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 September, 2005
CHINA SOUTHERN AIRLINES COMPANY LIMITED
(Translation of registrant's name into English)
Jichang Road
Guangzhou, Guangdong 510405
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
September 2, 2005 distributed its Interim Report for the six months ended June
30, 2005, in English and Chinese to its shareholders. A copy of the Interim
Report (in English) is included in this Form 6-K of the Company.
[PICTURE]
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 1
All Shareholders:
The Board of Directors of China Southern Airlines Company Limited (the
"Company") hereby announces the unaudited operating results of the Company and
its subsidiaries (collectively, the "Group") for the six months ended 30 June
2005.
INTRODUCTION
The Group is one of the largest airlines in the People's Republic of China
("PRC") in terms of volume of passenger traffic, number of scheduled flights per
week, number of hours flown, route networks and size of aircraft fleet. The
Group operates the most extensive route network among all PRC airlines. As of 30
June 2005, the Group operated a total of 498 routes, of which 399 were domestic,
26 were Hong Kong regional and 73 were international. For the six months ended
30 June 2005, the Group operated an average of 7,929 scheduled flights per week,
serving 134 cities. As of 30 June 2005, the Group operated a fleet of 242
aircraft, of which 136 were Boeing aircraft and 56 were Airbus aircraft. The
average age of the fleet was 8.68 years as of 30 June 2005.
BUSINESS OVERVIEW
With the continuous and steady growth of the PRC economy and the nation's "Go
West" and "Revitalising the Old Industrial Bases in the North-eastern Region"
strategies, coupled with the effects of joint restructuring of domestic
airlines, the Company is faced with new challenges under a market environment
which is full of opportunities. On 31 December 2004, the acquisition of the
airline operations and certain related assets of China Northern Airlines Company
("CNA") and Xinjiang Airlines Company ("XJA") ("CNA/XJA Acquisition") was
approved at an extraordinary general meeting of the Company, which completed the
restructuring exercise. The Group has benefited from this acquisition through
increased economies of scale and transportation capacity.
However, escalating oil prices continued to drive up the jet fuel prices, which
directly increased the operating costs of the Company significantly. In
addition, the competition in the domestic civil aviation market was very
intensive, leading to an unstable yield. Furthermore, after the restructuring of
the Group, it would take a period of time for the benefits of business
integration to materialise and for business synergy to take effect. As a result,
the Company recorded a net loss of RMB907 million during the first half of the
year.
During the first half year of 2005, the Group managed to maintain a consistently
high level of flight safety standard to further implement the integration of
management of the Group and to complete a stable transition. Notwithstanding
challenges like the period required for reorganisation of the management and
personnel of the Group after the CNA/XJA Acquisition, the enlarged scale of
management and difficulties associated therewith, and the increasingly intensive
competition in the aviation and air freight market, the Company has handled
these challenges with care and plan, and further implemented the development
strategies of the Company.
With the approval of the Board, the Company and Centergate Securities Co., Ltd
mutually agreed to the early termination of the assets management agreement. As
of 30 May 2005, the Company recovered the full investment principal sum of
RMB500,000,000 and the investment return of RMB12,904,110.
For the period under review, the Group's total traffic revenue was RMB17,443
million, an increase of RMB6,609 million or 61.0% from the same period last
year. Meanwhile, the Group's total traffic volume increased by 52.9% to 3,343
million RTKs. The aggregate utilisation rate of the Group's Boeing and Airbus
aircraft was 9.87 hours per day for the period under review, an increase of 0.47
hours or 5.0% from the same period last year.
2 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
Passenger revenue for the period under review was RMB15,967 million, up 63.3%
from the same period last year, representing 91.5% of the Group's total traffic
revenue. Passenger traffic volume increased by 65.2% to 28,478 million RPKs.
Domestic passenger revenue was RMB12,956 million, up 64.4% from the same period
last year. Domestic passenger revenue accounted for 81.1% of overall passenger
revenue. Passenger capacity, in terms of ASKs, increased by 68.0% while
passenger traffic volume, in terms of RPKs, increased by 72.1% from the same
period last year, resulting in an increase in passenger load factor of 1.7
percentage points to 69.4%. The passenger yield per RPK decreased by 5.2% from
RMB0.58 to RMB0.55, resulting from intensive competition in the domestic market.
On Hong Kong regional routes, the Group recorded passenger revenue of RMB599
million, up 12.0% from the same period last year. Hong Kong regional passenger
revenue accounted for 3.8% of total passenger revenue. Passenger capacity, in
terms of ASKs, increased by 22.9% while passenger traffic volume, in terms of
RPKs increased by 21.3% from the same period last year, resulting in a decrease
in passenger load factor of 0.8 percentage points to 61.1%. The passenger yield
per RPK decreased by 7.5% to RMB0.86 as more chartered flights were rendered
during the period under review.
Passenger revenue for the Group's international routes amounted to RMB2,412
million, an increase of 77.5% from the same period last year. International
passenger revenue accounted for 15.1% of total passenger revenue. Passenger
capacity, in terms of ASKs, increased by 39.5% while passenger traffic volume,
in terms of RPKs, increased by 42.3% from the same period last year, resulting
in an increase in passenger load factor of 1.3 percentage points to 63.5%. The
passenger yield per RPK increased by 24.4% to RMB0.56 mainly due to upward fare
adjustment on certain routes during the period under review.
Cargo and mail revenue was RMB1,476 million, an increase of 39.5% from the same
period last year. Cargo and mail revenue accounted for 8.5% of total traffic
revenue. Cargo and mail volume grew by 24.5% to 804 million RTKs from the same
period last year, mainly due to the increase in traffic volume. The overall
yield per cargo and mail tonne kilometre increased by 12.2% to RMB1.84, mainly
due to an increase in fares during the period under review.
The Group's other revenue amounted to RMB401 million, an increase of 54.2% from
the same period last year, primarily due to increases in ground service income
of RMB72 million, as a result of the increase in traffic volume.
Total operating expenses increased by 76.6% to RMB18,260 million from the same
period last year, primarily due to the general increases in fuel cost, aircraft
repairs and maintenance expenses, landing and navigation fees and commission
expenses resulting from the increase in traffic volume during the period under
review.
Flight operations expenses increased by 92.4% to RMB9,084 million from the same
period last year. Of these expenses, fuel cost was RMB5,549 million, up 104.6%
from the same period last year, mainly as a result of increases in fuel
consumption and fuel prices. Aircraft insurance costs increased by 48.2% to
RMB126 million, primarily resulted from the fleet expansion subsequent to the
CNA/XJA Acquisition. Operating lease payments increased by 43.0% to RMB1,184
million, mainly attributable to additional rental payments for new aircraft
under operating leases. Air catering expenses increased by 72.4% to RMB538
million, primarily as a result of an increase in number of passengers carried
during the period under review. Labour costs for flight personnel increased by
65.8% to RMB814 million, largely due to an increase in flying hours.
Maintenance expenses increased by 64.5% to RMB2,320 million, due mainly to
increases in aircraft overhaul charges and routine maintenance costs resulting
from the increase in flying hours during the period under review.
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 3
Aircraft and traffic servicing expenses increased by 51.6% to RMB2,560 million
from the same period last year, reflecting primarily an increase in number of
landing and takeoffs.
Promotion and sales expenses increased by 39.6% to RMB1,220 million from the
same period last year, primarily as a result of an increase in traffic volume.
General and administrative expenses increased by 65.2% to RMB912 million from
the same period last year, due mainly to an increase in the scale of operations.
As compared with the same period last year, depreciation and amortisation
expenses increased by 93.4% to RMB2,094 million, reflecting primarily the effect
of the fleet expansion through the CNA/XJA Acquisition and scheduled aircraft
delivered during the second half of 2004 and the period under review.
Interest expense increased by 118.0% to RMB750 million in the period under
review, primarily reflecting an increase in the balance of loan borrowings and
the increase in LIBOR rate, while 46.5% of the Group total borrowings are
subject to LIBOR rate.
The Group recorded a net exchange gain of RMB197 million, predominantly relating
to its Japanese yen denominated borrowings as a result of the depreciation of
Japanese Yen during the period under review. The major part of such amount
represented unrealised translation gain.
As a result of the aforementioned factors, for the six months ended 30 June
2005, the Group recorded a net loss attributable to equity holders of the parent
of RMB907 million, as compared to a net profit attributable to equity holders of
the parent of RMB266 million for the same period last year.
LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE
As of 30 June 2005, the Group's borrowings totalled RMB42,933 million, an
increase of RMB7,601 million from RMB35,332 million as of 31 December 2004. The
majority of such borrowings were denominated in United States dollars and, to a
smaller extent, in Japanese yen and Hong Kong dollars, with a significant
portion being fixed interest rate borrowings. As of 30 June 2005, cash and cash
equivalents of the Group totalled RMB5,632 million, an increase of RMB2,549
million from RMB3,083 million as of 31 December 2004. Of such balance, 30.8% was
denominated in foreign currencies. Net debts (total borrowings net of cash and
cash equivalents) increased by 15.7% to RMB37,301 million from RMB32,249 million
as of 31 December 2004.
As of 30 June 2005, the equity attributable to equity holders of the parent
amounted to RMB10,941 million, a decrease of RMB907 million from RMB11,848
million as of 31 December 2004, reflecting the net loss recorded for the period
under review.
Net debt/equity ratio of the Group as of 30 June 2005 was 3.41 times, as
compared to 2.72 times as of 31 December 2004.
4 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
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 is mainly attributable to its debts denominated in foreign
currencies. Depreciation or appreciation of the Renminbi against foreign
currencies could affect the Group's results and financial position
significantly, as 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, by entering into
forward foreign exchange contracts with authorised PRC banks.
On 21 July 2005, the People's Bank of China ("PBOC") announced that the PRC
government reformed the exchange rate regime by moving into a managed floating
exchange rate regime based on market supply and demand with reference to a
basket of foreign currencies. In particular, the exchange rate of US dollar
against Renminbi was adjusted upward to RMB8.11 per US dollar with effect from
the close of business on 21 July 2005. The Group considers that the above
appreciation of Renminbi would not have adverse financial impacts to its
operation.
The Group is required to procure a majority of its jet fuel domestically at PRC
spot market prices. There are currently no effective means available to the
Group for managing its exposure associated with the fluctuations in domestic jet
fuel prices.
CHARGES ON ASSETS
As of 30 June 2005, certain aircraft of the Group with an aggregate carrying
value of approximately RMB25,268 million (as of 31 December 2004: RMB23,562
million) were mortgaged under certain loan and lease agreements.
CAPITAL AND INVESTING COMMITMENTS
As of 30 June 2005, the Group had capital commitments of approximately RMB40,605
million. Of such amounts, RMB37,429 million was related to the acquisition of
aircraft and related flight equipment and RMB820 million was related to the
Group's facilities and equipment to be constructed and installed at the new
Guangzhou Baiyun International Airport. The remaining amount of RMB2,356 million
was related to the Group's other airports and office facilities and equipment,
overhaul and maintenance bases and training facilities.
As of 30 June 2005, the Group was committed to making a capital contribution of
approximately RMB61 million and RMB83 million to its subsidiaries and jointly
controlled entities respectively.
CONTINGENT LIABILITIES
There have been no material adverse changes in the contingent liabilities of the
Group since 31 December 2004.
RECENT ECONOMIC DEVELOPMENT
Upon approval from the Board, the Company will set up its Beijing branch in
Tianzhu Airport Industrial Zone, Beijing. The Company believes that with the
integration of the Group's core business, the Company's business development in
Beijing Capital International Airport will provide a better hub base for the
Group's existing Azure Big Delta (Guangzhou, Shenyang and Urumqi) network
services. Meanwhile, the Group can also take an active role in and share the
opportunities arising from the Beijing Olympics Games 2008.
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 5
Following the announcement by the PBOC on the changes in the Renminbi foreign
exchange rate system on 21 July 2005, the Company will benefit from the Renminbi
appreciation as it finances its aircraft acquisitions and conducts other
transactions in US dollar e.g. jet fuel, lease of aviation equipment,
acquisition and major repair, and it still has a substantial amount of debt in
US dollar. In addition, landing fees for international flights are denominated
in foreign currencies making the Company a beneficiary of the appreciation of
Renminbi. Reminbi appreciation will also bring a one-off exchange gain to the
Group and reduce its operating costs which are denominated in foreign
currencies. On the other hand, the Group faces greater challenge from
international routes.
According to "Notice of the National Development and Reform Commission (NDRC)
and the General Administration of Civil Aviation of China (CAAC) Concerning the
Relevant Questions on Collecting Fuel Surcharge to Domestic Routes", effective
from 1 August 2005 (flight time), airlines are allowed to impose fuel surcharge
on all domestic routes (other than routes between Mainland to Hong Kong and
Macau). The resumption of fuel surcharge collection will ease the Group's burden
due to the jet fuel cost.
PROSPECTS FOR THE SECOND HALF
Global airline industry has been badly hit by soaring jet fuel prices. As a
result of the three times increases in domestic jet fuel prices, the Group's jet
fuel cost has accounted for 30% of total costs. The Group intends to meet the
challenges by using its economies of scale operation and strict control over
operating costs increase, so as to reduce the impact brought by the persistently
high oil prices.
The enlarged scale of the Group due to its joint restructuring will provide more
opportunities for the development of the Company's business and operations. The
Group will adjust its flight network by increasing traffic capacity to fill in
any deficiencies in its routes, and will maintain or increase domestic and
regional market shares. The Group believes that its leading position in the
civil aviation industry can be assured by speeding up integration of flight
networks and capacity to realize the objectives of network operation, and also
through innovation, refinement and enhancement of incentive mechanism.
The Company will continue to implement strict costs control and raise its
overall synergy benefits.
DIVIDENDS
The Board of Directors does not propose to declare an interim dividend for the
year 2005.
6 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
STRUCTURE OF SHARE CAPITAL
As of 30 June 2005, the share capital of the Company comprised 4,374,178,000
shares, of which approximately 50.30% or 2,200,000,000 State-owned Shares were
held by China Southern Air Holding Company ("CSAHC"), approximately 22.86% or
1,000,000,000 A Shares were held by the PRC investors and approximately 26.84%
or 1,174,178,000 H Shares were held by Hong Kong and overseas investors.
PERCENTAGE TO THE
NUMBER OF TOTAL SHARE CAPITAL
CATEGORY OF SHARES SHARES HELD (%)
State-owned Shares (held by CSAHC) 2,200,000,000 50.30%
H Shares 1,174,178,000 26.84%
A Shares 1,000,000,000 22.86%
------------- ------
Total share capital 4,374,178,000 100.00%
============= ======
SUBSTANTIAL SHAREHOLDERS
As of 30 June 2005, to the knowledge of the directors, chief executive and
supervisors of the Company, the interests and short positions of the following
persons other than the directors, chief executives or supervisors in the shares
and underlying shares of the Company as recorded in the register of the Company
required to be kept under section 336 of the Securities and Futures Ordinance
(the "SFO") or otherwise persons who have an interest of 10% or more in the
Company's shares are as follows:
% OF
% OF THE TOTAL
THE TOTAL ISSUED
ISSUED SHARE
H SHARES CAPITAL
NAME OF TYPE OF TYPE OF NUMBER OF OF THE OF THE SHORT
SHAREHOLDER SHAREHOLDING SHARE SHARES HELD COMPANY COMPANY POSITION
CSAHC Direct holding Domestic share 2,200,000,000 - 50.30% -
HKSCC Nominees
Limited Direct holding H share 1,150,918,998 98.0% 26.31% -
Notes:
Based on the information available to the directors, chief executive and
supervisors of the Company (including such information as was available on the
website of the Stock Exchange) and so far as the directors, chief executive and
supervisors are aware, as at 30 June 2005:
1. Among the 1,150,918,998 H Shares held by HKSCC Nominees Limited, Li
Ka-Shing Unity Trustcorp Limited had an interest in an aggregate of
193,877,000 H Shares of the Company (representing approximately 16.51% of
its then total issued H Shares) in the capacity as beneficiary of a trust.
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 7
2. Among the 1,150,918,998 H Shares held by HKSCC Nominees Limited, J.P.
Morgan Chase & Co. had an interest in an aggregate of 164,098,800 H Shares
of the Company (representing approximately 13.98% of its then total issued
H Shares). Out of the 164,098,800 H Shares, J.P. Morgan Chase & Co. had an
interest in a lending pool comprising 76,962,000 H Shares of the Company
(representing approximately 6.55% of its then total issued H Shares).
According to the information as disclosed in the website of the Stock
Exchange and so far as the directors, chief executive and supervisors are
aware, J.P. Morgan Chase & Co. held its interest in the Company in the
following manners:
(a) 76,962,000 H Shares in a lending pool, representing approximately
6.55% of the Company's then total issued H Shares, were held by J.P.
Morgan Chase Bank N.A., which was 100% held by J.P. Morgan Chase &
Co.;
(b) 1,064,800 H Shares, representing approximately 0.09% of the
Company's then total issued H Shares, were held in the capacity as
beneficial owner by J.P. Morgan Whitefriars Inc., which was
ultimately 100% held by J.P. Morgan Chase & Co.;
(c) 83,512,000 H Shares, representing approximately 7.11% of the
Company's then total issued H Shares, were held in the capacity as
investment manager by JF Asset Management Limited, which was
approximately 99.99% held by J.P. Morgan Fleming Asset Management
(Asia) Inc., which was ultimately 100% held by J.P. Morgan Chase &
Co.; and
(d) 2,560,000 H Shares, representing approximately 0.22% of the
Company's then total issued H Shares, were held in the capacity as
beneficial owner by JF International Management Inc., which was
ultimately 100% held by J.P. Morgan Chase & Co..
3. Among the 1,150,918,998 H Shares held by HKSCC Nominees Limited, Morgan
Stanley International Incorporated had an interest in an aggregate of
111,121,932 H Shares of the Company (representing approximately 9.46% of
its then total issued H Shares). According to the information as disclosed
on the website of the Stock Exchange and so far as the directors, chief
executive and supervisors are aware, Morgan Stanley International
Incorporated which was (or its directors were) accustomed to act in
accordance with the directors of Morgan Stanley, held its indirect
interest in the Company in the manner as follows:
(a) 743,332 H Shares, representing approximately 0.06% of the Company's
then total issued H Shares, were held by Morgan Stanley Dean Witter
Hong Kong Securities Limited, which was ultimately 100% held by
Morgan Stanley Asia Pacific (Holdings) Limited, which, in turn, was
90% held by Morgan Stanley International Incorporated;
(b) 108,670,000 H Shares, representing approximately 9.25% of the
Company's then total issued H Shares, were held by Morgan Stanley
Investment Management Company, which was ultimately 100% held by
Morgan Stanley Asia Pacific (Holdings) Limited, which, in turn, was
90% held by Morgan Stanley International Incorporated;
(c) 292,600 H Shares, representing approximately 0.02% of the Company's
then total issued H Shares, were held by Morgan Stanley Asset &
Investment Trust Management Co. Limited, which was 100% held by
Morgan Stanley International Incorporated;
(d) 714,000 H Shares, representing approximately 0.06% of the Company's
then total issue H Shares, were held by Morgan Stanley & Co
International Limited, which was ultimately 100% held by Morgan
Stanley Group (Europe), which, in turn, was approximately 98.30%
held by Morgan Stanley International Limited, in which Morgan
Stanley International Incorporated held 100% control; and
(e) 702,000 H Shares, representing approximately 0.06% of the Company's
then total issued H Shares, were held by Morgan Stanley Capital
(Luxembourg) S.A., which was approximately 93.75% held by Morgan
Stanley International Incorporated.
According to the information as disclosed on the website of the Stock
Exchange and so far as the directors, chief executive and supervisors are
aware, Morgan Stanley Dean Witter Hong Kong Securities Limited also had a
short position in 616,000 H Shares of the Company (representing
approximately 0.05% of its then total issued H Shares).
4. Among the 1,150,918,998 H Shares held by HKSCC Nominees Limited,
96,938,500 H Shares, representing approximately 8.26% of the Company's
then total issued H Shares, were held by Space Dragon Limited as
beneficial owner, which was 100% held by Cheung Kong Investment Company
Limited.
5. Among the 1,150,918,998 H Shares held by HKSCC Nominees Limited,
96,938,500 H Shares, representing approximately 8.26% of the Company's
then total issued H Shares, were held by Choicewell Limited as beneficial
owner, which was ultimately 100% held by Hutchison Whampoa Limited.
Save as disclosed above, as at 30 June 2005, to the knowledge of the directors,
chief executive and supervisors of the Company, no other person (other than the
directors, chief executives or supervisors) had an interest or short positions
in the shares or underlying shares of the Company as recorded in the register of
the Company required to be kept under section 336 of the SFO or otherwise had an
interest of 10% or more in the Company's shares.
8 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
PURCHASE, SALE OR REDEMPTION OF SHARES
Neither the Company nor any of its subsidiaries purchased, sold or redeemed any
shares of the Company during the first half of 2005.
INTERESTS OF THE DIRECTORS AND SUPERVISORS IN THE EQUITY OF THE COMPANY
As of 30 June 2005, the interests and short positions of the directors, chief
executive and supervisors in the shares, underlying shares and/or debentures (as
the case may be) of the Company or its associated corporations (within the
meaning of Part XV of the SFO) which were required to be notified to the Company
and The Stock Exchange of Hong Kong Limited (the "Stock Exchange") pursuant to
SFO (including interest or short positions which are taken or deemed to have
under such provisions of the SFO), or recorded in the register maintained by the
Company pursuant to Section 352 of the SFO or which were required to be notified
to the Company and the Stock Exchange pursuant to the "Model Code for Securities
Transactions by Directors of the Listed Companies" in Schedule 10 of the Rules
Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited
(the "Listing Rules") are as follows:
% TO
THE TOTAL % TO
ISSUED THE TOTAL
THE SHARE ISSUED
COMPANY/ NUMBER CAPITAL H SHARES
ASSOCIATED TYPES OF TYPE OF OF SHARES OF THE OF THE SHORT
NAME CORPORATION INTEREST SHARE HELD COMPANY COMPANY POSITION
Simon To The Company Interest of H Shares 100,000 0.002% 0.009% -
spouse
(note 1)
Note 1: The spouse of Mr. Simon To is the owner of these 100,000 H shares of the
Company and accordingly, Mr. Simon To, is taken to be interested in
these 100,000 H Shares by virtue of the SFO.
Save as disclosed above, as of 30 June 2005, none of the directors, chief
executive or supervisors of the Company has interest or short position in the
shares, underlying shares and/or debentures (as the case may be) of the Company
or its associated corporations (within the meaning of the Part XV of the SFO)
which were notified to the Company and the Stock Exchange pursuant to SFO
(including interest or short positions which they are taken or deemed to have
under such provisions of the SFO), or recorded in the register maintained by the
Company pursuant to Section 352 of the SFO or which were notified to the Company
and the Stock Exchange pursuant to the "Model Code for Securities Transactions
by Directors of the Listed Companies" in Schedule 10 of the Listing Rules.
DESIGNATED DEPOSITS AND OVERDUE TIME DEPOSITS
As of 30 June 2005, 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.
THE MODEL CODE
Having made specific enquiries with all the directors of the Company, the
directors have for six months ended 30 June 2005 complied with the "Model Code
for Securities Transactions by Directors of Listed Issuers" as set out in
Appendix 10 of the Rules Governing the Listing of Securities on the Hong Kong
Stock Exchange (the "Listing Rules"). The Company has not adopted a code of
conduct less stringent than the "Model Code for Securities Transactions by
Directors of Listed Issuers" regarding securities transactions of the directors.
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 9
THE CODE OF CORPORATE GOVERNANCE PRACTICES
The Directors of the Company consider that, in the six months ended 30 June
2005, the Group was in compliance with the Code of Corporate Governance
Practices set out in Appendix 14 of the Listing Rules.
MATERIAL LITIGATION
The Company was involved in a civil litigation (Hong Kong High Court Action No.
515 of 2001) ("Litigation"). According to the writ of summons for the
Litigation, New Link Consultants Limited, the plaintiff, claimed against the
Group (as one of the defendants to the Litigation) on the basis of certain
evidence proving that United Aero-Supplies System of China, Limited ("UASSC")
entered into an agreement with the defendants for exclusive purchase of aviation
equipment consigned to UASSC for sale. As the defendants failed to perform the
agreement, UASSC should have the right to compensation. Since UASSC was in the
course of its winding up proceedings, all the rights and benefits of UASSC in
connection with the claim had been transferred to the plaintiff. The Company, as
one of the defendants to the Litigation was claimed for unspecified damages for
breach of the agreement. The Company filed an objection in respect of the
jurisdiction of the court, and has requested the court to transfer the case to
the PRC for trial. On 3 May 2004, the court made an award in favour of the
Company for the transfer to the PRC, against which the plaintiff has filed an
appeal.
In August 2005, the parties to the Litigation reached an out of court
settlement, pursuant to which the plaintiff will waive all its rights or
possible rights to commence proceedings, claims or appeals against the Company
in respect of the same matter.
By order of the Board of Directors
LIU SHAO YONG
Chairman of the Board of Directors
Guangzhou, the PRC
26 August 2005
10 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
DOCUMENTS AVAILABLE FOR INSPECTION AND ADDRESS FOR INSPECTION
DOCUMENT AVAILABLE FOR INSPECTION: Original copy of the Company's 2005 interim
report signed by the Chairman of the Board.
ADDRESS FOR INSPECTION: The Company Secretary Office of the China
Southern Airlines Company Limited, No. 278,
Ji Chang Lu, Guangzhou, the People's
Republic of China.
WEBSITE: www.cs-air.com
OPERATING DATA SUMMARY
FOR THE SIX MONTHS 2005 VS 2004
ENDED 30 JUNE INCREASE/
2005 2004 (DECREASE) (%)
CAPACITY
Available seat kilometres
(ASKs) (million)
- Domestic 33,833 20,141 13,692 68.0
- Hong Kong regional 1,138 926 212 22.9
- International 6,782 4,861 1,921 39.5
------- ------- ------
Total 41,753 25,928 15,825 61.0
======= ======= ======
Available tonne kilometres
(ATKs) (million)
- Domestic 3,885 2,333 1,552 66.5
- Hong Kong regional 127 103 24 23.3
- International 1,402 1,139 263 23.1
------- ------- ------
Total 5,414 3,575 1,839 51.4
======= ======= ======
Kilometres flown (thousand) 254,547 156,041 98,506 63.1
======= ======= ======
Hours flown (thousand) 400 242 158 65.3
======= ======= ======
Number of flight sectors
- Domestic 184,974 117,919 67,055 56.9
- Hong Kong regional 8,364 7,549 815 10.8
- International 12,826 7,548 5,278 69.9
------- ------- ------
Total 206,164 133,016 73,148 55.0
======= ======= ======
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 11
FOR THE SIX MONTHS 2005 VS 2004
ENDED 30 JUNE INCREASE/
2005 2004 (DECREASE) (%)
TRAFFIC
Revenue passenger kilometres
(RPKs) (million)
- Domestic 23,479 13,644 9,835 72.1
- Hong Kong regional 695 573 122 21.3
- International 4,304 3,025 1,279 42.3
------ ------ ------
Total 28,478 17,242 11,236 65.2
====== ====== ======
Revenue tonne kilometres
(RTKs) (million)
- Domestic 2,524 1,518 1,006 66.3
- Hong Kong regional 69 57 12 21.1
- International 750 611 139 22.7
------ ------ ------
Total 3,343 2,186 1,157 52.9
====== ====== ======
Passenger tonne kilometres
(million)
- Domestic 2,094 1,219 875 71.8
- Hong Kong regional 62 51 11 21.6
- International 383 270 113 41.9
------ ------ ------
Total 2,539 1,540 999 64.9
====== ====== ======
Cargo and mail tonne kilometres
(million)
- Domestic 430 299 131 43.8
- Hong Kong regional 7 6 1 16.7
- International 367 341 26 7.6
------ ------ ------
Total 804 646 158 24.5
====== ====== ======
Passengers carried (thousand)
- Domestic 18,115 11,825 6,290 53.2
- Hong Kong regional 739 671 68 10.1
- International 1,405 819 586 71.6
------ ------ ------
Total 20,259 13,315 6,944 52.2
====== ====== ======
12 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
FOR THE SIX MONTHS 2005 VS 2004
ENDED 30 JUNE INCREASE/
2005 2004 (DECREASE) (%)
Cargo and mail carried
(thousand tonne)
- Domestic 285 218 67 30.7
- Hong Kong regional 8 7 1 14.3
- International 55 42 13 31.0
---- ---- ----
Total 348 267 81 30.3
==== ==== ====
LOAD FACTORS
Passenger load factor
(RPK/ASK) (%)
- Domestic 69.4 67.7 1.7 2.5
- Hong Kong regional 61.1 61.9 (0.8) (1.3)
- International 63.5 62.2 1.3 2.1
Total 68.2 66.5 1.7 2.6
==== ==== ====
Average load factor
(RTK/ATK) (%)
- Domestic 65.0 65.1 (0.1) (0.2)
- Hong Kong regional 54.3 55.3 (1.0) (1.8)
- International 53.5 53.6 (0.1) (0.2)
Total 61.7 61.1 0.6 1.0
==== ==== ====
Breakeven load factor (%) 64.6 58.3 6.3 10.8
==== ==== ====
YIELD
Yield per RPK (RMB)
- Domestic 0.55 0.58 (0.03) (5.2)
- Hong Kong regional 0.86 0.93 (0.07) (7.5)
- International 0.56 0.45 0.11 24.4
Total 0.56 0.57 (0.01) (1.8)
==== ==== ====
Yield per cargo and
mail tonne kilometre (RMB) 1.84 1.64 0.20 12.2
==== ==== ====
Yield per RTK (RMB)
- Domestic 5.39 5.49 (0.10) (1.8)
- Hong Kong regional 9.29 9.98 (0.69) (6.9)
- International 4.28 3.15 1.13 35.9
Total 5.22 4.96 0.26 5.2
==== ==== ====
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 13
FOR THE SIX MONTHS 2005 VS 2004
ENDED 30 JUNE INCREASE/
2005 2004 (DECREASE) (%)
FLEET
Number of aircraft in service at period end
- Boeing 136 113 23 20.4
- Airbus 56 24 32 133.3
- McDonnell Douglas 36 - 36 100.0
- Embraer 6 2 4 200.0
- Others 8 - 8 100.0
----- ---- ----
Total 242 139 103 74.1
===== ==== ====
Aircraft utilisation rate
(hours per day)
- Boeing 10.30 9.60 0.70 7.3
- Airbus 9.34 9.27 0.07 0.8
Total 9.87 9.40 0.47 5.0
===== ==== ====
FINANCIAL
Operating cost per ASK (RMB) 0.44 0.40 0.04 10.0
Operating cost per ATK (RMB) 3.37 2.89 0.48 16.6
===== ==== ====
14 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
The Board of Directors of the Company hereby announces the unaudited
consolidated interim results of the Group for the six months ended 30 June,
2005, together with the comparative figures for the corresponding period of 2004
as follows:
A. PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS
("IFRS")
CONSOLIDATED INCOME STATEMENT
For the six months ended 30 June 2005 - unaudited
(Expressed in Renminbi)
FOR THE SIX MONTHS
ENDED 30 JUNE
2004
2005 RMB million
Note RMB MILLION (Note 2)
Operating revenue
Traffic revenue 17,443 10,834
Other operating revenue 401 260
-------- -------
Total operating revenue 3 17,844 11,094
-------- -------
Operating expenses
Flight operations 9,084 4,722
Maintenance 2,320 1,410
Aircraft and traffic servicing 2,560 1,689
Promotion and sales 1,220 874
General and administrative 912 552
Depreciation and amortisation 2,094 1,083
Other 70 8
-------- -------
Total operating expenses 18,260 10,338
-------- -------
Operating (loss)/profit (416) 756
-------- -------
Non-operating income/(expenses)
Interest income 17 9
Interest expense 4 (750) (344)
Share of associates' results (28) 21
Share of jointly controlled entities' results 24 4
(Loss)/profit on sale of property, plant and equipment (35) 3
Exchange gain, net 197 15
Other, net (34) 5
-------- -------
Total net non-operating expenses (609) (287)
-------- -------
(Loss)/profit before taxation 4 (1,025) 469
Taxation credit/(expense) 5 61 (95)
-------- -------
(Loss)/profit for the period (964) 374
======== =======
Attributable to
Equity holders of the parent (907) 266
Minority interests 2 (57) 108
-------- -------
(Loss)/profit for the period (964) 374
======== =======
Basic (loss)/earnings per share 7 (RMB0.21) RMB0.06
======== =======
The notes on pages 19 to 27 form part of this interim financial report.
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 15
CONSOLIDATED BALANCE SHEET
As at 30 June 2005 - unaudited
(Expressed in Renminbi)
As at
AS AT 31 December
30 JUNE 2004
2005 RMB million
Note RMB MILLION (Note 2)
NON-CURRENT ASSETS
Property, plant and equipment, net 8 50,478 46,841
Construction in progress 773 565
Lease prepayments 371 346
Interest in associates 402 429
Interest in jointly controlled entities 809 782
Other investments 290 272
Lease and equipment deposits 4,699 5,397
Deferred tax assets 68 -
Other assets 299 331
------- -------
58,189 54,963
------- -------
CURRENT ASSETS
Short term investments - 683
Inventories 1,505 1,302
Taxes recoverable 40 -
Trade receivables 9 1,271 1,203
Other receivables 976 616
Prepaid expenses and other current assets 418 378
Cash and cash equivalents 5,632 3,083
------- -------
9,842 7,265
------- -------
CURRENT LIABILITIES
Bank and other loans 13,282 11,518
Obligations under finance leases 2,397 2,144
Trade payables 10 2,334 1,554
Bills payable 2,760 136
Sales in advance of carriage 899 874
Taxes payable - 39
Amounts due to related companies 106 2,330
Accrued expenses 4,590 4,551
Other liabilities 3,246 2,974
------- -------
29,614 26,120
------- -------
NET CURRENT LIABILITIES (19,772) (18,855)
------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES 38,417 36,108
------- -------
NON-CURRENT LIABILITIES AND DEFERRED ITEMS
Bank and other loans 12,782 11,935
Obligations under finance leases 11,712 9,599
Provision for major overhauls 275 284
Deferred credits 370 100
Deferred tax liabilities 336 287
------- -------
25,475 22,205
------- -------
NET ASSETS 12,942 13,903
======= =======
The notes on pages 19 to 27 form part of this interim financial report.
16 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
CONSOLIDATED BALANCE SHEET (continued)
As at 30 June 2005 - unaudited
(Expressed in Renminbi)
As at
AS AT 31 December
30 JUNE 2004
2005 RMB million
Note RMB MILLION (Note 2)
CAPITAL AND RESERVES
Share capital 4,374 4,374
Reserves 11 6,567 7,474
------ ------
TOTAL EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT 10,941 11,848
MINORITY INTERESTS 2 2,001 2,055
------ ------
TOTAL EQUITY 12,942 13,903
====== ======
Approved and authorised for issue by the Board of Directors on 26 August 2005.
LIU SHAO YONG SI XIAN MIN XU JIE BO
Director Director Director
The notes on pages 19 to 27 form part of this interim financial report.
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 17
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the six months ended 30 June 2005 - unaudited
(Expressed in Renminbi)
ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT
---------------------------------------------------------------------------
SHARE SHARE OTHER RETAINED MINORITY TOTAL
CAPITAL PREMIUM RESERVES EARNINGS TOTAL INTERESTS EQUITY
Note RMB million RMB million RMB million RMB million RMB million RMB million RMB million
At 1 January 2004 2 4,374 5,325 611 1,586 11,896 1,673 13,569
Profit for the period - - - 266 266 108 374
Dividends - - - - - (60) (60)
Issue of share capital - - - - - 45 45
----- ----- --- ----- ------ ----- ------
At 30 June 2004 2 4,374 5,325 611 1,852 12,162 1,766 13,928
===== ===== === ===== ====== ===== ======
At 1 January 2005 2 4,374 5,325 672 1,477 11,848 2,055 13,903
Loss for the period - - - (907) (907) (57) (964)
Dividends - - - - - (9) (9)
Issue of share capital - - - - - 12 12
----- ----- --- ----- ------ ----- ------
AT 30 JUNE 2005 4,374 5,325 672 570 10,941 2,001 12,942
===== ===== === ===== ====== ===== ======
The notes on pages 19 to 27 form part of this interim financial report.
18 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
For the six months ended 30 June 2005 - unaudited
(Expressed in Renminbi)
FOR THE SIX MONTHS
ENDED 30 JUNE
2005 2004
RMB MILLION RMB million
Net cash inflows from operating activities 1,662 1,218
Net cash used in investing activities (692) (4,050)
----- -----
Net cash inflow/(outflow) before financing activities 970 (2,832)
Net cash inflows from financing activities 1,579 3,684
----- -----
Increase in cash and cash equivalents 2,549 852
Cash and cash equivalents as at 1 January 3,083 2,080
----- -----
Cash and cash equivalents as at 30 June 5,632 2,932
===== =====
The notes on pages 19 to 27 form part of this interim financial report.
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 19
NOTES:
1 BASIS OF PREPARATION
This interim financial report of China Southern Airlines Company Limited
(the "Company") and its subsidiaries (the "Group") has been prepared in
accordance with the applicable disclosure provisions of the Rules
Governing the Listing of Securities on The Stock Exchange of Hong Kong
Limited, including compliance with International Accounting Standard 34
"Interim Financial Reporting" ("IAS 34") adopted by the International
Accounting Standards Board ("IASB"). It was authorised for issuance on 26
August 2005.
The interim financial report has been prepared in accordance with the same
accounting policies adopted in the 2004 annual financial statements,
except for the change in presentation of financial statements arising from
the changes of International Financial Reporting Standards ("IFRS") that
is expected to be reflected in the 2005 annual financial statements.
Details of the changes are set out in note 2.
The preparation of an interim financial report in conformity with IAS 34
requires management to make judgements, estimates and assumptions that
affect the application of policies and reported amounts of assets and
liabilities, income and expenses on a year to date basis. Actual results
may differ from these estimates.
The interim financial report contains condensed consolidated financial
statements and selected explanatory notes. The notes include an
explanation of events and transactions that are significant to an
understanding of the changes in financial position and performance of the
Group since the 2004 annual financial statements. The condensed
consolidated interim financial statements and notes thereon do not include
all of the information required for full set of financial statements
prepared in accordance with IFRS. IFRS includes IAS and interpretations.
The interim financial report is unaudited, but has been reviewed by KPMG
in accordance with Statement of Auditing Standards 700, Engagements to
review interim financial reports, issued by the Hong Kong Institute of
Certified Public Accountants. KPMG's independent review report to the
Board of Directors is included on page 28.
The financial information relating to the financial year ended 31 December
2004 that is included in the interim financial report as being previously
reported information does not constitute the Group's annual financial
statements prepared under IFRS for that financial year but is derived from
those financial statements. The Group's annual financial statements for
the year ended 31 December 2004 are available at the Company's registered
office. The auditors have expressed an unqualified opinion on those
financial statements in their report dated 25 April 2005.
2 NEW AND REVISED IFRS
The IASB has issued a number of new and revised IFRS that are effective or
available for early adoption for accounting periods beginning on or after
1 January 2005. The Board of Directors has determined the accounting
policies to be adopted in the preparation of the Group's annual financial
statements prepared under IFRS for the year ending 31 December 2005, on
the basis of IFRS currently in issue.
The IFRS that will be effective or are available for voluntary early
adoption in the annual financial statements prepared under IFRS for the
year ending 31 December 2005 may be affected by the issue of additional
interpretation(s) or other changes announced by the IASB subsequent to the
date of issuance of this interim report. Therefore the policies that will
be applied in the Group's financial statements for that period cannot be
determined with certainty at the date of issuance of this interim
financial report.
20 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
2 NEW AND REVISED IFRS (continued)
The adoption of revised IAS 1, Presentation of financial statements and
IAS 27, Consolidated and separate financial statements, has resulted in a
change in presentation of minority interests in the financial statements:
In prior years, minority interests at the balance sheet date were
presented in the consolidated balance sheet separately from liabilities
and as deduction from net assets. Minority interests in the results of the
Group for the year were also separately presented in the consolidated
income statement as a deduction before arriving at the profit attributable
to shareholders.
With effect from 1 January 2005, in order to comply with IAS 1 and IAS 27,
minority interests at the balance sheet date are presented in the
consolidated balance sheet within equity, separately from the equity
attributable to the equity holders of the parent, and minority interests
in the results of the Group for the period are presented on the face of
the consolidated income statement as an allocation of the total profit or
loss for the period between the minority interests and the equity holders
of the parent.
The presentation of minority interests in the consolidated balance sheet,
income statement and statement of changes in equity for the comparative
period has been restated accordingly.
3 TURNOVER
The Group is principally engaged in the provision of domestic, Hong Kong
regional and international passenger, cargo and mail airline services,
with flights operating primarily from the Guangzhou Baiyun International
Airport in the People's Republic of China ("PRC"), which is both the main
hub of the Group's route network and the location of its corporate
headquarters.
Turnover comprises revenues from airline and airline-related businesses
and is stated net of sales tax.
Geographic information about the Group's turnover and operating
(loss)/profit are analysed as follows:
FOR THE SIX MONTHS ENDED 30 JUNE
HONG KONG
DOMESTIC REGIONAL INTERNATIONAL TOTAL
RMB million RMB million RMB million RMB million
2005
Traffic revenue 13,592 641 3,210 17,443
Other operating revenue 401 - - 401
------- --- ------ -------
Turnover 13,993 641 3,210 17,844
======= === ====== =======
Operating (loss)/profit (228) 28 (216) (416)
======= === ====== =======
2004
Traffic revenue 8,341 569 1,924 10,834
Other operating revenue 260 - - 260
------- --- ------ -------
Turnover 8,601 569 1,924 11,094
======= === ====== =======
Operating profit 605 39 112 756
======= === ====== =======
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 21
4 (LOSS)/PROFIT BEFORE TAXATION
FOR THE SIX MONTHS
ENDED 30 JUNE
2005 2004
RMB MILLION RMB million
(Loss)/profit before taxation is arrived at after charging:
Depreciation
- owned assets 1,603 815
- assets acquired under finance leases 491 255
Amortisation of deferred expenditure 30 13
Operating lease charges
- aircraft and flight equipment 1,184 828
Staff costs 1,776 1,061
Interest expense
Interest on bank and other loans 493 175
Finance charges on obligations under finance leases 302 186
Less: borrowing costs capitalised (45) (17)
Net interest expense 750 344
===== =====
and after crediting:
Net realised and unrealised gain on equity securities held for trading 1 -
===== =====
5 TAXATION (CREDIT)/EXPENSE
FOR THE SIX MONTHS
ENDED 30 JUNE
2005 2004
RMB MILLION RMB million
PRC income tax 5 28
Share of taxation of associates (1) 4
Share of taxation of jointly controlled entities (3) 5
--- --
1 37
Deferred taxation (62) 58
--- --
(61) 95
=== ==
The statutory income tax rate in the PRC is 33%. Pursuant to approval
documents issued by the relevant tax authorities, the Company and certain
airline subsidiaries of the Company are entitled to enjoy a preferential
tax rate of 15%.
In respect of the Group's overseas airline activities, the Group has
either obtained exemptions from overseas taxation pursuant to the
bilateral aviation agreements between the overseas governments and the PRC
government, or has sustained tax losses in these overseas jurisdictions.
Accordingly, no provision for overseas tax has been made for the periods
presented.
22 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
6 DIVIDENDS
The Board of Directors of the Company does not recommend the payment of an
interim dividend for the six months ended 30 June 2005 (six months ended
30 June 2004: Nil).
7 BASIC (LOSS)/EARNINGS PER SHARE
The calculation of basic (loss)/earnings per share is based on the
consolidated loss attributable to equity holders of the parent of RMB907
million (six months ended 30 June 2004: profit of RMB266 million) and the
weighted average number of shares in issue during the period of 4,374
million (six months ended 30 June 2004: 4,374 million).
The amount of diluted (loss)/earnings per share is not presented as there
were no dilutive potential ordinary shares in existence during the six
months ended 30 June 2004 and 2005.
8 PROPERTY, PLANT AND EQUIPMENT, NET
During the six months ended 30 June 2005, the Group acquired aircraft with
an aggregate cost of RMB5,168 million (six months ended 30 June 2004:
RMB1,382 million).
9 TRADE RECEIVABLES
Credit terms granted by the Group to sales agents and other customers
generally range from one to three months. An ageing analysis of trade
receivables, net of provision for doubtful accounts, is set out below:
AS AT As at
30 JUNE 31 December
2005 2004
RMB MILLION RMB million
Within 1 month 1,113 998
More than 1 month but less than 3 months 123 163
More than 3 months but less than 12 months 35 42
----- -----
1,271 1,203
===== =====
10 TRADE PAYABLES
An ageing analysis of trade payables is as follows:
AS AT As at
30 JUNE 31 December
2005 2004
RMB MILLION RMB million
Due within 1 month or on demand 917 599
Due after 1 month but within 3 months 582 430
Due after 3 months but within 6 months 835 525
----- -----
2,334 1,554
===== =====
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 23
11 RESERVES
No transfer to statutory surplus reserve, statutory public welfare fund
and discretionary surplus reserve has been made during the six months
ended 30 June 2005 (six months ended 30 June 2004: Nil).
12 COMMITMENTS
(a) Capital commitments
As at 30 June 2005, the Group had capital commitments as follows:
AS AT As at
30 JUNE 31 December
2005 2004
RMB MILLION RMB million
Commitments in respect of aircraft and related equipment
- authorised and contracted for 37,429 11,776
- authorised but not contracted for - 13,571
------ ------
37,429 25,347
------ ------
Commitments in respect of investments in the Guangzhou new airport
- authorised and contracted for 79 110
- authorised but not contracted for 741 714
------ ------
820 824
------ ------
Other commitments
- authorised and contracted for 57 132
- authorised but not contracted for 2,299 568
------ ------
2,356 700
------ ------
40,605 26,871
====== ======
(b) Investing commitments
As at 30 June 2005, the Group committed to make capital
contributions in respect of:
AS AT As at
30 JUNE 31 December
2005 2004
RMB MILLION RMB million
Subsidiaries 61 181
Jointly controlled entities 83 83
--- ---
144 264
=== ===
24 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
13 RELATED PARTY TRANSACTIONS
The Group obtained various operational and financial services provided by
China Southern Air Holding Company ("CSAHC"), the ultimate holding
company, and its subsidiaries, and the Group's associates and jointly
controlled entities during the normal course of its business.
(a) Significant transactions with related companies
The following is a summary of significant transactions carried out
in the normal course of business between the Group, CSAHC and its
subsidiaries, and the Group's associates and jointly controlled
entities:
FOR THE SIX MONTHS
ENDED 30 JUNE
2005 2004
RMB MILLION RMB million
EXPENSES
Paid to CSAHC and its subsidiaries
Handling charges 23 19
Sundry aviation supplies 35 26
Commission expenses 18 -
Housing benefits - 43
Lease charges for land and buildings 28 8
Lease charges for aircraft 5 -
Paid to associates and jointly controlled entities
Repairing charges 506 431
Flight simulation service charges 59 46
Interest expense 29 4
INCOME
Received from associates and jointly controlled entities
Interest income 3 1
Rental income 15 15
In addition to the above, certain subsidiaries of CSAHC also
provided hotel and other services to the Group during the periods
presented. The total amounts involved are not material to the
results of the Group for the periods.
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 25
13 RELATED PARTY TRANSACTIONS (continued)
(b) Amounts due to related companies
AS AT As at
30 JUNE 31 December
2005 2004
RMB MILLION RMB million
Jointly controlled entities (i) 13 340
CSAHC (ii) 93 1,990
(i) Amounts due to jointly controlled entities
Amounts due to jointly controlled entities mainly represent
amounts payable for repairing charges and other services.
The payable balances are unsecured, interest free and have
no fixed terms of repayment.
(ii) Amount due to CSAHC
The balance mainly represents remaining consideration
payable to CSAHC in respect of the Group's acquisition of
the airline operations and certain related assets of China
Northern Airlines Company and Xinjiang Airlines Company.
Amount due to CSAHC is unsecured, interest free and is
repayable within 6 months.
(c) Loans from Southern Airlines Group Finance Company Limited
Loans to the Group from Southern Airlines Group Finance Company
Limited, a PRC authorised financial institution controlled by CSAHC
and an associate of the Group, are unsecured and have the following
terms:
AS AT As at
30 JUNE 2005 31 December 2004
INTEREST RATE RMB MILLION RMB million GUARANTEE
Floating interest rates - 76 No guarantee
at 90% of interest rates
as published by the
People' s Bank of China
("PBOC"), repayable
within 1 year
Floating interest rates 300 180 Guaranteed by CSAHC
at 90% of interest rates
as published by the
PBOC, repayable
within 1 year
--- ---
300 256
=== ===
26 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
13 RELATED PARTY TRANSACTIONS (continued)
(d) Credit facilities provided by Southern Airlines Group Finance
Company Limited
As at 30 June 2005, bills payable arranged by Southern Airlines
Group Finance Company Limited amounted to RMB854 million (as at 31
December 2004: Nil).
(e) Bank balances and deposits placed with Southern Airlines Group
Finance Company Limited
As at 30 June 2005, the Group had bank balances and deposits placed
with Southern Airlines Group Finance Company Limited amounted to
RMB591 million (as at 31 December 2004: RMB406 million). The
applicable interest rates were determined in accordance with the
rates published by the PBOC.
(f) Key management personnel compensations
The key management personnel compensations are as follows:
FOR THE SIX MONTHS
ENDED 30 JUNE
2005 2004
RMB MILLION RMB million
Short-term employee benefits 2.3 1.8
Post-employment benefits 0.5 0.4
--- ---
2.8 2.2
=== ===
Directors and supervisors 1.6 1.6
Senior management 1.2 0.6
--- ---
2.8 2.2
=== ===
(g) Transactions with other state-owned enterprises
The Company is part of a larger group of companies under CSAHC,
which itself is owned by the PRC government. Other than the
transactions with CSAHC and its subsidiaries, the Group also
conducts business with other enterprises directly or indirectly
owned or controlled by the PRC government ("State-owned
enterprises"). The Group considers that the transactions with these
State-owned enterprises are conducted in the ordinary course of
business and under normal commercial terms and as such the Group has
not disclosed such activities as related party transactions.
14 CONTINGENT LIABILITIES
There have been no material adverse changes in contingent liabilities of
the Group subsequent to 31 December 2004, details of which are disclosed
in its 2004 annual financial statements.
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 27
15 POST BALANCE SHEET EVENTS
(a) Aircraft transactions
On 8 August 2005, the Group's subsidiary, Xiamen Airlines Company
Limited, entered into a purchase agreement with Boeing Company for
the purchase of 3 Boeing 787 aircraft, scheduled for deliveries in
2008 to 2010.
(b) Appreciation of Renminbi
On 21 July 2005, the PBOC announced that the PRC government reformed
the exchange rate regime by moving into a managed floating exchange
rate regime based on market supply and demand with reference to a
basket of foreign currencies. In particular, the exchange rate of US
dollar against Renminbi was adjusted upward to RMB8.11 per US dollar
with effect from the close of business on 21 July 2005. The
directors are of the opinion that the above appreciation of Renminbi
would not have adverse financial impacts to the Group for the year
ending 31 December 2005.
28 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
INDEPENDENT REVIEW REPORT TO THE BOARD OF DIRECTORS OF CHINA SOUTHERN AIRLINES
COMPANY LIMITED
INTRODUCTION
We have been instructed by the company to review the interim financial report as
set out on pages 14 to 27.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong
Limited require the preparation of an interim financial report to be in
compliance with the relevant provisions thereof and International Accounting
Standard 34 "Interim Financial Reporting" adopted by the International
Accounting Standards Board. The interim financial report is the responsibility
of, and has been approved by, the directors.
It is our responsibility to form an independent conclusion, based on our review,
on the interim financial report and to report our conclusion solely to you, as a
body, in accordance with our agreed terms of engagement, and for no other
purpose. We do not assume responsibility towards or accept liability to any
other person for the contents of this report.
REVIEW WORK PERFORMED
We conducted our review in accordance with Statement of Auditing Standards 700
"Engagements to review interim financial reports" issued by the Hong Kong
Institute of Certified Public Accountants. A review consists principally of
making enquiries of group management and applying analytical procedures to the
interim financial report and based thereon, assessing whether the accounting
policies and presentation have been consistently applied unless otherwise
disclosed. A review excludes audit procedures such as tests of controls and
verification of assets, liabilities and transactions. It is substantially less
in scope than an audit and therefore provides a lower level of assurance than an
audit. Accordingly, we do not express an audit opinion on the interim financial
report.
REVIEW CONCLUSION
On the basis of our review which does not constitute an audit, we are not aware
of any material modifications that should be made to the interim financial
report for the six months ended 30 June 2005.
KPMG
Certified Public Accountants
Hong Kong,
26 August 2005
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 29
B. PREPARED IN ACCORDANCE WITH THE PRC ACCOUNTING RULES AND REGULATIONS ("PRC
GAAP")
CONSOLIDATED INCOME STATEMENT
For the six months ended 30 June 2005 - unaudited
(Expressed in Renminbi)
FOR THE SIX MONTHS ENDED
30 JUNE
2005 2004
RMB MILLION RMB million
REVENUE FROM PRINCIPAL OPERATIONS 18,053 11,167
Less: Cost of principal operations 15,924 8,776
Business taxes and surcharges 518 318
----------- -----------
PROFIT FROM PRINCIPAL OPERATIONS 1,611 2,073
Add: Profit from other operations 240 95
Less: Selling expenses 1,290 870
Administrative expenses 862 478
Financial expenses 583 331
----------- -----------
OPERATING (LOSS)/PROFIT (884) 489
Add: Investment (loss)/income (10) 29
Non-operating income 23 48
Less: Non-operating expenses 57 25
----------- -----------
(LOSS)/PROFIT BEFORE INCOME TAX (928) 541
Less: Income tax (credit)/expenses (57) 88
Minority interests (28) 120
----------- -----------
NET (LOSS)/PROFIT FOR THE PERIOD (843) 333
=========== ===========
30 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
CONSOLIDATED BALANCE SHEET
As at 30 June 2005 - unaudited
(Expressed in Renminbi)
AS AT As at
30 JUNE 31 December
2005 2004
RMB MILLION RMB million
ASSETS
CURRENT ASSETS:
Cash at bank and on hand 5,844 3,274
Short-term investments - 669
Trade receivables 1,431 1,592
Other receivables 1,045 731
Advance payments 146 147
Inventories 1,639 1,398
Prepaid expenses 364 346
----------- -----------
TOTAL CURRENT ASSETS 10,469 8,157
----------- -----------
LONG-TERM EQUITY INVESTMENTS 726 741
----------- -----------
FIXED ASSETS:
Fixed assets, at cost 66,909 61,326
Less: Accumulated depreciation 15,647 13,706
----------- -----------
Net book value of fixed assets 51,262 47,620
Construction in progress 784 626
----------- -----------
TOTAL FIXED ASSETS 52,046 48,246
----------- -----------
OTHER ASSETS:
Lease and equipment deposits 4,748 5,397
Long-term deferred expenditure 113 131
Intangible assets 540 467
Long-term receivables 15 16
----------- -----------
TOTAL OTHER ASSETS 5,416 6,011
----------- -----------
DEFERRED TAXATION:
Deferred tax assets 70 55
----------- -----------
TOTAL ASSETS 68,727 63,210
=========== ===========
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 31
CONSOLIDATED BALANCE SHEET (continued)
As at 30 June 2005 - unaudited
(Expressed in Renminbi)
AS AT As at
30 JUNE 31 December
2005 2004
RMB MILLION RMB million
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term loans 11,666 10,173
Bills payable 2,760 137
Trade payables 2,561 2,600
Receipts in advance - 5
Sales in advance of carriage 899 874
Wages payable 123 179
Staff welfare payable 63 79
Taxes payable 271 324
Other creditors 718 495
Other payables 2,419 4,328
Accrued expenses 4,249 3,729
Dividend payable 39 -
Long-term liabilities due within one year 4,140 3,691
----------- -----------
TOTAL CURRENT LIABILITIES 29,908 26,614
----------- -----------
LONG-TERM LIABILITIES:
Long-term loans 13,139 12,324
Obligations under finance leases 11,604 9,538
Provision for major overhauls 275 284
Deferred credits 494 240
----------- -----------
TOTAL LONG-TERM LIABILITIES 25,512 22,386
----------- -----------
DEFERRED TAXATION:
Deferred tax liabilities 327 337
----------- -----------
TOTAL LIABILITIES 55,747 49,337
----------- -----------
MINORITY INTERESTS 2,158 2,220
----------- -----------
SHAREHOLDERS' EQUITY
Share capital 4,374 4,374
Capital reserve 5,813 5,801
Surplus reserves 672 672
Including: Statutory public welfare fund 193 193
(Accumulated loss)/ retained profits (37) 806
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 10,822 11,653
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 68,727 63,210
=========== ===========
32 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
NOTES:
1 SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies adopted by the Group in the
preparation of the financial statements conform to the Accounting
Standards for Business Enterprises and the "Accounting Regulations for
Business Enterprises" and other relevant regulations issued by the
Ministry of Finance ("MOF"). Pursuant to a notice Cai Kuai (2003) No. 18
from the MOF, the Group adopts the "Accounting Method for Civil Aviation
Enterprises" since 1 January 2003. The significant accounting policies
adopted in the preparation of these financial statements are set out
below:
(a) Accounting year
The accounting year of the Group is from 1 January to 31 December.
(b) Basis of consolidation
The consolidated financial statements have been prepared in
accordance with " Accounting Regulations for Business Enterprises "
and Cai Kuai Zi [1995] No. 11 " Provisional regulations on
consolidated financial statements " issued by the MOF.
The consolidated financial statements include the financial
statements of the Company and all of its principal subsidiaries.
Subsidiaries are those entities in which the Company has more than
50% equity interest or those entities controlled by the Company. The
consolidated income statement of the Company only includes the
results of the subsidiaries during the period when the Company has
more than 50% equity interest, or when the Company does not have
more than 50% equity interest, but has control over those entities.
The effect of minority interests on equity and profit/loss
attributable to minority interests are separately shown in the
consolidated financial statements. For those subsidiaries whose
assets and results of operations are not significant and have no
significant effect on the Group 's consolidated financial
statements, the Company does not consolidate these subsidiaries but
equity accounted in long term equity investment.
Where the accounting policies adopted by subsidiaries are different
from the policies adopted by the Company, the financial statements
of the subsidiaries have been adjusted in accordance with the
accounting policies adopted by the Company on consolidation. All
significant intercompany balances and transactions, and any
unrealised gains arising from inter-company transactions, have been
eliminated on consolidation.
For those jointly controlled entities which the Company has joint
control with other investors under contractual arrangements, the
Company consolidates their assets, liabilities, revenues, costs and
expenses based on the proportionate consolidation method according
to its percentage of equity interest holding in those entities in
the consolidated financial statements.
(c) Basis of preparation
The financial statements have been prepared on an accrual basis
under the historical costs convention, unless otherwise stated.
(d) Reporting currency
The financial statements are prepared in Renminbi.
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 33
1 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) Translation of foreign currencies
Foreign currency transactions during the year are translated into
Renminbi at the exchange rates quoted by the People's Bank of China
ruling at the transaction dates. Monetary assets and liabilities
denominated in foreign currencies are translated into Renminbi at
the exchange rates quoted by the People's Bank of China ruling at
the balance sheet date. Exchange gains and losses on foreign
currency translation, except for the exchange gains and losses
directly relating to the construction of fixed assets (see note
1(j)) below, are dealt with in the income statement.
(f) Cash equivalents
Cash equivalents are short-term and highly liquid investments which
are readily convertible into known amounts of cash and are subject
to an insignificant risk of change in value.
(g) Provision for bad and doubtful debts
Trade accounts receivable showing signs of uncollectibility are
identified individually and allowance is then made based on the
probability of being uncollectible. In respect of trade accounts
receivable showing no sign of uncollectibility, allowance is made
with reference to the ageing analysis and management's estimation
based on past experience.
Allowances for other receivables are made based on the nature of the
receivables and estimation of the corresponding collectibility risk.
(h) Inventories
Inventories, which consist primarily of expendable spare parts and
consumables, are carried at the lower of cost and net realisable
value. Inventories are measured at their actual cost upon
acquisition. The cost of inventories is calculated using the
weighted average method. Any excess of the cost over the net
realisable value of each class of inventories is recognised as a
provision for diminution in value of inventories. Net realisable
value is determined based on amount recoverable in the normal course
of business after the balance sheet date or estimates made by
management based on market conditions. Inventories are recorded
using the perpetual stocking method.
Inventories are amortised in full when issued for use.
(i) Investments
(i) Short-term investments
Short-term investments are carried at the lower of cost and
market value. The cost of a short-term investment is the total
price paid on acquisition of the investment. However, it does
not include cash dividends which have been declared but which
are unpaid or unpaid interest on debentures which was due at
the time of acquisition.
Provision for diminution in value is made on an item-by-item
basis for any shortfall of the market value over the cost of
material short-term investments. Provision for diminution in
value is also made for any shortfall of the market value over
the cost of other short-term investments on an aggregate basis
by each category of the investments.
34 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
1 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(i) Investments (Continued)
(i) Short-term investments (Continued)
With the exception of cash dividends which have been declared
but which are unpaid at the time of acquisition and interest
on debentures which is due but not yet paid at the time of
acquisition, cash dividends and interest are set off against
the carrying amount of the short-term investments when
received by the Company. Upon the disposal of short-term
investments, the difference between the carrying amount of the
short-term investments and the proceeds received is recognised
in the income statement for the current period.
(ii) Long-term equity investments
Where the Company has the power to control, jointly control or
exercise significant influence over an investee enterprise,
the investment is accounted for under the equity method of
accounting whereby the investment is initially recorded at
cost and adjusted thereafter for any post acquisition change
in the Company's share of the investors' equity in the
investee enterprise.
Equity investment difference, which is the difference between
the initial investment cost and the Company's share of
investors' equity in the investee enterprise, is accounted for
as follows:
- Any excess of the initial investment cost over the
Company's share of the investors' equity in the investee
enterprise is amortised on a straight-line basis. The
amortisation period is determined according to the
investment period as stipulated in the relevant
agreement, or 10 years if the investment period is not
specified in the agreement. The unamortised balance is
included in long-term equity investments at the year
end.
- Any shortfall of the initial investment cost over the
Company's share of the investors' equity in the investee
enterprise is amortised on a straight-line basis over 10
years if the investment was acquired before the MOF's
issuance of the " Questions and Answers on Implementing
Accounting Regulations for Business Enterprises and
Related Accounting Standards (II) " (Cai Kuai [ 2003]
No. 10). The unamortised balance is included in
long-term equity investments at the year end. Any
shortfalls are recognised in the " Capital surplus -
reserve for equity investment " if the investment is
acquired after the issuance of Cai Kuai [2003] No. 10.
Where the Company does not control, jointly control or
exercise significant influence over an investee enterprise,
the investment is accounted for under the cost method, stating
it at the initial investment cost. Investment income is
recognised when the investee enterprise declares a cash
dividend or distributes profits.
Upon the disposal or transfer of long-term equity investments,
the difference between the proceeds received and the carrying
amount of the investments is recognised in the income
statement.
The Group makes provision for impairment losses on long-term
equity investments (see note 1(n)).
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 35
1 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) Fixed assets and construction in progress
Fixed assets represent the assets held by the Group for rendering
services and administrative purposes with useful lives over 1 year
and comparatively high unit values.
Fixed assets are stated in the balance sheet at cost or revalued
amount less accumulated depreciation and impairment losses (see note
1(n)). Construction in progress are stated in the balance sheet at
cost less impairment losses (see note 1(n)). Valuation is carried
out in accordance with the relevant rules and regulations in the PRC
and the assets are adjusted to the revalued amounts accordingly.
All direct and indirect costs related to the acquisition or
construction of fixed assets, incurred before the assets are ready
for their intended uses, are capitalised as construction in
progress. Those costs include borrowing costs, which include foreign
exchange differences, on specific borrowings for the construction of
the fixed assets during the construction period.
Construction in progress is transferred to fixed assets when the
asset is ready for its intended use. No depreciation is provided on
construction in progress.
Pursuant to an approval document Cai Kuai Han [2004] No. 39 issued
by the MOF, the Group accounts for high value rotables as fixed
assets.
Depreciation is provided to write off the cost of fixed assets over
their estimated useful lives on a straight-line basis, after taking
into account their estimated residual values. The respective annual
depreciation rates for fixed assets are as follows:
ANNUAL DEPRECIATION RATE
Owned and leased aircraft 4.75%-6.33%
Other flight equipment:
- Jet engines 6.47%-12.13%
- Others, including high value rotables 6.67%-12.5%
Buildings 2.5%-6.67%
Machinery and equipment 9.7%-19.4%
Motor vehicles 16.17%
Land use rights are stated in the balance sheet at cost or revalued
amount less accumulated depreciation and impairment losses (see note
1(n)), and are amortised on a straight-line basis over the period
for land use rights.
36 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
1 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(k) Leased assets
Leases are classified into finance leases and operating leases. A
finance lease is a lease that transfers substantially all the risks
and rewards incidental to ownership of a leased asset to the lessee,
whether or not the legal title to the asset is eventually
transferred. An operating lease is a lease other than a finance
lease.
(i) Assets acquired under finance leases
Fixed assets acquired by way of finance leases are stated
under fixed assets at an amount equal to the lower of their
original carrying amount in the books of the legal owner (the
lessor) and the present value of the minimum lease payments at
the inception of the lease. Depreciation of leased assets is
calculated using the straight-line method. Subsequent to the
revaluation, which was based on depreciated replacement costs,
assets acquired under finance lease are carried at revalued
amount, being the fair value at the date of the revaluation
less any subsequent accumulated depreciation and impairment
losses.
If there is no reasonable certainty that the Group will obtain
ownership of the leased assets at the end of the lease term,
the leased assets are depreciated over the shorter of the
lease term or their estimated useful lives. If there is
reasonable certainty that the Group will obtain ownership of
the leased assets at the end of the lease term, the leased
assets are depreciated over their estimated useful lives.
At the inception of the lease, the minimum lease payments are
recorded as payables under finance leases. The difference
between the value of the leased assets and the minimum lease
payments is recognised as unrecognised finance charges under
finance leases. At the year end, payables under finance leases
are netted against the unrecognised finance charges under
finance leases and included in long-term payables in the
balance sheet.
Unrecognised finance charges under finance leases are
amortised using the effective interest rate method over the
lease term.
The Group makes provision for impairment losses on assets
acquired under finance leases (see note 1(n)).
(ii) Operating lease charges
Rental payments under operating leases are recognised as
expenses on a straight-line basis over the lease term.
Contingent rental payments are recognised as expenses in the
accounting period in which they are incurred.
(l) Intangible assets
Intangible assets are stated in the balance sheet at cost less
accumulated amortisation and impairment losses (see note 1(n)). The
cost of the intangible assets is amortised on a straight-line basis
over the contracted beneficial period or the effective period
stipulated by law, whichever is shorter. Where the useful life is
not stipulated by the contract or law, the amortisation is over a
period of 10 years.
(m) Long-term deferred expenses
Custom duties and other direct costs incurred in relation to
modifying, introducing and certifying certain operating leased
aircraft are deferred and amortised on a straight-line basis over
the terms of the related leases.
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 37
1 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(n) Provision for impairment
The carrying amounts of assets (including long-term investments,
fixed assets, construction in progress, intangible assets, assets
acquired under finance leases and other assets) are reviewed
regularly at each balance sheet date to determine whether their
recoverable amounts have declined below their carrying amounts.
Assets are tested for impairment whenever events or changes in
circumstances indicate that their recorded carrying amounts may not
be recoverable. When such a decline has occurred, the carrying
amount is reduced to the recoverable amount. The amount by which the
carrying amount is reduced is the impairment loss.
The recoverable amount is the higher of the net selling price and
the present value of the estimated future cash flows arising from
the continuous use of the asset and from the disposal of the asset
at the end of its useful life.
Provision for impairment loss is calculated on an item by item basis
and recognised as an expense in the income statement. However, when
a shortfall of the initial investment cost over the Group's share of
the investors' equity of the investee enterprise has been credited
to the capital reserve, any impairment losses for long-term equity
investment are firstly set off against the difference initially
recognised in the capital reserve relating to the investment and any
excess impairment losses are then recognised in the income
statement.
If there is an indication that there has been a favourable change in
the estimates used to determine the recoverable amount and as a
result the estimated recoverable amount is greater than the carrying
amount of the asset, the impairment loss recognised in prior years
is reversed. Reversals of impairment losses are recognised in the
income statement. Impairment losses are reversed to the extent of
the asset's carrying amount that would have been determined had no
impairment loss been recognised in prior years. In respect of the
reversal of an impairment loss for a long-term equity investment,
the reversal starts with the impairment losses that had previously
been recognised in the income statement and then the impairment
losses that had been charged to the capital reserve.
(o) Income tax
Income tax is recognised using the tax effect accounting method.
Income tax for the year comprises current tax paid and payable and
movement of deferred tax assets and liabilities.
Current tax is calculated at the applicable tax rate on taxable
income.
Deferred tax is provided using the liability method for the
differences between the accounting profits and the taxable profits
arising from the timing differences in recognising income, expenses
or losses between the accounting and tax regulations. When the tax
rate changes or a new type of tax is levied, adjustments are made to
the amounts originally recognised for the timing differences under
the liability method. The current tax rates are used in arriving at
the reversal amounts when the timing differences are reversed.
Deferred tax assets arising from tax losses, which are expected to
be utilised against future taxable profits, are set off against the
deferred tax liabilities (only for the same taxpayer within the same
jurisdiction). When it is not probable that the tax benefits of
deferred tax assets will be realised, the deferred tax assets are
reduced to the extent that the related tax benefits are expected to
be realised.
38 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
1 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(p) Provisions and contingent liabilities
Provisions are recognised when the Group has a present obligation as
a result of a past event, it is probable that an outflow of economic
benefits will be required to settle the obligations and a reliable
estimate can be made.
Where it is not probable that the settlement of the above obligation
will cause an outflow of economic benefits, or the amount of the
outflow cannot be estimated reliably, the obligation is disclosed as
a contingent liability.
(q) Revenue recognition
Provided it is probable that the economic benefits will flow to the
Group and the revenue and costs can be measured reliably, revenue is
recognised in the income statement as follows:
(i) Passenger, cargo and mail revenues are recognised when the
transportation is provided. Ticket sales for transportation
not yet provided are included in current liabilities as sales
in advance of carriage;
(ii) Revenues from airline-related businesses are recognised when
the relevant services are rendered;
(iii) Interest income is recognised on a time proportion basis
according to the principal outstanding and the applicable
rate; and
(iv) Dividend income is recognised when the Group's right to
receive the dividend is established.
(r) Traffic commissions
Traffic commissions are expensed when the transportation is provided
and the related revenue is recognised. Traffic commissions for
transportation not yet provided are recorded on the balance sheet as
a prepaid expense.
(s) Borrowing costs
Borrowing costs incurred on specific borrowings for the construction
of fixed assets are capitalised into the cost of the fixed assets
during the construction period until the fixed assets are ready for
their intended uses.
Except for the above borrowing costs, other borrowing costs are
recognised as financial expenses in the income statement when
incurred.
(t) Repairs and maintenance expenses
Routine maintenance and repairs and overhauls in respect of owned
aircraft and aircraft held under finance leases are expensed as and
when incurred. In respect of aircraft held under operating leases, a
provision is made over the lease term for the estimated cost of
overhauls that are required to be performed on the related aircraft
prior to their return to the lessors.
(u) Dividends
Dividends appropriated to shareholders are recognised in the income
statement and profit appropriation statement when approved.
Dividends proposed or approved after the balance sheet date but
before the date on which the financial statements are authorised for
issue are separately disclosed under shareholders' equity in the
balance sheet.
CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT 39
1 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(v) Retirement benefits
Pursuant to the relevant laws and regulations in the PRC, the Group
has joined certain defined contribution retirement schemes for the
employees arranged by the governmental organisations. The Group
makes contributions to the retirement schemes at the applicable
rates based on the employees' salaries. The required contributions
under the retirement schemes are charged to the income statement
when they are due.
(w) Frequent flyer award programmes
The Group maintains two frequent flyer award programmes, namely, the
China Southern Airlines Sky Pearl Club and Egret Mileage Plus, which
provide travel awards to members based on accumulated mileage. The
estimated incremental cost of providing free travel is recognised as
an expense and accrued as a current liability as members accumulate
mileage. As members redeem awards or their entitlements expire, the
incremental cost liability is reduced accordingly, to reflect the
acquittal of the outstanding obligations.
Revenue from mileage sales to third parties under the frequent flyer
award programmes is recognised when the related transportation
services are provided.
(x) Related parties
If the Group has the power, directly or indirectly, to control,
jointly control or exercise significant influence over another
party, or vice versa, or where the Group and one or more parties are
subject to common control from another party, they are considered to
be related parties. Related parties may be individuals or
enterprises.
2 SIGNIFICANT DIFFERENCES BETWEEN PRC GAAP AND IFRS
Effect of significant differences between PRC GAAP and IFRS on net
(loss)/profit are analysed as follows:
FOR THE SIX MONTHS ENDED 30 JUNE
2005 2004
Note RMB MILLION RMB million
Net (loss)/profit under PRC GAAP (843) 333
Adjustments:
Gains on aircraft sales and leaseback transactions (a) (15) (15)
Losses on staff housing allocations (b) (13) (56)
Adjustment for revaluation of land use rights (c) 2 2
Adjustment for investment in associates (d) (52) -
Donation (f) 12 -
Effect of the above adjustments on taxation 2 2
----------- -----------
Net loss/(profit) attributable to equity holders
of parent under IFRS (907) 266
=========== ===========
40 CHINA SOUTHERN AIRLINES COMPANY LIMITED 2005 INTERIM REPORT
2 SIGNIFICANT DIFFERENCES BETWEEN PRC GAAP AND IFRS (Continued)
Effect of significant differences between PRC GAAP and IFRS on
shareholders' equity are analysed as follows:
AS AT As at
30 JUNE 31 December
2005 2004
Note RMB MILLION RMB million
Total shareholders' equity under PRC GAAP 10,822 11,653
Adjustments:
Gains on aircraft sales and leaseback transactions (a) 165 180
Losses on staff housing allocations (b) 184 197
Adjustment for revaluation of land use rights (c) (160) (162)
Adjustment for investment in associates (d) (78) (26)
Interest capitalisation (e) 11 11
Effect of the above adjustments on taxation (3) (5)
----------- -----------
Total equity attributable to equity holders
of parent under IFRS 10,941 11,848
=========== ===========
Notes:
(a) In accordance with PRC accounting rules and regulations, gains on aircraft
sale and leaseback transactions are recorded as deferred credits and
amortised over the lease terms on a straight line basis. Under IFRS, gains
on sale and leaseback transactions where the subsequent lease is an
operating lease are recognised as income immediately, if the transactions
are established at fair value. Differences between the sale price and fair
value are deferred and amortised over the lease term.
(b) In accordance with PRC accounting rules and regulations, losses on staff
housing allocation executed by CSAHC on the Company's behalf are charged
to retained profits as and when incurred. In addition, lump sum housing
benefits are charged to retained profits as of 1 January 2001 pursuant to
the relevant regulations. Under IFRS, losses on staff housing allocations
and lump sum housing benefits are charged to the income statement in the
obligatory periods stipulated by the relevant contracts.
(c) In accordance with PRC accounting rules and regulations, land use rights
are carried at revalued amounts. Under IFRS, land use rights are carried
at cost with effect from 1 January 2002. Accordingly, the unamortised
surplus on revaluation of the land use rights was reversed against
shareholders' equity.
(d) In the PRC GAAP financial statements, the investment in associates have
been equity accounted for based on the PRC GAAP financial statements of
these companies. The accounting policies of these companies differ in
certain aspects from those of the Group. In the IFRS financial statements,
the differences arising from the different accounting policies of the
associates have been adjusted to conform with the accounting policies of
the Group.
(e) In the PRC GAAP financial statements, interest incurred on specific
borrowings obtained for the construction of fixed assets is capitalised.
In the IFRS financial statements, interest incurred on specific and other
borrowings which are directly attributable to the construction of fixed
assets is capitalised.
(f) In the PRC GAAP financial statements, all donations received are
recognised as movement in capital reserve as and when incurred. Under
IFRS, donations are recognised in the income statements when received.
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: September 2, 2005