from the Board1. Introduction........................................... 62. The Share Proposal and the Option Proposal............. 73. Pre-Condition to making the Proposals.................. 74. Conditions of the Proposals............................105. Information on the CNAC Group..........................126. General Information....................................147. Air China's Intention in relation to CNAC..............148. Background to, Reasons for and Benefits of the Discloseable Transaction........................159. Effect of the Proposals................................1710. Additional Information.................................17Appendix - General Information ............................18 DEFINITIONSIn this circular, the following expressions have the meanings set out belowunless the context requires otherwise. "acting in concert" has the meaning ascribed to it in the Takeovers Code; "Air China" or the "Company" Air China Limited, a company incorporated in the PRC with limited liability whose shares are listed on the Main Board of the Stock Exchange under the stock code 753; "Air China Directors" the directors of Air China; "Air China Group" or the "Group" Air China and its subsidiaries; "Business Day(s)" a day on which banks are opened for business in Hong Kong (excluding Saturdays, Sundays or public holidays in Hong Kong); "Cathay" Cathay Pacific Airways Limited, a company incorporated in Hong Kong with limited liability, whose shares are listed on the Main Board of the Stock Exchange under the stock code 293; "CICC" China International Capital Corporation (Hong Kong) Limited, a licensed corporation for type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the Securities and Futures Ordinance, being an exclusive financial adviser to Air China in relation to the Proposals; "CNAC" China National Aviation Company Limited, a company incorporated in Hong Kong with limited liability, whose shares are listed on the Main Board of the Stock Exchange under the stock code 1110; "CNAC Board" the board of CNAC Directors; "CNAC Directors" the directors of CNAC; "CNAC Group" CNAC and its subsidiaries; "Companies Ordinance" the Companies Ordinance (Chapter 32 of the Laws of Hong Kong); "Concert Parties" persons who are acting in concert with Air China; "Conditions" the conditions of the Proposals, as set out under the paragraph headed "Conditions of the Proposals" of this circular; "Court Meeting" a meeting of the Independent Scheme Shareholders to be convened at the direction of the High Court at which the Scheme will be voted upon; "Dragonair" Hong Kong Dragon Airlines Limited, a private company incorporated in Hong Kong; "Effective Date" the date on which the Scheme, if approved, becomes effective in accordance with its terms, being the date on which an official copy of the order of the High Court sanctioning the Scheme together with the minutes containing the particulars required by Section 61 of the Companies Ordinance are registered by the Registrar of Companies in Hong Kong; "Extraordinary General Meeting" the extraordinary general meeting of CNAC to be held to consider and approve, among other matters, the capital reduction arising as a result of the Scheme, or any adjournment thereof; "High Court" the High Court of Hong Kong; "HK$" Hong Kong dollars, the lawful currency of Hong Kong; "Hong Kong" the Hong Kong Special Administrative Region of the PRC; "Independent Scheme Scheme Shareholders other than Shareholders" Concert Parties and, in respect of the Option Shares, the Optionholders; "Last Trading Date" 2 June 2006, being the last day on which Shares were traded prior to the publication of the Restructuring Announcement; "Latest Practicable Date" 6 July, 2006; "Listing Rules" the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited; "Merrill Lynch" Merrill Lynch (Asia Pacific) Limited, a licensed corporation for type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 7 (providing automated trading services) regulated activities under the Securities and Futures Ordinance, being an exclusive financial adviser to Air China in relation to the Proposals; "New Share" new Share(s) to be issued to Air China or its nominees, credited as fully paid, pursuant to the Share Proposal; "Operating Agreement" the agreement entered into by Air China and Cathay on 8 June 2006, details of which are set out in the joint announcement made by Air China and Cathay on 8 June 2006; "Option Exercise Date" the date which is fourteen days after the Effective Date; "Option Proposal" the proposal to Optionholders for cancellation of all Outstanding Options (or, if Air China so elects prior to the despatch of the Scheme Document, a general offer by Air China to acquire all of the Outstanding Options not owned by Air China at a price equal to the Option Proposal Price); "Option Proposal Price" HK$1.66 per Outstanding Option pursuant to the Option Proposal; "Option Shares" Shares that are subscribed for in exercise of the Options pursuant to the Share Option Scheme; "Optionholders" the holders of one or more Options, and as at the date of this circular, namely Chuang Shih Ping, Zhang Xianlin, Tsang Hing Kwong, Thomas and Gu Tiefei, who altogether hold 104,378,000 Options (or, if Air China so elects prior to the Scheme lapsing or becoming ineffective, the offer by Air China to acquire all of the Outstanding Options not owned by Air China at a price equal to the Option Proposal Price); "Options" the share options granted pursuant to the Share Option Scheme; "Outstanding Options" Options not exercised as at the Option Exercise Date; "PRC" the People's Republic of China, excluding, for the purpose of this circular, Hong Kong, Macau and Taiwan; "Pre-Condition" the Pre-Condition to making the Proposals, as set out under the paragraph headed "The Pre-Condition to making the Proposals" of this circular; "Privatisation Announcement" the joint announcement dated 21 June 2006 issued by Air China and CNAC in relation to the Proposals; "Proposals" the Share Proposal and the Option Proposal; "Record Date" two Business Days prior to the Court Meeting; "Relevant Shareholders' Meetings" the shareholders' meetings to be convened by Air China, CNAC, Cathay, CITIC Pacific Limited and Swire Pacific Limited to approve the Restructuring; "Restructuring" the restructuring referred to in the Restructuring Agreement; "Restructuring Agreement" the restructuring agreement dated 8 June 2006 entered into by Swire Pacific Limited, CITIC Pacific Limited, CNAC, Air China and Cathay, details of which are set out in the Restructuring Announcement; "Restructuring Announcement" the joint announcement dated 8 June 2006 published by Air China, CNAC, Cathay, CITIC Pacific Limited and Swire Pacific Limited; "Scheme" a scheme of arrangement under Section 166 of the Companies Ordinance; "Scheme Document" the document to be issued to all Shareholders and Optionholders containing, among other things, further details of the Proposals and the Scheme, the recommendation of the Independent Board Committee (as defined in the Privatisation Announcement) in respect of the Proposals, the letter of advice from the independent financial adviser to the Independent Board Committee, an explanatory statement as required under the Companies Ordinance, the expected timetable, and the notices convening the Court Meeting and the Extraordinary General Meeting; "Scheme Share(s)" the Share(s) held by Scheme Shareholders; "Scheme Shareholders" Shareholders except Air China, but including the Concert Parties and holders of Option Shares; "Share(s)" ordinary share(s) of HK$0.10 each in the issued share capital of CNAC; "Share Option Scheme" the share option scheme adopted by CNAC on 29 May 2002, the major terms of which are set out in the audited annual report of CNAC for the year ended 31 December 2005; "Share Proposal" the proposal to Scheme Shareholders for the cancellation of all Scheme Shares pursuant to the Scheme (or, if Air China so elects prior to the despatch of the Scheme Document, a general offer by Air China to acquire all of the Shares not owned by Air China at a price equal to the Share Proposal Price); "Share Proposal Price" HK$2.80 per Scheme Share pursuant to the Share Proposal; "Shareholders" registered holders for the time being of Shares; "Shareholders Agreement" the shareholders agreement referred to in the Restructuring Announcement; "Stock Exchange" The Stock Exchange of Hong Kong Limited; "subsidiaries" has the meaning ascribed to it in Section 2 of the Companies Ordinance; "Takeovers Code" The Hong Kong Code on Takeovers and Mergers; and "Voting Shares" Scheme Shares other than the Option Shares and those held by Concert Parties. LETTER FROM THE BOARD AIR CHINA LIMITED (a joint stock limited company incorporated in the People's Republic of China with limited liability) (Stock Code: 753) Directors: Registered address: 9th Floor, Blue Sky MansionNon-executive Directors: 28 Tianzhu RoadLi Jiaxiang (Chairman) Zone AKong Dong (Vice Chairman) Tianzhu Airport Industrial ZoneWang Shixiang (Vice Chairman) Shunyi DistrictYao Weiting BeijingChristopher Dale Pratt PRC Executive Directors: Principal place of businessMa Xulun in Hong Kong:Cai Jianjiang 5th Floor, CNAC HouseFan Cheng 12 Tung Fai Road Hong Kong International AirportIndependent Non-executive Directors: Hong KongHu Hung Lick, HenryWu Zhi PanZhang KeJia Kang 12 July 2006 To the Shareholders Dear Sir or Madam, DISCLOSEABLE TRANSACTION 1. INTRODUCTION On 21 June 2006, Air China and CNAC jointly announced that, subject tosatisfaction of the Pre-Condition, Air China will make the Proposals toprivatise CNAC by way of a scheme of arrangement under Section 166 of theCompanies Ordinance. The Proposals are made at the request of the CNAC Board whobelieves the Proposals to be in the interest of CNAC. If approved, the Scheme will be binding on all Scheme Shareholders, irrespectiveof whether or not they attended or voted at the Court Meeting or theExtraordinary General Meeting. 2,264,642,000 Shares held by Air China and itsConcert Parties, representing approximately 68.4% of the existing issued capitalas at the date of this letter, and 66.3% of the enlarged issued share capital,assuming the Options are exercised in full prior to the Option Exercise Date,will not form part of the Voting Shares. As such, Air China and its ConcertParties are required to abstain from voting at the Court Meeting. The 14,000Shares currently held by a Concert Party will however form part of the SchemeShares. In addition, an Optionholder, who exercised his or her Option prior tothe Record Date, would also be required to abstain from voting at the CourtMeeting for the reasons set out in the paragraph headed "General Information",but the Option Shares will form part of the Scheme Shares. 2. THE SHARE PROPOSAL AND THE OPTION PROPOSAL Subject to the satisfaction of the Pre-Condition, Air China will make theProposals on the following basis: The Share Proposal For each Scheme Share.......................................... HK$2.80 in cash The Option ProposalFor each Outstanding Option.................................... HK$1.66 in cash 3. PRE-CONDITION TO MAKING THE PROPOSALS The making of the Proposals is conditional upon completion of the transactionscontemplated under the Restructuring Agreement, details of which are set out inthe Restructuring Announcement (the Pre-Condition). If the Pre-Condition is not satisfied, the Proposals will not be made. Air Chinawill, to the extent that it is within its power to do so, use its reasonableefforts to ensure that the Pre-Condition will be satisfied as soon aspracticable. The Share Proposal The Share Proposal involves the following principal steps, all of which willoccur on the Effective Date: (a) the share capital of CNAC will be reduced by canceling the SchemeShares; (b) CNAC will apply the credit arising in its books of account as aresult of the reduction of capital to pay up in full, at par, a number of NewShares which is equal to the number of Scheme Shares cancelled, and the NewShares will be allotted and issued, credited as fully paid, to Air China or itsnominees (which may include a subsidiary of Air China); and (c) in consideration for the cancellation of the Scheme Shares and theallotment and issue of New Shares to Air China or its nominees, SchemeShareholders will receive HK$2.80 in cash per Scheme Share. Comparisons of value The Share Proposal The Share Proposal Price represents: (a) a premium of approximately 65.9% over the average closing price ofapproximately HK$1.69 per Share for the six months up to and including the LastTrading Date; (b) a premium of approximately 50.3% over the average closing price ofapproximately HK$1.86 per Share for the three months up to and including theLast Trading Date; (c) a premium of approximately 49.8% over the average closing price ofapproximately HK$1.87 per Share for the last 30 trading days up to and includingthe Last Trading Date; (d) a premium of approximately 52.2% over the average closing price ofapproximately HK$1.84 per Share for the last 10 trading days up to and includingthe Last Trading Date; (e) a premium of approximately 45.8% over the average closing price ofHK$1.92 per Share for the last five trading days up to and including the LastTrading Date; (f) a premium of approximately 42.1% over the closing price of HK$1.97 perShare as quoted on the Stock Exchange on the Last Trading Date; (g) a premium of approximately 199.9% over the audited net asset value perShare of approximately HK$0.93 as at 31 December 2005, equivalent to a multipleof 3.0x net asset value (adjusted for year-end dividends and minority interests)of CNAC of HK$3,092.7 million and 3,312,680,000 Shares in issue as at 31December 2005; and (h) a price earnings multiple of approximately 41.2x based on the auditednet profit attributable to Shareholders of approximately HK$225 million for thefinancial year ended 31 December 2005 and 3,312,680,000 Shares in issue as at 31December 2005. The Option Proposal In accordance with the terms of the Share Option Scheme, Optionholders areentitled to exercise their Options, which confer on them rights to subscribe forShares at a price of HK$1.14 per Share, in full or in part at any time up to theOption Exercise Date. Shares issued upon exercise of the Options in accordancewith the terms of the Share Option Scheme prior to the Record Date will formpart of the Scheme Shares. If the Scheme becomes effective, Options which arenot exercised in accordance with the terms of the Share Option Scheme willlapse. Under the Option Proposal, Air China will offer to purchase Outstanding Options,for cancellation in exchange for HK$1.66 in cash for each Outstanding Option,subject to and conditional upon the Scheme becoming effective. Total consideration On the basis of the Share Proposal Price of HK$2.80 per Scheme Share and3,312,680,000 Shares in issue of which 1,048,052,000 are Scheme Shares as at thedate of this letter, the Scheme Shares are valued at approximately HK$2,934.5million. There are 104,378,000 Options, giving rights to subscribe for 104,378,000Shares, outstanding as at the date of this letter. There are no otheroutstanding options, warrants, derivatives or other securities issued by CNACthat carry a right to subscribe for or which are convertible into Shares.Assuming that none of the Options is exercised prior to the Option Exercise Dateand the Option Proposal is accepted in full, on the basis of a consideration ofHK$1.66 payable for the cancellation of each of the 104,378,000 OutstandingOptions, the Option Proposal is valued at HK$173.3 million. Assuming that all Options are exercised in full by Optionholders prior to theOption Exercise Date in accordance with the terms of the Share Option Scheme,the consideration payable by Air China pursuant to the Share Proposal will beincreased to approximately HK$3,226.8 million. No consideration for cancellationwill then be payable under the Option Proposal. Air China intends to fund the cash required to effect the Proposals fromfinancing arranged through bank borrowings. The financing agreement for suchbank borrowings is governed by PRC law and the performance of such agreement maybe limited by force majeure provisions under the PRC Civil Code and the PRCContract Law. 4. CONDITIONS OF THE PROPOSALS The Scheme will become effective and binding on CNAC and all Scheme Shareholderssubject to satisfaction or waiver (as applicable) of the following conditions: (a) the approval of the Scheme by a majority in number of the IndependentScheme Shareholders representing not less than three-fourths in value of theScheme Shares held by Independent Scheme Shareholders, present and voting eitherin person or by proxy at the Court Meeting, provided that: (i) the Scheme is approved by at least 75% of the votes attaching to SchemeShares held by Independent Scheme Shareholders that are cast either in person orby proxy at the Court Meeting (by way of poll); and (ii) the number of votes cast against the resolution to approve the Schemeat the Court Meeting (by way of poll) is not more than 104,803,800, representing10% of the votes attaching to all Scheme Shares held by Independent SchemeShareholders; (b) the passing of a special resolution to approve and give effect to thecancellation of the Scheme Shares and the reduction of the relevant portion ofthe issued share capital of CNAC by a majority of at least three-fourths of thevotes cast by Shareholders present and voting in person or by proxy, at theExtraordinary General Meeting by way of poll; (c) the sanction of the Scheme (with or without modifications) by the HighCourt and the delivery to the Registrar of Companies in Hong Kong of an officialcopy of the order of the High Court for registration; (d) the compliance with the procedural requirements of Section 58 of theCompanies Ordinance in relation to the reduction of the issued share capital ofCNAC; (e) the receipts of all relevant authorisations, consents and/or approvalsfrom each of State Administration for Foreign Exchange of the PRC, NationalDevelopment and Reform Commission of the PRC, Ministry of Commerce of the PRC,China Civil Aviation Authority, Ministry of Finance of the PRC, State AssetsSupervision and Administration Commission of the PRC, China SecuritiesRegulatory Commission, China Banking Regulatory Commission and Hong Kong andMacau Affairs Department of the State Council necessary for the implementationof the Proposals, and all such authorisations, consents and/or approvalsremaining in full force and effect; (f) no act referred to under Rule 4 of the Takeovers Code having been orbeing proposed or threatened to be carried out by the CNAC Board; (g) since the date of the Privatisation Announcement, there having been noforce majeure event, including, without limitation, act of God, war, riot,public disorder, civil commotion, economic sanctions, fire, flood, explosion,epidemic, terrorism, labour dispute strike, lock-out, out-break, escalation,declaration or threat of war or hostility, or disaster which is outside AirChina's control that would render it impossible for Air China to implement theProposals; and (h) save for the payment of a final dividend of HK cent 1.0 per Share asapproved by the Shareholders on the annual general meeting of CNAC held on 25May 2006, since the date of the Privatisation Announcement and up to theEffective Date, CNAC not having declared, made or paid any dividend ordistribution of any kind, and not agreeing or proposing to declare, make or payany dividend or distribution of any kind. Air China will use its reasonable endeavours to fulfill the Conditions which arereasonably within its powers in a timely manner. If the Conditions are notsatisfied on or before the specific date to be set out in the Scheme Document,the Scheme will lapse. The Option Proposal will be subject to and conditional upon the Share Proposalbecoming or being declared effective. Air China reserves the right to implement the Proposals by way of a generaloffer prior to the despatch of the Scheme Document. Air China also reserves theright, at its absolute discretion, to waive, in whole or in part, any of theConditions referred to in paragraphs (f) to (h) above. Conditions (a) to (e)cannot be waived by Air China. In the event that any of Conditions (a) to (e) isnot satisfied on or before the specific date to be set out in the SchemeDocument, the Scheme will lapse. Air China may only invoke any or all ofConditions (a) to (h) as a basis for not proceeding with the Scheme if theprovisions of Note 2 to Rule 30.1 of the Takeovers Code are satisfied. Note 2 toRule 30.1 of the Takeovers Code provides that an offeror should not invoke anycondition (other than the acceptance condition) so as to cause the offer tolapse unless the circumstances which give rise to the right to invoke thecondition are of material significance to the offeror in the context of theoffer. 5. INFORMATION ON THE CNAC GROUP Business of the CNAC Group CNAC was incorporated in Hong Kong in 1997 and was listed on the Stock Exchangeon 17 December 1997, trading under the stock code 1110. The CNAC Groups'principal activities are airline operations and aviation related businesses. Theprincipal business activity of CNAC is that of an investment holding company.Following the completion of the Restructuring Agreement, the core businesses ofCNAC will include air transportation services (Air Macau, Macau Asia ExpressLimited and a minority stake in Cathay), airline catering services (Beijing AirCatering Co. Ltd., Southwest Air Catering Company Limited and LSG LufthansaService Hong Kong Ltd.), airport ground handling services (Jardine AirportService Ltd. and Menzies Macau Airport Services Ltd.) and logistics services(Tradeport Hong Kong Ltd.). The number of Shares in issue is 3,312,680,000 as at the date of this letter andAir China and its Concert Parties are interested in 2,264,642,000 Shares,representing approximately 68.4% of the entire issued share capital in CNAC asat the date of this letter. Key financial information of the CNAC Group For the purpose of this section, the definition of CNAC Group includes CNAC, itssubsidiaries and joint ventures. A summary of the audited consolidated results and net asset value of the CNACGroup for each of the two years ended 31 December 2004 and 31 December 2005 isset out below: For the year ended 31 December 2004 2005 HK$'000 HK$'000 Turnover 1,890,710 2,620,033Operating profit/(loss) 16,733 (52,317)Profit before tax 406,808 221,966Profit after tax and extraordinary items but before 394,464 211,924 minority interestsProfit after tax and extraordinary items attributable to 360,969 225,000ShareholdersNet asset value (after deducting minority interests) 3,125,837 as at 31 December 2005Earnings per share (HK Cents) 7Net asset per share (HK Cents) 94 The above financial information is extracted from the financial statements setout in the CNAC 2005 annual report, which had been prepared in accordance withHong Kong Financial Reporting Standards and Hong Kong Accounting Standards andinterpretations issued by the Hong Kong Institute of Certified PublicAccountants. Shareholding Structure of CNACShareholders As at the date of Immediately after the Immediately after the Effective Date and the Effective Date and the this circular Shares are delisted on Shares are delisted on the Stock Exchange the Stock Exchange (Note 2) (Note 3) Number of Shares % Number of Shares % Number of Shares %Air China 2,264,628,000 68.4 3,312,680,000 100.0 3,417,058,000 100.0Concert Parties 14,000 0 Nil Nil Nil NilSubtotal for Air China and 2,264,642,000 68.4 3,312,680,000 100.0 3,417,058,000 100.0 Concert PartiesIndependent Scheme 1,048,038,000 31.6 Nil Nil Nil Nil Shareholders (Note 1) Total 3,312,680,000 100.0 3,312,680,000 100.0 3,417,058,000 100.0 Optionholders 2004 2005 Names of Optionholders (Note 4) As at the date of this circular Number of Options % Chuang Shih Ping 33,126,000 31.7Gu Tiefei 5,000,000 4.8Tsang Hing Kwong, Thomas 33,126,000 31.7Zhang Xianlin 33,126,000 31.7 Total 104,378,000 100.0 Note 1: The Independent Scheme Shareholders include the non-profitorganisations who will receive the Shares from Cathay prior to the CourtMeeting. Note 2: Assuming no Options will be exercised before or on the OptionExercise Date. Note 3: Assuming the Options will be exercised prior to the Record Date. Note 4: All the Optionholders are executive directors of CNAC. The Options were granted on 25 July 2003 and are exercisable during the periodfrom 26 October 2003 to 25 October 2009 at an exercise price of HK$1.14 perShare. 6. GENERAL INFORMATION Assuming the Proposals are implemented in full, the consideration ratio pursuantto Rule 14.07 of the Listing Rules in connection with the issue of New Shares byCNAC to Air China pursuant to the Scheme is expected to be 10.9% and thereforewould constitute a discloseable transaction for Air China under Chapter 14 ofthe Listing Rules. The Optionholders are all executive directors of CNAC, currently holding inaggregate 104,378,000 Options in CNAC and are therefore deemed to have amaterial interest in the Proposals. As such, an Optionholder who exercises hisor her Options prior to the Record Date would then be required to abstain fromvoting at the Court Meeting in respect of the Option Shares. Assuming all theOptions are exercised in full prior to the Record Date, the issued share capitalof CNAC so enlarged will comprise 3,417,058,000 Shares, of which 104,378,000 areOption Shares, representing approximately 3.05% of the enlarged issued capitalof CNAC. Mr. Zhang Xianlin, an executive director of CNAC, is a supervisor of Air Chinaand therefore a connected person of Air China. As such, if Mr. Zhang Xianlinaccepts the Option Proposal from Air China or becomes a Scheme Shareholder, itwould constitute a connected transaction for Air China under Chapter 14A of theListing Rules. Air China will fully comply with the requirements under Chapter14A of the Listing Rules if and when Mr. Zhang Xianlin accepts the OptionProposal or the Share Proposal. Save as disclosed above, neither the Proposals nor the issue of New Shares byCNAC to Air China would constitute connected transactions for Air China underChapter 14A of the Listing Rules. Air China is a company incorporated in the PRC on 30 September 2004, whoseshares were listed on the Main Board of the Stock Exchange on 15 December 2004under the stock code 753. Air China's shares were also listed on the LondonStock Exchange in December 2004 by way of a secondary listing. As at the date ofthis letter, China National Aviation Holding Company, a state-owned companyestablished under the laws of the PRC, directly and indirectly owns 65.80% ofAir China. Air China is a leading provider of air passenger, air cargo andairline-related services in the PRC. 7. AIR CHINA'S INTENTION IN RELATION TO CNAC Intention regarding CNAC It is the intention of Air China to apply for a withdrawal of the listing of theShares from the Stock Exchange pursuant to Rule 6.05 of the Listing Rules. AirChina has no current intention to introduce any major changes to the existingoperating and management structure of CNAC, nor does Air China have any currentintention to discontinue the employment of any employee of the CNAC Group as aresult of the implementation of the Proposals or the Scheme becoming effective. Lapsing of the Scheme The Scheme will lapse if it does not become effective on or before a date to beset out in the Scheme Document, or such other later date as Air China and CNACmay agree or as the High Court may direct. The listing of Shares will not bewithdrawn if the Scheme is not approved or lapses. 8. BACKGROUND TO, REASONS FOR AND BENEFITS OF THE DISCLOSEABLE TRANSACTION On 8 June 2006, Air China, Cathay, CNAC, CITIC Pacific Limited and Swire PacificLimited made a joint announcement that they had entered into the RestructuringAgreement in respect of their shareholdings in Dragonair, Cathay and Air China.Concurrent and conditional upon the Restructuring Agreement becoming effective,Air China and Cathay also announced that they had entered into the OperatingAgreement which represents a far reaching agreement to enhance cooperationbetween Air China and Cathay in a number of key operational areas. Air Chinabelieves that the Restructuring Agreement and Operating Agreement represent anextremely attractive package of initiatives that will bring substantial benefitsto the Air China Group as a whole. Implementation of the Restructuring Agreement will involve the followingactions: (i) Air China acquiring a 10.16% shareholding in Cathay from CITIC PacificLimited and Swire Pacific Limited, at HK$13.50 per Cathay share; (ii) Cathay increasing its ownership in Air China from 10% to 20% throughthe subscription of new Air China H-shares at HK$3.45 per Air China H-share; (iii) Cathay acquiring the remaining 82.21% shareholding in Dragonair that itdoes not already own from CNAC (43.29%), CITIC Pacific Limited (28.50%) andSwire Pacific Limited (7.71%) and others (2.71%) for a combination of equity(548 million new Cathay shares at HK$13.50 per Cathay share) and cash (HK$822.1million), valuing 100% of the equity of Dragonair at HK$10.0 billion; and (iv) Swire Pacific Limited and CITIC Pacific Limited further reducing theirshareholdings in Cathay to 40.00% and 17.50%, respectively. Execution of the Operating Agreement will include: (i) implementing reciprocal sales representation for passenger services,where Air China will be exclusively responsible for Cathay's passenger sales inMainland China, including those of Dragonair, while Cathay will be exclusivelyresponsible for Air China's passenger sales in Hong Kong, Macau and Taiwan; (ii) the extension of code share arrangements between Hong Kong and MainlandChina such that Air China and Cathay will operate all their passenger services(including those of Dragonair) between Hong Kong and Mainland China under acode-share arrangement; (iii) the operation of all shared routes between Hong Kong and Mainland Chinaas joint venture routes under revenue and cost pooling arrangements; (iv) the creation of a cargo joint venture based in Shanghai which will bemajority controlled by Air China; (v) maintaining Dragonair as a principal airline for at least six years; and (vi) the strengthening of business cooperation in a number of other areas. Implementation of the Restructuring Agreement and the Operating Agreement willbring significant benefits to Air China including the realisation of substantialrevenue and cost synergies by leveraging integration advantages includingimproved load factors and better route management, sharing operating results,creating economies of scale, optimising resource allocation and the transfer ofknow-how between the airlines. Furthermore, Air China believes that the HK$10.0 billion valuation achieved for100% of the equity of Dragonair represents realisation of the full value ofCNAC's 43.29% shareholding in Dragonair, including a fair attribution ofexpected synergies. This valuation represents a price-to-earnings ratio of 33.3times Dragonair's reported earnings of HK$300.4 million for the year ended 31stDecember 2005. In recent years the Chinese aviation industry has experiencedrapid growth and development: the creation of three Chinese airline groups, thecontinuing liberalization of the market to international airlines and theincreasing internationalisation of the Chinese airlines' route networks. In thecontext of these market developments, Air China Directors are of the view thatthe competitive position of Dragonair has deteriorated (especially in the faceof intensive competition on its HK-Mainland routes) and the shareholdingstructure of Dragonair has proved to be inefficient with the result thatDragonair is unable to take full advantage of potential economies of scale andthe management of its business is not optimised. The rationalisation of theshareholding structure of Dragonair will benefit all the companies that arecurrent shareholders of Cathay and Dragonair itself. Upon completion of the Restructuring Agreement, CNAC will own a 7.34%shareholding in Cathay. Air China wishes to rationalise its shareholding inCathay so that Air China Group directly controls a 17.5% shareholding in Cathay,allowing Air China greater influence over Cathay and to equity account for ahigher percentage of Cathay's financial results. As a result, Air China wishesto privatise CNAC so that CNAC becomes a wholly owned subsidiary of Air China. For further details about the Transaction, please refer to the jointannouncement dated 8 June 2006 published by, among others, Air China, Cathay andCNAC, and the circular dated 3 July 2006 issued by Air China. 9. EFFECT OF THE PROPOSALS For the purpose of this section, the definition of Air China Group includes AirChina, its subsidiaries and joint ventures. (a) Earnings The net profit of Air China Group (excluding minority interests) for the yearended 31 December 2005 was approximately RMB2,406 million. The costs andexpenses to be incurred in connection with the Proposals would have nosignificant effect in relation to the net profit of Air China Group (excludingnet profit attributable to minority interests) for the year ended 31 December2005 had the Proposals been implemented on 31 December 2005. (b) Net assets Air China Group's audited consolidated net assets as at 31 December 2005 wasapproximately RMB21,551 million. Had the Proposals been completed on 31 December2005, the consolidated net asset value of Air China Group as at 31 December 2005would have decreased by approximately RMB1,288 million assuming that (1) thedifference between the total consideration of the Proposals and the amountattributable to the minority shareholders of CNAC as at 31 December 2005 wouldbe capitalised as goodwill in the consolidated balance sheet of Air China Groupand (2) the costs and expenses to be incurred in connection with the Proposalswould be insignificant. The net asset value of CNAC may change over time before the completion of theProposals and as such, the actual amount of the reduction in the net asset valueof Air China Group may be different from the amount stated above upon completionof the Proposals. (c) Gearing The Air China Group's gearing ratio (calculated by dividing the totalliabilities by the total assets of Air China Group) was approximately 68% as at31 December 2005. Had the Proposals been completed on 31 December 2005 andassuming none of the Options was exercised prior to the Option Exercise Date,Air China Group's gearing ratio would have been increased to approximately 70%provided that the costs and expenses to be incurred in connection with theProposals would be insignificant. 10. ADDITIONAL INFORMATION Your attention is drawn to the additional information set out in the appendix tothis circular. By Order of the Board Li Jiaxiang Chairman Beijing, the PRC APPENDIX GENERAL INFORMATION 1. RESPONSIBILITY STATEMENT This circular includes particulars given in compliance with the Listing Rulesfor the purpose of giving information with regard to the Group. The Directorscollectively and individually accept full responsibility for the accuracy of theinformation contained in this circular and confirm, having made all reasonableenquiries, that to the best of their knowledge and belief there are no otherfacts the omission of which would make any statement herein misleading. 2. DISCLOSURE OF INTERESTS OF DIRECTORS AND SUPERVISORS As at the Latest Practicable Date, Mr. Zhang Xianlin, a supervisor of theCompany, had interests in 33,126,000 Options, which represents approximately 1%of the share capital of CNAC. Save as disclosed above, as at the Latest Practicable Date, none of theDirectors, supervisors or chief executive of the Company has interests or shortpositions in the shares, underlying shares and/or debentures (as the case maybe) of the Company or its associated corporations (within the meaning of Part XVof the SFO) which were notified to the Company and the Stock Exchange pursuantto SFO (including interests or short positions which he is taken or deemed tohave under such provisions of the SFO), or recorded in the register maintainedby the Company pursuant to Section 352 of the SFO, or which were notified to theCompany and the Stock Exchange pursuant to the Model Code for SecuritiesTransactions by Directors of the Listed Companies. Mr. Christopher Dale Pratt is a non-executive director of the Company and Mr.Zhang Xianlin is a supervisor of the Company. Concurrently, Mr. Christopher DalePratt is chairman and executive director of Cathay whilst Mr. Zhang Xianlin is anon-executive director of Cathay, a substantial shareholder of the Company, andalso a director of Dragonair. Cathay and Dragonair compete or are likely tocompete either directly or indirectly with some aspects of the business of theCompany as they operate airline services to certain destinations which are alsoserved by the Company. Save as above, none of the Directors or supervisors of the Company and theirrespective associates (as defined in the Listing Rules) has any competinginterests which would be required to be disclosed under Rule 8.10 of the ListingRules if each of them were a controlling shareholder of the Company. 3. SUBSTANTIAL SHAREHOLDERS As at the Latest Practicable Date, to the knowledge of the Directors,supervisors and chief executive of the Company, the interests and shortpositions of the following persons (other than a Director, supervisor or chiefexecutive of the Company) who have an interest or short position in the sharesand underlying shares of the Company which would fall to be disclosed to theCompany pursuant to the SFO, or who are, directly or indirectly, interested in10% or more of the nominal value of any class of share capital carrying rightsto vote in all circumstances at general meetings of any members of the Group areas follows: (a) Substantial interests in the Company Name Type of Type and number Percentage Percentage Percentage Percentage Short of shares of of the total of the total of the total of the position interests the Company issued issued issued non-H total concerned shares of domestic foreign issued the Company shares of shares of H shares of the Company the Company the Company China National Beneficial 4,826,195,989 51.16% 100% - - -Aviation owner domestic Holding Company shares China National Attributable 1,380,482,920 14.64% - 100% - -Aviation interests non-H foreign Holding Company shares (1) China National Beneficial 1,380,482,920 14.64% - 100% - -Aviation owner non-H foreign Corporation shares(Group) Limited Cathay Pacific Beneficial 943,321,091 H 10.00% - - 29.24% - owner shares Swire Pacific Attributable 943,321,091 H 10.00% - - 29.24% -Limited(2) interests shares John Swire & Sons Attributable 943,321,091 H 10.00% - - 29.24% - Limited(2) interests shares John Swire & Son Attributable 943,321,091 H 10.00% - - 29.24% - (H.K.) Limited interests shares (2) Temasek Holdings Attributable 400,450,000 H 4.25% - - 12.41% - (Private) interest shares Limited(3) Wellington Investment 226,208,500 H 2.40% - - 7.01% -Management manager shares Company, LLP Name Type of Type and Percentage Percentage Percentage Percentage Short number of of the total of the total of the total of the total position interests shares of the issued issued issued non-H issued Company shares of domestic foreign H shares of concerned the Company shares of shares of the Company the Company the Company JPMorgan Chase & Investment 459,361,500 4.87% - - 14.24% - Co. (4) manager H shares 113,358,000 1.20% - - 3.51% - H shares (lending pool) Morgan Stanley(5) Investment 251,804,110 2.67% - - 7.80% - manager H shares 40,223,485 H shares 0.43% - - 1.25% - (short position) Note: Based on the information available to the Directors, chief executive andsupervisors of the Company (including such information as was available on thewebsite of the Stock Exchange) and so far as the Directors, chief executive andsupervisors are aware, as at the Latest Practicable Date: 1. By virtue of China National Aviation Holding Company's 100% interestin China National Aviation Corporation (Group) Limited, China National AviationHolding Company is deemed to be interested in the 1,380,482,920 non-H foreignshares of the Company directly held by China National Aviation Corporation(Group) Limited. 2. By virtue of John Swire & Sons Limited's 100% interest in John Swire& Sons (H.K.) Limited and their approximately 30% equity interest and 53% votingrights in Swire Pacific Limited, and Swire Pacific Limited's approximately 46%interest in Cathay Pacific, John Swire & Sons Limited, John Swire & Sons (H.K.)Limited and Swire Pacific Limited are deemed to be interested in the 943,321,091H shares of the Company directly held by Cathay Pacific. Upon satisfaction ofthe Pre-condition as described in this circular, Cathay will directly hold2,122,472,455 H shares of the Company and its shareholding in the Company willaccount for approximately 20% of the enlarged total issued shares of the Companyand 48.18% of the enlarged total issued H Shares of the Company. 3. Temasek Holdings (Private) Limited, through its controlled entities,had an attributable interest in 400,450,000 H shares of the Company, out ofwhich the interest in 292,500,000 H shares (representing approximately 9.07% ofthe total issued H shares) was held directly by Aranda Investment (Mauritius)Pte Ltd. and the interest in the remaining 107,950,000 H shares was helddirectly by Dahlia Investments Ptd Ltd, FPL Alpha Investment Pte Ltd andFullerton (Private) Limited. 4. JPMorgan Chase & Co, through its controlled entities, had anattributable interest in 459,361,500 H shares of the Company and 113,358,000 Hshares of the Company as lending pool, out of which the interest in 113,358,000H shares was held directly by JPMorgan Chase Bank, N.A., 295,154,000 H shareswas held directly by JF Asset Management Limited, 10,078,000 H shares was helddirectly by JF International Management Inc., 1,441,500 H shares was helddirectly by J.P. Morgan Whitefriars Inc., 12,000,000 H shares was held directlyby J.P. Morgan Securities Ltd., 26,266,000 H shares was held directly byJPMorgan Asset Management (Japan) Limited and 1,064,000 H shares was helddirectly by JF Asset Management (Singapore) Limited. 5. Morgan Stanley, through its controlled entities, had an attributableinterest in 251,804,110 H shares of the Company and maintained a short positionof 40,223,485 H shares of the Company, out of which Morgan Stanley InvestmentManagement Company directly held 202,242,000 H shares, Morgan Stanley UruguayLtd a directly held 1,000 H shares, Morgan Stanley & Co International Limiteddirectly held 6,729,721 H shares and maintained a short position of 2,926,372 Hshares, Morgan Stanley Dean Witter Hong Kong Securities Limited directly held23,568 H shares and maintained a short position of 78,000 H shares, MorganStanley Asset & Investment Trust Management Co., Limited directly held 5,134,000H shares, Morgan Stanley Capital (Cayman Islands) Limited maintained a shortposition of 1,302,000 H shares, Morgan Stanley Capital Services Inc. directlyheld 271,355 H shares, Morgan Stanley Capital (Luxembourg) S.A. directly held1,344,000 H shares, and Morgan Stanley & Co. Inc. directly held 36,058,466 Hshares and maintained a short position of 35,917,113 H shares. (b) Substantial interests in CNAC Capacity No. of shares Percentage of the issued share capitalChina National Aviation Holding Attributable interest 2,264,628,000 68.36Company(1)The Company(2) Beneficial owner 2,264,628,000 68.36Best Strikes Limited Beneficial owner 187,656,000 5.66On Ling Investments Limited(3) Attributable interest 322,856,000 9.75Novel Investments Holdings Limited Attributable interest 322,856,000 9.75(3)Novel Enterprises Limited(3) Attributable interest 322,856,000 9.75Novel Enterprises (BVI) Limited(3) Attributable interest 322,856,000 9.75Novel Credit Limited(3) Attributable interest 322,856,000 9.75Novel Holdings (BVI) Limited(3) Attributable interest 322,856,000 9.75Westleigh Limited(3) Attributable interest 322,856,000 9.75 Notes: 1. China National Aviation Holding Company owns approximately 51.16% ofthe total issued share capital of the Company and the entire issued sharecapital of China National Aviation Corporation (Group) Limited, a companyincorporated in Hong Kong, which in turn owns approximately 14.64% of the totalissued share capital of the Company. Accordingly its interests in CNAC duplicatewith those interest of the Company. 2. China National Aviation Corporation (Group) Limited, the formerimmediate controlling shareholder of CNAC, transferred its approximately 69%shareholding interest in CNAC to the Company in September 2004 by way of acapital contribution in return for the Company's non-H foreign shares, as suchthe Company becomes the immediate controlling shareholder of CNAC. Its interestin CNAC duplicates with those interests of China National Aviation HoldingCompany. 3. 5.6% of the interest held by each of these companies in CNACduplicates with Best Strikes Limited's interest in CNAC. The interests of thesecompanies in CNAC also duplicate each other. (c) Substantial interests in other members of the Group Approximate %Member of the Group Name of share capital Air Macau CNAC 51%Air Macau Sociedale de Turismo e Diversaes de Macau 14%Air Macau Servico, Administracao e Participacoes, 20% Lda.Ameco Deutsche Lufthansa AG 40%Air China Cargo Capital Airport Holding Company 24%Air China Cargo CITIC Pacific Limited 25% Save as disclosed above, as at the Latest Practicable Date, to the knowledge ofthe Directors, chief executive and supervisors of the Company, no other person(other than a Director, supervisor or chief executive of the Company) had aninterest or short position in the shares and underlying shares of the Companywhich would fall to be disclosed to the Company pursuant to the SFO, orotherwise was, directly or indirectly, interested in 10% or more of the nominalvalue of any class of share capital carrying rights to vote in all circumstancesat general meetings of any members of the Group. 4. LITIGATION As at the Latest Practical Date, the litigation or claims of material importancepending or threatened against a member of the Group are as disclosed in thesection headed "Contingent Liabilities" set out in the Company's 2005 annualreport dated 18 April 2006. Except as disclosed above, there was no litigation or claims of materialimportance pending or threatened against any member of the Group as at theLatest Practicable Date. 5. SERVICE CONTRACTS Each of the Directors except Mr. Christopher Dale Pratt and Mr. Jia Kang hasentered into a service contract with the Company for a term of three years from30 September 2004 other than Mr. Fan Cheng, whose service contract has a term ofthree years from 18 October 2005 and the service contract is thereafter subjectto termination by either party giving written notice to the other party. Mr.Christopher Dale Pratt and Mr. Jia Kang are going to enter into a servicecontract with the Company with a term that shall begin as of 12 June 2006 and 5June 2006 respectively and end on the expiry of the term of the current sessionof the Board. 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). 6. MISCELLANEOUS (a) The joint company secretaries of the Company are Zheng Baoan and Li ManKit. Mr. Li is an associate member of the Institute of Chartered Secretaries andAdministrators, UK and the Hong Kong Institute of Company Secretaries. (b) The qualified accountant of the Company is David Tze-kin Ng. Mr. Ng is amember of the Hong Kong Institute of Certified Public Accountants. (c) The registered address of the Company is at 9th Floor, Blue Sky Mansion,28 Tianzhu Road, Zone A, Tianzhu Airport Industrial Zone, Shunyi District,Beijing, PRC. The head office of the Company is at South Terminal, BeijingCapital International Airport, Chaoyang District, Beijing, PRC. (d) The Hong Kong branch share registrar and transfer office of the Companyis Computershare Hong Kong Investor Services Limited, Rooms 1712-1716, 17thFloor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong. This information is provided by RNS The company news service from the London Stock Exchange