Air China Regulatory News (AIRC)

30 May 2006 07:02

Air China Ld30 May 2006 13. APPROPRIATIONS Set out below are the details of distributions made by the Company for the twoyears ended 31 December 2005: Group 2005 2004 RMB'000 RMB'000 Declared during the year Carved-out of net assets (note 13(c)) - 39,136 Dividend paid (note 13(c)) - 29,074 Distribution to CNAHC (note 13(a)) - 377,550 Distribution to CNAHC (note 13(b)) - 2,025,105 Distribution to CNACG (note 13(b)) - 118,680 Total - 2,589,545 Proposed for approval (not recognised as a liability as at 31 December) Final dividend for 2005: RMB0.2383 (2004: Nil) per 10 shares (note 13(d)) 224,793 - (a) On 21 April 2004, Fly Top Limited, a wholly-owned subsidiary of CNAC,entered into the following acquisition agreements which were supplemented on 26April 2004: (i) a share purchase agreement with Air China International Corporation inrelation to the acquisition of 60% of the equity interest in BACL (the "BACLAgreement") for a consideration of RMB294 million; and (ii) a share purchase agreement with Air China International Corporation inrelation to the acquisition of 60% of the equity interest in SWACL (the "SWACLAgreement") for a consideration of RMB67 million. On 12 November 2004, all the pre-completion undertakings of the BACL Agreementand the SWACL Agreement were completed and these two acquisition agreements wereeffective on that date accordingly. On 20 April 2004, Air China International Corporation entered into a stocktransfer agreement with HKSACL (the "HKSACL Agreement"), the minorityshareholder of SWACL, pursuant to which, Air China International Corporationdisposed of 15% of the equity interest in SWACL to HKSACL for a consideration ofapproximately RMB17 million. On 12 November 2004, all the pre-completionundertakings of the HKSACL Agreement were completed and this agreement waseffective on that date accordingly. Immediately after the completion of the BACL Agreement, SWACL Agreement andHKSACL Agreement, the Group's effective shareholding interests in BACL and SWACLwere diluted from 60% and 75%, respectively, to approximately 41%. As a result of the completion of the BACL Agreement, SWACL Agreement and HKSACLAgreement, the Group made a payment of approximately RMB378 million to CNAHC,representing the total consideration payable by CNAC and HKSACL for theacquisitions of the entire shareholding interests held by the Group in BACL andSWACL pursuant to the Restructuring as set out in note 1 to these financialstatements. This payment has been made to CNAHC and accounted for as a specialdistribution to CNAHC by the Company. (b) In accordance with the ( ) "Provisional Regulations Relating to CorporateReorganisation of Enterprises and Related Management of State-owned Capital andFinancial Treatment" notice issued by the Ministry of Finance, which becameeffective from 27 August 2002, and pursuant to the Restructuring, after theCompany's incorporation, the Company is required to make a distribution toCNAHC, which represents an amount equal to the net profit attributable toshareholders, as determined based on the audited accounts prepared in accordancewith the accounting principles and the financial regulations applicable in thePRC ("PRC GAAP"), generated during the period from 1 January 2004 to 30September 2004 (the date of incorporation of the Company) by the businesses andoperations (excluding those of CNAC) contributed to the Group by CNAHC aftergiving effect to relevant necessary adjustments. The net profit attributable toshareholders mentioned above for the said period is calculated after deductingthe amount of income tax payable to CNAHC of approximately RMB191,721,000 whichin turn will settle the tax liability on profit arisen during that period withthe relevant tax bureau as detailed in note 12 to these financial statements. In addition, in accordance with ( ) "Provisional Regulations Relating toCorporate Reorganisation of Enterprises and Related Management of State-ownedCapital and Financial Treatment" notice issued by the Ministry of Finance andpursuant to the Restructuring, after the Company's incorporation, the Company isrequired to make a distribution to CNACG, which represents an amount equal tothe net profit attributable to shareholders, as determined based on auditedaccounts prepared in accordance with PRC GAAP, generated during the period from1 January 2004 to 30 September 2004 (the date of incorporation of the Company)by the businesses and operations (excluding those directly contributed by CNAHC)contributed to the Group by the CNAC group, less the 2003 final dividend and2004 interim dividend amounts already paid by CNAC to CNACG. (c) The profit distributions made prior to the incorporation of the Companyrepresent the net assets which have been carved out and treated as deemeddistributions pursuant to the Restructuring set out in note 1 to these financialstatements and the dividends paid during that period. The rates of dividend and the number of shares ranking for dividends for theyear ended 31 December 2004 are not presented in this footnote for those profitdistributions made prior to the incorporation of the Company as such informationis not considered meaningful. (d) The proposed final dividend of RMB0.2383 per 10 shares for the year ended 31December 2005 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. Following the incorporation of the Company, under the PRC Company Law and theCompany's articles of association, net profit after tax as reported in the PRCstatutory financial statements can only be distributed as dividends afterallowance 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 the PRC GAAP. The transfer tothis reserve must be made before any distribution of dividends 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 of 5% to 10% of after-tax profit, as determined under PRCGAAP, to the Company's statutory public welfare fund, which will be establishedfor the purpose of providing for the Company's employees collective welfarebenefits such as the construction of dormitories, canteens and other staffwelfare facilities. The fund forms part of the shareholders' equity as onlyindividual employees can use these facilities, while the title of suchfacilities is held by the Company. The transfer to this fund must be made beforeany distribution of dividends to shareholders; and (iv) 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 net profitafter tax of the Company for the purpose of dividends payment is based on thelesser of (i) the net profit determined in accordance with PRC GAAP; and (ii)the net profit determined in accordance with IFRSs. Prior to the incorporation of the Company on 30 September 2004, no profitappropriations to the aforesaid reserve funds were required. 14. EARNINGS PER SHARE ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT The calculation of basic earnings per share for the year ended 31 December 2005is based on the net profit attributable to equity holders of the parent for theyear ended 31 December 2005 of approximately RMB2,406,256,000, and the weightedaverage number of approximately 9,422,728,916 ordinary shares in issue duringthe year, as adjusted to reflect the new issue of 382,592,727 H shares on theexercise of the over-allotment options granted to international underwriters tosubscribe for the Company's H shares during the year. The calculation of basic earnings per share for the year ended 31 December 2004is based on the net profit attributable to equity holders of the parent for theyear ended 31 December 2004 of approximately RMB2,385,964,000, and the weightedaverage number of approximately 6,618,795,915 ordinary shares in issue duringthe year on the assumption that the 6,500,000,000 shares issued as at 30September 2004 had been in issue throughout the year ended 31 December 2004, andas adjusted to reflect the new issue of 2,550,618,182 H shares by way of placingand public offering in connection with the public listing of the Company's Hshares on 15 December 2004. Diluted earnings per share for the year ended 31 December 2005 has not beendisclosed because no diluting events existed during 2005. The calculation of diluted earnings per share for the year ended 31 December2004 was based on the net profit attributable to equity holders of the parentfor the year ended 31 December 2004 of approximately RMB2,385,964,000. Theweighted average number of ordinary shares used in the calculation is theweighted average number of 6,618,795,915 ordinary shares in issue during theyear, as used in the basic earnings per share calculation and the weightedaverage of 556,132 ordinary shares assumed to have been issued at noconsideration on the deemed exercise of all over-allotment options granted tointernational underwriters to subscribe for the Company's H shares during theyear. 15. PROPERTY, PLANT AND EQUIPMENT Group Aircraft and flight Transportation Office Construction equipment Buildings Machinery equipment equipment in progress Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 At 1 January 2004, net of accumulated 37,789,877 2,715,540 1,051,602 293,144 90,268 483,489 42,423,920 depreciation Establishment of a joint venture (note (267,119) (186,169) (86,932) (21,673) - (3,947) (565,840) 45 (a)) Additions 4,479,459 42,515 109,019 135,909 77,244 734,028 5,578,174 Disposals (424,064) (49,111) (28,705) (7,170) (22,315) - (531,365) Transfer from 164,788 285,156 91,393 5,177 206 (546,720) - CIP Depreciation (3,024,078) (123,071) (172,910) (89,845) (53,348) - (3,463,252) charge for the year At 31 December 2004 and 1 January 2005, net of accumulated 38,718,863 2,684,860 963,467 315,542 92,055 666,850 43,441,637 depreciation Additions 7,185,603 10,022 112,533 72,122 32,270 1,394,017 8,806,567 Disposals (469,378) (44,861) (4,542) (15,975) (273) - (535,029) Transfer from 467,440 71,898 67,571 5,147 22,724 (634,780) - CIP Exchange (6,542) (1,826) - (1,399) - - (9,767) adjustment Depreciation (4,128,357) (147,542) (156,489) (56,501) (23,791) - (4,512,680) charge for the year At 31 December 2005, net of accumulated 41,767,629 2,572,551 982,540 318,936 122,985 1,426,087 47,190,728 depreciation At 31 December 2004 and 1 January 2005 Cost 63,813,626 3,674,146 2,045,002 1,068,502 223,531 666,850 71,491,657 Accumulated (25,094,763) (989,286) (1,081,535) (752,960) (131,476) - (28,050,020) depreciation Net carrying 38,718,863 2,684,860 963,467 315,542 92,055 666,850 43,441,637 amount At 31 December 2005 Cost 70,705,988 3,698,597 2,192,095 1,076,728 276,239 1,426,087 79,375,734 Accumulated (28,938,359) (1,126,046) (1,209,555) (757,792) (153,254) - (32,185,006) depreciation Net carrying 41,767,629 2,572,551 982,540 318,936 122,985 1,426,087 47,190,728 amount Company Aircraft and flight Transportation Office Construction equipment Buildings Machinery equipment equipment in progress Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Transferred to the Company upon its incorporation 38,595,577 1,858,577 784,743 182,711 76,724 583,635 42,081,967 (note 1) Additions 372,799 - 25,547 42,916 27,182 308,493 776,937 Disposals (9,216) (32) (31,158) (1,650) (148) - (42,204) Transfer from CIP - 219,934 17,770 176 - (237,880) - Depreciation charge (804,864) (23,307) (29,053) (20,021) (31,027) - (908,272) for the period At 31 December 2004 and 1 January 2005, net of accumulated 38,154,296 2,055,172 767,849 204,132 72,731 654,248 41,908,428 depreciation Additions 6,444,967 2,209 85,229 46,376 20,404 1,347,614 7,946,799 Disposals (460,726) (39,100) (1,898) (15,096) (197) - (517,017) Transfer from CIP 467,440 63,320 57,033 5,147 22,706 (615,646) - Depreciation charge (3,997,538) (130,020) (129,145) (36,615) (19,429) - (4,312,747) for the year At 31 December 2005, net of accumulated 40,608,439 1,951,581 779,068 203,944 96,215 1,386,216 45,025,463 depreciation At 31 December 2004 and 1 January 2005 Cost 61,842,914 2,820,374 1,520,769 830,178 131,321 654,248 67,799,804 Accumulated (23,688,618) (765,202) (752,920) (626,046) (58,590) - (25,891,376)depreciation Net carrying amount 38,154,296 2,055,172 767,849 204,132 72,731 654,248 41,908,428 At 31 December 2005 Cost 68,020,677 2,839,822 1,649,825 823,159 172,910 1,386,216 74,892,609 Accumulated (27,412,238) (888,241) (870,757) (619,215) (76,695) - (29,867,146)depreciation Net carrying amount 40,608,439 1,951,581 779,068 203,944 96,215 1,386,216 45,025,463 Certain of the Group's and the Company's bank loans are secured by certain ofthe Group's and the Company's aircraft which had an aggregate carrying amount ofapproximately RMB16,471 million as at 31 December 2005 (2004: RMB16,586 million)(note 33(a)). The carrying amount of aircraft held under finance leases as at 31 December 2005is approximately RMB10,487 million (2004: RMB11,999 million) (note 32(a)).Leased assets are pledged as security for the related finance lease liabilities. As at 31 December 2005, the Group is in the process of applying to obtain thetitle certificates of certain of its buildings with an aggregate carrying amountof approximately RMB270 million (2004: RMB2,178 million). The Directors of theCompany are of the view that the Group is entitled to lawfully and validlyoccupy and use the above-mentioned buildings. The Directors of the Company areof the opinion that the aforesaid matter will not have any significant impact onthe Group's financial position as at 31 December 2005. 16. LEASE PREPAYMENTS Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Cost At 1 January 938,992 30,017 924,895 - Transferred to the Company upon its incorporation (note 1) - - - 924,895 Additions 157,723 908,975 151,955 - At 31 December 1,096,715 938,992 1,076,850 924,895 Accumulated amortisation At 1 January 5,094 210 5,024 - Transferred to the Company upon its incorporation (note 1) - - - 411 Amortisation for the year 19,555 4,884 19,333 4,613 At 31 December 24,649 5,094 24,357 5,024 Net book value At 31 December 1,072,066 933,898 1,052,493 919,871 17. INTERESTS IN SUBSIDIARIES Company 2005 2004 RMB'000 RMB'000 Listed shares in Hong Kong, 579,472 579,472 at cost Unlisted investments, at 137,707 134,647 cost Due from subsidiaries 11,519 22,513 Due to subsidiaries (588,623) (559,703) 140,075 176,929 Market value of listed 2,893,811 3,161,997 shares The balances with the subsidiaries are unsecured, interest-free and have nofixed terms of repayment. As at 31 December 2005, the Group is in the process of applying to register thealready transferred equity interests in certain subsidiaries with an aggregatecost of approximately RMB504,000 (2004: RMB134 million) from Air ChinaInternational Corporation into the Company's name. The Directors of the Companyare of the view that the Company owns the aforesaid equity interests and thatthe aforesaid matter will not have any significant impact on the Group'sfinancial position as at 31 December 2005. Particulars of the principal subsidiaries at 31 December 2005 are as follows: Percentage of equity Place of Nominal interests incorporation/ value attributable to establishment of paid-up the Company Principal Company name and Legal capital Direct Indirect activities operations status (in thousands) Subsidiaries CNAC Hong Kong Limited HK$331,268 69 - Investment liability ( ) company holding Air Macau Company Macau Limited MOP400,000 - 35 Airline operator Limited liability ("Air Macau")* company ( ) Air China Group Import PRC/Mainland Limited RMB90,000 100 - Import and and liability export Export Trading Co. China company trading ("AIE") ( ) PRC/Mainland Limited RMB20,000 100 - Provision of liability (Zhejiang Air Services China company airline catering Co., Ltd.) ** and shuttle bus services Beijing Aviation PRC/Mainland Limited RMB3,000 100 - Provision of Passenger liability Service China company passenger Corporation ( ) transportation services Air China Shantou PRC/Mainland Limited RMB18,000 51 - Manufacture and Industrial liability Development China company retail of Company aircraft ( ) supplies China National PRC/Mainland Limited RMB6,980 100 - Provision of Aviation Air liability travel Passenger and China company agency and Cargo Services Agency freight Company ( ) forwarding services Beijing Air China PRC/Mainland Limited RMB1,500 100 - Provision of Engineering liability Technology China company engineering Development Centre consultancy ( ) services Beijing Civil Aviation PRC/Mainland Limited RMB5,533 100 - Provision of Blue Sky liability travel Air Travel Services China company agency services Company ( ) Air China Hong Kong Limited HK$500 95 - Provision of Development liability air Corporation (Hong company ticketing Kong) Limited services ( ) Percentage of equity Place of Nominal interests incorporation/ value attributable to establishment of paid-up the Company Principal Company name and Legal capital Direct Indirect activities operations status (in thousands) PRC/Mainland Limited RMB2,000 100 - Provision of liability (Shanghai Air China China company ground Base services, Development Centre) air ** passenger, cargo and consultancy services * Air Macau is a 51%-owned subsidiary of CNAC. ** The English names are direct translations of the company's Chinese names. The above table lists the subsidiaries of the Company which, in the opinion ofthe Directors, principally affected the results for the year ended 31 December2005 or formed a substantial portion of the net assets of the Group at 31December 2005. To give details of other subsidiaries would, in the opinion ofthe Directors, result in particulars of excessive length. 18. INTERESTS IN JOINT VENTURES Company 2005 2004 RMB'000 RMB'000 Unlisted investments, at cost 1,398,595 1,392,388 Particulars of the joint ventures of the Group at 31 December 2005 are asfollows: Percentage of equity interests Nominal attributable Place of value to incorporation/ of paid-up the establishment of paid-up Group Principal Company name and Legal capital Direct In- activities operations status (in direct thousands) Joint ventures Aircraft PRC/Mainland Limited US$112,533 60 - Provision of Maintenance and liability Engineering China company aircraft Corporation, overhaul Beijing and maintenance ( ) services Air China Cargo PRC/Mainland Limited RMB2,200,000 51 - Provision of liability cargo ( ) China company carriage services BACL PRC/Mainland Limited US$8,000 - 41 Provision of liability airline ( ) China company catering services SWACL PRC/Mainland Limited RMB70,000 - 41 Provision of liability airline ( ) China company catering services As at the balance sheet date and for the two years ended 31 December 2005, theGroup's proportionate share of the assets, liabilities, and the Group'sproportionate share of the revenue and expenses of the joint ventures are asfollows: Group 2005 2004 RMB'000 RMB'000 Current assets 1,654,865 1,606,903 Non-current assets 2,147,711 1,706,734 Total assets 3,802,576 3,313,637 Current liabilities (1,349,440) (1,578,665) Non-current liabilities (444,475) (8,734) Net assets attributable to the Group 2,008,661 1,726,238 Revenue 4,248,167 3,944,633 Operating expenses (3,929,313) (3,748,389) Finance revenue 10,616 5,720 Finance costs (25,460) (21,857) Share of profits less losses from - 1,006 associates Profit before tax 304,010 181,113 Tax (35,767) (51,976) Net profit attributable to the Group 268,243 129,137 19. INTEREST IN ASSOCIATES Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Listed shares in Mainland China, - - 163,477 168,949 at cost Unlisted investments, at cost - - 673,879 676,692 Share of net assets 2,382,547 2,587,304 - - Goodwill 1,444,367 1,404,966 - - Due from associates 62,948 90,842 15,419 17,305 Due to associates (95,905) (81,591) (129,410) (82,109) 3,793,957 4,001,521 723,365 780,837 Market value of listed shares - - 124,032 288,192 The balances with the associates are unsecured, interest-free and have no fixedterms of repayment. As at 31 December 2005, the Group is in the process of applying to register thealready transferred equity interests in certain associates with an aggregatecost of approximately RMB101 million (2004: RMB846 million) from Air ChinaInternational Corporation into the Company's name. The Directors of the Companyare of the view that the Company owns the aforesaid equity interests and thatthe aforesaid matter will not have any significant impact on the Group'sfinancial position as at 31 December 2005. Particulars of the associates at 31 December 2005 are as follows: Percentage of equity Place of interests incorporation/ Registered/ attributable establishment issued to Principal Name and operations share capital the Group activities Shenzhen Airlines PRC/Mainland RMB300,000,000 25 Airline operator ( ) China Hong Kong Dragon Hong Kong HK$500,000,000 29.9 Airline operator Airlines Limited ("Dragonair") # ( ) Shandong Aviation Group PRC/Mainland RMB580,000,000 48 Investment Corporation ("Shandong China holding Aviation") ( ) Shandong Airlines Co., PRC/Mainland RMB400,000,000 22.8 Airline operator Ltd. ("Shandong China Airlines") ( ) Sichuan SNECMA PRC/Mainland US$21,000,0000 40.3 Provision of Aeroengine Maintenance China maintenance Co., Ltd. and repair ( ) services for aircraft engines Chengdu Falcon Aircraft PRC/Mainland RMB16,474,293 35.6 Provision of Engineering Service China maintenance Co., Ltd. and repair ( ) services for aircraft engines Yunnan Airport Aircraft PRC/Mainland RMB10,000,000 40 Provision of Maintenance Services China maintenance Co., Ltd. and repair ( ) services Macau Aircraft Repair and Macau MOP100,000 17.3 Provision of Conversion Company aircraft repair Limited # and conversion ( ) services Jardine Airport Hong Kong HK$10,000 34.5 Provision of Services Limited # airport ground ( ) handling services Menzies Macau Airport Macau MOP10,000,000 23.2 Provision of Services Limited # airport ground ( ) handling services Percentage of Place of equity incorporation/ interests establishment Registered/ attributable Name and issued to Principal operations share capital the Group activities Guangzhou Baiyun PRC/Mainland RMB100,000,000 21 Provision of International Airport China airport ground Ground Handling Service handling Company Limited services ( ) PRC/Mainland RMB5,000,000 40 Provision of (Sanya World Trade China airport ground Development Company handling Limited) * services CAAC Data PRC/Mainland RMB10,800,000 23.2 Provision of Communications China aviation data Co., Ltd. communication ( services ) CAAC Cares Chongqing PRC/Mainland RMB9,800,000 24.5 Provision of Co., Ltd. China airline-related( information ) system services PRC/Mainland RMB2,000,000 35 Provision of China airline-related(Chengdu CAAC information Southwest Cares system Co., Ltd.) services * Tradeport Hong Kong Hong Kong HK$400 17.3 Provision of Limited # services for ( ) developing and operating logistics centre LSG Lufthansa Service Hong Kong HK$501 13.9 Provision of Hong Kong Limited airline catering ("LSGHK") # services ( ) China National PRC/Mainland RMB505,269,500 23.5 Provision of Aviation Finance Co., Ltd. China financial ("CNAF") services ( )** # Shareholding interests of these associates are held indirectly throughsubsidiaries of the Company. * The English names are direct translations of the company's Chinese names. ** 19.3% of the Group's equity interests in CNAF is held directly by theCompany, while the remaining 4.2% is held indirectly through subsidiaries of theCompany. Summarised financial information of the Group's associates is as follows: Group 2005 2004 RMB'000 RMB'000 Aggregate of associates' financial position: Total assets 32,096,859 27,767,944 Total liabilities (25,497,576) (20,747,807) Aggregate of associates' results: Revenue 21,026,538 16,770,072 Net profit 745,230 1,330,066 Share of profits less losses after tax from associates: Dragonair 139,824 279,801 Others 85,106 184,243 224,930 464,044 Movements of goodwill are as follows: Group 2005 2004 RMB'000 RMB'000 Goodwill at beginning of the year (note 19(a)) 1,404,966 1,205,390 Adjustment to opening goodwill (note 19(b)) 40,445 - Additions (note 19(b)) - 199,576 Exchange adjustment (1,044) - Goodwill at end of the year 1,444,367 1,404,966 Accumulated impairment - - Notes: (a) The goodwill brought forward from 2003 related to the acquisition ofshareholding interests of 35.86% and 7.43% in Dragonair by CNACG and its thenwholly-owned subsidiary, CNAC, in June 1996 and October 1997, respectively. Theaggregate goodwill arising from these two acquisitions was approximatelyRMB2,130 million and subsequently reduced to approximately RMB1,205 millionthrough deemed disposal upon the initial public offering of CNAC and theaccumulated amortisation on the straight-line basis over a period of 20 yearsuntil 1 January 2001 (the date of adoption of IFRS 3 by the Group). (b) The goodwill arose in 2004 related to the acquisitions of effectiveshareholding interests of 48.0% in Shandong Aviation, 22.8% in Shandong Airlinesand 13.9% in LSGHK by the Group, resulting in an aggregate goodwill amount ofapproximately RMB200 million. During the year, Shandong Aviation and Shandong Airlines restated their retainedearnings as at 31 December 2004 and as such the goodwill, being calculated asthe excess of the cost of the business combination over the Group's interest inthe net fair value of the identifiable assets, liabilities and contingentliabilities of Shandong Aviation and Shandong Airlines arising on theacquisitions of shareholding interests in these two companies, were adjustedaccordingly. Impairment testing of goodwill attributable to Dragonair, Shandong Airlines andShandong Aviation Goodwill acquired through the business combination in relation to theacquisition of shareholding interests in Dragonair, Shandong Airlines andShandong Aviation has been allocated to the cash-generating unit, Dragonair,Shandong Airlines and Shandong Aviation, within the airline operations segment. The recoverable amount of Dragonair has been determined based on a value in usecalculation. To calculate this, cash flow projections are based on financialbudgets approved by management covering a one-year period. The discount rateapplied to the cash flow projections beyond the one-year period is 5.0% (2004:5.0%). No growth has been projected beyond the one-year period. Key assumptions used in the value in use calculation of Dragonair, ShandongAirlines and Shandong Aviation The following describes each key assumption on which management has based itscash flow projections when undertaking the impairment testing of goodwillattributable to Dragonair, Shandong Airlines and Shandong Aviation: Passenger revenue - the bases used to determine the value assigned to thebudgeted passenger revenue are available seat kilometers, passenger traffic,passenger load factor and passenger yield. Values assigned to the keyassumptions reflect past experience and are consistent with external informationsources. Operating expenses - the bases used to determine the values assigned are staffheadcount, scheduled flight hours, passenger traffic and jet fuel consumption.Values assigned to the key assumptions reflect past experience and areconsistent with external information sources. 20. LONG TERM RECEIVABLE FROM CNAHC On 30 September 2004, the Company entered into an agreement with CNAHC wherebyCNAHC agreed to assume the obligation to settle an aggregate amount ofapproximately RMB757 million, which was recorded by the Group as governmentgrant receivable as at 31 December 2003 of RMB842 million, consisting of longterm portion and short term portion of RMB764 million and RMB78 million,respectively. This receivable from CNAHC is unsecured, interest-free andrepayable over eight years commencing from 31 December 2004 by 16 semi-annualinstalments to be made by 30 June and 31 December each year. Pursuant to therelevant agreement, the first instalment amount of RMB25 million was settled by31 December 2004 and the final instalment amount of approximately RMB32 millionshall be settled by 30 June 2012, with the remaining 14 semi-annual instalmentamounts of RMB50 million each to be settled by 30 June and 31 December each yearbetween 30 June 2005 and 31 December 2011. 21. AVAILABLE-FOR-SALE INVESTMENTS Available-for-sale investments consist of unlisted equity investments. 22. DEFERRED TAX ASSETS Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Balance at beginning of year 776,084 590,153 658,000 - Transferred to the Company upon its incorporation (note 1) - - - 660,349 Charge for the year (note 12) (277,713) (607,824) (267,000) (2,349) Credited to equity - 793,755 - - Balance at end of year 498,371 776,084 391,000 658,000 The principal components of the Group's and the Company's deferred income tax assets are as follows: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Deferred income tax liabilities: Accelerated depreciation for tax purposes (447,186) (441,441) (456,000) (426,000) Other deferred income tax (72,000) (47,000) (72,000) (47,000) liabilities Gross deferred income tax (519,186) (488,441) (528,000) (473,000) liabilities Deferred income tax assets: Additional tax deduction on revaluation surplus arising from the 528,000 714,000 434,000 606,000 Restructuring Provisions and accruals 341,070 384,000 329,000 381,000 Losses available for offset against future taxable income 10,487 20,525 - - Other deferred income tax assets 138,000 146,000 156,000 144,000 Gross deferred income tax assets 1,017,557 1,264,525 919,000 1,131,000 Net deferred income tax assets 498,371 776,084 391,000 658,000 There was no material unprovided deferred income tax during the year (2004:Nil). 23. TRADE RECEIVABLES The Group normally allows a credit period ranging from 30 days to 90 days to itssales agents and other customers. An aged analysis of the trade receivables, netof provision for doubtful debts, of the Group and the Company is analysed asfollows: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Within 30 days 1,770,628 1,838,756 1,511,371 2,067,875 31 to 60 days 458,454 280,382 503,590 102,938 61 to 90 days 177,587 152,548 245,168 14,949 Over 90 days 357,806 93,130 257,255 11,531 At end of year 2,764,475 2,364,816 2,517,384 2,197,293 Included in the Group's and the Company's trade receivables was the following amount due from a joint venture: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Joint venture 451,965 412,539 922,378 841,916 24. INVENTORIES Inventories primarily consist of materials and supplies. Set out below is the breakdown of materials and supplies: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Flight equipment 745,411 680,039 516,320 454,220 spare parts Work in progress 72,664 38,061 3,586 1,621 Catering supplies 33,240 25,188 21,547 13,089 851,315 743,288 541,453 468,930 25. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES Set out below is the breakdown of prepayments, deposits and other receivables: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Advances and 457,568 324,655 379,258 322,047 others Manufacturers' credits on aircraft acquisition 62,930 74,518 62,930 74,518 receivables Prepaid aircraft operating lease rentals 110,472 95,681 91,608 79,260 Receivables from the sale of staff quarters 4,333 24,681 4,333 24,681 Miscellaneous 127,132 395,595 113,649 388,531 deposits 762,435 915,130 651,778 889,037 26. DEPOSITS AND CASH AND CASH EQUIVALENTS Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Cash and bank balances 1,092,900 8,635,653 439,803 7,888,436 Cash placed with CNAF 67,567 261,904 37,570 219,655 1,160,467 8,897,557 477,373 8,108,091 Time deposits placed 958,573 648,667 141,677 94,287 with banks Time deposits placed 403,296 305,081 377,796 300,000 with CNAF 1,361,869 953,748 519,473 394,287 Less: Pledged deposits against: Bank loans (note 33) 81,598 64,242 81,598 64,242 Finance leases (note 32) - 16,277 - 16,277 Others * 94,977 36,712 2,450 - Pledged deposits 176,575 117,231 84,048 80,519 Less: Non-pledged deposits with maturity of more than three months when acquired 97,375 320,850 20,875 313,768 Cash and cash 2,248,386 9,413,224 891,923 8,108,091 equivalents * Including deposits pledged against the Group's aircraft operating leases andfinancial derivatives. At the balance sheet date, the cash and cash equivalents balances of the Groupdenominated in RMB amounted to RMB992,468,000 (2004: RMB8,549,508,000). The RMBis not freely convertible into other currencies, however, under Mainland China'sForeign Exchange Control Regulations and Administration of Settlement, Sale andPayment of Foreign Exchange Regulations, the Group is permitted to exchange RMBfor other currencies through banks authorised to conduct foreign exchangebusiness. Cash at banks earns interest at floating rates based on daily bank depositrates. Time deposits are made for terms of between three days and one yeardepending on the immediate cash requirements of the Group and the Company, andearn interest at the respective time deposit rates. 27. BALANCES WITH OTHER CNAHC GROUP COMPANIES The balances with other CNAHC group companies are unsecured, interest-free andhave no fixed terms of repayment. 28. TRADE PAYABLES An aged analysis of the trade payables is as follows: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Within 3,247,501 3,108,028 2,549,447 2,740,974 30 days 31 to 60 603,010 805,858 468,948 673,690 days 61 to 90 293,407 304,943 253,482 243,448 days Over 90 457,446 224,779 394,251 161,241 days At end 4,601,364 4,443,608 3,666,128 3,819,353 of year Included in the Group's and the Company's trade payables was the following amount due to a joint venture: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Joint 115,435 179,934 288,588 449,835 venture 29. BILLS PAYABLE An aged analysis of the bills payable is as follows: Group and Company 2005 2004 RMB'000 RMB'000 Over 90 327,937 362,033 days At end 327,937 362,033 of year Included in the Group's and the Company's bills payable amount due to was the following CNAF: Group and Company 2005 2004 RMB'000 RMB'000 CNAF 103,426 - 30. OTHER PAYABLES AND ACCRUALS Set out below is a breakdown of other payables and accruals: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Provision for 135,381 469,617 112,372 448,694 staff housing benefits Accrued 894,052 692,510 732,240 562,493 salaries, wages and benefits Interest 308,152 269,928 298,330 255,977 expense payable Accruals for - 208,644 - 208,644 share issue expenses Custom duties 982,819 742,201 900,544 665,986 and levies payable Current portion of long term payables (note 35) 100,218 101,802 100,218 101,802 Current portion of deferred income (note 36) 76,943 76,943 76,943 76,943 Advances from 259,965 294,798 163,608 224,321 customers Accrued 1,038,995 716,548 909,260 611,257 operating expenses Others 371,910 347,296 275,381 231,753 4,168,435 3,920,287 3,568,896 3,387,870 31. PROVISION FOR MAJOR OVERHAULS Set out below is the movement of provision for major overhauls in respect of aircraft and engines under operating leases for each of the two years ended 31 December 2005 and 2004. Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 At beginning 498,828 404,939 401,372 - of year Transferred to the Company upon its - - - 363,842 incorporation (note 1) Provision for 415,513 221,543 271,550 61,341 the year Utilised (259,902) (127,654) (179,630) (23,811) during the year At end of 654,439 498,828 493,292 401,372 year Less: Portion classified as current liabilities (18,721) (28,130) (18,721) (28,130) Long term 635,718 470,698 474,571 373,242 portion 32. OBLIGATIONS UNDER FINANCE LEASES The Group and the Company have obligations under finance lease agreementsexpiring during the years from 2006 to 2011 (2004: 2005 to 2011) in respect ofaircraft and related equipment. As at the balance sheet date, future minimumlease payments under these finance leases, together with the present value ofthe net minimum lease payments, which are principally denominated in foreigncurrencies, are as follows: Company Company Present Present Group and value of Group and value of Minimum Minimum Minimum Minimum lease lease lease lease payments payments payments payments 2005 2005 2004 2004 RMB'000 RMB'000 RMB'000 RMB'000 Amounts repayable: Within one year 2,306,587 1,954,873 2,313,871 1,705,146 In the second year 2,330,192 1,949,802 2,408,481 1,943,630 In the third to fifth years, 6,850,768 6,071,492 7,784,209 6,722,448 inclusive Over five years 79,157 57,377 2,049,406 1,910,163 Total minimum finance lease 11,566,704 10,033,544 14,555,967 12,281,387 payments Less: Amounts representing finance charges (1,533,160) (2,274,580) Present value of minimum lease 10,033,544 12,281,387 payments Less: Portion classified as current liabilities (1,954,873) (1,705,146) Long term portion 8,078,671 10,576,241 Certain lease financing arrangements comprised finance leases between theCompany and certain of its subsidiaries, and the corresponding borrowingsbetween such subsidiaries and banks. The Company has guaranteed thesubsidiaries' obligations under the bank borrowings and, accordingly, theaforesaid assets and obligations are recorded in the balance sheets to reflectthe substance of the transactions. The future payments under these leases havetherefore been presented by the Company and the Group in the amounts thatreflect the payments under the bank borrowings between the subsidiaries and thebanks. At 31 December 2005, there were 21 (2004: 23) aircraft under finance leaseagreements. Under the terms of the leases, the Company has the option topurchase, at the end of or during the lease terms, certain aircraft at fairmarket value and others at either fair market value or at the price asstipulated in the finance lease agreements. For the current year, the effectiveborrowing rate ranged from 1.64% to 9.84% (2004: 1.64% to 9.13%). The Group's and the Company's finance leases were secured by: (a) mortgages over certain of the Group's and the Company's aircraft, which hadan aggregate carrying value of approximately RMB10,487 million as at 31 December2005 (2004: RMB11,999 million) (note 15); (b) the pledge of certain of the Group's and the Company's bank depositsamounting to approximately RMB16 million as at 31 December 2004 (note 26); and (c) guarantees by certain commercial banks in an aggregate amount ofapproximately RMB12,044 million (2004: RMB14,785 million). As at 31 December 2005, certain PRC state-owned banks have providedcounter-guarantees in an aggregate amount of RMB2,521 million (2004: RMB3,074million) in respect of the commercial bank guarantee arrangements set out innote 32 (c) above. At 31 December 2004, CNAHC and CNAF, in turn, providedcounter-guarantees to certain of these PRC state-owned banks in the amounts ofRMB921 million and RMB3,976 million (note 46), respectively. Thesecounter-guarantees provided by CNAHC and CNAF were released during the year. 33. BANK AND OTHER LOANS Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Bank loans: Secured 11,667,241 13,685,002 11,258,268 13,643,002 Unsecured 8,336,734 7,519,047 8,126,735 7,144,917 20,003,975 21,204,049 19,385,003 20,787,919 Other loans: Secured 50,560 66,667 50,560 66,667 Unsecured 169,514 431,957 140,351 297,731 220,074 498,624 190,911 364,398 Corporate bonds: Unsecured 3,000,000 - 3,000,000 - 23,224,049 21,702,673 22,575,914 21,152,317 Bank loans repayable: Within one year 10,217,210 8,359,280 9,973,050 7,943,149 In the second year 2,732,712 3,049,084 2,698,551 3,049,084 In the third to fifth 4,677,985 6,178,222 4,575,502 6,178,222 years, inclusive Over five years 2,376,067 3,617,464 2,137,900 3,617,464 Other loans repayable: Within one year 183,960 446,771 154,797 312,546 In the second year 14,446 14,815 14,446 14,815 In the third to fifth 21,669 37,037 21,668 37,037 years, inclusive Corporate bonds: Over five years 3,000,000 - 3,000,000 - Total bank and other loans 23,224,049 21,702,673 22,575,914 21,152,317 Less: Portion classified as current liabilities (10,401,170) (8,806,051) (10,127,847) (8,255,695) Long term portion 12,822,879 12,896,622 12,448,067 12,896,622 Further details of bank and other loans at the balance sheet date are as follows: Group Company Nature Interest rate 2005 2004 2005 2004 and final maturity RMB'000 RMB'000 RMB'000 RMB'000 RMB denominated loans: Loans for Floating 4,452,262 5,382,986 4,452,262 5,382,986 purchases interest of aircraft rates ranging from and related 5.18% to equipment 5.51% and 4.94% to 5.76% per annum at 31 December 2005 and 2004, respectively, with maturities through 2014 Loans for Fixed 4,196,394 2,528,869 4,140,000 2,171,800 working interest capital rates ranging from 2.92% to 5.02% and 4.54% to 4.94% per annum at 31 December 2005 and 2004, respectively, with maturities through 2007 United States dollars denominated loans: Loans for Fixed 5,837,073 7,155,311 5,837,073 7,155,311 purchases interest of aircraft rates ranging from and related 5.40% to equipment 8.33% and 5.40% to 10.17% per annum at 31 December 2005 and 2004, respectively, with maturities through 2012 Loans for Floating 1,514,147 1,270,236 1,105,174 1,270,236 purchases interest rate of aircraft at six months and related LIBOR + 0.4% equipment to 0.7% per annum at 31 December 2005 and 2004 with maturities through 2014 Loans for Floating 4,000,508 5,365,271 3,833,345 5,171,984 working interest capital rates at six months LIBOR + 0.5% to 0.7% and six months LIBOR + 0.6% to 0.8% per annum at 31 December 2005 and 2004, respectively, with maturities through 2007 Hong Kong dollars denominated loans: Loans for Fixed 15,605 - - - working interest rate capital at 4.60% per annum at 31 December 2005 with maturities through 2006 Loans for Floating 208,060 - 208,060 - working interest rate capital at six months LIBOR +1% per annum at 31 December 2005 with maturities through 2006 Corporate bonds Corporate Fixed 3,000,000 - 3,000,000 - bonds for interest rate at 4.50% per annum purchases at 31 of aircraft December 2005 and related with maturity equipment in September 2015 23,224,049 21,702,673 22,575,914 21,152,317 Less: Loans due within one year classified as current liabilities (10,401,170) (8,806,051) (10,127,847) (8,255,695) Loans due after one year classified 12,822,879 12,896,622 12,448,067 12,896,622 as long term portion The interest rates of RMB denominated loans are set and subject to change by the People's Bank of China. The Group's and the Company's bank and other loans of approximately RMB14,718million as at 31 December 2005 (2004: RMB13,710 million) were secured by: (a) mortgages over certain of the Group's and the Company's aircraft and relatedequipment, which had an aggregate carrying value of approximately RMB16,471million as at 31 December 2005 (2004: RMB16,586 million) (note 15); (b) the pledge of certain of the Group's and the Company's bank depositsamounting to RMB82 million as at 31 December 2005 (2004: RMB64 million) (note26); and (c) guarantees by certain commercial banks amounting to RMB9,780 million (2004:RMB8,294 million). As at 31 December 2005, certain PRC state-owned banks providedcounter-guarantees in an aggregate amount of RMB4,891 million (2004: RMB5,943million) to one of these commercial banks as mentioned in note 33 (c) above. At31 December 2004, CNAHC and CNAF, in turn, provided counter-guarantees tocertain of these PRC state-owned banks in the amounts of RMB1,455 million andRMB761 million (note 46), respectively. These counter-guarantees provided byCNAHC and CNAF were released during the year. 34. DUE FROM/(TO) SHAREHOLDERS Set out below is the breakdown of the amounts due from/(to) shareholders: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Due from CNAHC 474,216 - 474,216 - Due to CNAHC - (2,137,437) - (2,121,533) Due to CNACG (133,680) (118,680) (118,680) (118,680) (133,680) (2,256,117) (118,680) (2,240,213) The amount due from CNAHC mainly arose from transactions as set out in notes 20and 46(A) to the financial statements. The amount is unsecured, interest-freeand repayable within one year. The amounts due to shareholders are unsecured, interest-free and repayablewithin one year. 35. LONG-TERM PAYABLES Long term payables mainly represent customs duties and value-added tax payableafter one year to the PRC government in respect of the acquisition of aircraftand related equipment under finance leases. The customs duties and value-addedtax are payable upon repayment of the corresponding finance lease installments.Set out below are details of the customs duties and value-added tax payablefurther analysed into non-current and current portions: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Customs duties and value-added tax payable 417,339 539,121 417,339 539,121 Others 35,759 8,992 258 258 453,098 548,113 417,597 539,379 Less: Portion classified as current liabilities (note 30) (100,218) (101,802) (100,218) (101,802) Long term portion 352,880 446,311 317,379 437,577 36. DEFERRED INCOME In 2000, the Group acquired an aircraft which was funded by the PRC government,and a further aircraft was injected into the Group by the PRC government during2004. In accordance with IAS 20 Accounting for Government Grants and Disclosureof Government Assistance, the Group recorded these aircraft purchased in 2000and received in 2004 as property, plant and equipment with the correspondingamounts of government grant recorded as deferred income at the respective datesof the delivery of the aircraft. As such, the government subsidies in relationto the aforesaid aircraft purchased in 2000 and the aircraft received in 2004are recorded in deferred income of the Group in 2000 and 2004, respectively. Thedeferred income is recognised as income over the expected useful lives of therelevant aircraft on the straight-line basis. The movements of deferred income as stated under current and non-currentliabilities are as follows: Group Company 2005 2004 2005 2004 RMB'000 RMB'000 RMB'000 RMB'000 Deferred income: At beginning of the year 1,462,667 1,157,880 1,462,667 - Transferred to the Company upon its incorporation (note 1) - - - 1,462,667 Additions during the year - 304,787 - - At end of year 1,462,667 1,462,667 1,462,667 1,462,667 Accumulated income recognised as other operating revenue: At beginning of year 282,871 212,278 282,871 - Transferred to the Company upon its incorporation (note 1) - - - 263,636 Credit during the year (note 5) 76,943 70,593 76,943 19,235 At end of the year 359,814 282,871 359,814 282,871 Net amount 1,102,853 1,179,796 1,102,853 1,179,796 Less: Portion classified as current liabilities (note 30) (76,943) (76,943) (76,943) (76,943) Long term portion 1,025,910 1,102,853 1,025,910 1,102,853 37. SHARE CAPITAL Number of Nominal Number of Nominal shares value shares value 2005 2005 2004 2004 RMB'000 RMB'000 Company and Group Registered, issued and fully paid: - State legal person shares of RMB1.00 each 4,826,195,989 4,826,196 4,855,945,675 4,855,946 - Non-H foreign shares of RMB1.00 each 1,380,482,920 1,380,483 1,388,992,507 1,388,992 - H shares of RMB1.00 each 3,226,532,000 3,226,532 2,805,680,000 2,805,680 9,433,210,909 9,433,211 9,050,618,182 9,050,618 A summary of the movements in the Company's issued share capital for the yearended 31 December 2005 is as follows: Number of Nominal shares value 2005 2005 RMB'000 At beginning of year 9,050,618,182 9,050,618 State legal person shares converted into H (29,749,686) (29,750) shares (note 37(a)) Non-H foreign shares converted into H shares (8,509,587) (8,509) (note 37(a)) Share placement and public offer (note 37(b)) 420,852,000 420,852 9,433,210,909 9,433,211 A summary of the movements in the Company's issued share capital for the periodfrom 30 September 2004 (date of incorporation of the Company) to 31 December2004 is as follows: Number of Nominal shares value 2004 2004 RMB'000 Restructuring (note 37(c)) 6,500,000,000 6,500,000 State legal person shares converted into H (198,331,240) (198,331) shares (note 37(d)) Non-H foreign shares converted into H shares (56,730,578) (56,731) (note 37(d)) Share placement and public offer (note 37(e)) 2,805,680,000 2,805,680 9,050,618,182 9,050,618 Notes: (a) In January 2005, upon the exercise of the over-allotment options granted tointernational underwriters, the Company issued 420,852,000 H shares, consistingof 382,592,727 new shares, 29,749,686 H shares converted from state legal personshares and 8,509,587 H shares converted from non-H foreign shares, with a parvalue of RMB1.00 each at HK$2.98 (equivalent to RMB3.17072) per share. Theproceeds from the sale of the state legal person shares and non-H foreign sharestotalling approximately RMB117 million, after deducting share issue expenses ofapproximately RMB4 million which were borne by the Social Security Fund inconnection with the sale of the state legal person shares and non-H foreignshares, were remitted to the Social Security Fund. (b) As referred to in note 37 (a) above, the Company issued 420,852,000 H sharesupon the exercise of the over-allotment options granted to internationalunderwriters. After deducting aggregate net proceeds of approximately RMB117million from the sale of 29,749,686 H shares converted from state legal personshares and 8,509,587 H shares converted from non-H foreign shares, which wereremitted to the Social Security Fund and share issue expenses of approximatelyRMB45 million (before deducting share issue expenses of approximately RMB4million borne by the Social Security Fund), the Company raised net proceeds ofapproximately RMB1,172 million, of which paid-up share capital amounted toapproximately RMB383 million and capital reserve amounted to approximatelyRMB789 million. (c) Pursuant to the Restructuring, and the basis of presentation thereof, asdiscussed in note 1 to these financial statements, the owners' equity of theCompany in the consolidated balance sheet as at 30 September 2004, the date ofincorporation of the Company, was converted into the Company's share capital ofRMB6,500 million of RMB1.00 each with the rest as capital reserve. (d) The Company's H shares were listed on the Hong Kong Stock Exchange and theLondon Stock Exchange on 15 December 2004 and 2,805,680,000 H shares, consistingof 2,550,618,182 new shares, 198,331,240 shares converted from state legalperson shares and 56,730,578 shares converted from non-H foreign shares, with apar value of RMB1.00 each were issued to the public by way of placement andoffer at HK$2.98 (equivalent to approximately RMB3.17072) each. The proceedsfrom the sale of the 198,331,240 state legal person shares and 56,730,578 non-Hforeign shares totalling approximately RMB759 million, after deducting theportion of share issuing expenses of approximately RMB50 million which wereborne by the Social Security Fund in connection with these sales of State legalperson shares and non-H foreign shares, were remitted to the Social SecurityFund. (e) As referred to in note 37 (d) above, the Company issued 2,805,680,000 Hshares to the public by way of placement and offer. After deducting aggregatenet proceeds of approximately RMB759 million from the sale of 198,331,240 Hshares converted from state legal person shares and 56,730,578 H sharesconverted from non-H foreign shares which were remitted to the Social SecurityFund as referred to in note 37 (d) above and share issue expenses ofapproximately RMB536 million (before deducting share issue expenses ofapproximately RMB50 million borne by the Social Security Fund as referred to innote 37 (d) above), the Company raised net proceeds of approximately RMB7,601million, of which paid-up share capital amounted to approximately RMB2,551million and capital reserve amounted to approximately RMB5,050 million. The H shares rank pari passu, in all material respects, with the state legalperson shares and non-H foreign shares of the Company. 38. RESERVES Group The amounts of the Group's reserves and the movements therein for each of thetwo years ended 31 December 2005 are presented in the consolidated statement ofchanges in equity on page 58 of these financial statements. Company Proposed Capital Reserve Retained final reserve funds earnings dividend Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Upon incorporation of the Company (note 38(a)) (627,464) - 34,813 - (592,651) Profit for the period from 1 October to 31 December 2004 - - 1,229,603 - 1,229,603 Distributions (note 38 - - (377,550) - (377,550) (b)) Transfer to reserve funds (note 13) - 51,908 (51,908) - - Issue of new shares upon listing (note 37(e)) 5,536,678 - - - 5,536,678 Share issue expenses (note 37(e)) (486,457) - - - (486,457) At 31 December 2004 and I January 2005 4,422,757 51,908 834,958 - 5,309,623 Profit for the year - - 2,113,350 - 2,113,350 Transfer to statutory reserve funds (note - 252,908 (252,908) - - 13) Proposed final 2005 dividend (note 13(d)) - - (224,793) 224,793 - Issue of new shares upon exercise of over- allotment options (note 37(b)) 830,414 - - - 830,414 Share issue expenses (note 37(b)) (40,910) - - - (40,910) At 31 December 2005 5,212,261 304,816 2,470,607 224,793 8,212,477 Notes: (a) As described in note 1 to these financial statements, the financialstatements of the Group for the year ended 31 December 2004 have been preparedas if the Group had been in existence throughout the year and as if the RelevantBusinesses and the interests in the Relevant Companies were transferred to theCompany prior to 1 January 2004. Upon incorporation of the Company on 30September 2004, the historical net asset value of the Relevant Businesses andthe interests in the Relevant Companies transferred to the Company wereconverted into the Company's registered capital as described in note 37 (c) to these financial statements with all the then existing reserveseliminated and the resulting difference dealt with in the capital reserve andretained earnings. Accordingly, the aggregate of the capital reserve andretained earnings amounts, being the difference between the amount of sharecapital issued and the historical net asset value of the Relevant Businesses andthe interests in the Relevant Companies transferred to the Company as at 30September 2004, were presented in the reserves of both the Group and theCompany. Retained earnings of the Company and the Group upon incorporation of the Companyrepresent the amounts set aside for distributions, details of which are set outin note 13 to these financial statements. Therefore, these amounts were notcapitalised by the Company and the Group upon the Company's incorporation. (b) Details of the distributions are set out in note 13 to these financialstatements. 39. LONG TERM COMPENSATION PLAN The Company has adopted a long term compensation plan (the "Plan") which wasapproved by the shareholders on 18 October 2004 for the purpose of motivatingits employees. The Plan provides for the grant of share appreciation rights("SARs") to eligible participants, including the Company's Directors (excludingindependent non-executive Directors), supervisors (excluding independentsupervisors), president, vice presidents, heads of key departments in theCompany's headquarters, general managers and general deputy managers ofprincipal branches and subsidiaries as well as selected senior professionals andkey specialists. In any event, SARs will be granted to no more than 200individuals. The Plan will remain in force unless otherwise cancelled oramended. Under the Plan, the holders of SARs are entitled the rights to receive an amountin respect of the appreciation in market value of the Company's H shares fromthe date of grant of SARs and the date of exercise. No shares will be issuedunder the Plan and therefore the Company's equity interests will not be dilutedas a result of the issuance of SARs. The maximum number of unexercised SARspermitted to be granted under the Plan is, upon their exercise, limited to 2% ofthe Company's H shares in issue at any time during each year. The maximum numberof SARs granted to eligible participants under the Plan within any 12-monthperiod is, upon their exercise, limited to 0.4% of the Company's H shares inissue at any time during each year. The maximum number of SARs granted to anyeligible participant is limited to 10% of the total number of unexercised SARsin issue at any time during each year. Any further grant of SARs in excess ofthe above limits is subject to shareholders' approval in general meetings. The exercise period of all SARs commences after a vesting period and ends on adate which is not later than five years from the date of grant of the SARs. Asat each of the last day of the second, third and fourth anniversary of the dateof grant, the total number of SARs exercisable will not exceed 30%, 70% and100%, respectively, of the total SARs granted to the respective eligibleparticipants. The exercise price of SARs will be equal to the average closing price of theCompany's H shares on the Hong Kong Stock Exchange for the five consecutivetrading days immediately preceding the date of the grant. As at 31 December 2005 and 31 December 2004, no SARs had been issued under thePlan. This information is provided by RNS The company news service from the London Stock Exchange