SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of April, 2003
CHINA SOUTHERN AIRLINES COMPANY LIMITED
(Translation of registrant's name into English)
Baiyun International Airport
Guangzhou, People's Republic of China
(Address of principal executive offices)
(Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.)
Form 20-F. X Form 40-F.
----- -----
(Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.)
Yes. No. X
----- -----
(If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-_____.)
China Southern Airlines Company Limited (the "Company") on or around April
3rd, 2003 distributed its Annual Report, together with the Revised and Restated
Notice of Annual General Meeting, Form of Proxy for Annual General Meeting, and
Reply Slip, in English and Chinese to its shareholders. A copy of each of the
documents is included in this Form 6-K of the Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHINA SOUTHERN AIRLINES COMPANY LIMITED
BY /s/ Su Liang
-------------------------------------
Name: Su Liang
Title: Company Secretary
Date: April 14, 2003
Contents
2 Company Profile
3 Corporate Information
4 Financial Highlights
6 Chairman's Statement
10 Management's Discussion and Analysis of
Financial Condition and Results of Operations
21 Report of the Directors
41 Report of the Supervisory Committee
42 Report of the International Auditors
43 Consolidated Profit and Loss Account
44 Consolidated Balance Sheet
46 Balance Sheet
48 Consolidated Statement of Changes in Shareholders' Equity
49 Consolidated Cash Flow Statement
51 Notes to the Financial Statements
109 Five Year Summary
111 The Board of Directors, Supervisory Committee
and Senior Administrative Officers
116 Glossary
Company Profile
China Southern Airlines Company Limited (the "Company") together with its
subsidiaries (collectively, the "Group") is one of the largest airlines in the
People's Republic of China ("China" or "the PRC"). In 2002, the Group continued
to rank first among all Chinese airlines in terms of volume of passenger
traffic, number of scheduled flights per week, number of hours flown, number of
routes and size of aircraft fleet.
As of the year end of 2002, the Group operated 349 routes, of which 286 were
domestic, 43 were international and 20 were Hong Kong regional. The Group
operates the most extensive domestic route network among all Chinese airlines.
In 2002, the Group operated an average of 4,282 landings and take-offs per week
serving 88 destinations, covering 64 cities in China including Beijing,
Shanghai, Tianjin, Guangzhou, Shenzhen, Wuhan, Changsha, Zhengzhou, Xiamen, Xian
and Chengdu. Most of these cities served
by the Group are located in commercial centres or rapidly developing economic
regions in China. The Group's headquarters is located in Guangzhou, one of the
gateway cities of China. Located in the rapidly developing Pearl River Delta
region, Guangzhou is the transportation hub of Southern China.
In addition to its main route base in Guangzhou, the Group maintains 10 regional
route bases in Zhengzhou, Wuhan, Changsha, Shenzhen, Haikou, Zhuhai, Xiamen,
Guilin, Shantou and Guiyang. Most of its regional route bases are located in
provincial capitals or major commercial centres in the PRC.
The Group operates a portion of its air transportation business through its
subsidiaries, namely Xiamen Airlines Company Limited, Southern Airlines Group
Shantou Airlines Company Limited, Guangxi Airlines Company Limited, Zhuhai
Airlines Company Limited and Guizhou Airlines Company Limited (collectively, the
"Airline Subsidiaries"). Each of the Airline Subsidiaries is 60%-owned by the
Company.
As of 31 December, 2002, the Group operated a fleet of 122 aircraft, consisting
primarily of Boeing 737-200, 737-300, 737-500, 737-700, 737-800, 747-200,
747-400, 757-200, 777-200 and Airbus 320-200 aircraft. Most of the Aircraft were
held under finance and operating leases. The average age of the Group's fleet
was 7.76 years as of the year end of 2002.
Corporate Information
Directors
Executive Directors
Yan Zhi Qing
(Chairman of the Board of Directors)
Wang Chang Shun
(Vice Chairman of the Board of Directors,
President)
Wang Shao Xi (Director)
Zhang Rui Ai (Director)
Zhou Yong Jin (Director)
Xu Jie Bo (Director, Chief Financial Officer)
Wu Rong Nan (Director)
Independent Non-Executive Directors
Simon To
Peter Lok
Wei Ming Hai
Supervisors
Liang Hua Fu
(Chairman of the Supervisory Committee)
Gan Yu Hua (Supervisor)
Li Qi Hong (Supervisor)
Company Secretary
Su Liang
Authorised Representatives
Xu Jie Bo
Su Liang
Principal Bankers
The Industrial & Commercial Bank of China
Bank of China
China Construction Bank
Agricultural Bank of China
Legal Advisers to the Company
O'Melveny & Myers LLP
Z&T Law Firm
Share Registrar
Hong Kong Registrars Limited
Rooms 1901-5, 19th Floor
Hopewell Centre
183 Queen's Road East
Hong Kong
The Bank of New York
Investor Relations
P.O. Box 11258
Church Street Station
New York, NY 10286-1258, U.S.A.
Corporate Headquarters
Baiyun International Airport
Guangzhou
P.R.C.
Website: www.cs-air.com
Place of Business in Hong Kong
Unit B1, 9th Floor
United Centre
95 Queensway
Hong Kong
International Auditors
KPMG
Certified Public Accountants
8th Floor, Prince's Building
10 Chater Road
Hong Kong
Financial Highlights
The Board of Directors of the Company is pleased to present below the
consolidated results of the Group for the year ended 31 December, 2002, prepared
in accordance with International Financial Reporting Standards ("IFRS"),
together with the comparative figures for the corresponding period in 2001. The
following consolidated results should be read in conjunction with the financial
statements and the Report of the International Auditors contained in this annual
report (the "Annual Report").
Consolidated Profit and Loss Account
2002
For the year ended 31 December, vs 2001
------------------------------------------------- Increase/
2002 2001 2002 2002 (decrease)
RMB'000 RMB'000 HK'000 US'000 %
---------- --------- ---------- --------- ----------
Traffic revenue:
Passenger 15,695,622 15,055,496 14,791,841 1,896,225 4.3
Cargo and mail 1,786,270 1,406,036 1,683,413 215,803 27.0
---------- --------- ---------- --------- ----------
17,481,892 16,461,532 16,475,254 2,112,028 6.2
Other operating revenue 536,728 418,126 505,822 64,843 28.4
---------- --------- ---------- --------- ----------
Total operating revenue 18,018,620 16,879,658 16,981,076 2,176,871 6.7
---------- --------- ---------- --------- ----------
Operating expenses:
Flight operations 6,732,543 6,905,628 6,344,871 813,374 (2.5)
Maintenance 2,333,419 2,014,579 2,199,057 281,906 15.8
Aircraft and traffic servicing 2,511,284 2,297,521 2,366,680 303,394 9.3
Promotion and sales 1,499,587 1,540,780 1,413,238 181,169 (2.7)
General and administrative 1,060,010 892,233 998,973 128,062 18.8
Depreciation and
amortisation 1,839,871 1,814,974 1,733,928 222,279 1.4
Other 15,829 13,270 14,918 1,912 19.3
---------- ---------- ---------- --------- ----------
Total operating expenses 15,992,543 15,478,985 15,071,665 1,932,096 3.3
---------- ---------- ---------- --------- ----------
Operating profit 2,026,077 1,400,673 1,909,411 244,775 44.7
---------- ---------- ---------- --------- ----------
2002
For the year ended 31 December, vs 2001
------------------------------------------------- Increase/
2002 2001 2002 2002 (decrease)
RMB'000 RMB'000 HK'000 US'000 %
---------- --------- ---------- --------- ----------
Non-operating
income/(expenses):
Share of associated
companies' results 36,988 53,077 34,858 4,469 (30.3)
Share of jointly controlled
entities' results (3,352) (4,034) (3,159) (405) (16.9)
Gain/(loss) on sale
of fixed assets 170,740 (55,889) 160,908 20,627 405.5
2002
For the year ended 31 December, vs 2001
------------------------------------------------- Increase/
2002 2001 2002 2002 (decrease)
RMB'000 RMB'000 HK'000 US'000 %
---------- --------- ---------- --------- ----------
Interest income 52,618 49,878 49,588 6,357 5.5
Interest expense (959,193) (933,717) (903,961) (115,882) 2.7
Exchange (loss)/gain, net (175,451) 296,777 (165,348) (21,197) (159.1)
Other, net (9,328) (11,509) (8,789) (1,127) (19.0)
Total net non-operating
expenses (886,978) (605,417) (835,903) (107,158) 46.5
Profit before taxation
and minority interests 1,139,099 795,256 1,073,508 137,617 43.2
Taxation (398,227) (320,519) (375,296) (48,111) 24.2
Profit before minority
interests 740,872 474,737 698,212 89,506 56.1
Minority interests (165,111) (134,512) (155,604) (19,947) 22.7
Profit attributable to
shareholders 575,761 340,225 542,608 69,559 69.2
Basic earnings per share RMB0.17 RMB0.10 HK$0.16 US$0.021 69.2
Note: The above consolidated profit and loss account has been prepared in
Renminbi ("RMB"), the national currency of the PRC. Translations of amounts from
RMB into Hong Kong dollars ("HK$") and United States dollars ("US$") solely for
the convenience of readers have been made at the rates of HK$1.00 to RMB1.0611
and US$1.00 to RMB8.2773, being the average of the buying and selling rates as
quoted by the People's Bank of China at the close of business on 31 December,
2002. No representation is made that the RMB amounts could have been or could be
converted into HK$ or US$ at these rates or at any other certain rates on 31
December, 2002 or on any other date.
Chairman's Statement
Chairman's Statement
Opportunities from
industry-wide restructuring
being closely explored to gain
economies of scale
Dear shareholders:
2002 was a very challenging year for the Group. With the assistance of
hardworking staff, the Group recorded a traffic volume of over 20 million
passengers for the year, and is expected to rank among the world's top 20s in
terms of passenger carried. Our air cargo business also reported steady growth
in line with our strategic objectives. However, the Group faced tremendous
pressure for its operation due to higher insurance premiums subsequent to the
911 incident in U.S., a weak US dollar versus Japanese yen and an increase in
landing and take-off fees. Meanwhile, market competition within the domestic
airline industry remained highly intense, with lower air fares resulting in a
decrease in yield. During the year, the Group imposed stringent cost controls
and managed to achieve increases in operating revenue and net profit by 6.7% and
69.2% respectively when compared to last year.
Under the full support and leadership of the PRC government, on 11 October, 2002
Southern Airlines (Group) (the Company's controlling shareholders), China
Northern Airlines ("Northern Airlines") and Xinjiang Airlines ("Xinjiang
Airlines") restructured and consolidated into a new airline group named as China
Southern Air Group after a long period of preparation. On the same date,
Southern Airlines (Group) changed its official name to China Southern Air
Holding Company ("CSAHC"). Such restructuring and consolidation has provided the
Group with new development opportunities. Currently, CSAHC and the Group are
preparing for the injection of the airline businesses of Northern Airlines and
Xinjiang Airlines into the Group in order to achieve economies of scale and
enhance the competitiveness of the core business. Meanwhile, the Group has
entered into revenue sharing agreements with Northern Airlines and Xinjiang
Airlines on jointly operated routes. Since 1 January, 2003, the three airlines
have also started a code sharing arrangement, whereby the flight code of CZ is
used for the three airlines' domestic flights. The arrangement is operating
smoothly at the moment.
Meanwhile, the Group invested in Sichuan Airlines Corporation Limited and China
Postal Airlines Limited to further expand our market shares in Southwestern
China and in the area of postal transportation. Besides, we jointly established
Zhuhai Xiang Yi Aviation Technology Company Limited, the first sino-foreign
joint venture
company engaging in aviation training services in the PRC with CAE of Canada. We
also jointly established CSN-ETC E-Commerce Limited, an online passenger
ticketing company with an independent network operator to enhance integration of
operational standards, and to effectively attract funds and market resources
while at the same time saving operating costs.
To cope with the needs of market and routes network expansion, the Group has
been continuing to expand its aircraft fleet to maintain sufficient traffic
capability to tap market growth and to develop its passenger and cargo
businesses. The Group expects to raise capital in the domestic A Share market to
finance the acquisitions of aircraft. The Group is pleased to announce that the
proposed A share listing in the domestic market has been approved at the
shareholders' general meeting at the beginning of 2002. Currently, the project
is proceeding at a steady pace. The A share listing, if successfully completed,
will not only expand the fund raising channel of the Group, but will also enable
it to further strengthen its corporate governance standards.
In 2002, the Group recorded a faster growth in its air freight business,
especially in the international cargo sector. We will continue to boost the
development of our cargo business. With the completion of the construction and
commencement of operation of the Guangzhou new international airport and the
potential demand for logistics services in the Pearl River Delta, the Group
believes that its air freight business will contribute growth to the Group in
real terms in the next few years.
Looking forward, 2003 will be a year of opportunities and challenges for the PRC
aviation industry. The intended restructuring among the Group, Northern Airlines
and Xinjiang Airlines is expected to provide the Group with opportunities for
network expansion and increase in market shares, while the proceeds from the
proposed A Shares listing will provide impetus for future development. On the
other hand, the volatile situations of the international community, especially
in the Middle East, among other factors of instability, will have great impact
on the global economy, while high fuel prices will exert great pressure on the
operating costs of airlines.
The top priority of our management is to achieve a coherent enterprise
development vision after the anticipated group restructuring and consolidation,
and to cultivate the vision into a pragmatic and innovative corporate culture.
Our objectives are to enhance our overall management quality; to provide the
customers with products and services of enhanced safety, efficiency, convenience
and comfort; and to achieve
economies of scale. This is the goal towards which the Group will strive
incessantly.
On behalf of the board, I would like to take this opportunity to express our
gratitude to our hardworking management and staff, and to our shareholders for
their support to the Group.
Yan Zhi Qing
Chairman
Guangzhou, the PRC
14 March, 2003
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations With aggressive cost controls to meet challenges
The following discussion and analysis should be read in conjunction with the
financial statements of the Group contained elsewhere in this Annual Report. The
Group maintains its books and accounts in accordance with generally accepted
accounting principles in the PRC ("PRC GAAP") and prepares its financial
statements in accordance with both PRC GAAP and IFRS. The financial statements
contained elsewhere in this Annual Report have been prepared in accordance with
IFRS. IFRS differs in certain material respects from accounting principles
generally accepted in the United States of America ("U.S. GAAP").
Overview
During the year, with the PRC government continued measures to maintain the
momentum of economic growth, the PRC aviation market continued to show steady
growth, as evidenced by a rise in passenger load factor of the Group. However,
passenger yield per RPK decreased as a result of increased competition among the
PRC airlines. On the international front, traffic volume increased significantly
as a result of growth in demand for Southeast Asian routes and other
international routes operated by the
Group.
The Group conducts a portion of its airline operations through the Airline
Subsidiaries. Operating results for the Airline Subsidiaries are included in
each of the years presented in the consolidated financial statements. The
Airline Subsidiaries, which derive substantially all of their operating revenue
from passenger traffic, accounted for 29.7% and 26.8% of the Group's total
operating revenue, and 34.2% and 34.5% of the Group's total passengers carried,
in 2001 and 2002, respectively. Xiamen Airlines is the largest member of the
Airline Subsidiaries, with operating revenue of RMB3,185 million and RMB3,278
million in 2001 and 2002, respectively, or 18.9% and 18.2% of the Group's total
operating revenue.
The Group's operating revenue is substantially dependent on the passenger and
cargo traffic volume carried, which is subject to seasonal and other changes in
traffic patterns, the availability of appropriate time slots for the Group's
flights and alternative routes, the degree of competition from other airlines
and alternate means of transportation, as well as other factors that may
influence passenger travel demand and cargo and mail volume. In particular, the
Group's airline revenue is generally higher in the second and third quarters
than in the first and fourth quarters.
Like most airlines, the Group is subject to a high degree of financial and
operating leverage. A significant percentage of the Group's operating expenses
is fixed costs that do not vary proportionally based on the Group's yields or
load factors. These fixed costs include depreciation expense, jet fuel costs,
landing and navigation fees, financing costs, operating lease payments, aircraft
maintenance costs and labour costs for flight crew, cabin crew and ground
personnel. Thus, a minor change in the Group's yields or load factors would have
a material effect on the Group's results of operations. In addition, certain of
these expenses, primarily financing costs and operating lease payments, labour
costs and depreciation do not vary based on the number of flights flown. Thus,
the Group's operating results can also be substantially affected by minor
changes in aircraft utilisation rates. The Group is and will continue to be
highly leveraged with substantial obligations denominated in foreign currencies
and, accordingly, the results of its operations are significantly affected by
fluctuations in foreign exchange rates, particularly for the U.S. dollar and the
Japanese yen. The Group recognised a net exchange gain of RMB297 million and a
net exchange loss of RMB175 million in 2001 and 2002, respectively. These
amounts represented mainly unrealised exchange differences resulting from the
retranslation of the foreign currency borrowings as at the years ended 2001 and
2002.
A number of other external variables, including political and economic
conditions in China, tend to have a major impact on the Group's performance. The
Group's financial performance is also significantly affected by factors arising
from operating in a regulated industry. As substantially all aspects of the
Group's airline operations are regulated by the Civil Aviation Administration of
China (the "CAAC"), the Group's operating revenues and expenses are directly
affected by CAAC's policies with respect to domestic airfares, jet fuel prices
and landing and navigation fees, among others. The nature and extent of airline
competition and the ability of Chinese airlines to expand are also affected by
CAAC's control over route allocations. Any changes in the CAAC's regulatory
policies, or any implementation of such policies could have a significant impact
on the Group's future operations and its ability to implement its operating
strategy.
Certain Financial Information and Operating Data by Geographic Region
The following table sets forth certain financial information and operating data
by geographic region for the years ended 31 December, 2001 and 2002:
2002
vs
For the year ended 2001
31 December, Increase/
---------------------- (decrease)
2002 2001 %
------ ------ --------
Traffic
Revenue passenger kilometres (RPK) (million)
- Domestic 22,092 19,447 13.6
- Hong Kong regional 1,081 1,060 2.0
- International 5,767 4,550 26.7
------ ------
Total 28,940 25,057 15.5
====== ======
Revenue tonne kilometres (RTK) (million)
- Domestic 2,532 2,217 14.2
- Hong Kong regional 108 105 2.9
- International 974 712 36.8
------ ------
Total 3,614 3,034 19.1
====== ======
Passengers carried (thousand)
- Domestic 18,535 16,499 12.3
- Hong Kong regional 1,369 1,409 (2.8)
- International 1,589 1,213 31.0
------ ------
Total 21,493 19,121 12.4
====== ======
Cargo and mail carried (thousand tonne)
- Domestic 404 348 16.1
- Hong Kong regional 14 14 --
- International 52 36 44.4
------ ------
Total 470 398 18.1
====== ======
Certain Financial Information and Operating Data by Geographic Region (cont'd)
2002
vs
For the year ended 2001
31 December, Increase/
---------------------- (decrease)
2002 2001 %
------ ------ --------
Capacity
Available seat kilometres (ASK) (million)
- Domestic 33,753 31,393 7.5
- Hong Kong regional 1,746 1,690 3.3
- International 8,746 6,981 25.3
------ ------
Total 44,245 40,064 10.4
====== ======
Available tonne kilometres (ATK) (million)
- Domestic 3,924 3,622 8.3
- Hong Kong regional 193 185 4.3
- International 1,798 1,317 36.5
------ ------
Total 5,915 5,124 15.4
====== ======
2002
vs
For the year ended 2001
31 December, Increase/
---------------------- (decrease)
2002 2001 %
------ ------ --------
Load factors
Passenger load factor (RPK/ASK) (%)
- Domestic 65.5 61.9 5.8
- Hong Kong regional 61.9 62.7 (1.3)
- International 65.9 65.2 1.1
Total 65.4 62.5 4.6
==== ====
Overall load factor (RTK/ATK) (%)
- Domestic 64.5 61.2 5.4
- Hong Kong regional 55.8 56.8 (1.8)
- International 54.2 54.1 0.2
Total 61.1 59.2 3.2
==== ====
Certain Financial Information and Operating Data by Geographic Region (cont'd)
2002
vs
For the year ended 2001
31 December, Increase/
---------------------- (decrease)
2002 2001 %
------ ------ --------
Yield
Yield per RPK (RMB)
- Domestic 0.55 0.62 (11.3)
- Hong Kong regional 0.98 1.06 (7.5)
- International 0.42 0.41 2.4
Total 0.54 0.60 (10.0)
===== =====
Yield per RTK (RMB)
- Domestic 5.21 5.83 (10.6)
- Hong Kong regional 10.36 11.26 (8.0)
- International 3.25 3.31 (1.8)
Total 4.84 5.43 (10.9)
===== =====
Fleet
Total number of aircraft in service at year end
- Boeing 102 91 12.1
- Airbus 20 20 --
----- -----
Total 122 111 9.9
===== =====
Overall utilisation rate (hours per day)
- Boeing 9.9 9.2 7.6
- Airbus 9.3 8.9 4.5
9.8 9.1 7.7
===== =====
Cost
- Operating cost per ASK (RMB) 0.36 0.39 (7.7)
===== =====
- Operating cost per ATK (RMB) 2.70 3.02 (10.6)
===== =====
2002 Compared with 2001
The Group recorded a net profit of RMB576 million for 2002, as compared to a net
profit of RMB340 million for 2001. The Group's operating revenue increased by
RMB1,139
million or 6.7% from RMB16,880 million in 2001 to RMB18,019 million in
2002. Passenger load factor increased by 2.9 percentage points from 62.5% in
2001 to 65.4% in 2002. Passenger yield (in passenger revenue per RPK) decreased
by 10.0% from RMB0.60 in 2001 to RMB0.54 in 2002. Average yield (in traffic
revenue per RTK) decreased by 10.9% from RMB5.43 in 2001 to RMB4.84 in 2002.
Operating expenses increased by RMB514 million or 3.3% from RMB15,479 million in
2001 to RMB15,993 million in 2002. As operating revenue increased more than
operating expenses, operating profit increased by 44.7% from RMB1,401 million in
2001 to RMB2,026 million in 2002. The Group's net non-operating expenses
increased by 46.5%, from RMB605 million in 2001 to RMB887 million in 2002,
mainly due to an unfavourable movement in exchange differences of RMB472
million, partly offset by a gain on disposal of four Boeing 757-200 aircraft of
RMB199 million. Overall, the Group's net profit increased by 69.2%, from RMB340
million in 2001 to RMB576 million in 2002.
Operating Revenue
Substantially all of the Group's operating revenue is attributable to its
airline operations. Traffic revenue in 2002 and 2001 accounted for 97.0% and
97.5% respectively of total operating revenue. Passenger revenue and, cargo and
mail revenue accounted for 89.8% and 10.2% respectively of total traffic revenue
in 2002. The balance of the Group's operating revenue is derived from commission
income, income from general aviation operations, fees charged for ground
services rendered to other Chinese airlines that operate flights in and out of
airports in Southern China (including the airports in Guangzhou, Shenzhen,
Xiamen and Wuhan), air catering services and aircraft lease income.
Operating revenue increased by 6.7% from RMB16,880 million in 2001 to RMB18,019
million in 2002. This increase was primarily due to a 4.3% rise in passenger
revenue from RMB15,055 million in 2001 to RMB15,696 million in 2002 due to
higher traffic volume. The total number of passengers carried increased by 12.4%
to 21.49 million passengers in 2002. RPKs increased by 15.5% from 25,057 million
in 2001 to 28,940 million in 2002, primarily as a result of an increase in
passengers carried. However, passenger yield decreased by 10.0% from RMB0.60 in
2001 to RMB0.54 in 2002, mainly as a result of a fall in the average fares
resulting from increased competition.
Domestic passenger revenue, which accounted for 78.0% of total passenger revenue
in 2002, increased by 1.4% from RMB12,068 million in 2001 to RMB12,234 million
in 2002. For the Group's domestic routes, passenger traffic in RPKs increased by
13.6%, while
passenger capacity in ASKs increased by 7.5%, resulting in 3.6 percentage points
increase in passenger load factor, or an increase of 5.8% from 2001. Passenger
yield, however, decreased from RMB0.62 in 2001 to RMB0.55 in 2002 mainly as a
result of increased competition among the PRC airlines.
Hong Kong passenger revenue, which accounted for 6.7% of total passenger
revenue, decreased by 6.5% from RMB1,128 million in 2001 to RMB1,055 million in
2002. For Hong Kong flights, passenger traffic in RPKs increased by 2.0%, while
passenger capacity in ASKs increased by 3.3%, resulting in 0.8 percentage point
decrease in passenger load factor, or a decrease of 1.3% from 2001. Passenger
yield decreased from RMB1.06 in 2001 to RMB0.98 in 2002 mainly due to slack in
traffic volume.
International passenger revenue, which accounted for 15.3% of total passenger
revenue, increased by 29.4% from RMB1,860 million in 2001 to RMB2,407 million in
2002. For international flights, passenger traffic in RPKs increased by 26.7%,
while passenger capacity in ASKs increased by 25.3%, resulting in a 0.7
percentage point gain in passenger load factor, or an increase of 1.1% from
2001. Passenger yield increased slightly by 2.4% from RMB0.41 in 2001 to RMB0.42
in 2002.
Cargo and mail revenue, which accounted for 10.2% of the Group's total traffic
revenue and 9.9% of total operating revenue, increased by 27.0% from RMB1,406
million in 2001 to RMB1,786 million in 2002. The increase was primarily due to
the opening of two international cargo routes in 2002.
Other operating revenue increased by 28.4% from RMB418 million in 2001 to RMB537
million in 2002. The increase was primarily due to increase in fees charged for
ground services rendered to other Chinese airlines as the traffic volume
increased as well as an income from a lease arrangement effected during the
year.
Operating Expenses
Substantially all of the Group's operating expenses result from its airline
operations. The vast majority of such expenses relate directly to flight
operations, aircraft and traffic servicing, aircraft repairs and maintenance and
to depreciation and amortisation in respect of aircraft and flight equipment.
Expenses associated directly with the Group's flight operations (collectively,
"flight operations expenses") include fuel costs, operating lease payments,
catering expenses, aircraft insurance, flight personnel payroll and welfare and
training expenses. Expenses
associated directly with repairs and maintenance in respect of the Group's
aircraft (collectively, "maintenance expenses") include repairs and maintenance
and overhaul charges, the costs of consumables and other maintenance materials
and labour costs for maintenance personnel. Expenses associated directly with
the Group's aircraft and traffic servicing operations (collectively "aircraft
and traffic servicing expenses") include landing and navigation fees, rental
payments and charges in respect of terminal and other ground facilities and
labour costs for ground personnel. The balance of the Group's operating expenses
result from promotional and marketing activities (collectively, "promotion and
sales expenses") such as sales commissions, fees for use of the CAAC's
reservation system, ticket-printing and sales office expenses, advertising and
promotional expenses, and from general and administrative expenses, such as
administrative salaries and welfare and other personnel benefits and office
expenses.
Total operating expenses in 2002 amounted to RMB15,993 million, representing an
increase of 3.3% or RMB514 million over 2001, primarily due to the combined
effect of the growth in operations and increase in maintenance expenses. Total
operating expenses as a percentage of total operating revenue decreased from
91.7% in 2001 to 88.76% in 2002 as the increase in operating revenue exceeded
the increase in operating expenses.
Flight operation expenses, which accounted for 42.1% of total operating
expenses, decreased by 2.5% from RMB6,906 million in 2001 to RMB6,733 million in
2002, mainly due to a decrease in operating lease rentals. Fuel costs, which
accounted for 52.3% of flight operations expenses decreased by 0.8% from
RMB3,549 million in 2001 to RMB3,519 million in 2002 mainly resulting from
decreased fuel prices. Operating lease rentals decreased by 25.9% from RMB1,913
million in 2001 to RMB1,417 million in 2002, primarily due to the termination of
wet leases of five Boeing 737-300/37K aircraft from Zhongyuan Airlines in
January 2002. Catering expenses increased by 12.8% from RMB554 million in 2001
to RMB625 million in 2002, reflecting primarily an increase in number of
passengers carried. Aircraft insurance costs increased by 108.1% from RMB123
million in 2001 to RMB256 million in 2002, largely due to a rise in the rates of
aircraft insurance premiums subsequent to the 911 incident of the United States.
Labour costs for flight personnel increased by 18.9% from RMB657 million in 2001
to RMB781 million in 2002, largely due to an increase in flight hours as well as
an increase in bonuses for flight personnel.
Maintenance expenses which accounted for 14.6% of total operating expenses,
increased
by 15.8% from RMB2,015 million in 2001 to RMB2,333 million in 2002. The increase
was primarily attributable to a 15.7% increase in aircraft maintenance and
repair charges from RMB1,845 million in 2001 to RMB2,135 million in 2002, mainly
as a result of the effect of fleet expansion in recent years and the growth in
operations.
Aircraft and traffic servicing expenses, which accounted for 15.7% of total
operating expenses, increased by 9.3% from RMB2,298 million in 2001 to RMB2,511
million in 2002. The increase primarily resulted from 9.1% rise in landing and
navigation fees from RMB2,157 million in 2001 to RMB2,353 million in 2002, as
the number of flights increased.
Promotional and sales expenses, which accounted for 9.4% of total operating
expenses, decreased by 2.7% from RMB1,541 million in 2001 to RMB1,500 million in
2002. The decrease was due to 15.9% decrease in sale commissions and bonuses
paid to sales agents because of tighter cost controls exercised by the Group.
General and administrative expenses, which accounted for 6.6% of total operating
expenses, increased by 18.8% from RMB892 million in 2001 to RMB1,060 million in
2002. This was mainly due to an increase in staff salaries and welfare benefits
of 27.8% from RMB439 million in 2001 to RMB561 million in 2002 and increased
scale of operations.
Depreciation and amortisation, which accounted for 11.5% of total operating
expenses, increased by 1.4% from RMB1,815 million in 2001 to RMB1,840 million in
2002. This was primarily as a result of the additions of aircraft during 2002.
Operating Profit
Operating profit increased by 44.7% from RMB1,401 million in 2001 to RMB2,026
million in 2002, as operating revenue increased by RMB1,139 million or 6.7% from
2001, while operating expenses increased by RMB514 million or 3.3% over the same
period.
Non-operating Income/(Expenses)
Interest expense increased by 2.7% from RMB934 million in 2001 to RMB959 million
in 2002, mainly reflecting the additional bank loans borrowed to finance the
acquisitions of aircraft, partly offset by scheduled debt repayments during the
year.
Interest income increased by 5.5% from RMB50 million in 2001 to RMB53 million in
2002.
This was mainly due to an increase in cash balances.
The Group recognised a net gain on sale of fixed assets of RMB171 million in
2002, mainly resulting from disposal of four Boeing 757-200 aircraft.
During 2002, the Group recorded a net exchange loss of RMB175 million
predominantly due to its Japanese yen denominated borrowings as a result of the
Japanese yen appreciation. Such amount comprised mostly unrealised translation
loss.
Taxation
The Group is subject to PRC income tax at a rate of 33%.
Taxation expense increased by 24.2% from RMB321 million in 2001 to RMB398
million in 2002, reflecting primarily an increase in profit before taxation. A
deferred tax asset of RMB149 million was recognised at 31 December, 2002 in
respect of the unrelieved PRC tax losses brought forward from prior years. Such
tax losses are available for carry-forward to offset against future PRC taxable
profits for a maximum period of 5 years.
Minority Interests
Minority interests increased by 22.7% from RMB135 million in 2001 to RMB165
million in 2002, primarily as a result of an increase in net profits of the
Group's Airline Subsidiaries.
Liquidity, Financial Resources and Capital Structure
As at 31 December, 2002, the Group's borrowings totalled RMB19,275 million,
representing an increase of RMB4,326 million from RMB14,949 million last year.
Such borrowings were denominated, to a larger extent, in United States dollars
and, to a smaller extent, in Japanese yen and Renminbi, with a significant
portion being fixed interest rate borrowings. Of such borrowings, RMB6,807
million, RMB2,115 million, RMB2,111 million, RMB2,061 million and RMB6,181
million will be repayable in 2003, 2004, 2005, 2006, 2007 and thereafter
respectively. As at 31 December, 2002, cash and cash equivalents of the Group
totalling RMB3,771 million, of which 23.7% were denominated in foreign
currencies (mainly in United States dollars), increased by 33.8% from RMB2,819
million last year. Net debts (total borrowings net of cash and
cash equivalents) increased by 27.8% to RMB15,504 million.
As at 31 December, 2002, the Group's shareholders' equity amounted to RMB9,613
million, representing an increase of RMB391 million from RMB9,222 million last
year.
Net debt/equity ratio of the Group at 31 December, 2002 was 1.61 times, as
compared to 1.30 times last year.
Financial risk management policy
In the normal course of business, the Group is exposed to fluctuations in
foreign currencies and jet fuel prices. The Group's exposure to foreign
currencies was the result of its having foreign currency debts. Depreciation or
appreciation of the Renminbi against foreign currencies affects the Group's
results significantly because the Group's foreign currency payments generally
exceed its foreign currency receipts. The Group is not able to hedge its foreign
currency exposure effectively other than by retaining its foreign currency
denominated earnings and receipts to the extent permitted by the State
Administration of Foreign Exchange, or subject to certain restrictive
conditions, entering into forward foreign exchange contracts with authorised PRC
banks.
The Group is required to procure a majority of its jet fuel consumption
domestically at PRC spot market prices. There are currently no effective means
available to manage the Group's exposure associated with the fluctuations in
domestic jet fuel prices.
Charges on assets
As at 31 December, 2002, certain aircraft of the Group with an aggregate
carrying value of approximately RMB14,783 million (2001: RMB14,295 million) were
pledged as collateral under certain loan and lease agreements. Details of
charges are set out in note 10, 21 and 22 to the financial statements.
Commitments and Contingencies
As at 31 December, 2002, the Group had capital commitments of approximately
RMB9,548 million. Of such amounts, RMB5,876 million is related to the
acquisition of aircraft and related flight equipment and RMB3,127 million is
related to the Group's facilities and equipment to be constructed and installed
at the Guangzhou new international
airport. The remaining amounts of RMB545 million is related to the Group's other
airport and office facilities and equipment, overhaul and maintenance bases and
training facilities. The Group's capital expenditures are generally subject to
receipt of various approvals of the PRC Government and may be subject to change
depending on the timing of such approvals, prevailing market condition, the
availability of financing and other relevant factors.
As at 31 December, 2002, the Group was committed to make a capital contribution
of approximately RMB60 million and RMB201 million to its jointly controlled
entity and associated company.
Details of the capital and investing commitments are set out in note 29 to the
financial statements.
Major contingent liabilities of the Group at 31 December, 2002 are set out in
note 30 to the financial statements.
Report of the Directors
Report of the Directors
The Group continues
to strive for maximising value
for Shareholders
The Board of Directors of the Company hereby presents this report and the
audited consolidated financial statements of the Group for the year ended 31
December, 2002.
Principal Activities, Operating Results and Financial Position
The Group is principally engaged in airline operations. The Group also operates
certain airline related businesses including aircraft maintenance and air
catering operations. The Group is one of the largest airlines in China. In 2002,
the Group ranked first among all Chinese airlines in terms of passenger traffic
volume, number of scheduled flights per week, number of hours flown, number of
routes and size of aircraft fleet. The Group has prepared the results of
operations for the year ended 31 December, 2002, and the financial position of
the Company and the Group as of that date in accordance with International
Financial Reporting Standards ("IFRS"). See pages 42 to 108 of this Annual
Report.
Five Year Summary
A summary of the results and the assets and liabilities of the Group for the
five-year period ended 31 December, 2002 are set out on pages 109 and 110 of
this Annual Report.
Acquisition of Assets from CSAHC
On 29 August, 2002, the Company entered into agreements with CSAHC to acquire
90% registered capital in each of Guangzhou Aviation Hotel, South China
International Aviation & Travel Services Company and Southern Airlines
Advertising Company of CSAHC at considerations of RMB99,048,000, RMB4,999,000
and RMB3,799,000 respectively. The remaining 10% registered capital in each of
these companies is still held by CSAHC. Following the transfer, Guangzhou
Aviation Hotel, South China International Aviation and Travel Services
Corporation and Southern Airlines Advertising Company became subsidiaries of the
Company.
The Board of the Directors believes that the aforesaid transactions may enable
the Company to achieve vertical integration and cost control and help the
Company to expand its service base and enhance its brand name.
A Shares Issue Plan
The Company has applied to the relevant PRC authorities for the issue of not
more than 1,000,000,000 A Shares and the listing of such A Shares on the
Shanghai Stock Exchange (the "A Shares Issue Plan"). The A Shares Issue Plan was
approved by the Independent shareholders at the Extraordinary General Meetings
held on 26 March, 2002 and 21 May, 2002, and the Board was authorised to plan
for and on behalf of the Company deal with all relevant matters relating to the
A Shares Issue.
Consolidation and Restructuring
On 11 October, 2001, the State Council of PRC approved the consolidation and
restructuring among CSAHC, Northern Airlines and Xinjiang Airlines. The name of
such new entity is China Southern Air Group.
Dividends
No interim dividend was paid during the year ended 31 December, 2002 (2001:
Nil).
The Board of Directors of the Company does not recommend the payment of a final
dividend in respect of the year ended 31 December, 2002.
A final dividend of RMB0.02 per share totalling RMB67,484,000 in respect of the
previous financial year was approved and paid during the year.
Bank Loans and Other Borrowings
Details of the bank loans and other borrowings of the Company and the Group are
set out in notes 21 and 22 to the financial statements.
Interest Capitalisation
For the year ended 31 December, 2002, RMB64,186,000 interest (2001:
RMB5,227,000) was capitalised as the cost of construction in progress and fixed
assets.
Fixed Assets
Fixed assets of the Company and the Group and movements of fixed assets during
the year ended 31 December, 2002 are set out in note 10 to the financial
statements.
Major Customers and Suppliers
The Group's five largest customers in the aggregate did not exceed 30% of the
Group's total operating revenue (i.e. turnover) for the year ended 31 December,
2002.
The largest supplier and the aggregate of the five largest suppliers represented
approximately 53% and 64%, respectively, of the Group's total purchases (not
including purchases of items which are of a capital nature) for the year ended
31 December, 2002.
At no time during the year ended 31 December, 2002 have any Directors,
associates of Directors or shareholders of the Company owning, to the knowledge
of the Directors, more than 5% of the Company's share capital had any interest
in the Group's five largest customers or suppliers.
Taxation
Details of taxation of the Company and the Group are set out in note 7 to the
financial statements.
Reserves
Movements in the reserves of the Company and the Group during the year are set
out in note 26 to the financial statements.
Employees and Employees' Pension Scheme
As at 31 December, 2002, the Group had an aggregate of 17,031 employees (2001:
16,368). Details of the employees' pension schemes and other welfare are set out
in note 28 to the financial statements.
Subsidiaries
Details of the principal subsidiaries of the Company are set out in note 35 to
the financial statements.
Share Capital Structure
As at 31 December, 2002, the total share capital of the Company was
3,374,178,000 shares, of which approximately 65.2% (2,200,000,000 state-owned
shares) is held by CSAHC and approximately 34.8% (1,174,178,000 H shares) is
held by Hong Kong and overseas shareholders.
Substantial Shareholders
As at 31 December, 2002, the following shareholders had an interest of 10% or
more in the Company's shares:
Approximate
Percentage of the
Name Number of Shares Total Number of Shares
---- ---------------- ----------------------
CSAHC 2,200,000,000 65.20%
HKSCC Nominees Limited 1,148,129,999 34.03%
The following persons have informed the Company that the Company's H shares held
by them as at 31 December, 2002 in CCASS's stock accounts of HKSCC Nominees
Limited were more than 10% of the total number of H shares issued by the
Company:
Approximate
Percentage of the
Name Number of H Shares Total Number of Shares
---- ------------------ ----------------------
The Hongkong and Shanghai
Banking Corporation Limited 643,649,717 54.82%
Standard Chartered Bank 154,060,050 13.12%
Save for the information above, as at 31 December, 2002, the Company is not
aware of any interests which are required to be reported pursuant to Section
16(1) of the Securities (Disclosure of Interests) Ordinance (Chapter 369 of the
Laws of Hong Kong) (the "SDI Ordinance").
Purchase, Sale or Redemption of Shares
Neither the Company nor any of its subsidiaries purchased, sold or redeemed any
shares of the Company during 2002.
Use of Proceeds from H Share Offering
As stated in the 2001 Annual Report of the Company, as of 31 December, 2001, the
Company had RMB40 million remaining from the proceeds of the Company's initial
public offering. As at 31 December, 2002, the sum of RMB40 million remained
unused.
Consistent with the disclosure in the Prospectus of the Company dated July 1997,
the Company intends to use the remaining proceeds of RMB40 million (held as at
31 December, 2002 as short-term deposits with Southern Airlines Group Finance
Company Limited, a PRC authorised financial institution and an associated
company of the Group) for various projects including the development of the
computerised accounting system.
Pre-emptive Rights
Neither the Articles of Association of the Company nor the laws of the PRC
provide for any pre- emptive rights requiring the Company to offer new shares to
existing shareholders in proportion to their existing shareholdings.
Compliance with the Code of Best Practice
The Directors of the Company confirm that in the year ended 31 December, 2002,
the Group was in compliance with the Code of Best Practice set out in Appendix
14 to the Main Board Listing Rules ("the Listing Rules") issued by the Stock
Exchange of Hong Kong Limited ("Hong Kong Stock Exchange").
Directors, Supervisors and Senior Administrative Officers
Directors, Supervisors and Senior Administrative Officers of the Company in 2002
were as follows:
Name Age Position
--------------- --- --------------------------------------------------
Yan Zhi Qing 60 Chairman of the Board of Directors
Wang Chang Shun 45 Vice Chairman of the Board of Directors; President
Li Feng Hua 53 Director; Vice President
Wang Shao Xi 61 Director
Zhang Rui Ai 61 Director
Zhou Yong Jin 59 Director
Xu Jie Bo 37 Director; Chief Financial Officer
Wu Rong Nan 61 Director
Simon To 51 Independent Non-Executive Director
Peter Lok 66 Independent Non-Executive Director
Wei Ming Hai 38 Independent Non-Executive Director
Liang Hua Fu 61 Chairman of the Supervisory Committee
Gan Yu Hua 74 Supervisor
Li Qi Hong 55 Supervisor
Jiang Ping 52 Vice President
Li Kun 42 Vice President
Yuan Xin An 46 Vice President
Zheng En Ren 57 Vice President
Yang Guang Hua 49 Vice President
Su Liang 40 Company Secretary
On 12 April, 2002, the Board of Directors by resolutions appointed Mr. Yuan Xin
An, Mr. Zheng En Ren and Mr. Yang Guang Hua respectively as Vice President of
the Company.
On 11 October, 2002, Li Feng Hua resigned as the Director and Vice President of
the Company due to work arrangement.
On 14 March, 2003, Mr. Wang Shao Xi and Mr. Zhang Rui Ai tendered their
resignations to the Company as Directors of the Company due to retirement. Such
resignations will take effect after approval at the 2002 Annual General Meeting
of the Company.
Subject to passing of the proposed resolutions in the Company Annual General
Meeting for the year 2003, the Company will appoint Liu Ming Qi, Peng An Fa,
Wang Quan Hua, Zhao Liu An, Zhou Yong Qian, Wang Zhi and Sui Guan Jun as
directors.
Biographical details of the Board of Directors, Senior Administrative Officers
and members of the Supervisory Committee are set out on pages 111 to 115 of this
Annual Report.
Equity Interests in the Company Held by the Directors and Supervisors
As at 31 December, 2002, none of the Directors or Supervisors of the Company
held any interest in the Company or any associated corporation of the Company,
which is required to be notified to the Company and the Hong Kong Stock Exchange
pursuant to Section 28 of the SDI Ordinance, or which is required, pursuant to
Section 29 of the SDI Ordinance, to be entered in the register of the Company.
At no time during 2002 or before has any Director, Supervisor or member of the
Senior Administrative Officers or any of their spouses or minor children, been
granted or exercised or subscribed for shares or debentures or options of the
Company.
Service Contracts of the Directors and Supervisors
All Directors and Supervisors of the Company have entered into service contracts
with the Company for a term of three years commencing on 16 April, 2001. Except
for such service contracts, none of the Directors or Supervisors of the Company
has entered or has proposed to enter into any other service contracts with the
Company or its subsidiaries. None of the Directors or Supervisors has entered
into any service
contracts with the Company which is not determinable by the Company within one
year without payment of compensation, other than statutory compensation.
Interests of the Directors and Supervisors in Contracts
In 2002, none of the Directors and Supervisors of the Company had a material
interest in any contract of significance to which the Company or any of its
subsidiaries was a party.
Connected Transactions
The Company enters from time to time into certain connected transactions with
CSAHC and other connected persons. Such transactions fall within the definition
of connected transactions as set out in Chapter 14 of the Listing Rules issued
by the Stock Exchange of Hong Kong Limited ("the Hong Kong Stock Exchange"). The
Hong Kong Stock Exchange has granted waivers to the Company in respect of
compliance with certain provisions of Chapter 14 of the Listing Rules. Details
of such transactions conducted during the year and/or the related agreements
entered into between the Company and such parties for which waivers have been
obtained are disclosed as follows:
(A) Demerger Agreement
The Demerger Agreement dated 25 March, 1995 (such Agreement was amended by
Amendment No.1 dated 22 May, 1997) was entered into between the CSAHC and the
Company for the purpose of defining and allocating the assets and liabilities
between CSAHC and the Company. Under the Demerger Agreement, CSAHC and the
Company have agreed to indemnify the other party against, among other things,
claims, liabilities and expenses incurred by such other party but relating to
the businesses, assets and liabilities held or assumed by CSAHC or the Company
(as the case may be) pursuant to the Demerger Agreement.
Neither the Company nor CSAHC has been required to make any payments in respect
of such indemnification obligations from the date of the Demerger Agreement up
to the date of this report.
(B) Connected Business Transactions
The Company and CSAHC and their respective subsidiaries were a single group
prior
to the restructuring of CSAHC in 1995 in anticipation of the Company's global
offering (the "Restructuring"). As a result, certain arrangements between them
have continued after the Restructuring and the listing of the Company's shares
on the Hong Kong Stock Exchange and New York Stock Exchange. At present, the
Company and CSAHC (or their respective subsidiaries) have entered into the
following agreements:
(a) Southern Airlines (Group) Import and Export Trading Company ("SAIETC"), a
wholly-owned subsidiary of CSAHC
The Company and SAIETC have entered into an agreement dated 22 May, 1997, for
the import and export of aircraft, flight equipment, special vehicles for
airline use, communication and navigation facilities, and training facilities
for a term extending from 22 May, 1997 to 22 May, 2000 (renewable by the
parties). The agreement has been extended to 22 May, 2003.
For the year ended 31 December, 2002, the amount incurred by the Group for the
import and export of the above equipment was RMB583,548,000, inclusive of agency
commission of 1.5% above the contract prices paid to SAIETC.
(b) Southern Airlines Advertising Company, which is 90% owned by the Company and
10% owned by CSAHC
On 26 August, 2002, the Company had entered into a takeover agreement with
CSAHC. As a result, the Company owns 90%, and CSAHC owns 10% of Southern
Airlines Advertising Company.
The Company and Southern Airlines Advertising Company have entered into an
agreement dated 22 May, 1997, for the provision of advertising services for a
term extending from 22 May, 1997 to 22 May, 2000. The agreement has been
extended three years to 22 May, 2003.
From January to December 2002, the amount incurred by the Group to Southern
Airlines Advertising Company for advertising services was RMB3,275,000.
(c) Southern Airlines Group Finance Company Limited ("SA Finance") which is 42%
owned by CSAHC, 30% owned by the Company, 28% owned in aggregate by six
subsidiaries of the Company
The Company has entered into a financial agreement dated 22 May, 1997, with SA
Finance for the provision of financial services such as deposit and loan
facilities, credit facilities, financial guarantees and credit references for a
term commencing from 22 May, 1997 to 22 May, 2000. The agreement has been
extended to 22 May, 2006.
Under such agreement, (a) all funds that the Company deposits with SA Finance
will be deposited by SA Finance with the Industrial and Commercial Bank of
China, Bank of Communications, Bank of Agriculture, China Construction Bank, or
other banks of similar creditworthiness; and (b) SA Finance will not at any time
have outstanding loans in excess of the amount representing the aggregate of (i)
deposits received from entities other than the Company, (ii) SA Finance's
shareholders' equity and (iii) capital reserves.
The Group had short-term deposits placed with SA Finance at 31 December, 2002
amounting to RMB900,979,000 which earned interest at the rate of 1.98%-3.00% per
annum.
(d) Shenzhen Air Catering Company Limited, which is 33% owned by CSAHC , and 67%
owned by two independent third parties
The Company and Shenzhen Air Catering Company Limited have entered into an
agreement dated 23 May, 1997 for the sale and purchase of in-flight meals for
flights originating or stopping at the airport in Shenzhen. Pursuant to such
agreement, Shenzhen Air Catering Company Limited will supply in-flight meals to
the Group from time to time during the term from 23 May, 1997 to 23 May, 1998.
The agreement has been extended by the parties to 23 May, 2003.
For the year ended 31 December, 2002, the amount paid by the Group to Shenzhen
Air Catering Company Limited for the provision of in-flight meals was
approximately RMB29,058,000.
(e) Guangzhou Aircraft Maintenance Engineering Company Limited ("GAMECO"), which
is 50% owned by the Company and 50% owned by two independent third parties
The Company and GAMECO have entered into an Aircraft Maintenance and Engineering
Agreement for the provision of aircraft repair and maintenance services. On 17
May, 1996, the Company and GAMECO entered into an agreement regarding the fee
arrangement for the provision of such repair and maintenance services (the "Fee
Agreement"). Pursuant to the Fee Agreement and subsequent agreements, GAMECO
charged the Company
for expendables at cost plus 15%, and labour costs at US$30.0 per hour during
2002.
For the year ended 31 December, 2002, the amount incurred by the Group for such
repair and maintenance services was RMB592,311,000.
(f) China Southern West Australian Flying College Pty Ltd (the "Australian Pilot
College"), which is 65% owned by the Company and 35% owned by CSAHC
CSAHC and the Australian Pilot College entered into an agreement dated 7
October, 1993 for the provision of pilot training in Australia to the cadet
pilots of CSAHC (the "Training Agreement"). The Training Agreement will remain
in force unless terminated by either party upon 90 days' prior written notice to
the other party. Pursuant to the Demerger Agreement, the Company has assumed all
the interests, rights and obligations of CSAHC under the Training Agreement.
For the year ended 31 December, 2002, the amount paid by the Group to the
Australian Pilot College for training services was RMB56,342,000.
(g) Southern Airlines (Group) Economic Development Company, which is 61% owned
by CSAHC and 39% owned by an independent third party
The Company and Southern Airlines (Group) Economic Development Company have
entered into an agreement dated 22 May, 1997, for the provision of drinks,
snacks, liquor, souvenirs and other products for a term extending from 22 May,
1997 to 22 May, 2007.
For the year ended 31 December, 2002, the amount paid by the Group to Southern
Airlines (Group) Economic Development Company for the provision of drinks,
snacks, liquor, souvenirs and other products was RMB101,350,000.
(h) Guangzhou Nanland Air Catering Company Limited ("Nanland"), which is 51%
owned by the Company and 49% owned by an independent third party
The Company and Nanland have entered into a catering agreement dated 22 May,
1999 for the sale and purchase of in-flight meals for flights originating or
stopping at the airport in Guangzhou. Pursuant to such agreement, Nanland will
supply inflight meals to the Company from time to time during the term from 22
May, 1999 to 22 May, 2000. The agreement will then be automatically extended
annually.
For the year ended 31 December, 2002, the amount paid by the Group to Nanland
for the provision of inflight meals was RMB88,911,000.
(i) Ticket sales arrangements
The Group has entered into ticket agency agreements for the sale of the Group's
air tickets with several subsidiaries of CSAHC (the "Agents"). The Agents charge
commission on the basis of the rates stipulated by the CAAC and International
Air Transport Association ("IATA"). The Agents charge a commission in the amount
of 3% of the ticket price for domestic tickets and 5% to 12% of the ticket price
for Hong Kong regional/international tickets. The Group has other air ticket
sales agents in China who also charge commission at the same rates. The Agents
also act as air ticket sales agents for other Chinese airlines and charge the
same rates of commission to such other airlines as those charged to the Group.
For the year ended 31 December, 2002, the aggregate amount of ticket sales of
the Group conducted through the Agents was RMB226,488,000.
(C) Trademark Licence Agreement
The Company and CSAHC have entered into a 10 year Trademark Licence Agreement
dated 22 May, 1997 pursuant to which CSAHC acknowledges that the Company has the
right to use the name "China Southern" and "China Southern Airlines" in both
Chinese and English, and grants to the Company a renewable royalty-free licence
to use the kapok logo on a world-wide basis in connection with the Company's
airline and airline-related businesses. Unless CSAHC gives written notice of
termination three months before the expiration of the agreement, the agreement
will be automatically extended for another 10-year term.
(D) Leases
The Company as lessee and CSAHC as lessor have entered into the following lease
agreements:
(a) The Company and CSAHC have entered into a land lease agreement dated 22 May,
1997, in respect of the land used by the Company within Guangzhou Baiyun
International Airport. The rental payment is RMB2,650,700 per year. The term of
the lease is five years commencing 1 April, 1997 and is renewable by the parties
thereafter (subject
to mutual agreement with respect to rental terms).
(b) The Company and CSAHC have separately entered into four lease agreements
dated 22 May, 1997, in respect of office premises located at the east wing of
the Guangzhou Railway Station on Guangzhou Huanshi Dong Road, office premises at
Haikou Airport, office premises in Haikou City, and office premises at Tianhe
Airport in Wuhan, Hubei Province. The aggregate rental payment under the four
leases is RMB12,573,000 per year. The term of each lease is one year and is
renewable by the parties thereafter (subject to mutual agreement with respect to
rental terms).
(c) The Company and CSAHC have entered into an indemnification agreement dated
22 May, 1997 in which CSAHC has agreed to indemnify the Company against any loss
or damage caused by or arising from any challenge of, or interference with, the
Company's right to use certain land and buildings.
(E) Comprehensive Services and Employee Benefits
The Company and CSAHC have entered into a comprehensive services agreement (the
"Services Agreement") dated 22 May, 1997.
The Services Agreement provides that CSAHC shall sell or rent housing to
eligible employees of the Group at lower than market price. As the housing is
sold or rented below cost and the construction costs of the leased housing were
originally paid by CSAHC, the Company shall pay CSAHC RMB85 million per year,
payable quarterly in arrears, for a term of ten years from 1995 to 2004.
(F) Ongoing Connected Transactions with Northern Airlines and Xinjiang Airlines
Northern Airlines
Northern Airlines is principally engaged in commercial airline services in the
PRC with its headquarters based in Shenyang, East Northern part of the PRC.
Following the consolidation and restructuring among CSAHC, Northern Airlines and
Xinjiang Airlines as described in the Company's announcement dated 11 October,
2002 (the "Consolidation and Restructuring"), Northern Airlines becomes a wholly
owned subsidiary of CSAHC and therefore constitutes a connected person of the
Company under the Listing Rules.
Xinjiang Airlines
Xinjiang Airlines is principally engaged in commercial airline services in the
PRC with its headquarters based in Urumqi, Xinjiang. Following the consolidation
and restructuring, Xinjiang Airlines becomes a wholly owned subsidiary of CSAHC
and therefore constitutes a connected person of the Company under the Listing
Rules.
(a) In-flight Meals Arrangement with Northern Airlines, a wholly owned
subsidiary of CSAHC
Nanland has been providing and will provide in-flight meals to Northern
Airlines. Pursuant to an agreement dated 23 June, 2000, Nanland has been
providing in-flight meals to Northern Airlines from time to time for a period of
one year. The agreement will then be automatically extended annually. For the
year ended 31 December, 2002, the amount paid by Northern Airlines to Nanland
for the provision of in-flight meals was approximately RMB4,413,000.
(b) Pursuant to an agreement dated 30 October, 2001, Northern Airlines has been
providing and will provide in-flight meals to the Group from time to time for a
period of one year. The agreement will then be automatically extended annually.
For the year ended 31 December, 2002, the amount paid by the Group to
Northern Airlines for the provision of in-flight meals was approximately
RMB2,539,000.
(c) In-flight Meals Arrangement with Xinjiang Airlines, a wholly owned
subsidiary of CSAHC
Pursuant to an agreement dated 24 March, 2001, Nanland has been providing
and will provide in-flight meals to the Xinjiang Airlines from time to time for
a period of one year. The agreement will then be automatically extended
annually.
For the year ended 31 December, 2002, the amount paid by Xinjiang Airlines
to Nanland for the provision of in-flight meals was approximately RMB2,096,000.
(d) Pursuant to an agreement dated 20 September, 1999, Xinjiang Airlines has
been providing and will provide in-flight meals to the Company for a period of
one year. The agreement will then be automatically extended annually. The amount
paid by the Group to Xinjiang Airlines for the provision of in-flight meals for
the year ended
31 December, 2002 was approximately RMB1,067,000.
(e) Ticket Sales Arrangement with Northern Airlines, a wholly owned subsidiary
of CSAHC
In accordance with the relevant requirement and industry practice, the
Group has entered into ticket agency arrangement with Northern Airlines for the
sale of the Group's air tickets by Northern Airlines and for the sale of
Northern Airlines air tickets by the Group. The selling party charges a
commission in the amount of 3% of the ticket price for domestic tickets and 5%
to 12% of the ticket price for Hong Kong regional and international tickets.
These commission rates are based on the rates stipulated by the CAAC and IATA.
The amount of commission paid by Northern Airlines to the Group for the year
ended 31 December, 2002 was approximately RMB1,516,000. The amount of commission
paid by the Group to Northern Airlines for the year ended 31 December, 2002 was
approximately RMB554,000.
The amounts payable under the above aforesaid transactions are based on the
rates stipulated by the CAAC and IATA.
(f) Ticket Sales Arrangement with Xinjiang Airlines, a wholly owned subsidiary
of CSAHC
The Group has entered into ticket agency arrangement with Xinjiang Airlines
for the sale of the Group's air tickets by Xinjiang Airlines and for the sale of
Xinjiang Airlines air tickets by the Group. The selling party charges a
commission in the amount of 3% of the ticket price for domestic tickets and 5%
to 12% of the ticket price for Hong Kong regional and international tickets.
These commission sales are based on the rates stipulated by the CAAC and IATA.
The amount of commission paid by Xinjiang Airlines to the Group for the year
ended 31 December, 2002 was approximately RMB449,000. The amount of commission
paid by the Group to Xinjiang Airlines for the year ended 31 December, 2002 was
approximately RMB199,000.
The amount payable under the above aforesaid transactions are based on the
rates stipulated by the CAAC and IATA.
(g) In November 2002, the Hong Kong Stock Exchange granted a waiver in relation
to the in-flight meals and ticket sales arrangements between the Group and
CSAHC after approval of the consolidation and restructuring proposal of the PRC
aviation industry
by the State Council of the PRC (the "Ongoing Connected Transactions for
In-Flight meals and Ticket Sales").
The Hong Kong Stock Exchange has granted the waiver on and subject to the
following conditions:
1. the Ongoing Connected Transactions for In-flight Meals and Ticket Sales shall
be:
(a) entered into in the ordinary and usual course of business of the Group;
(b) conducted either on normal commercial terms or on terms no less favourable
than terms available to (or from, as appropriate) independent third parties; and
(c) on terms that are fair and reasonable so far as the shareholders of the
Company and in the interest of the Company as a whole are concerned;
2. the aggregate annual amount payable by the Group to CSAHC, and the aggregate
annual amount payable by CSAHC to the Group, under the On going Connected
Transactions for In-Flight Meals and Ticket Sales for each financial year have
will not exceeded the higher of HK$10 million and 3% of the consolidated net
tangible assets of the Company as disclosed in its latest published audited
accounts (the "Relevant Cap Amount");
3. the details of the On going Connected Transactions for In-Flight Meals and
Ticket Sales will be disclosed in the Company's annual report as set out in Rule
14.25(1)(A) to (D) of the Listing Rules for the relevant financial year of the
Company;
4. the independent non-executive directors will review annually and confirm in
the Company's annual report of the relevant financial year that the On going
Connected Transactions for In-Flight Meals and Ticket Sales have been conducted
in the manner as stated in paragraph 1 above and comply with the Relevant Cap
Amount as stated in paragraph 2 above;
5. the auditors of the Company shall review annually the transactions and
provide a letter to the Board of Directors stating that:
(a) the Ongoing Connected Transactions for In-Flight Meals and Ticket Sales have
received approval of the Board of Directors of the Company;
(b) the Ongoing Connected Transactions for In-Flight Meals and Ticket Sales have
been entered into in accordance with the terms of the agreements relating to the
transactions;
(c) the aggregate annual amount payable by the Group to CSAHC, and the aggregate
annual amount payable by CSAHC to the Group, under the Ongoing Connected
Transactions for In-Flight Meals and Ticket Sales for each financial year shall
not exceed the Relevant Cap Amount set out in paragraph 2 above; and
(d) the Ongoing Connected Transactions for In-Flight Meals and Ticket Sales are
in accordance with the pricing policy of the Group.
Where, for whatever reasons, the auditors decline to accept the engagement or
are unable to provide the auditors' letter, the Directors shall contact the Hong
Kong Stock Exchange immediately.
6. CSAHC shall provide to the Hong Kong Exchange an undertaking that, for so
long as the Company's shares are listed on the Hong Kong Stock Exchange, it will
provide the Company's auditors with full access to its relevant records for the
purpose of the auditors' review of the Ongoing Connected Transactions for
In-Flight Meals and Ticket Sales.
(h) As CSAHC is the 65.2% controlling shareholder of the Company, each of the
eight revenue sharing scheme agreements entered into between the Company,
Northern Airlines and Xinjiang Airlines (the "RSSA") where Northern Airlines and
Xinjiang Airlines are the relevant parties will constitute a connected
transaction under the Listing Rules. The major terms of each RSSA are similar
and are briefly described as follows:
1. Revenue arising from those routes covered under the RSSA will be allocated in
proportion to the traffic capacity, calculated by reference to the model of the
aircraft, frequency of the flights and also the seats capacity, deployed by the
respective parties to the RSSA respectively. The allocation of the revenue is
not ascertainable until the end of each month during the term of the respective
RSSA.
2. The traffic capacity is determined by the respective airlines. The
corresponding operating costs will be borne by the respective parties to the
RSSA.
3. The revenue derived from those routes covered under the RSSA will be
collected by the respective parties to the RSSA independently ("Actual
Revenue"). At the end of the term of the RSSA, Actual Revenue of the respective
parties to the RSSA will be aggregated and calculated under the terms of the
RSSA. The amount of revenue attributable to each party according to the terms of
the RSSA will be allocated among the respective parties to the RSSA in
proportion to the monthly seat capacity of the parties ("Allocated Revenue").
Any Allocated Revenue in excess of the Actual Revenue collected by any parties
under the RSSA will be allocated to such parties. The tickets will be sold by
the respective parties to the RSSA under their respective codes.
4. The scheme has the beneficial effect of protecting the interests of the
parties to the RSSA in the operation of the routes covered under the RSSA.
5. There is no consideration payable by the parties in entering into the RSSA.
6. Each of the RSSA will be effective from 1 December, 2002 to 29 March, 2003.
At the end of the term, the parties to the respective RSSA can renew the term on
the same terms as the RSSA or amend the terms of the RSSA. If and when there are
any amendments to the terms of the RSSA, the Company will comply with the
Listing Rules requirements.
Reasons for the Ongoing Transactions
It is expected that by entering into the RSSA, adverse price competition of the
routes covered under the RSSA can be avoided to certain extent and the effect of
which is to protect the interest of each party to the RSSA.
In December 2002, the Hong Kong Stock Exchange granted a waiver in relation to
the eight RSSA between the Company, Northern Airlines and Xinjiang Airlines
relating to eight domestic routes (the "Ongoing Connected Transactions for
Revenue sharing").
The Hong Kong Stock Exchange has granted the Waiver on and subject to the
following conditions:
1. the Ongoing Connected Transactions for Revenue Sharing shall be:
(a) entered into in the ordinary and usual course of business of the Group;
(b) conducted either on normal commercial terms or on terms no less favourable
than terms available from independent third parties; and
(c) entered into in accordance in the relevant agreements and on terms that are
fair and reasonable so far as the shareholders of the Company are concerned and
in the interest of the Company as a whole;
2. the aggregate amount payable by the Group to Northern Airlines and Xinjiang
Airlines (as appropriate) and by Northern Airlines and Xinjiang Airlines (as
appropriate) to the Group under the RSSA for each financial year will not exceed
the higher of HK$10 million and 3% of the consolidated net tangible assets of
the Company as disclosed in its latest published audited accounts (the "Relevant
Cap Amount for Revenue Sharing");
3. the details of the Ongoing Connected Transactions for Revenue Sharing will be
disclosed in the Company's annual report as set out in Rule 14.25(1)(A) to (D)
of the Listing Rules for the relevant financial year of the Company;
4. the independent non-executive directors will review annually and confirm in
the Company's annual report of the relevant financial year that the Ongoing
Connected Transactions for Revenue Sharing have been conducted in the manner as
stated in paragraph 1 above and comply with the Relevant Cap Amount for Revenue
Sharing as stated in paragraph 2 above;
5. the auditors of the Company shall review annually the Ongoing Connected
Transactions for Revenue Sharing and provide a letter to the Board of Directors
stating that:
(a) the Ongoing Connected Transactions for Revenue Sharing have received
approval of the Board of Directors of the Company;
(b) the Ongoing Connected Transactions for Revenue Sharing have been entered
into in accordance with the terms of the agreements relating to the
transactions;
(c) the aggregate amount payable by the Group to Northern Airlines and Xinjiang
Airlines (as appropriate) and by Northern Airlines and Xinjiang Airlines (as
appropriate) to the Group under the RSSA for each financial year will not exceed
the
Relevant Cap Amount for Revenue Sharing set out in paragraph 2 above; and
(d) the Ongoing Connected Transactions for Revenue Sharing are in accordance
with the pricing policy of the Group.
Where, for whatever reasons, the auditors decline to accept the engagement or
are unable to provide the auditors' letter, the Directors shall contact the Hong
Kong Exchange immediately; and
6. Northern Airlines and Xinjiang Airlines shall provide to the Hong Kong Stock
Exchange an undertaking that, for so long as the Company's shares are listed on
the Hong Kong Stock Exchange, it will provide the Company's auditors with full
access to their relevant records for the purpose of the auditors' review of the
Ongoing Connected Transactions for Revenue Sharing .
For the year ended 31 December, 2002, the aggregate amounts payable by the Group
to Northern Airlines and Xinjiang Airlines under the RSSA amounted to
RMB1,408,000 and the aggregate amounts payable by Northern Airlines and Xinjiang
Airlines to the Group amounted to RMB238,000 and RMB1,170,000
The Independent Non-Executive Directors of the Company have confirmed to the
Board of Directors of the Company that they have reviewed the connected
transactions described in (B) through (F) above and have concluded that:
(a) the transactions have been entered into by the Group in the ordinary and
usual course of its business;
(b) the transactions have been entered into either (A) on normal commercial
terms (by reference to transactions of a similar nature made by similar entities
within the PRC) or (B) (where there is no available comparison) on terms that
are fair and reasonable so far as the shareholders of the Company are concerned;
(c) the transactions have been performed either (A) in accordance with the terms
of the agreement governing each such transaction or (B) (where there is no such
agreement) on terms no less favourable than terms available from third parties;
and
(d) the aggregate annual amount payable by the Group to CSAHC, and the aggregate
annual amount payable by CSAHC to the Group, under the On going Connected
Transactions
for In-Flight Meals and Ticket Sales for each financial year have not exceeded
the higher of HK$10 million and 3% of the consolidated net tangible assets of
the Company as disclosed in its latest published audited accounts.
Waiver from the Stock Exchange of Hong Kong Limited
In March 2002, the Hong Kong Stock Exchange granted a waiver to allow the
Company to use a new size test based on available tonne kilometres ("ATKs") to
replace the normal net asset test and consideration test under Chapter 14 of the
Listing Rules in respect of acquisitions and disposals of aircraft.
The Hong Kong Stock Exchange has granted the waiver on and subject to the
following conditions:
1. Instead of the normal tests under Chapter 14 of the Listing Rules, the tests
may be calculated by reference to the ATKs for aircraft being acquired or
disposed of as compared to the Company's aggregate fleet ATKs.
2. The proposed method of calculation for the four tests will replace the net
asset test and the consideration test only while the other two tests, namely,
net profit and equity capital issued tests will continue to apply as set out in
Chapter 14 of the Listing Rules.
3. The calculation of ATKs will be as follows: i) fleet ATKs will be the
aggregate actual ATKs for all aircraft in the Company's fleet for the last
financial year as disclosed in the Company's annual report, ii) ATKs for
aircraft being disposed of will be based on actual ATKs of the aircraft for the
previous two financial years; and iii) ATKs for aircraft being acquired will be
based on the historical operating data for the same type of aircraft. Where the
aircraft to be acquired is a new type, the ATKs will be estimated based on other
aircraft of similar size operated by the Company or the average for the Chinese
civil aviation industry.
4. The Company's ATKs figure will be disclosed in the Company's annual report
and be reviewed by auditors who will confirm on an annual basis that the
Company's ATKs are calculated correctly and consistently.
5. For the purposes of making the test as stated in paragraph 1 above, all
acquisitions and disposals for the last 12 months will be aggregated, unless the
acquisition or disposal has previously been reported as a notifiable transaction
under these rules.
6. The thresholds for classifying a transaction as a discloseable, major or very
substantial acquisition will be 30%, 50% and 100% (assuming that there are no
circumstances which would make it a connected transaction or a share
transaction).
7. Where the transaction is a discloseable transaction, disclosure will take the
form of a press announcement complying with rule 14.14 of the Listing Rules and
details of the transaction will be set out in the Company's next annual report
and accounts. Where the transaction is a major transaction or a very substantial
acquisition, the provisions of Chapter 14 of the Listing Rules will apply.
8. An option to acquire aircraft will not be treated as acquisition while the
exercise of such an option will be treated as acquisition of aircraft.
9. The waiver will only apply to acquisition/disposal of aircraft, and
acquisition or disposal of other types of assets by the Company will be subject
to provisions under Chapter 14 of the Listing Rules.
10. The Company will disclose in its annual reports and interim reports the
following information:
(a) regarding future deliveries of aircraft, details of aircraft on order
including the number and type; and the years in which such aircraft are
scheduled to be delivered;
(b) the number and type of aircraft which are subject to options exercisable
during a period of not less than 12 months from the end of the financial year or
period to which the annual report relates; and
(c) details of the waiver granted pursuant to the application.
11. The Company remains a subsidiary of the CSAHC. Should there be any change in
control of the Company, the Hong Kong Stock Exchange will need to reconsider
whether the waiver continues to be appropriate.
Regarding future deliveries of aircraft, details of aircraft on order and the
years in which such aircraft are scheduled to be delivered, please refer to note
29 to the
financial statements. Three Boeing 757-200 aircraft were subject to options
exercisable and had been exercised during the period to which this annual report
relates.
Donations
During the year, the Group made donations for charitable purposes amounting to
RMB1.4 million (2001: RMB1.4 million).
Designated Deposits and Overdue Time Deposits
As at 31 December, 2002, the Group's deposits placed with financial institutions
or other parties did not include any designated deposits, or overdue time
deposits against which the Group failed to receive repayments.
Material Litigation
The Group was not involved in any material litigation or dispute in 2002.
Auditors
A resolution is to be proposed at the forthcoming Annual General Meeting of the
Company for the reappointment of KPMG as the international auditors of the
Company and of KPMG Huazhen as the PRC auditors of the Company.
By Order of the Board of Directors
Yan Zhi Qing
Chairman of the Board of Directors
Guangzhou, the PRC
14 March, 2003
Report of the Supervisory Committee
Dear shareholders:
In 2002, the Supervisory Committee of the Company pursued their work in
accordance
with the provisions of the Company Law of the PRC, the Articles of Association
of the Company and the "Working Regulations of the Supervisory Committee of
China Southern Airlines Company Limited" with the objective of protecting the
shareholders' best interests and focusing on the development and expansion of
the Group.
The Supervisory Committee has participated in the Group's reorganisation and has
studied and reviewed the Group's major operations, improving efficiency
measures, flying safety, technological improvement and investment projects.
The Supervisory Committee has reviewed the Report of the Directors to be
submitted at the forthcoming 2002 Annual General Meeting of the Company, and
concluded that they have been properly prepared. It has also reviewed the
Group's financial position, including interim results and annual financial
statements, and no irregularities have been found.
In the opinion of the Supervisory Committee, the Directors, the President and
Senior Administrative Officers of the Company have all carried out their duties
diligently and with due consideration to the overall interests of the Company
and the shareholders, and in compliance with the provisions of the Company's
Articles of Association, the Listing Rules of the Hong Kong Stock Exchange and
the provisions of the Company Laws of the PRC.
The Supervisory Committee is satisfied with the Report of the Directors for 2002
and appreciates the measures the Company undertook during the year to control
operating cost per unit of available tonne kilometre and to enhance the economic
returns of the Company. The Supervisory Committee is also glad to find that the
Company managed to achieve profit amid keen market competition and significant
slowdown in the global economy. We will continue to pay close attention to the
challenges and opportunities brought by the reorganisation of the CSAHC. We
believe the market competitive power and ability to strive for continual growth
of the CSAHC will be further strengthened after the reorganisation, and we have
every confidence in the Group's prospects.
In the opinion of the Supervisory Committee, in order to coordinate the future
development of the Company, the Supervisory Committee is prepared to continue
strengthening its supervisory efforts in the future.
By Order of the Supervisory Committee
Liang Hua Fu
Chairman of the Supervisory Committee
Guangzhou, the PRC
14 March, 2003
Report of the International Auditors
REPORT OF THE INTERNATIONAL AUDITORS
TO THE SHAREHOLDERS OF CHINA SOUTHERN AIRLINES COMPANY LIMITED (Established in
the People's Republic of China with limited liability)
We have audited the financial statements on pages 43 to 108 which have been
prepared in accordance with International Financial Reporting Standards
promulgated by the International Accounting Standards Board.
Respective responsibilities of Directors and Auditors
The Company's directors are responsible for the preparation of financial
statements which give a true and fair view. In preparing financial statements
which give a true and fair view it is fundamental that appropriate accounting
policies are selected and applied consistently, that judgements and estimates
are made which are prudent and reasonable and that the reasons for any
significant departure from applicable accounting standards are stated.
It is our responsibility to form an independent opinion, based on our audit, on
those financial statements and to report our opinion to you.
Basis of opinion
We conducted our audit in accordance with Statements of Auditing Standards
issued by the Hong Kong Society of Accountants. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures in the
financial statements. It also includes an assessment of the significant
estimates and judgements made by the directors in the preparation of the
financial statements, and of whether the accounting policies are appropriate to
the Company's and the Group's circumstances, consistently applied and adequately
disclosed.
We planned and performed our audit so as to obtain all the information and
explanations
which we considered necessary in order to provide us with sufficient evidence to
give reasonable assurance as to whether the financial statements are free from
material misstatement. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements. We
believe that our audit provides a reasonable basis for our opinion.
Opinion
In our opinion, the financial statements give a true and fair view of the state
of affairs of the Company and of the Group as at 31 December, 2002 and of the
Group's profit and cash flows for the year then ended and have been properly
prepared in accordance with International Financial Reporting Standards
promulgated by the International Accounting Standards Board and the disclosure
requirements of the Hong Kong Companies Ordinance.
KPMG
Certified Public Accountants
Hong Kong
14 March, 2003
CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the year ended 31 December, 2002
(Expressed in Renminbi)
2002 2001
Note RMB'000 RMB'000
---- ---------- ----------
Operating revenue:
Traffic revenue 17,481,892 16,461,532
Other revenue 536,728 418,126
---------- ----------
Total operating revenue 3 18,018,620 16,879,658
= ========== ==========
Operating expenses:
Flight operations 6,732,543 6,905,628
Maintenance 2,333,419 2,014,579
Aircraft and traffic servicing 2,511,284 2,297,521
Promotion and sales 1,499,587 1,540,780
General and administrative 1,060,010 892,233
2002 2001
Note RMB'000 RMB'000
---- ---------- ----------
Depreciation and amortisation 1,839,871 1,814,974
Other 15,829 13,270
---------- ----------
Total operating expenses 4 15,992,543 15,478,985
= ========== ==========
Operating profit 2,026,077 1,400,673
Non-operating income/(expenses):
Share of associated companies' results 36,988 53,077
Share of jointly controlled entities' results 14 (3,352) (4,034)
Gain/(loss) on sale of fixed assets 5 170,740 (55,889)
Interest income 52,618 49,878
Interest expense 4 (959,193) (933,717)
Exchange (loss)/gain, net (175,451) 296,777
Other, net (9,328) (11,509)
--------- --------
Total net non-operating expenses (886,978) (605,417)
========= ========
Profit before taxation and minority interests 4 1,139,099 795,256
Taxation 7 (398,227) (320,519)
--------- --------
Profit before minority interests 740,872 474,737
Minority interests (165,111) (134,512)
--------- --------
Profit attributable to shareholders 575,761 340,225
--------- --------
Basic earnings per share 9 RMB0.17 RMB0.10
--------- --------
The notes on pages 51 to 108 form part of these financial statements.
(CHINA SOUTHERN AIRLINES COMPANY LIMITED LOGO) (CHINESE TRANSLATION
OF COMPANY'S NAME)
CHINA SOUTHERN AIRLINES COMPANY LIMITED
(a joint stock limited company incorporated in the People's Republic of China
with limited liability)
ATTACHMENT A
REPLY SLIP
TO: CHINA SOUTHERN AIRLINES COMPANY LIMITED
I/we intend to attend (in person/by proxy)(1) the AGM of the Company to be held
on 13 May, 2003.
Name(2) ________________________________________________________________________
Number of ordinary shares registered in my name(3) _____________________________
Identity card/passport number(1),(4) ___________________________________________
Share account number ___________________________________________________________
Mailing address ________________________________________________________________
Telephone number _______________________________________________________________
Signature(5): ___________________________ Date: ______________________ 2003
Notes:
(1) Please delete the option which is not applicable.
(2) Please insert your full name in both English and Chinese in block
capital letters.
(3) Please attach a photocopy of proof of ownership of your shares.
(4) Please attach a photocopy of your identity card/passport.
(5) This reply slip must be signed by the registered shareholder. If the
registered shareholder is a company or an organization, then this reply
slip must be sealed with the common seal of such company or organization
or under hand by any directors or agents duly appointed by such company
or organization.
(CHINA SOUTHERN AIRLINES COMPANY LIMITED LOGO) (CHINESE TRANSLATION OF
COMPANY'S NAME)
CHINA SOUTHERN AIRLINES COMPANY LIMITED
(a joint stock limited company incorporated in the People's Republic of China
with limited liability)
ATTACHMENT B
The number of H Shares to which this
proxy form relates(1)
FORM OF PROXY FOR ANNUAL GENERAL MEETING
I/We(2),
------------------------------------------------------------------------,
holder of share account number
-------------------------------------------------,
residing at
--------------------------------------------------------------------,
being the registered holder of(3)
----------------------------------------------,
ordinary shares of the Company, HEREBY APPOINT(4)
------------------------------,
residing at
--------------------------------------------------------------------.
as my/our proxy/proxies to attend on my/our behalf the AGM of the Company to be
held at the Company's headquarters at Baiyun International Airport, Guangzhou,
PRC at 9:00 a.m., on 13 May, 2003 and to act and vote on my/our behalf at the
AGM in respect of the resolutions listed below, in accordance with my/our
instructions below(5).
ORDINARY RESOLUTIONS FOR AGAINST
-------------------- --- -------
1. To approve the Report of the Directors for the year 2002;
2. To approve the Report of the Supervisory Committee for the year 2002;
3. To approve the audited consolidated financial statements for the year 2002;
4. To approve the reappointment of KPMG as the international auditors and KPMG Huazhen
as the PRC auditors of the Company for the year 2003;
5. It is resolved, that appointments of Liu Ming Qi, Peng An Fa, Wang Quan
Hua, Zhao Liu An, Zhou Yong Qian, Wang Zhi, Sui Guang Jun, and that
resignations of Wong Shao Xi and Zhang Rui Ai as directors of the
Company and the authorisation by the Board of Directors to determine the
newly appointed directors' remuneration be hereby accepted;
6. To approve the authority for the A Share Issue as approved by the
resolutions (I) to (VI) passed at the second Extraordinary General
Meeting of the Company on 21 May 2002 be extended for one year from 21 May 2003;
7. To approve the Company's board of directors' authority to plan for and on behalf of
the Company all relevant matters relating to the A Share Issue be extended for 1 year
from 21 May 2003; and
8. To consider and approve the change of the Company's registered address to Guangzhou
Economic & Technological Development District, Guangzhou, Guangdong Province, China.
9. As special resolution, to consider and approve the passing of the following
resolution:
"That the Articles of Association of the Company be amended by adopting the
following Article to replace Article 2:
Article 2 Promoter of the Company: Southern Airlines (Group) (renamed as China Southern
Air Holding Company)
Registered Name of the Company:
(Company's Name in Chinese)
CHINA SOUTHERN AIRLINES COMPANY LIMITED" (English)
10. As special resolution, to consider and approve the passing of the following
resolution:
"That the Articles of Association of the Company be amended by adopting the
following Article to replace Article 3:
Article 3 The company's address:
Guangzhou Economic & Technological
Development District, Guangzhou
Guangdong Province
China
Telephone: (020) 86123303
Facsimile: (020) 86644623"
11. Subject to passing of the proposed resolutions in agenda item numbers
(8) to (10) herein, to consider and approve that the Board of Directors
be authorized to take such actions on behalf of the Company as it deems
necessary in order to give effect to such proposed resolutions.
12. To approve other matters, if any.
Signature(5): Date: 2003
----------------- ----------------------------------
Notes:
(1) Please insert the number of shares in the Company registered in your
name(s) and to which this proxy form relates. If no such number is
inserted, this form of proxy will be deemed to relate to all the shares
in the Company registered in your name(s).
(2) Please insert the name(s) and address(es) (as shown in the register of
members) in block capital(s).
(3) Please insert the number of all the Shares in the Company registered in
your name(s).
(4) If no person is appointed as proxy, the Chairman of the AGM will be
deemed to have been appointed by you as your proxy.
(5) If you wish to vote for any of the resolutions, please insert a "|X|" in
the box marked "FOR" or if you wish to vote against any of the
resolutions, please insert a "|X|" in the box marked "AGAINST" if no
indication is given, then your proxy/proxies may vote in such manner as
he/she/they think(s) fit.
(6) BIOGRAPHICAL DETAILS OF NEW DIRECTORS
LIU MING QI Mr. Liu graduated from the South China Normal University and
Fudan University with a Master degree in Economics. He is the party
secretary and vice president of China Southern Air Holding Company
("CSAHC"). Mr. Liu began his career in 1968. He has held positions such
as the party secretary, and Mayor of Sanya, vice governor of Hainan
Province, vice director of the Hong Kong and Macau Affairs Office of the
State Council, vice director of the Liaison Office of the Central
People's Government in Macau Special Administrative Region.
PENG AN FA Mr. Peng is a vice president of the CSAHC. He graduated from
the China Civil Aviation Flight College with major in Navigation, and
from South China Normal University with major in Chinese Language. He
began his career in civil aviation in 1969. He has held positions such
as navigation director of the Sixth Fleet, vice party secretary and
party secretary of CAAC. He was party secretary of the Aviation
Department of the SA Group in July 1994, president and deputy party
secretary of the Shenzhen Company of the SA Group in March 1998 and vice
president of the SA Group from August 2001 to October 2002. Mr. Peng is
concurrently the deputy chairman of Shenzhen Air Catering Company
Limited and CNAC (Hong Kong) Co., Ltd.
WANG QUAN HUA Mr. Wang is a vice president of CSAHC. He graduated from
the Economics and Management Department of the Central Party School. He
began his career in civil aviation in 1972. He has held positions such
as director of Planning Department of Guangzhou Civil Aviation
Administration, office director of Shenzhen Company of CSAHC, director
of Planning and Operation Division of CSAHC, president of Planning and
Development Division of China Southern Airlines Company Limited, and
vice president of the SA Group.
ZHAO LIU AN Mr. Zhao is a vice president of CSAHC and the president of
Xinjiang Airlines. He began his career in civil aviation in 1966. He has
held positions such as director of the Flight Meteorology and Safety
Monitoring Division, director of Scientific Education Division, director
of Aviation Standard Division, Chief captain of the ninth Squadron of
the Civil Aviation Administration, vice president and he is currently a
president of Urumqi Civil Aviation Administration. He was a vice
president and was later promoted to the position of president of
Xinjiang Airlines.
ZHOU YONG QIAN Mr. Zhou is a vice president of CSAHC and the president
of Northern Airlines. He graduated from Nan Jing Institute of
Meteorology College and began his career in civil aviation in 1990. He
has held positions such as director of Organization Department of the
Northeast China Civil Aviation Administration, deputy party secretary of
Taoxian International Airport of Shenyang, deputy party secretary of
Northeast China Civil Aviation Administration and party secretary of
Northern Airlines.
WANG ZHI Mr. Wang is a nominee of independent non-executive director of
the Company. He graduated from Harbin Institute of Technology
specializing in Airplane Design and began his career in 1965. He has
held positions such as director and senior engineer of Civil Aviation
Research Institute of China, vice president and deputy secretary of
Civil Aviation First Research Institute, deputy chief and chief of the
Planning Division of the CAAC, chief of Planning and Technology
Restructuring Division and Planning and Technology Division of the CAAC.
Mr. Wang also holds professor positions in several universities.
SUI GUANG JUN Mr. Sui is a nominee of independent non-executive director
of the Company. He graduated from the Department of Economics of Jinan
University with a Master degree in 1986. He obtained a Doctorate degree
in the Department of Business Administration of Jinan University in
1996. Mr. Sui has held positions such as deputy director of Institute of
Economy of Hongkong, Macau & Special Economic Zone and Dean of the
Department of Business Administration in Jinan University. He is
currently the head of the Postdoctoral Research Station of Applied
Economic and President of Management Institute in Jinan University.
(7) This form of proxy must be signed by you or your attorney duly
authorised in writing or, in the case of a company or an organization,
either under the common seal or under the hand of any director or
attorney duly authorised in writing. In any event, the execution shall
be made in accordance with the articles of association of such company
or organization.
(8) To be valid, this proxy form and, if such proxy form is signed by a
person under a power of attorney or authority on behalf of the
appointer, a notarised copy of that power of attorney or other
authority, must be delivered to Hong Kong Registrars Limited at Room
1901-5, 19th Floor, Hopewell Centre, 183 Queen's Road East, Hong Kong in
not less than 24 hours before the time appointed for the holding of the
AGM.
(9) A proxy, on behalf of the Shareholder, attending AGM shall bring along
the proxy form duly completed and signed as well as the proof of
identification of the proxy, in the case of a company or an
organization, the proxy shall also bring along a notarised copy of the
resolution of the board of directors or other governing body of the
appointer or a letter of authorization.
(10) This proxy form shall be completed in form of a set of two copies, one
of which shall be lodged to the Company pursuant to Note 7; and the
other copy shall be produced upon the AGM by the proxy of the
Shareholder pursuant to Note 8.
(11) Completion and return of the form of proxy will not preclude you from
attending and voting in person at the AGM or any adjourned AGM should
you so which to.