Edgar Filing: CHINA EASTERN AIRLINES CORP LTD

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

under the Securities Exchange Act of 1934

For the month of August 2009

Commission File Number: 001-14550

China Eastern Airlines Corporation Limited

(Translation of Registrant’s name into English)

2550 Hongqiao Road

Hongqiao Airport

Shanghai, China 200335

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F: x Form 20-F ¨ Form 40-F

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

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 x No

If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): n/a

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 Eastern Airlines Corporation Limited
		(Registrant)

Date	August 25, 2009	By	/s/ Luo Zhuping
			Name: Luo Zhuping
			Title: Company Secretary

Certain statements contained in this announcement may be regarded as "forward-looking statements" within the meaning of the U.S. Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual performance, financial condition or results of operations of the Company to be materially different from any future performance, financial condition or results of operations implied by such forward-looking statements. Further information regarding these risks, uncertainties and other factors is included in the Company's filings with the U.S. Securities and Exchange Commission. The forward-looking statements included in this announcement represent the Company's views as of the date of this announcement. While the Company anticipates that subsequent events and developments may cause the Company's views to change, the Company specifically disclaims any obligation to update these forward-looking statements, unless required by applicable laws. These forward-looking statements should not be relied upon as representing the Company's views as of any date subsequent to the date of this announcement.

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular, you should consult a stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in China Eastern Airlines Corporation Limited, you should at once hand this circular to the purchaser or the transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

Hong Kong Stock Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

This circular appears for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for the securities in the Company.

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock code: 00670)

MAJOR TRANSACTION

ABSORPTION OF SHANGHAI AIRLINES

Financial Adviser

A letter from the board of directors of China Eastern Airlines Corporation Limited (the ‘‘Company’’) is set out on pages 1 to 12 of this circular.

An extraordinary general meeting of the Company (the ‘‘EGM’’) and separate class meetings of the holders of H shares of the Company (the ‘‘H Shareholders Class Meeting’’) and the holders of A shares of the Company (the ‘‘A Shareholders Class Meeting’’), respectively will be held at Shanghai International Airport Hotel (上海國際機場賓館), 2550 Hongqiao Road, Shanghai, the People’s Republic of China at 2 : 00 p.m. and 2 : 30 p.m. respectively on Friday, 9 October 2009. Notices of the EGM and H Shareholders Class Meeting dated 25 August 2009 setting out the resolutions to be approved at the EGM and the H Shareholders Class Meeting are set out at the end of this circular. Proxy forms for use at the EGM and the H Shareholders Class Meeting and the attendance slips are also despatched together with this circular. If you intend to attend the EGM and/or the H Shareholders Class Meeting, you should complete and return the attendance slip in accordance with the instructions printed thereon as soon as possible.

Whether or not you intend to attend the EGM and/or the H Shareholders Class Meeting, you are requested to complete and return the proxy form in accordance with the instructions thereon and return it to Hong Kong Registrars Limited at Rooms 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, as soon as possible and in any event not later than 24 hours before the time appointed for holding such meetings or any adjournment thereof.

Completion and return of the proxy form will not preclude you from attending and voting at the EGM and/or the H Shareholders Class Meeting should you so wish.

25 August 2009

CONTENTS

		Pages

Definitions		ii

Letter from the Board

1.	Introduction	1

2.	The Absorption Proposal	2

3.	The Absorption Agreement	4

4.	Effects of the Absorption Proposal	5

5.	Reasons for and benefits of the Absorption Proposal	6

6.	Financial impact of the Absorption	7

7.	Implications of the Listing Rules	7

8.	Shareholding structure of the Company	8

9.	Ranking of new A Shares to be issued	9

10.	Information about the parties	9

11.	EGM and class meetings	11

12.	Recommendation of the Board	11

13.	Additional information	12

Appendix I — Financial Information of Shanghai Airlines		13

Appendix II — Financial Information of the Group		95

Appendix III — Unaudited Pro Forma Financial Information of the Enlarged Group		197

Appendix IV — Management Discussion and Analysis of the Results of the Target Group		203

Appendix V — General Information		213

Notice of Extraordinary General Meeting		224

Notice of H Shareholders Class Meeting		227

– i –

DEFINITIONS

In this circular, unless the context otherwise requires, the following expressions have the following meanings:

‘‘Absorption Agreement’’		means the agreement entered into between the Company and Shanghai Airlines on 10 July 2009 in relation to the Absorption Proposal;

‘‘Absorption Proposal’’		means the proposed absorption of Shanghai Airlines by the Company pursuant to the Absorption Agreement through the proposed issue of A Shares by the Company at the Exchange Ratio to exchange for SA Shares or the Cash Alternative;

‘‘ADRs’’		means the American depositary shares of the Company, which are listed on the New York Stock Exchange Inc.;

‘‘Announcement’’		means the announcement of the Company dated 10 July 2009 relating to, among other things, the proposed absorption of Shanghai Airlines pursuant to the Absorption Proposal;

‘‘A Shareholders Class Meeting’’		means the shareholders’ meeting to be convened for the holders of A Shares on Friday, 9 October 2009, or any adjournment thereof, to consider, and if thought fit, approve the Absorption Proposal;

‘‘A Shares’’		means the ordinary shares issued by the Company, with a RMB denominated par value of RMB1.00 each, which are subscribed for and paid up in RMB and are listed on the Shanghai Stock Exchange;

‘‘Articles of Association’’		means the articles of association of the Company;

‘‘associates’’		has the meaning ascribed thereto under the Listing Rules;

‘‘Board’’		means the board of directors of the Company;

‘‘Business Day’’		means a day (excluding Saturday and Sunday) on which the banks are generally open for business in the PRC;

‘‘Buy-back Alternative’’		means the right of the CEA Dissenting Shareholder to require the Buy-back Alternative Provider to buy-back its Shares as required by the applicable PRC laws and regulations (for example, 《公司法》(PRC Company Law) and《到境外上市公司章程必備條款》(Mandatory Provisions for Companies Listing Overseas)) and the Articles of Association;

‘‘Buy-back Alternative Declaring Period’’		means the period to be determined and announced by the Company in which CEA Dissenting Shareholder may declare their election of the Buy-back Alternative;

– ii –

DEFINITIONS

‘‘Buy-back Alternative Exercise Day’’	means the day to be determined and announced by the Company on which the Buy-back Alternative Provider shall pay, and the CEA Dissenting Shareholder shall receive, cash in exchange for the Shares held by the CEA Dissenting Shareholders pursuant to the Absorption Proposal;

‘‘Buy-back Alternative Provider’’	means:
	(i)	in respect of any CEA Dissenting Shareholders who holds A Shares, State Development & Investment Corp. (國家開發投資公司) or its wholly owned subsidiaries incorporated in the PRC; and

	(ii)	in respect of any CEA Dissenting Shareholders who holds H Shares, State Development & Investment Corp. (國家開發投資公司) or its wholly owned subsidiaries incorporated outside the PRC,

	each being an independent third party of the Company, which shall, at the Buy-back Alternative Exercise Day, pay the CEA Dissenting Shareholders in cash in exchange for the whole or part of A Shares or H Shares held by the CEA Dissenting Shareholders pursuant to the Absorption Proposal;

‘‘Cash Alternative’’	means the right of the SA Dissenting Shareholder to elect to receive cash from the Cash Alternative Provider pursuant to the Absorption Proposal as required by the applicable PRC laws and regulations (for example, 《上市公司收購管理辦法》(Administrative Measures in relation to the Acquisition of the Listed Companies));

‘‘Cash Alternative Declaring Period’’	means the period to be determined and announced by the Company and Shanghai Airlines in which the SA Dissenting Shareholder may declare its election of the Cash Alternative;

‘‘Cash Alternative Exercise Day’’	means the day to be determined and announced by the Company and Shanghai Airlines on which the Cash Alternative Provider shall pay, and the SA Dissenting Shareholder shall receive, such cash in exchange for the SA Shares held by the SA Dissenting Shareholders pursuant to the Absorption Proposal;

– iii –

DEFINITIONS

‘‘Cash Alternative Provider’’	means State Development & Investment Corp. (國家開發投資公司) or its wholly owned subsidiaries incorporated in the PRC, an independent third party of the Company, which shall, on the Cash Alternative Exercise Day, pay the SA Dissenting Shareholder in cash in exchange for the whole or part of the SA Shares held by such SA Dissenting Shareholders pursuant to the Absorption Proposal;

‘‘CEA Dissenting Shareholder’’	means the Shareholder who:
	(i)	has made Effective Dissenting Votes at the shareholders’ meetings of the Company convened for the purpose of approving the Absorption Proposal;

	(ii)	continuously holds the Shares representing the Effective Dissenting Votes until the Buy-back Alternative Exercise Day; and

	(iii)	has, within the Buy-back Alternative Declaring Period, duly declared all the Effective Dissenting Votes that enable it to exercise the Buy-back Alternative;

	and excluding the following Shareholders:

	(i)	any Shareholder who is a director, supervisor and senior management person of the Company and whose Shares are subject to lock-up requirements;

	(ii)	any Shareholder whose Shares are subject to any pledge, third party rights or are frozen as a result of judicial proceedings;

	(iii)	any Shareholder who has committed to the Company that it will not elect to receive the Buy-back Alterative; or

	(iv)	any Shareholder who is not permitted to elect the Buy-back Alternative pursuant to applicable laws and regulations;

‘‘CCASS’’	the Central Clearing and Settlement System;

‘‘CEA Holding’’	means 中國東方航空集團公司 (China Eastern Air Holding Company), a wholly PRC state-owned enterprise and the controlling shareholder of the Company holding approximately 56.08% of its issued share capital as at the Latest Practicable Date;

– iv –

DEFINITIONS

‘‘CES Global’’		means 東航國際控股（香港）有限公司 (CES Global Holdings (Hong Kong) Limited), a company incorporated under the laws of Hong Kong, and an indirectly wholly owned subsidiary of CEA Holding and a substantial shareholder of the Company holding approximately 18.57% of its issued share capital as at the Latest Practicable Date;

‘‘Company’’		means 中國東方航空股份有限公司 (China Eastern Airlines Corporation Limited), a joint stock limited company incorporated in the PRC with limited liability, whose H Shares, A Shares and American depositary shares are listed on the Stock Exchange, the Shanghai Stock Exchange and the New York Stock Exchange, Inc., respectively;

‘‘connected person’’		has the meaning ascribed thereto under the Listing Rules;

‘‘controlling shareholder’’		has the meaning ascribed thereto under the Listing Rules;

‘‘CSRC’’		means the China Securities Regulatory Commission;

‘‘Directors’’		means the directors of the Company;

‘‘Effective Dissenting Votes’’		means any dissenting votes in relation to the Absorption Proposal effectively made by a shareholder through one of the two means: vote at the shareholders’ meeting or vote through internet, and if the same share has been voted by both means, or if the same share has been voted for several times through internet, then ‘‘Effective Dissenting Vote’’ shall refer to the first vote;

‘‘EGM’’		means the extraordinary general meeting of the Company to be convened on Friday, 9 October 2009, or any adjournment thereof, to consider, and if thought fit, approve the Absorption Proposal;

‘‘Enlarged Group’’		means the Group after the completion of the proposed absorption of Shanghai Airlines;

‘‘Exchange Ratio’’		means the ratio at which 1.3 A Shares will be issued by the Company in exchange for every SA Share under the Absorption Proposal;

‘‘Group’’		means the Company and its subsidiaries;

‘‘H Shareholders Class Meeting’’		means the shareholders’ meeting to be convened for the holders of H Shares on Friday, 9 October 2009, or any adjournment thereof, to consider, and if thought fit, approve the absorption;

– v –

DEFINITIONS

‘‘H Shares’’	means the ordinary shares issued by the Company, with a RMB denominated par value of RMB1.00 each, which are subscribed for and paid up in a currency other than RMB and are listed on the Stock Exchange;

‘‘HK$’’	means Hong Kong dollars, the lawful currency of Hong Kong;

‘‘Hong Kong’’	means the Hong Kong Special Administrative Region of China;

‘‘IFRS’’	means the International Financial Reporting Standards;

‘‘Latest Practicable Date’’	means 20 August 2009, being the latest practicable date for ascertaining certain information referred to in this circular prior to the printing of this circular;

‘‘Listing Rules’’	means the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited;

‘‘PRC’’ or ‘‘China’’	means the People’s Republic of China;

‘‘Price Fixing Period’’	means the 20 trading days ending on and including 5 June 2009;

‘‘PwC’’	means PricewaterhouseCoopers;

‘‘RMB’’	means Renminbi, the lawful currency of the PRC;

‘‘SA Dissenting Shareholder’’	means any SA Shareholder who:
	(i)	has made the Effective Dissenting Votes at the shareholders’ meeting of Shanghai Airlines convened for the purpose of approving the Absorption Proposal;

	(ii)	continuously holds the SA Shares representing the Effective Dissenting Votes until the Cash Alternative Exercise Day; and

	(iii)	has, within the Cash Alternative Declaring Period, duly declared all the Effective Dissenting Votes that enable it to exercise the Cash Alternative;

	and excluding the following SA Shareholders:

	(i)	any SA Shareholder who is a director, supervisor and senior management person of Shanghai Airlines and whose SA Shares are subject to lock-up requirements;

	(ii)	any SA Shareholder whose SA Shares are subject to any pledge, third party rights or are frozen as a result of judicial proceedings;

– vi –

DEFINITIONS

	(iii)	any SA Shareholder who has committed to Shanghai Airlines that it will not elect to receive the Cash Alterative; or

	(iv)	any SA Shareholder who is not permitted to elect the Cash Alternative pursuant to applicable laws and regulations;

‘‘SA Shareholders’’	means the shareholders of Shanghai Airlines;

‘‘SA Shares’’	means the A shares of Shanghai Airlines issued and listed on Shanghai Stock Exchange;

‘‘SFO’’	means the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong);

‘‘Shanghai Airlines’’	means 上海航空股份有限公司 (Shanghai Airlines Co., Ltd), a PRC airlines company with its entire shares listed on the Shanghai Stock Exchange;

‘‘Shareholders’’	means the shareholders of the Company;

‘‘Shares’’	means A Shares and H Shares;

‘‘Stock Exchange’’	means The Stock Exchange of Hong Kong Limited;

‘‘substantial shareholder’’	has the meaning ascribed thereto under the Listing Rules;

‘‘Target Group’’	means Shanghai Airlines and its subsidiaries;

‘‘trading day’’	with respect to A shares, means a day on which the Shanghai Stock Exchange is open for dealing or trading in securities; and with respect to H shares, means a day on which the Stock Exchange is open for dealing or trading in securities; and

‘‘%’’	per cent.

In this circular: (i) all figures have been rounded to the nearest two decimal places; (ii) for illustration purpose, an exchange rate of HK$1.00 to RMB0.88 has been applied; and (iii) for the avoidance of doubt, references to ‘‘not less than’’ a figure and ‘‘not more than’’ a figure shall include the figure mentioned.

– vii –

LETTER FROM THE BOARD

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock code: 00670)

Directors:		Legal address:
Liu Shaoyong (Chairman)		66 Airport Street
Li Jun (Vice Chairman)		International Airport
Ma Xulun (Director, President)		Pudong New District
Luo Chaogeng (Director)		Shanghai
Luo Zhuping (Director, Company Secretary)		PRC

Independent non-executive Directors:		Head office:
Hu Honggao		2550 Hongqiao Road
Wu Baiwang		Shanghai
Zhou Ruijin		PRC
Xie Rong
Sandy Ke-Yaw Liu		Principal place of business in
		Hong Kong:
		Unit B, 31/F.
		United Centre
		95 Queensway
		Hong Kong

		Hong Kong share registrar
		and transfer office:
		Hong Kong Registrars Limited
		Rooms 1712–1716,
		17th Floor Hopewell Centre
		183 Wanchai Queen’s Road East
		Hong Kong

		25 August 2009

To the Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION

ABSORPTION OF SHANGHAI AIRLINES

1.	INTRODUCTION

Reference is made to the announcement of the Company dated 10 July 2009 (the ‘‘Announcement’’) in relation to, among other things, the proposed absorption of Shanghai Airlines.

– 1 –

LETTER FROM THE BOARD

On 10 July 2009, the Company entered into the Absorption Agreement with Shanghai Airlines in relation to the Absorption Proposal. The Absorption Proposal, if fully implemented, will involve the issue of a maximum of 1,694,838,860 A Shares by the Company to the SA Shareholders on a record date to be determined and announced by the Company and Shanghai Airlines, in exchange for all the existing issued shares of Shanghai Airlines.

The purposes of this circular are, among other things:

(1)

to provide you with further information in relation to the proposed absorption; and

(2)

to give you notices of the EGM and the H Shareholders Class Meeting to consider and, if thought fit, to approve resolutions in relation to, among other things, the Absorption Proposal.

2.	THE ABSORPTION PROPOSAL

The Exchange Ratio

The Company will exchange in aggregate a maximum of 1,303,722,200 SA Shares in the issued share capital of Shanghai Airlines by an issue of a maximum of 1,694,838,860 A Shares, meaning that for every SA Share, 1.3 A Shares will be issued. The Exchange Ratio has been determined on the following basis:

(1)

the price per SA Share was determined at RMB5.50 based on the average trading price of SA Shares for a period of 20 trading days up to and including 5 June 2009, being the last trading day immediately before the suspension of trading of SA Shares on the Shanghai Stock Exchange pending release of an announcement of the Company in relation to the proposed negotiation on the terms of the Absorption Proposal;

(2)

the price per A Share was determined at RMB5.28 based on the average trading price per A Share for a period of 20 trading days up to and including 5 June 2009, being the last trading day immediately before the suspension of trading of A Shares on the Shanghai Stock Exchange pending release of an announcement of the Company in relation to the proposed negotiation on the terms of the Absorption Proposal; and

(3)

based on a risk premium of approximately 25%, for every SA Share, 1.3 A Shares will be issued, and for the avoidance of doubt, such risk premium is only available to those SA Shareholders who elect to exchange their SA Shares for A Shares.

In determining the level of the risk premium and the Exchange Ratio, the Company has taken into consideration factors including: (i) uncertainty in the fluctuation of the share prices of the Company that the SA Shareholders will have to face; (ii) the financial situation of Shanghai Airlines; (iii) the synergy effect that will be brought to bear on the business of the Company such as the ability to establish economies of scale, the increase in the market share of the Company in the air transportation market in Shanghai and the integrating of the flight route network and marketing network of the Company and Shanghai Airlines.

– 2 –

LETTER FROM THE BOARD

Rights of the Dissenting Shareholders

Subject to the Absorption Proposal becoming unconditional, the SA Dissenting Shareholders may elect to exercise the Cash Alternative to receive cash at the rate of RMB5.50 per SA Share. Such rate is determined based on the average trading price of SA Shares during the Price Fixing Period. The Cash Alternative will be provided by the Cash Alternative Provider. The SA Dissenting Shareholder who opts for the Cash Alternative should, within the Cash Alternative Declaring Period, declare altogether the Effective Dissenting Votes such SA Dissenting Shareholder owns.

Subject to the Absorption Proposal becoming unconditional, the CEA Dissenting Shareholders may elect to exercise the Buy-back Alternative to receive cash at the rates of RMB5.28 per A Share and HK$1.56 per H Share. Such rates are determined by reference to the average trading prices of A Shares and average trading prices of H Shares respectively during the Price Fixing Period. The Buy-back Alternative will be provided by the Buy-back Alternative Provider. The CEA Dissenting Shareholder who opts for the Buy-back Alternative should, within the Buy-back Alternative Declaring Period, declare altogether the Effective Dissenting Votes such CEA Dissenting Shareholder owns.

The cash to be received by a CEA Dissenting Shareholder who opts for the Buy-back Alternative is determined at a rate by reference to the average trading prices of A Shares and the average trading prices of H Shares respectively during the Price Fixing Period. The Board considers the Buy-back Alternative fair and reasonable and in the interest of the Shareholders as a whole.

Please also refer to paragraph 14 ‘‘Investors whose H Shares held by nominee or trustee and holders of ADRs dissenting the Absorption Proposal’’ of Appendix V ‘‘General Information’’ of this circular for more information relating to the Buy-back Alternative.

Absorption of Assets and Assumption of Liabilities

Upon full implementation of the Absorption Proposal, all the assets, business, staff and rights of Shanghai Airlines will be absorbed into and all the liabilities of Shanghai Airlines will be assumed by the Company or a wholly owned subsidiary of the Company to be used to absorb all the assets and assume all the liabilities of Shanghai Airlines pursuant to the Absorption Proposal.

To facilitate the obtaining of consents to the proposed absorption by the creditors of Shanghai Airlines and subject to the Absorption Proposal becomes unconditional, the Company may, if so required by the creditors of Shanghai Airlines, provide guarantees to those creditors of Shanghai Airlines in relation to all the relevant liabilities and contingent liabilities of Shanghai Airlines arising out of its provision of guarantees to other companies, which will be assumed by the Company or its wholly owned subsidiary to be used to absorb all the assets and assume all the liabilities of Shanghai Airlines. As of 30 June 2009, the total liabilities of Shanghai Airlines (prepared in accordance with PRC accounting regulations) amounts to approximately RMB13.35 billion and the amount of guarantees provided by Shanghai Airlines to other companies amounts to approximately RMB126.50 million (details of which please refer to Appendix I of this circular). The total amount of guarantee that the Company is to provide is expected to be not more than RMB13,481,053,813.65. Further announcement(s) will be made by the Company if required by the Listing Rules when the details of such guarantee(s) become available.

– 3 –

LETTER FROM THE BOARD

Shanghai Airlines shall deliver all its assets and, with the assistance of the Company, handle all the relevant registration and filing procedures within 4 months after the coming into effect of the Absorption Agreement, including but not limited to the registration and filing procedures in relation to the title to real property, intellectual property, shares and aircraft.

3.	THE ABSORPTION AGREEMENT

On 10 July 2009, the Company entered into the Absorption Agreement with Shanghai Airlines in relation to the Absorption Proposal. In addition to the terms set out in section 2 above, the major terms and conditions of the Absorption Agreement include:

Parties

The Company and Shanghai Airlines.

Consideration

Conditions Precedents

The Absorption Agreement and the transactions contemplated thereunder shall become effective upon satisfaction of the following conditions:

(1)

obtaining the approvals from (i) the Shareholders at the shareholders’ meeting and the respective class meetings of the Company convened for such purpose; and (ii) the SA Shareholders at the shareholders’ meeting of Shanghai Airlines convened for such purpose;

(2)

obtaining the requisite consents and approvals from the State-owned Assets Administration Commission, the relevant governing authorities of the civil aviation industry, the Ministry of Commerce and CSRC; and

(3)

obtaining the waiver from CSRC in relation to the requirement of a general offer by CEA Holding (if applicable).

– 4 –

LETTER FROM THE BOARD

Re-negotiation of the

exchange ratio

In the event that a notice for convening the shareholders’ meetings of the Company for purpose of approving the Absorption Proposal cannot be despatched to the Shareholders within 6 months after 10 July 2009, the Company and Shanghai Airlines shall hold other meetings of their respective board of directors to further discuss and determine the absorption proposal.

Termination

The Company and Shanghai Airlines shall use their best endeavors to procure the conditions precedents to be satisfied upon the later of: (i) 12 months after the shareholders’ meetings of both the Company and Shanghai Airlines have approved the Absorption Agreement and the transactions contemplated thereunder; or (ii) otherwise agreed in writing by the parties (the ‘‘Prescribed Period’’).

If the conditions precedents cannot be fully satisfied or otherwise waived by the parties and the parties cannot reach an agreement on the extension of the Prescribed Period within 90 days after the expiration of the Prescribed Period, the Absorption Agreement shall be terminated automatically.

As at the Latest Practicable Date, except the approval from the State-owned Assets Administration Commission in relation to Absorption Proposal has been obtained, none of the other conditions precedents have been satisfied.

4.	EFFECTS OF THE ABSORPTION PROPOSAL

The Absorption Proposal will involve the issue of A Shares at the Exchange Ratio by the Company to the SA Shareholders in exchange for SA Shares held by them. Subject to the approval of the CSRC and the Shanghai Stock Exchange, the A Shares to be issued for the purpose of the Absorption Proposal will be listed on the Shanghai Stock Exchange.

If the Absorption Proposal is implemented, a maximum total of 1,694,838,860 A Shares will be issued in exchange for SA Shares. Upon full implementation of the Absorption Proposal (assuming no other shares of the Company are to be issued between the Latest Practicable Date and implementation of the Absorption Proposal), the maximum total issued share capital of the Company will be 9,436,538,860 shares, comprising 3,004,325,000 H Shares and maximum 6,432,213,860 A Shares, representing approximately 31.84% and 68.16%, respectively, of the total issued share capital of the Company as enlarged by the issue of A Shares pursuant to the Absorption Proposal.

The A Shares issued to the SA Shareholders pursuant to the Absorption Proposal will be freely tradable and subject to certain lock-up arrangements applicable to certain substantial shareholders among the existing SA Shareholders. Details of such lock-up arrangements are currently not known. They are yet to be determined in due course through consultation with relevant PRC regulatory authorities. Further announcement(s) will be made by the Company when details of the lock-up arrangements have been determined.

– 5 –

LETTER FROM THE BOARD

5.	REASONS FOR AND BENEFITS OF THE ABSORPTION PROPOSAL

The reasons for and benefits of the Absorption Proposal are:

The Company aims to optimize its airlines network, improve the operating efficiency of its resources, effectively reduce its operating costs, enhance its profitability and better serve the World Exposition to be held in Shanghai through the absorption of Shanghai Airlines. The absorption will expand the operations of the Company, improve its profitability, with a view to enhancing the interests of the Shareholders as a whole. Specifically, the absorption aims to achieve the following purposes:

(1)

Strengthening the competitiveness of the Company

China has become one of the largest air transportation markets in the world. However, comparing to the leading international airlines in the world, the air transportation industry of China is still lacking in competitiveness due to its inability to establish economies of scale. The absorption will enable the Company to expand its market share in the air transportation market in Shanghai which is a transportation hub, increase the number of joint flights, expand its market coverage and facilitate the realization of the Company’s strategic objective of positioning itself as an hub-networking air transportation company.

(2)

Attaining synergy through integration of the resources

The Company and Shanghai Airlines are both airline carriers with Shanghai as their bases. There has been for a long time overlapping in the resources input into route operations and flights and aircraft services as the two companies run independently. With the absorption, the two companies can attain synergy in their use of aircraft fuel, purchases of aircraft, aircraft repair and maintenance, flight equipment, etc. In addition, they can realize the optimization of the route plans and flight schedules, enhancement of route network structure and improvement of transport efficiency. Accordingly, the operating costs and management fees can be reduced and the profitability can be improved.

(3)

Promoting the evolution of Shanghai international air transportation centre

The implementation of the strategy of the Shanghai airport hub is vital for Shanghai to become an essential integral part of the international air transportation centre. The absorption will enable the Company to enhance its route network and number of aircraft. Meanwhile, a stronger based airline company can expedite the emergence of the Shanghai airport hub, which in turn will promote the evolution of Shanghai as an international air transportation centre.

Clearly, the above benefits more than outweigh the impact from the recent loss-making financial position of Shanghai Airlines. The Board believes that the terms of the Absorption Proposal are fair and reasonable and are in the interests of the Shareholders as a whole.

– 6 –

LETTER FROM THE BOARD

6.	FINANCIAL IMPACT OF THE ABSORPTION

According to the Company’s audited financial statements as at and for the year ended 31 December 2008 prepared in accordance with IFRS, the consolidated total assets of the Company amounted to RMB73.05 billion as at 31 December 2008, with a liabilities-to-assets ratio of 117.26%. According to the interim results announcement of the Company dated 10 August 2009, the unaudited consolidated total assets of the Company as at 30 June 2009 amounted to RMB72.84 billion, with a liabilities-to-assets ratio of 106.27%. Assuming the absorption of Shanghai Airlines were completed on 30 June 2009, the unaudited consolidated total assets of the Company on a pro forma basis would have increased to RMB97.63 billion, and the liabilities-to-assets ratio would have decreased to 95.46%. Upon completion of the absorption, the Company will become more financially secured and better shielded against risks, and its sustainable development in the future will be safeguarded.

		Year ended 31 December									Six months ended 30 June
		2006			2007			2008			2008			2009
					(Unit: RMB’000)

Revenue	Shanghai Airlines		9,842,049			12,044,857			13,154,092			6,560,579			5,328,020
	the Company		37,556,852			42,533,893			41,072,557			20,267,185			17,130,451

Profit/(loss) for	Shanghai Airlines		8,430			(531,971	)		(1,199,420	)		33,571			(270,547	)
the year/period	the Company		(3,035,157	)		378,568			(15,268,532	)		(175,318	)		984,654
attributable to the
equity holders

Note:

The financial data of Shanghai Airlines and the Company for the six months ended 30 June 2008 and the financial data of the Company for the six months ended 30 June 2009 are unaudited. Loss for the year ended 31 December 2006 attributable to the equity holders of the Company is restated according to the latest accounting policies adopted by the Company as further explained on page 104 of this circular. Other than the above, the remainders set out above represent audited data.

Upon completion of the absorption when all of the assets, liabilities, business operations and human resources of Shanghai Airlines will be consolidated to the Company, the scale of revenue of the Company will increase. In recent years, factors including the change in the overall economic landscape, the substantial fluctuation in international oil prices and the occurrence of natural disasters and unexpected circumstances in the PRC have contributed to a large fluctuation in the operating results of PRC domestic airlines including Shanghai Airlines and the Company. Upon completion of the absorption, the synergy in terms of sales and marketing, operating settlement, cost control and information infrastructure will provide positive impact to the future operating results of the Company.

7.	IMPLICATIONS OF THE LISTING RULES

To the best knowledge, information and belief of the Directors having made all reasonable enquiry, Shanghai Airlines and its beneficial owners (Shanghai Alliance Investment Limited, Bank of China Group Investment Limited and Jin Jiang International) are parties independent of the Company and independent of the connected persons of the Company. To the best knowledge, information and belief of the Directors having made all reasonable enquiry, the ultimate beneficial owners of Shanghai Alliance Investment Limited, Bank of China Group Investment Limited and Jin Jiang International are not connected persons of the Company. The transactions contemplated under the Absorption Proposal do not constitute connected transactions of the Company.

– 7 –

LETTER FROM THE BOARD

The highest ‘‘size tests’’ percentage ratio applicable to the relevant share exchange through the Absorption Proposal is more than 25% but less than 100%. As a result, the Absorption Proposal will constitute a major transaction of the Company under Rule 14.06(3) of the Listing Rules. Further, the issue of A Shares pursuant to the Absorption Proposal will constitute a variation of class rights of the holders of A Shares and the holders of H Shares under the Articles of Association.

Pursuant to Rule 14.06(3), Rule 19A.38 of the Listing Rules and the Articles of Association, the Absorption Proposal is required to be approved by the Shareholders at a general meeting and separate class meetings. No Shareholder will be required to abstain from voting at any shareholders’ meeting to approve the Absorption Proposal.

8.	SHAREHOLDING STRUCTURE OF THE COMPANY

As at the date of Latest Practicable Date, the shareholding structure of the Company is as follows:

Note:

The percentages shown are rounded to the nearest 2 decimal places.

– 8 –

LETTER FROM THE BOARD

Immediately after the full implementation of the Absorption Proposal (assuming that no other Shares has been issued after the Latest Practicable Date until the full implementation of the Absorption Proposal), it is anticipated that the shareholding structure of the Company will be as follows:

Note:

The percentages shown are rounded to the nearest 2 decimal places.

The percentages shown are based on the assumption that none of the SA Shareholders or the Shareholders opts for the Cash Alternative or the Buy-back Alternative (as the case may be) pursuant to the Absorption Proposal.

As such, full implementation of the Absorption Proposal will not result in change of control of the Company.

9.	RANKING OF NEW A SHARES TO BE ISSUED

The new A Shares to be issued pursuant to the Absorption Proposal will rank, upon issue, pari passu in all respects with the A Shares in issue at the time of issue and allotment of such new A Shares.

10.	INFORMATION ABOUT THE PARTIES

The Company is an international airline company incorporated in the PRC whose H Shares, A Shares and ADRs are listed on the Stock Exchange, the Shanghai Stock Exchange and the New York Stock Exchange, Inc., respectively. The existing registered share capital of the Company is RMB7,741,700,000, which has been fully paid up.

– 9 –

LETTER FROM THE BOARD

Shanghai Airlines is a joint stock limited company established in the PRC, with its A shares listed on the Shanghai Stock Exchange. The shareholding structure of Shanghai Airlines as at 10 August 2009 is as follows:

Shanghai Airlines primarily engages in the business of domestic air transportation of passengers and cargo, agency business for airline companies, approved international and regional business for air transportation of passengers and cargo, domestic business flight, business flight in neighbouring countries and regions, approved management of business aircraft, and maintenance of aviation equipment and machinery. The listing status of Shanghai Airlines will not be maintained after the completion of the Absorption Proposal.

Based on the audited financial information of Shanghai Airlines prepared in accordance with PRC accounting regulations, the net asset value attributable to equity holders of Shanghai Airlines as at 31 December 2007 and 31 December 2008 and the net profit before tax and net profit after tax attributable to equity holders of Shanghai Airlines for the 2 financial years ended 31 December 2007 and 31 December 2008 respectively as stated in Shanghai Airlines’ published annual reports are as follows:

	As at	As at
	31 December 2007	31 December 2008
	(RMB in million)	(RMB in million)

Net asset value attributable to equity holders of Shanghai Airlines	1,585.89	331.58

	For the year ended			For the year ended
	31 December 2007			31 December 2008
	(RMB in million)			(RMB in million)

Net profit before tax		(479.42	)		(1,346.93	)
Net profit after tax attributable to equity holders of Shanghai Airlines		(435.12	)		(1,249.25	)

– 10 –

LETTER FROM THE BOARD

11.	EGM AND CLASS MEETINGS

The Company will convene the EGM and class meetings for the Shareholders to consider and, if thought fit, to approve, among other things, the proposed absorption. Details of the EGM and the H Shareholders Class Meeting and resolutions to be considered in these meetings are set out in the ‘‘Notice of EGM’’ and ‘‘Notice of H Shareholders Class Meeting’’ of this circular.

Persons who hold H Shares and are registered as holders of H Shares on the register of members maintained by Hong Kong Registrars Limited, at the close of business on Tuesday, 8 September 2009 will be entitled to attend the EGM and the H Shareholders Class Meeting upon completion of the necessary registration procedures.

Book closure

Holders of H Shares whose names appear on the register of members of the Company at the close of business on Tuesday, 8 September 2009 will be entitled to attend the EGM and the H Shareholders Class Meeting upon completion of the necessary registration procedures. The H Shares register of members will be closed from Wednesday, 9 September 2009 to Friday, 9 October 2009, both days inclusive, during which period no transfer of H Shares will be effected. Where applicable, holders of the H Shares intending to attend the EGM and the H Shareholders Class Meeting are therefore required to lodge their respective instrument(s) of transfer and the relevant share certificate(s) to the Company’s H share registrar, Hong Kong Registrars Limited at Rooms 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, by 4:00 p.m. on Tuesday, 8 September 2009.

Proxy forms and attendance slips

Whether or not you intend to attend the EGM or the class meetings, you are requested to complete and return the relevant proxy form(s) in accordance with the instructions thereon. The proxy form should be returned as soon as possible and in any event not later than 24 hours before the time appointed for holding such meeting or any adjournment thereof. Completion and return of the proxy form will not preclude you from attending and voting at the relevant meetings should you so wish.

If you are eligible and intend to attend the respective meetings, you are required to complete and return the relevant attendance slip(s) to in accordance with the instructions thereon. The attendance slip should be returned as soon as possible and in any event not later than 20 days before the date appointed for holding such meeting or any adjournment thereof.

12.	RECOMMENDATION OF THE BOARD

The Directors believe that the terms of the Absorption Agreement are fair and reasonable and in the interests of the Group and the Shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the resolutions to be proposed at the EGM and the relevant class meetings in relation to the Absorption.

– 11 –

LETTER FROM THE BOARD

13.	ADDITIONAL INFORMATION

Your attention is also drawn to the additional information set out in the appendices to this circular.

By order of the Board

中國東方航空股份有限公司

CHINA EASTERN AIRLINES CORPORATION LIMITED

Luo Zhuping

Director and Company Secretary

– 12 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

The following is the text of a report received from the Company’s reporting accountant, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong for the purpose of incorporation into this circular.

The Directors

China Eastern Airlines Corporation Limited

Dear Sirs

We set out below our report on the financial information (the ‘‘Financial Information’’) of Shanghai Airlines Co., Ltd. (the ‘‘Target Company’’) and its subsidiaries (together, the ‘‘Target Group’’) set out in Sections I to III below, for inclusion in the circular of China Eastern Airlines Corporation Limited (the ‘‘Company’’) dated 25 August 2009 (the ‘‘Circular’’) in connection with the proposed acquisition of the Target Company by the Company (the ‘‘Proposed Acquisition’’). The Financial Information comprises the consolidated balance sheets of the Target Group as at 31 December 2006, 2007 and 2008 and 30 June 2009, the balance sheets of the Target Company as at 31 December 2006, 2007 and 2008 and 30 June 2009, and the consolidated statements of comprehensive income, the consolidated statements of changes in equity and the consolidated cash flow statements of the Target Company for each of the years ended 31 December 2006, 2007 and 2008 and the six months ended 30 June 2008 and 2009 (the ‘‘Relevant Periods’’), and a summary of significant accounting policies and other explanatory notes.

The Target Company was established in the People’s Republic of China (the ‘‘PRC’’) as a limited liability company on 25 October 2000. As at the date of this report, the Target Company has direct and indirect interests in subsidiaries, associated companies and joint controlled entities as set out in Notes 20, 21 and 22 of Section II below. All of these companies are private companies. The consolidated financial statements of the Target Company prepared in accordance with the Accounting Standards for Business Enterprises and the Accounting System for Business Enterprises in the PRC for the year ended 31 December 2006 and the consolidated financial statements of the Target Company prepared in accordance with the Accounting Standards for Business Enterprises (2006) of the PRC for the each of the years ended 31 December 2007 and 2008 and six months ended 30 June 2009 were audited by Shulun Pan Certified Public Accountants Co., Ltd..

For the purpose of this report, the directors of the Company have prepared the consolidated financial statements of the Target Company for the Relevant Periods (the ‘‘Underlying Financial Statements’’) in accordance with International Financial Reporting Standards (‘‘IFRS’’) issued by the International Accounting Standards Board. We have audited the Underlying Financial Statements for each of the years ended 31 December 2006, 2007 and 2008 and the six months ended 30 June 2009 in accordance with International Standards on Auditing. The Financial Information has been prepared based on the Underlying Financial Statements with no adjustment made thereon.

– 13 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

DIRECTORS’ RESPONSIBILITY

The directors of the Target Company during the Relevant Periods are responsible for the preparation and the true and fair presentation of the consolidated financial statements of the Target Company in accordance with the Accounting Standards for Business Enterprises and the Accounting System for Business Enterprises in the PRC or the Accounting Standards for Business Enterprises (2006) of the PRC as appropriate. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of the consolidated financial statements of the Target Company that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

For the Financial Information for each of the years ended 31 December 2006, 2007 and 2008 and the six months ended 30 June 2009, the directors of the Company are responsible for the preparation and the true and fair presentation of the Financial Information in accordance with IFRS. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of the Financial Information that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

For the Financial Information for the six months ended 30 June 2008, the directors of the Company are responsible for the preparation and the presentation of the Financial Information in accordance with the accounting policies set out in Note 2 of Section II below which are in conformity with IFRS.

REPORTING ACCOUNTANT’S RESPONSIBILITY

For the Financial Information for each of the years ended 31 December 2006, 2007 and 2008 and the six months ended 30 June 2009, our responsibility is to express an opinion on the Financial Information based on our examination and to report our opinion to you. We examined the Underlying Financial Statements used in preparing the Financial Information, and carried out such additional procedures as we considered necessary in accordance with the Auditing Guideline 3.340 ‘‘Prospectuses and the Reporting Accountant’’ issued by the Hong Kong Institute of Certified Public Accountants (the ‘‘HKICPA’’).

For the Financial Information for the six months ended 30 June 2008, our responsibility is to express a conclusion on the Financial Information based on our review and to report our conclusion to you. We conducted our review in accordance with International Standard on Review Engagements 2410 ‘‘Review of Interim Financial Information Performed by the Independent Auditor of the Entity’’. A review of the Financial Information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

– 14 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

OPINION AND REVIEW CONCLUSION

In our opinion, the Financial Information for each of the years ended 31 December 2006, 2007 and 2008 and the six months ended 30 June 2009, for the purpose of this report, gives a true and fair view of the state of affairs of the Target Company and of the Target Group as at 31 December 2006, 2007 and 2008 and 30 June 2009 and of the Target Group’s results and cash flows for the respective years and period then ended.

Based on our review, which does not constitute an audit, nothing has come to our attention that causes us to believe that the Financial Information for the six months ended 30 June 2008, for the purpose of this report, is not prepared, in all material respects, in accordance with the accounting policies set out in Note 2 of Section II below which are in conformity with IFRS.

– 15 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

I.	FINANCIAL INFORMATION OF THE TARGET GROUP

The following is the Financial Information of the Target Company and the Target Group as at 31 December 2006, 2007 and 2008 and 30 June 2009 and for each of the years ended 31 December 2006, 2007 and 2008 and the six months ended 30 June 2008 and 2009.

(a)

Consolidated Statements of Comprehensive Income

		Year ended 31 December									Six months ended 30 June
		2006			2007			2008			2008			2009
	Note	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000
											(Unaudited)

Revenues	5		9,842,049			12,044,857			13,154,092			6,560,579			5,328,020
Other income	6		3,968			45,377			81,637			42,407			314,875
Other gains/(losses)	6		20,223			(120,780	)		14,877			123			(1,294	)

Operating expenses
Aircraft fuel			(2,770,045	)		(3,703,668	)		(4,957,548	)		(2,205,349	)		(1,400,255	)
(Loss)/gain on fair value movements of fuel option contracts	8		—			—			(181,119	)		—			51,693
Take-off and landing charges			(855,101	)		(1,045,877	)		(1,127,735	)		(527,224	)		(587,617	)
Depreciation and amortization			(654,342	)		(746,914	)		(726,271	)		(357,496	)		(414,516	)
Wages, salaries and benefits	9		(901,986	)		(1,192,078	)		(1,412,436	)		(654,572	)		(778,364	)
Aircraft maintenance			(493,061	)		(726,249	)		(963,405	)		(509,242	)		(385,503	)
Food and beverages			(119,409	)		(118,207	)		(132,993	)		(66,115	)		(73,264	)
Aircraft operating lease rentals			(798,194	)		(1,103,385	)		(1,194,585	)		(581,744	)		(590,425	)
Transportation, accommodation and meals			(1,033,771	)		(1,222,629	)		(1,244,097	)		(690,046	)		(457,577	)
Cost of inventories			(832,324	)		(963,734	)		(681,483	)		(337,131	)		(258,001	)
Other operating lease rentals			(67,889	)		(83,867	)		(171,013	)		(77,536	)		(71,220	)
Selling and marketing expenses			(437,328	)		(511,972	)		(561,096	)		(266,769	)		(288,645	)
Civil aviation infrastructure levies			(183,320	)		(220,252	)		(235,739	)		(114,881	)		(130,468	)
Office, administrative and other expenses			(576,759	)		(804,783	)		(861,009	)		(373,634	)		(340,341	)
Total operating expenses			(9,723,529	)		(12,443,615	)		(14,450,529	)		(6,761,739	)		(5,724,503	)

Operating profit/(loss)	10		142,711			(474,161	)		(1,199,923	)		(158,630	)		(82,902	)
Finance income	11		143,102			283,481			296,975			298,064			11,851
Finance costs	12		(273,895	)		(374,964	)		(396,834	)		(204,578	)		(181,783	)
Share of results of associates	21		5,831			6,265			8,087			5,007			4,447
Share of results of jointly controlled entities	22		(1,629	)		3,799			1,245			440			2,943

Profit/(loss) before income tax			16,120			(555,580	)		(1,290,450	)		(59,697	)		(245,444	)
Income tax	13		(22,873	)		(18,148	)		(15,403	)		(8,787	)		(20,811	)

Loss for the year/period			(6,753	)		(573,728	)		(1,305,853	)		(68,484	)		(266,255	)
Other comprehensive income/(expense) for the year/period			5,079			3,169			(4,575	)		(4,976	)		2,449
Fair value movements of available-for-sale financial assets, net of tax			3,253			1,440			(4,566	)		(4,486	)		2,626
Other income/(expense) recognised directly in equity			1,826			1,729			(9	)		(490	)		(177	)

Total comprehensive loss for the year/period			(1,674	)		(570,559	)		(1,310,428	)		(73,460	)		(263,806	)

– 16 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

		Year ended 31 December									Six months ended 30 June
		2006			2007			2008			2008			2009
	Note	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000
											(Unaudited)

Profit/(loss) attributable to:	15
— Equity holders of the Target Company			8,430			(531,971	)		(1,199,420	)		33,571			(270,547	)
— Minority interests			(15,183	)		(41,757	)		(106,433	)		(102,055	)		4,292

			(6,753	)		(573,728	)		(1,305,853	)		(68,484	)		(266,255	)

Total comprehensive income/(loss) attributable to:
— Equity holders of the Target Company			13,509			(528,802	)		(1,203,995	)		28,595			(268,098	)
— Minority interests			(15,183	)		(41,757	)		(106,433	)		(102,055	)		4,292

			(1,674	)		(570,559	)		(1,310,428	)		(73,460	)		(263,806	)

Earnings/(loss) per share attributable to the equity holders of the Target Company during the year/period
— Basic and diluted (RMB)	16		0.01			(0.49	)		(1.11	)		0.03			(0.25	)

– 17 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(b)

Consolidated Balance Sheets

		As at 31 December									30 June
		2006			2007			2008			2009
	Note	RMB’000			RMB’000			RMB’000			RMB’000

Non-current assets
Intangible assets			20,619			17,293			15,291			21,874
Property, plant and equipment	17		7,698,080			7,711,010			8,578,881			8,696,469
Lease prepayments	18		148,554			145,183			118,682			117,244
Advanced payments on acquisition of aircraft	19		949,006			1,879,092			2,535,437			2,966,923
Investments in associates	21		51,792			54,257			57,929			55,085
Investments in jointly controlled entities	22		14,165			17,124			18,369			19,587
Available-for-sale financial assets	23		80,127			144,749			178,519			181,945
Other long-term assets	24		444,706			505,202			514,008			542,208
Deferred tax assets	35		4,791			6,425			7,728			7,470
			9,411,840			10,480,335			12,024,844			12,608,805
Current assets
Flight equipment spare parts			275,371			299,522			383,717			392,576
Trade receivables	25		587,863			804,645			524,975			489,262
Amounts due from related companies	41(b)(i)		225			1,756			5,740			2,935
Prepayments, deposits and other receivables	26		432,587			604,929			500,784			749,070
Cash and cash equivalents	27		621,960			944,174			1,055,936			1,951,542
			1,918,006			2,655,026			2,471,152			3,585,385
Current liabilities
Sales in advance of carriage			157,848			192,232			238,544			194,547
Trade payables and notes payable	28		897,891			1,159,915			1,378,917			1,340,061
Amounts due to related companies	41(b)(i)		—			2,445			4,513			12,339
Other payables and accrued expenses	29		1,219,793			1,835,579			1,859,587			1,744,648
Short term debentures	30		800,000			800,000			—			—
Current portion of obligations under finance leases	31		—			32,208			69,430			71,861
Current portion of borrowings	32		2,653,910			3,882,581			6,084,068			7,203,120
Income tax payable			13,765			7,955			4,020			20,250
Current portion of provision for return condition checks for aircraft under operating leases	33		35,510			—			—			—
Derivative financial instrument	8		—			—			172,458			58,037
			5,778,717			7,912,915			9,811,537			10,644,863

Net current liabilities			(3,860,711	)		(5,257,889	)		(7,340,385	)		(7,059,478	)

Total assets less current liabilities			5,551,129			5,222,446			4,684,459			5,549,327

– 18 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

		As at 31 December								30 June
		2006		2007			2008			2009
	Note	RMB’000		RMB’000			RMB’000			RMB’000

Non-current liabilities
Obligations under finance leases	31		—		466,748			1,085,354			1,048,516
Borrowings	32		3,337,295		2,916,205			2,781,675			2,854,788
Provision for return condition checks for
aircraft under operating leases	33		301,727		396,986			523,791			599,063
Other long-term liabilities	34		88,598		141,446			199,901			233,601
Deferred tax liabilities	35		217		375			142			295
Post-retirement benefit obligations	36		396,753		411,963			401,336			413,281
			4,124,590		4,333,723			4,992,199			5,149,544

Net assets/(Liabilities)			1,426,539		888,723			(307,740	)		399,783

Equity
Capital and reserves attributable to the equity holders of the Target Company
Share capital	37		1,081,500		1,081,500			1,081,500			1,303,722
Reserves	38		289,825		(238,977	)		(1,442,972	)		(952,852	)
			1,371,325		842,523			(361,472	)		350,870
Minority interests			55,214		46,200			53,732			48,913

Total equity			1,426,539		888,723			(307,740	)		399,783

– 19 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(c)

Company Balance Sheets

											As at
		As at 31 December									30 June
		2006			2007			2008			2009
	Note	RMB’000			RMB’000			RMB’000			RMB’000

Non-current assets
Intangible assets			19,277			15,607			12,196			18,623
Property, plant and equipment	17		7,384,894			7,317,889			8,120,885			8,242,516
Lease prepayments	18		148,379			145,049			118,590			117,172
Advanced payments on acquisition of aircraft	19		949,006			1,879,092			2,535,437			2,966,923
Investments in subsidiaries	20		281,022			327,436			470,436			470,436
Investments in associates	21		40,000			40,000			40,000			40,000
Investment in a jointly controlled entity	22		15,000			15,000			15,000			15,000
Available-for-sale financial assets	23		78,028			142,374			177,521			180,315
Other long-term assets	24		423,944			457,431			448,909			434,155
Deferred tax assets	35		4,422			5,945			6,665			6,024
			9,343,972			10,345,823			11,945,639			12,491,164
Current assets
Flight equipment spare parts			259,887			278,910			345,990			347,670
Trade receivables	25		261,209			326,068			197,331			201,407
Amounts due from related companies	41(b)(i)		60,521			63,470			34,622			52,366
Amounts due from subsidiaries	41(b)(ii)		50,000			70,000			50,000			75,000
Prepayments, deposits and other receivables	26		179,008			159,379			263,354			517,108
Cash and cash equivalents	27		305,501			389,036			434,188			1,482,058
			1,116,126			1,286,863			1,325,485			2,675,609
Current liabilities
Sales in advance of carriage			160,551			205,485			242,078			185,639
Trade payables and notes payable	28		704,528			812,253			939,130			930,326
Amounts due to related companies	41(b)(i)		—			2,445			4,513			12,231
Other payables and accrued expenses	29		772,362			1,078,022			1,310,837			1,180,308
Short term debentures	30		800,000			800,000			—			—
Current portion of obligations under
finance leases	31		—			32,208			69,430			71,861
Current portion of borrowings	32		2,520,060			3,515,081			5,730,568			6,826,620
Income tax payable			6,865			—			—			—
Current portion of provision for return condition checks for aircraft under operating leases	33		35,510			—			—			—
Derivative financial instrument	8		—			—			172,458			58,037
			4,999,876			6,445,494			8,469,014			9,265,022

Net current liabilities			(3,883,750	)		(5,158,631	)		(7,143,529	)		(6,589,413	)

Total assets less current liabilities			5,460,222			5,187,192			4,802,110			5,901,751

– 20 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

										As at
		As at 31 December								30 June
		2006		2007			2008			2009
	Note	RMB’000		RMB’000			RMB’000			RMB’000

Non-current liabilities
Obligations under finance leases	31		—		466,748			1,085,354			1,048,516
Borrowings	32		3,337,295		2,888,205			2,753,675			2,824,788
Provision for return condition checks for
aircraft under operating leases	33		207,984		272,110			360,010			410,986
Other long-term liabilities	34		88,598		141,446			196,401			230,101
Post-retirement benefit obligations	36		374,648		388,204			367,440			377,571
			4,008,525		4,156,713			4,762,880			4,891,962

Net assets			1,451,697		1,030,479			39,230			1,009,789

Equity
Share capital	37		1,081,500		1,081,500			1,081,500			1,303,722
Reserves	38		370,197		(51,021	)		(1,042,270	)		(293,933	)

Total equity			1,451,697		1,030,479			39,230			1,009,789

– 21 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(d)

Consolidated Cash Flow Statements

		Year ended 31 December									Six months ended 30 June
		2006			2007			2008			2008			2009
	Note	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000
											(Unaudited)

Cash flows from operating activities
Cash generated from operations	39(a)		1,518,699			852,554			404,725			(260,725	)		54,031
Income tax paid			(27,868	)		(26,177	)		(19,920	)		(17,119	)		(4,970	)

Net cash inflow/(outflow) from operating activities			1,490,831			826,377			384,805			(277,844	)		49,061

Cash flows from investing activities
Additions of property, plant and equipment and intangible assets			(1,130,664	)		(618,005	)		(488,506	)		(149,659	)		(359,696	)
Proceeds from disposal of property, plant and equipment			48,940			496,587			2,013			276			1,584
Acquisition of land use rights			—			(27	)		—			—			—
Advanced payments on acquisition of aircraft			(920,477	)		(1,210,250	)		(1,055,368	)		(976,965	)		(557,824	)
Repayments of advances on aircraft and flight equipment			—			204,760			222,379			76,287			—
Interest received			7,214			11,041			16,270			6,258			8,058
Dividend received			3,639			4,815			5,415			5,415			956
Capital injections in a jointly controlled entity			(500	)		—			—			—			—
Capital injections in associates			(1,078	)		(175	)		(1,000	)		—			—
Proceeds from disposal of available-for-sale financial assets			—			2,649			6,847			—			—
Purchase of available-for-sale financial assets			—			(63,034	)		—			—			—
Net cash outflow from investing activities			(1,992,926	)		(1,171,639	)		(1,291,950	)		(1,038,388	)		(906,922	)

– 22 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

		Year ended 31 December									Six months ended 30 June
		2006			2007			2008			2008			2009
	Note	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000
											(Unaudited)
Cash flows from financing activities
Proceeds from draw down of short-term bank loans			2,968,370			4,716,949			5,983,335			3,338,929			3,747,456
Repayments of short-term bank loans			(2,949,769	)		(3,314,778	)		(4,298,679	)		(1,962,640	)		(3,110,341	)
Proceeds from draw down of long-term bank loans			1,206,166			417,811			1,243,618			693,986			1,006,813
Repayments of long-term bank loans			(1,151,175	)		(726,981	)		(589,221	)		(269,019	)		(450,220	)
Principal repayments of finance lease obligations			—			(2,310	)		(36,997	)		(30,911	)		(33,959	)
Receipt of restricted bank deposit			—			—			—			—			46,921
Payments of restricted bank deposit			—			—			(46,921	)		(46,921	)		(171,835	)
Interest paid			(302,746	)		(445,715	)		(546,070	)		(254,893	)		(260,416	)
Proceeds from issuance of short-term debentures			774,960			800,000			—			—			—
Repayments of short-term debentures			—			(800,000	)		(800,000	)		—			—
New share issue	37		—			—			—			—			980,440
Contributions from minority shareholders of
subsidiaries			58,164			38,717			119,400			117,000			—
Dividends paid			(37,682	)		(5,974	)		(5,435	)		—			(1,040	)

Net cash inflow from financing
activities			566,288			677,719			1,023,030			1,585,531			1,753,819

Net increase in cash and cash equivalents			64,193			332,457			115,885			269,299			895,958
Cash and cash equivalents at beginning of the year/period			558,714			621,960			944,174			944,174			1,055,936
Exchange adjustments			(947	)		(10,243	)		(4,123	)		(1,960	)		(352	)

Cash and cash equivalents at end of the year/period			621,960			944,174			1,055,936			1,211,513			1,951,542

– 23 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(e)	Consolidated Statements of Changes in Equity

	Attributable to equity
	holders of the Target Company
						Retained
						profits/
	Share		Other			(accumulated						Minority			Total
	capital		reserves			losses)			Subtotal			interests			equity
	RMB’000		RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Balance at 1 January 2006		1,081,500		624,064			(315,301	)		1,390,263			17,468			1,407,731
Total comprehensive income/
(loss) for the year ended
31 December 2006		—		5,079			8,430			13,509			(15,183	)		(1,674	)
Capital injection		—		—			—			—			58,164			58,164
Dividend paid		—		—			(32,447	)		(32,447	)		(5,235	)		(37,682	)
Appropriation to statutory and
discretionary reserves		—		5,304			(5,304	)		—			—			—

Balance at 31 December 2006		1,081,500		634,447			(344,622	)		1,371,325			55,214			1,426,539

Balance at 1 January 2007		1,081,500		634,447			(344,622	)		1,371,325			55,214			1,426,539
Total comprehensive income/
(loss) for the year ended
31 December 2007		—		3,169			(531,971	)		(528,802	)		(41,757	)		(570,559	)
Capital injection		—		—			—			—			38,717			38,717
Dividend paid to minority interests in subsidiaries		—		—			—			—			(5,974	)		(5,974	)

Balance at 31 December 2007		1,081,500		637,616			(876,593	)		842,523			46,200			888,723

Balance at 1 January 2008		1,081,500		637,616			(876,593	)		842,523			46,200			888,723
Total comprehensive loss for
the year ended 31 December
2008		—		(4,575	)		(1,199,420	)		(1,203,995	)		(106,433	)		(1,310,428	)
Capital injection		—		—			—			—			119,400			119,400
Dividend paid		—		—			—			—			(5,435	)		(5,435	)

Balance at 31 December 2008		1,081,500		633,041			(2,076,013	)		(361,472	)		53,732			(307,740	)

Balance at 1 January 2009		1,081,500		633,041			(2,076,013	)		(361,472	)		53,732			(307,740	)
Total comprehensive income/(loss)
for the six months ended
30 June 2009		—		2,449			(270,547	)		(268,098	)		4,292			(263,806	)
New share issue (Note 37)		222,222		758,218			—			980,440			—			980,440
Dividend paid to minority interests
in subsidiaries		—		—			—			—			(9,111	)		(9,111	)

Balance at 30 June 2009		1,303,722		1,393,708			(2,346,560	)		350,870			48,913			399,783

Unaudited:
For the six months ended
30 June 2008
Balance at 1 January 2008		1,081,500		637,616			(876,593	)		842,523			46,200			888,723
Total comprehensive (loss)/income
for the six months ended
30 June 2008		—		(4,976	)		33,571			28,595			(102,055	)		(73,460	)
Capital injection		—		—			—			—			117,000			117,000

Balance at 30 June 2008		1,081,500		632,640			(843,022	)		871,118			61,145			932,263

– 24 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

II.	NOTES TO THE FINANCIAL INFORMATION

GENERAL INFORMATION

The Target Company, a joint stock company limited by shares, was established in the PRC on 25 October 2000. The Target Company listed its A shares on The Shanghai Stock Exchange on 11 October 2002. The registered address of the Target Company is 100 Airport Street, Pudong International Airport, Shanghai, the PRC.

The Target Group is principally engaged in the operation of civil aviation, including the provision of passenger, cargo, and mail delivery, other extended transportation services, export and import trading, tour operations and the provision of freight forwarding services, etc.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of the Financial Information are set out below. These policies have been consistently applied to the Relevant Periods presented, unless otherwise stated.

(a)

Basis of preparation

The Financial Information has been prepared in accordance with International Financial Reporting Standards (‘‘IFRS’’). It has been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.

The preparation of Financial Information in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Target Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the Financial Information are disclosed in Note 4.

In preparing the Financial Information, the Company’s directors have given careful consideration to the going concern status of the Target Group in the context of the Target Group’s current working capital requirements.

The Target Group’s accumulated losses were approximately RMB2,347 million as at 30 June 2009 and its current liabilities exceeded its current assets by approximately RMB7,059 million. Against this background, the Target Company’s management has taken active steps to seek additional sources of finance to improve the Target Group’s liquidity position. At 30 June 2009, the Target Group had total un-used contracted credit facilities of approximately RMB14.9 billion from banks.

Based on the Target Group’s history of obtaining finance and generating cash from operation, the Company’s directors believes that the Target Group will be able to generate/obtain sufficient operating funds/financing to enable it to operate and meet its liabilities as and when they fall due. Accordingly, the Company’s directors consider it is appropriate that the Financial Information should be prepared on a going concern basis and do not include any adjustments that would be required should the Target Company and the Target Group fail to continue as a going concern.

The following standards, interpretations and amendments to existing standards which are relevant to the Target Group’s operations but are not yet effective for the Relevant Periods and have not been early adopted by the Target Group:

IAS 27 (Revised) ‘‘Consolidated and Separate Financial Statements’’ (effective from annual period beginning on or after 1 July 2009). The amendment requires non-controlling interests (i.e. minority interests) to be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent. Total comprehensive income must be attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control are accounted for within equity. When control of a subsidiary is lost, the assets and liabilities and related equity components of the former subsidiary are derecognised. Any gain or loss is recognised in profit or loss. Any investment retained in the former subsidiary is measured at its fair value at the date when control is lost. The Target Group will apply IAS 27 (Revised) from 1 January 2010.

– 25 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

IFRS 3 (Revised) ‘‘Business Combinations’’ (effective for business combinations with acquisition date on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The amendment may bring more transactions into acquisition accounting as combinations by contract alone and combinations of mutual entities are brought into the scope of the standard and the definition of a business has been amended slightly. It now states that the elements are ‘‘capable of being conducted’’ rather than ‘‘are conducted and managed’’. It requires considerations (including contingent consideration), each identifiable asset and liability to be measured at its acquisition-date fair value, except leases and insurance contracts, reacquired right, indemnification assets as well as some assets and liabilities required to be measured in accordance with other IFRSs. They are income taxes, employee benefits, share-based payment and non current assets held for sale and discontinued operations. Any non-controlling interest in an acquiree is measured either at fair value or at the non- controlling interest’s proportionate share of the acquiree’s net identifiable assets. All acquisition related cost should be expensed. The Target Group will apply IFRS 3 (Revised) prospectively to all business combinations from 1 January 2010.

Amendment to IFRS 8 ‘‘Operating segments’’, effective for periods beginning on or after 1 January 2010. Disclosure of information about total assets and liabilities for each reportable segment is required only if such amounts are regularly provided to the CODM. The Target Group will apply IFRS 8 (amendment) from 1 January 2010.

Amendment to IAS 7 ‘‘Statement of cash flows’’, effective for periods beginning on or after 1 January 2010. Only expenditures that result in a recognised asset are eligible for classification as investing activities. The Target Group will apply IAS 7 (amendment) from 1 January 2010.

Amendment to IAS 17 ‘‘Leases’’, effective for periods beginning on or after 1 January 2010. The amendment removes the specific guidance on the classification of long-term leases of land as operating leases. When classifying land leases, the general principles applicable to the classification of leases should be applied. The classification of land leases has to be reassessed on adoption of the amendment on the basis of information existing at inception of the leases. The Target Group will apply IAS 17 (amendment) from 1 January 2010.

Amendment to IAS 36 ‘‘Impairment of assets’’, effective for periods beginning on or after 1 January 2010. This clarifies that the largest unit permitted for the goodwill impairment test is the lowest level of operating segment before any aggregation as defined in IFRS 8. The Target Group will apply IAS 36 (amendment) from 1 January 2010.

Amendment to IAS 38 ‘‘Intangible assets’’, effective for periods beginning on or after 1 July 2009. This clarifies the description of the valuation techniques commonly used to measure intangible assets acquired in a business combination when they are not traded in an active market. In addition, an intangible asset acquired in a business combination might be separable but only together with a related contract, identifiable asset or liability. In such cases, the intangible asset is recognised separately from goodwill but together with the related item. The Target Group will apply IAS 38 (amendment) from 1 January 2010.

Amendment to IAS 39 ‘‘Financial instruments: recognition and measurement’’, effective for periods beginning on or after 1 January 2010. Loan prepayment penalties are treated as closely related embedded derivatives, only if the penalties are payments that compensate the lender for loss of interest by reducing the economic loss from reinvestment risk. In addition, the scope exemption to business combination contracts only applies to forward contracts that are firmly committed to be completed between the acquirer and a selling shareholder to buy or sell an acquiree in a business combination at a future acquisition date. Therefore option contracts are not in this scope exemption. This amendment also clarifies that in a cash flow hedge of a forecast transaction that a reclassification of the gains or losses on the hedged item from equity to profit or loss is made during the period the hedged forecast cash flows affect profit or loss. The Target Group will apply IAS 39 (amendment) from 1 January 2010.

– 26 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

Amendment to IFRIC 9 ‘‘Reassessment of embedded derivatives’’, effective for periods beginning on or after 1 July 2009. This amendment aligns the scope of IFRIC 9 to the scope of IFRS 3 (revised): the interpretation does not apply to embedded derivatives in contracts acquired in a business combination, a common control combination or the formation of a joint venture. The Target Group will apply IFRIC 9 (amendment) from 1 January 2010.

(b)

Consolidation

The Financial Information includes the financial statements of the Target Company and all of its subsidiaries made up in the Relevant Periods.

(i)

Subsidiaries

Subsidiaries are all entities (including special purpose entities) over which the Target Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Target Group controls another entity.

Subsidiaries are fully consolidated from the date on which control is transferred to the Target Group. They are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Target Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest.

The excess of the cost of acquisition over the fair value of the Target Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the profit and loss in the consolidated statement of comprehensive income.

Inter-company transactions, balances and unrealised gains on transactions between Target Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Target Group.

In the Target Company’s balance sheet, the investments in subsidiaries are stated at cost less provision for impairment losses (Note 2(m)). The results of subsidiaries are accounted for by the Target Company on the basis of dividend received and receivable.

(ii)

Associates

Associates are all entities over which the Target Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Target Group’s investments in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition.

The Target Group’s share of its associates’ post-acquisition profits or losses is recognised in the consolidated statement of comprehensive income, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Target Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Target Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

– 27 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

Unrealised gains on transactions between the Target Group and its associates are eliminated to the extent of the Target Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Target Group.

Dilution gains and losses in associates are recognised in the consolidated statement of comprehensive income.

In the Target Company’s balance sheet, the investments in associates are stated at cost less provision for impairment losses (Note 2(m)). The results of associates are accounted for by the Target Company on the basis of dividend received and receivable.

(iii)

Jointly controlled entities

A jointly controlled entity is an entity in which the Target Group has joint control over its economic activity established under a contractual arrangement. The Target Group’s investments in jointly controlled entities include goodwill (net of any accumulated impairment loss) identified on acquisition.

The Target Group’s interests in jointly controlled entities are accounted for using the equity method of accounting based on the audited financial statements or management accounts of the jointly controlled entities. The Target Group’s share of its jointly controlled entities’ post-acquisition profits or losses is recognised in the consolidated statement of comprehensive income, and its share of post-acquisition movements is adjusted against the carrying amount of the investment. When the Target Group’s share of losses in a jointly controlled entity equals or exceeds its interest in that entity, including any other unsecured receivables, the Target Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the jointly controlled entity.

The Target Group recognises the portion of gains or losses on the sale of assets by the Target Group to the joint venture that it is attributable to the other venturers. The Target Group does not recognise its share of profits or losses from the joint venture that result from the Target Group’s purchase of assets from the jointly controlled entity until it resells the assets to an independent party. However, a loss on the transaction is recognised immediately if the loss provides evidence of a reduction in the net realisable value of current assets, or an impairment loss.

In the Target Company’s balance sheet, the investments in jointly controlled entities are stated at cost less provision for impairment losses (Note 2(m)). The results of jointly controlled entities are accounted for by the Target Company on the basis of dividends received and receivable.

(c)

Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the steering committee that makes strategic decisions.

(d)

Foreign currency translation

(i)

Functional and presentation currency

Items included in the financial statements of each of the Target Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘‘functional currency’’). The Financial Information are presented in Chinese Renminbi (‘‘RMB’’), which is the Target Company’s functional and presentation currency.

– 28 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(ii)

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit and loss in the statement of comprehensive income, except when deferred in equity as qualifying cash flow hedges or qualifying net investment hedges.

(e)

Revenue recognition and sales in advance of carriage

Revenue comprises the fair value of the consideration received or receivable for the sale of goods and the provision of services in the ordinary course of the Target Group’s activities. Revenue is shown net of business and value-added taxes, returns, rebates and discounts and after eliminating sales within the Target Group.

The Target Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Target Group’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Target Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

(i)

Traffic revenues

Passenger, cargo and mail revenues are recognised as traffic revenues when the transportation services are provided. The value of sold but unused tickets is recognised as sales in advance of carriage (‘‘SIAC’’).

(ii)

Tour operation revenues

Revenues from tour and travel services and other travel related services to recognised when the services are rendered.

(iii)

Other revenue

Revenues from other operating businesses, including income derived from the provision of ground services, cargo handling services and freight forwarding are recognised when the services are rendered.

Revenue from the sale of goods in connection with the import and export business is recognised when the significant risks and rewards of ownership have been transferred to the customer and collectability of the related receivables is reasonably assured. This is usually taken as the time when the goods are delivered and the customer has accepted the goods.

(f)

Government grants

Grants from the Government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Target Group will comply with all attached conditions.

Government grants relating to costs are deferred and recognised in the profit and loss in the statement of comprehensive income over the period necessary to match them with the costs that they are intended to compensate.

Government grants relating to property, plant and equipment are included in non-current liabilities as deferred government grants and are credited to the profit and loss in the statement of comprehensive income on a straight-line basis over the expected lives of the related assets.

– 29 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(g)

Maintenance and overhaul costs

In respect of aircraft and engines under operating leases, the Target Group has the responsibility to fulfill certain return conditions under the leases. Provision for the estimated cost of these return condition checks is made on a straight line basis over the term of the leases. Costs incurred for periodic overhauls during the lease periods are charged to profit and loss in the statement of comprehensive income as and when incurred.

In respect of aircraft and engines owned by the Target Group or held under finance leases, overhaul costs are capitalised as a component of property, plant and equipment and are depreciated over the appropriate maintenance cycles (Note 2(l)).

All other repairs and maintenance costs are charged to profit and loss in the statement of comprehensive income as and when incurred.

(h)

Interest income

Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Target Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate.

(i)

Borrowing costs

Borrowing costs incurred for the construction of any qualifying asset, including the interest attributable to loans for advance payments used to finance the acquisition of aircraft, are capitalised during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are expensed as incurred.

(j)

Current and deferred income tax

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the jurisdictions where the Target Company and its subsidiaries, associates and jointly controlled entities operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and jointly controlled entities, except where the timing of the reversal of the temporary difference is controlled by the Target Group and it is probable that the temporary difference will not reverse in the foreseeable future.

(k)

Intangible assets

Intangible assets represent acquired computer software licenses which are capitalised on the basis of the costs incurred to acquire and being to use the specific software. These costs are amortised using the straight-line method over their estimated useful lives.

– 30 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(l)

Property, plant and equipment

Property, plant and equipment is recognised initially at cost which comprises purchase price, and any directly attributable costs of bringing the assets to the condition for their intended use.

Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately.

When each major aircraft overhaul is performed, its cost is recognised in the carrying amount of the item of property, plant and equipment and is depreciated over the appropriate maintenance cycles. Components related to airframe overhaul cost, are depreciated on a straight-line basis over 5 to 7.5 years. Components related to engine overhaul costs, are depreciated between each overhaul period using the ratio of actual flying hours and estimated flying hours between overhauls. Upon completion of an overhaul, any remaining carrying amount of the cost of the previous overhaul is derecognised and charged to profit and loss in the statement of comprehensive income.

Except for components related to aircraft overhaul costs, the depreciation method of which has been described in the preceding paragraph, other depreciation of property, plant and equipment is calculated using the straight-line method to write down their costs to their residual values over their estimated useful lives, as follows:

Aircraft, engines and flight equipment	10 to 20 years
Buildings	40 to 45 years
Other property, plant and equipment	5 to 18 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing the proceeds with the assets’ carrying amount and are recognised in the profit and loss in the statement of comprehensive income.

Construction in progress represents buildings under construction and plant and equipment pending installation. This includes the costs of construction or acquisition and interest capitalised. No depreciation is provided on construction in progress until the asset is completed and ready for use.

(m)

Impairment of investments in subsidiaries, associates, jointly controlled entities and non-financial assets

Assets that have an indefinite useful life or which are not yet available for use are not subject to amortisation and are tested for impairment at least annually or whenever there is indication of impairment. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that have suffered an impairment are reviewed for possible reversal of the impairment at each balance sheet date.

(n)

Lease prepayments

Lease prepayments represent acquisition costs of land use rights less accumulated amortisation. Amortisation is provided over the lease period of the land use rights on a straight-line basis.

(o)

Advanced payments on acquisition of aircraft

Advanced payments on acquisition of aircraft represent payments to aircraft manufacturers to secure deliveries of aircraft in future years, including attributable finance costs, and are included in non-current assets. The balance is transferred to property, plant and equipment upon delivery of the aircraft.

– 31 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(p)

Flight equipment spare parts

Flight equipment spare parts are stated at the lower of cost and net realisable value. Cost is determined using the weighted average method. The cost of flight equipment spare parts comprises the purchase price (net of discounts), freight charges, duty and value added tax and other miscellaneous charges. Net realisable value is the estimated selling price of the flight equipment in the ordinary course of business, less applicable selling expenses.

(q)

Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Target Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the assets is reduced through the use of an allowance account, and the amount of the loss is recognised in the statement of comprehensive income. When a trade receivable is uncollectible, it is written off against the provision account for trade receivables. Subsequent recoveries of amounts previously written off are credited in the profit and loss in the statement of comprehensive income.

(r)

Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less.

(s)

Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any differences between the proceeds (net of transaction costs) and the redemption value is recognised in the profit and loss in the statement of comprehensive income over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Target Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

(t)

Provisions

Provisions are recognised when the Target Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.

– 32 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(u)

Leases

Finance leases

The Target Group leases certain property, plant and equipment. Leases of property, plant and equipment, including aircraft, where the Target Group has acquired substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments.

Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in current portion and non-current portion of obligations under finance leases. The interest element of the finance cost is charged to profit and loss in the statement of comprehensive income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Leased assets are depreciated using a straight-line basis over their expected useful lives to residual values.

For sale and leaseback transactions resulting in a finance lease, differences between sales proceeds and net book values are deferred and amortised over the minimum lease terms.

Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit and loss in the statement of comprehensive income on a straight-line basis over the period of the lease.

For sale and leaseback transactions resulting in an operating lease, differences between sales proceeds and net book values are recognised immediately in the profit and loss in the statement of comprehensive income, except to the extent that any profit or loss is compensated by future lease payments at above or below market value.

(v)

Employee benefits

Employee benefits mainly include salaries, bonuses, allowances and subsidies, retirement benefit obligations, housing funds and other expenses related to the employees for their services. The Target Group recognizes employee benefits as liabilities during the accounting period when employees rendered services and allocates them to the related expenses based on different beneficiaries.

(i)

Retirement benefit obligations

The Target Group primarily pays contributions on a monthly basis to various defined contribution retirement benefit plans organized by relevant municipal and provincial governments in the PRC. The municipal and provincial governments undertake to assume the retirement benefit obligations of all existing and future retired employees payable under these plans. Except for the post retirement benefits that the Target Group provides to certain eligible employees as described in the following paragraph, the Target Group has no legal or constructive obligations for further contributions if the funds do not hold sufficient assets to pay all employees the benefit relating to their current and past services.

In addition to making contributions to the above defined contribution retirement benefit plans, the Target Group also provides certain post-retirement subsidies to certain employees. These post- retirement benefits constitute defined benefit obligation under IFRS. The liabilities recognised in the balance sheet in respective of these defined benefit obligations are the present value of the defined benefit obligations at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised past-service costs. The defined benefits obligation is calculated annually using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. Actuarial gain and losses arising from experience adjustment and changes in actuarial assumptions in excess of the greater of 10% of the value of planed assets or 10% of the defined benefit obligation are charged or credited to the profit and loss in the statement of comprehensive income statement over the employees’ expected average remaining working lives.

– 33 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

Past-service cost are recognised immediately in the profit and loss in the statement of comprehensive income, unless the changes to the pension plan are conditional on the employees remaining in service for a specific period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period.

(ii)

Housing funds

The Target Group provides housing funds based on certain percentages of salaries and at no more than the upper limits of the requirements. These benefits are paid to social security organisations and the amounts paid are expensed as incurred. The Target Group has no legal or constructive obligations for further contributions if the fund does not hold sufficient assets to pay all employees the benefit relating to their current and past services.

(w)

Derivative financial instruments

Derivative financial instruments are initially recognised in the balance sheet at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged.

As described in the felling paragraph, derivative financial instruments that do not qualify for hedge accounting are accounted for as trading instruments and any unrealised gains or losses, being changes in fair value of the derivatives, are recognised in the profit and loss in the statement of comprehensive income immediately.

The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged items is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability.

(x)

Available-for-sale financial assets

Investments in securities other than subsidiaries, associates and jointly controlled entities, being held for non- trading purposes, are classified as available-for-sale financial assets and are recognised on the trade-date, being the date on which the Target Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs. At each balance sheet date, the fair value is remeasured, with any resulting gain or loss being recognised directly in equity, except for impairment losses. When these investments are derecognised, the cumulative gain or loss previously recognised directly in equity is recognised in the profit and loss in the statement of comprehensive income.

The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific inputs. Where fair value of unquoted investments cannot be measured reliably, the related investments are stated at cost less impairment losses.

The Target Group assesses at each balance sheet date whether there is objective evidence that a financial asset is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the securities below its cost is considered an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss, measured as the difference between the acquisition cost and the current fair value less any impairment loss on that financial asset previously recognised in the profit and loss in the statement of comprehensive income, is removed from equity and recognised in the profit and loss in the statement of comprehensive income. Impairment losses recognised in the profit and loss in the statement of comprehensive income on equity instruments are not reversed through the statement of comprehensive income.

– 34 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(y)

Dividend distribution

Dividend distribution to the Target Company’s shareholders is recognised as a liability in the Financial Information in the period in which the dividends are approved by the Target Company’s shareholders.

FINANCIAL RISK MANAGEMENT

(a)

Financial risk factors

The Target Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and fuel price risk), credit risk, and liquidity risk. The Target Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Target Group’s financial performance. The Target Group uses derivative financial instruments to manage certain risk exposures.

(i)

Foreign currency risk

Since 21 July 2005, the PRC government reformed the Renminbi exchange rate system and established a floating exchange rate system in which the exchange rate would be adjusted and managed based on market supply and demand with reference to a basket of foreign currencies. The fluctuation in the Renminbi exchange rate is affected by the domestic and international economy, the political situation and the currency supply and demand of the currency, and thus the Renminbi exchange rate in the future may therefore be very different from the current exchange rate.

The Target Group operates its business in several countries and territories. The Target Group generates its revenue in different currencies, and its foreign currency liabilities at the end of the period are much higher than its foreign currency assets. The Target Group’s major liability item (purchases and leases of aircraft) is mainly priced and settled in US dollars. In addition, fluctuations in exchange rates will affect the Target Group’s costs incurred from foreign purchases such as aircraft, flight equipment and aviation fuel, and take-off and landing charges at foreign airports.

The following table details the Target Group’s and the Target Company’s exposure at the balance sheet date to major currency risk which is primarily attributable to US dollars.

	Target Group
										As at
	As at 31 December									30 June
	2006			2007			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000

Trade and other receivables		25,192			36,510			47,144			78,824
Cash and cash equivalents		34,411			151,483			45,665			54,539
Trade and other payables		(83,328	)		(156,042	)		(149,111	)		(115,532	)
Obligations under finance leases		—			(498,956	)		(1,154,784	)		(1,120,377	)
Borrowings		(4,198,596	)		(4,303,086	)		(3,670,354	)		(4,079,153	)

Net balance sheet exposure		(4,222,321	)		(4,770,091	)		(4,881,440	)		(5,181,699	)

– 35 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

	Target Company
										As at
	As at 31 December									30 June
	2006			2007			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000

Trade and other receivables		2,261			1,162			21,454			54,493
Cash and cash equivalents		17,789			134,465			37,907			30,690
Trade and other payables		(14,106	)		(39,839	)		(74,497	)		(83,691	)
Obligations under finance leases		—			(498,956	)		(1,154,784	)		(1,120,377	)
Borrowings		(4,198,596	)		(4,303,086	)		(3,670,354	)		(4,079,153	)

Net balance sheet exposure		(4,192,652	)		(4,706,254	)		(4,840,274	)		(5,198,038	)

The following table indicates the approximate change in the Target Group’s and the Target Company’s profit and loss in response to a 5% appreciation of the RMB against US dollars at the balance sheet date with all other variables held constant.

	Target Group
				As at
	As at 31 December			30 June
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000

Increase in profit after tax	211,116	238,505	244,072	259,085

	Target Company
				As at
	As at 31 December			30 June
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000

Increase in profit after tax	209,633	235,313	242,014	259,902

(ii)

Interest rate risk

The Target Group’s interest-rate risk primarily arises from borrowings and obligations under finance leases. Borrowings issued at variable rates expose the Target Group to cash flow interest-rate risk. Borrowings issued at fixed rates expose the Target Group to fair value interest-rate risk. For the years ended 31 December 2006, 2007 and 2008 and the six months ended 30 June 2009, the Target Group’s borrowings at variable rates were primarily denominated in US dollars. The interest rates and terms of repayment of borrowings made to the Target Group are disclosed in Notes 32 to the Financial Information. The Target Group’s obligations under finance leases were principally at variable rates and denominated in US dollars as disclosed in Notes 31 to the Financial Information.

The Target Group currently does not have any interest hedging/swap contracts. To mitigate the impact of interest rate fluctuations, the Target Company’s management closely monitors the Target Group’s exposure to interest rate risk.

– 36 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

The following table indicates the approximate change in the Target Group’s and the Target Company’s profit and loss if interest rate had been 25 basis points higher with all other variables held constant.

	Target Group
										As at
	As at 31 December									30 June
	2006			2007			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000

Decrease in profit after tax		(13,358	)		(17,272	)		(20,642	)		(11,449	)

		Target Company
										As at
	As at 31 December									30 June
	2006			2007			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000

Decrease in profit after tax		(13,076	)		(16,591	)		(19,522	)		(11,455	)

(iii)

Fuel price risk

The Target Group’s results of operations may be significantly affected by fluctuations in fuel prices which is a significant expense for the Target Group. For the years ended 31 December 2006, 2007 and 2008 and the six months ended 30 June 2009, aircraft fuel accounted for 28%, 30%, 34% and 24% of the Target Group’s operating expenses respectively. The Target Group entered into fuel option contract in 2008 to hedge against fuel price risk although the fuel option contract does not qualify for hedge accounting. Details of the fuel option contract are disclosed in Note 8 to the Financial Information.

For the years ended 31 December 2006, 2007 and 2008 and the six months ended 30 June 2009, if the fuel price had been 5% higher/lower with all other variables held constant (excluding the impact of fuel option contracts), the Target Group’s fuel cost would have been RMB139 million, RMB185 million, RMB248 million and RMB70 million higher/lower respectively.

(iv)

Credit risk

The Target Group’s credit risk is primarily attributable to cash and cash equivalents, restricted cash, trade and other receivables and derivative financial instruments as well as credit exposures to sales agents. The Target Group has established different credit policies for customers in each of its core businesses. The average credit period granted to trade debtors was 60 days. The Target Group reviews the recoverable amount of each individual debt at each balance sheet date to ensure adequate impairment losses are made for irrevocable amounts.

The Target Group has policies in place to ensure that sales of blank tickets are only made available to sales agents with an appropriate credit history. A major portion of sales are conducted through sales agents and the majority of these agents are connected to various settlement plans and/or clearing systems which impose requirements on the credit standing.

A significant portion of the Target Group’s air tickets are sold by agents participating in the Billing and Settlements Plan (‘‘BSP’’), a clearing system between airlines and sales agents organised by the International Air Transportation Association. As at 31 December 2006, 2007 and 2008 and 30 June 2009, the balance due from BSP agents amounted to approximately RMB113 million, RMB150 million, RMB75 million and RMB116 million respectively.

Except for the above, the Target Group has no significant concentration of credit risk, with the exposure spreading over a number of counterparties.

– 37 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

Further quantitative disclosures in respect of the Target Group’s exposure to credit risk arising from trade receivables are set out in Note 25.

The Target Group’s cash management policy is to deposit cash and cash equivalents mainly in state- owned banks and other banks, which are highly rated by an international credit rating company. The Target Company’s management does not expect any loss to arise from non-performance by these banks.

(v)

Liquidity risk

The Target Group’s primary cash requirements have been for additions of and upgrades to aircraft, engines and flight equipment and payments on related borrowings. The Target Group finances its working capital requirements through a combination of funds generated from operations and bank borrowings. The Target Group generally finances the acquisition of aircraft through long-term finance leases and bank loans.

The Target Group generally operates with a working capital deficit. As at 31 December 2006, 2007 and 2008 and 30 June 2009, the Target Group’s net current liabilities amounted to RMB3,861 million, RMB5,258 million, RMB7,340 million and RMB7,059 million respectively. For each of the years ended 31 December 2006, 2007 and 2008 and six months ended 30 June 2009, the Target Group recorded a net cash inflow from operating activities of RMB1,519 million, RMB853 million, RMB405 million and RMB54 million respectively, a net cash outflow from investing activities and financing activities of RMB1,426 million, RMB494 million, RMB267 million and net cash inflow of RMB847 million respectively, and an increase in cash and cash equivalents of RMB64 million, RMB332 million, RMB116 million and RMB896 million respectively.

Due to the dynamic nature of the underlying businesses, the Target Group’s treasury policy aims at maintaining flexibility in funding by keeping credit lines available. The Target Company’s management monitors rolling forecasts of the Target Group’s liquidity reserves on the basis of expected cash flows.

The directors of the Company believe that the Target Group has obtained sufficient general credit facilities from PRC banks and generated adequate cash from operations for financing future capital commitments and for working capital purposes (see Notes 2(a)).

The table below analyses the financial liabilities of the Target Group and the Target Company that will be settled into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows:

	Target Group
	Less than		Between 1		Between 2
	1 year		and 2 years		and 5 years		Over 5 years
	RMB’000		RMB’000		RMB’000		RMB’000

At 31 December 2006
Short term debentures		800,000		—		—		—
Borrowings		2,891,292		730,380		1,769,798		1,694,534
Trade, notes and other payables		2,117,684		—		—		—

Total		5,808,976		730,380		1,769,798		1,694,534

At 31 December 2007
Short term debentures		800,000		—		—		—
Borrowings		4,123,129		783,820		1,562,454		1,221,386
Obligations under finance leases		54,784		54,590		164,089		381,686
Trade, notes and other payables		2,995,494		—		—		—

Total		7,973,407		838,410		1,726,543		1,603,072

– 38 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

	Target Group
	Less than		Between 1		Between 2
	1 year		and 2 years		and 5 years		Over 5 years
	RMB’000		RMB’000		RMB’000		RMB’000

At 31 December 2008
Borrowings		6,332,098		863,049		1,422,724		871,174
Derivative financial instrument		172,458		—		—		—
Obligations under finance leases		103,891		106,146		329,018		862,364
Trade, notes and other payables		3,238,504		—		—		—

Total		9,846,951		969,195		1,751,742		1,733,538

At 30 June 2009
Borrowings		7,395,213		838,409		1,374,833		867,350
Derivative financial instrument		58,037		—		—		—
Obligations under finance leases		108,626		110,083		339,860		815,351
Trade, notes and other payables		3,084,709		—		—		—

Total		10,646,585		948,492		1,714,693		1,682,701

	Target Company
	Less than		Between 1		Between 2
	1 year		and 2 years		and 5 years		Over 5 years
	RMB’000		RMB’000		RMB’000		RMB’000
At 31 December 2006
Short term debentures		800,000		—		—		—
Borrowings		2,757,442		730,380		1,769,798		1,694,534
Trade, notes and other payables		1,476,890		—		—		—

Total		5,034,332		730,380		1,769,798		1,694,534

At 31 December 2007
Short term debentures		800,000		—		—		—
Borrowings		3,737,875		783,820		1,530,218		1,221,386
Obligations under finance leases		54,784		54,590		164,089		381,686
Trade, notes and other payables		1,890,275		—		—		—

Total		6,482,934		838,410		1,694,307		1,603,072

At 31 December 2008
Borrowings		5,965,126		832,518		1,422,724		871,174
Derivative financial instrument		172,458		—		—		—
Obligations under finance leases		103,891		106,146		329,018		862,364
Trade, notes and other payables		2,249,967		—		—		—

Total		8,491,442		938,664		1,751,742		1,733,538

At 30 June 2009
Borrowings		7,005,883		838,409		1,340,604		867,350
Derivative financial instrument		58,037		—		—		—
Obligations under finance leases		108,626		110,083		339,860		815,351
Trade, notes and other payables		2,110,634		—		—		—

Total		9,283,180		948,492		1,680,464		1,682,701

– 39 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(b)

Capital risk management

The Target Group’s objectives when managing capital are to safeguard the Target Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Target Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

Consistent with others in the industry, the Target Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings less cash and cash equivalents. Total capital is calculated as equity, as shown in the consolidated balance sheet, plus net debt.

The gearing ratios at 31 December 2006, 2007 and 2008 and 30 June 2009 were as follows:

										As at
	As at 31 December									30 June
	2006			2007			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000

Total borrowings		5,991,205			6,798,786			8,865,743			10,057,908
Less: Cash and cash equivalents		(621,960	)		(944,174	)		(1,055,936	)		(1,951,542	)

Net debt		5,369,245			5,854,612			7,809,807			8,106,366
Total equity		1,426,539			888,723			(307,740	)		399,783

Total capital		6,795,784			6,743,335			7,502,067			8,506,149

Gearing ratio		0.79			0.87			1.04			0.95

(c)

Fair value estimation of financial assets and liabilities

The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Target Group is the current bid price; the quoted market price used for financial liabilities is the current asking price.

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Target Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of fuel option contracts is determined by reference to mark-to-market values provided by counterparties applying appropriate option valuation models.

The fair values of other long-term receivables are based on cash flows discounted using a rate based on the borrowing rate. The fair value of long term financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Target Group for similar financial instruments (Notes 31 and 32).

The carrying amounts of the Target Group and the Target Company’s current financial assets (including trade and other receivables, amounts due from related companies, and cash equivalents) and short term financial liabilities (including trade payables and notes payable, amounts due to related companies, other payables and accrued expenses and short term borrowings) are assumed to approximate their fair values due to their short- term maturities.

– 40 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Estimates and judgments used in preparing the Financial Information are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Target Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

(a)

Estimated impairment of property, plant and equipment

The Target Group tests whether property, plant and equipment have been impaired in accordance with the accounting policy stated in Note 2(l) to the Financial Information. An impairment loss is recognized for the amount by which the recoverable amount of property, plant and equipment being lower than its carrying value. The recoverable amount is the higher of an asset’s fair value less cost to sell and value in use. The calculation of value in use is based on cash flow projections approved by management in which various assumptions and estimations (including but not limited to ticket price, fuel price, load factor, aircraft daily utilisation and discount rate etc.) are involved. Different judgments and estimations could significantly affect the results of the calculation.

(b)

Revenue recognition

The Target Group recognises passenger, cargo and mail revenues in accordance with the accounting policy stated in Note 2(e) to the Financial Information. Unused tickets are recognised in traffic revenues based on management’s estimates. Management annually evaluates the balance in the SIAC and records any adjustments, which can be material, in the period the evaluation is completed.

These adjustments result from differences between the estimates of certain revenue transactions and the timing of recognising revenue for any unused air tickets and the related sales price, and are impacted by various factors, including a complex pricing structure and interline agreements throughout the industry, which affect the timing of revenue recognition.

(c)

Frequent flyer programme

The Target Company operates a frequent flyer programme called ‘‘Crane Club’’ that provides travel awards to programme members based on accumulated miles. A portion of passengers revenue attributable to the award of frequent flyer benefits is deferred and recognised when the miles have been redeemed or have expired. The deferment of revenue is estimated based on historical trends of redemptions which are then used to project the expected utilisation of these benefits and the estimated fair value of the redeemable miles. Any remaining unutilised benefits are recognised as deferred revenue. Different judgments and estimates could significantly affect the estimated deferred revenue or impact the results of operations.

(d)

Depreciation of components related to overhaul costs

Depreciation of components related to airframe and engine overhaul costs are based on the Target Group’s historical experience with similar airframe and engine models and taking into account anticipated overhauls costs, the timeframe between each overhaul and the ratio of actual flying hours and estimated flying hours between overhauls. Different judgments or estimates could significantly affect the estimated depreciation charge and materially impact the results of operations.

(e)

Provision for costs of return condition checks for aircraft and engines under operating leases

Provision for the estimated costs of return condition checks of aircraft and engines under operating leases is made based on the estimated costs for such return condition checks and taking into account anticipated flying hours, flying cycles and the timeframe between each overhaul. These judgments or estimates are based on historical experience of returning similar airframe and engine models, actual costs incurred and aircraft and engine status. Different judgments or estimates could significantly affect the estimated provision for costs of return condition checks.

– 41 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(f)

Post retirement benefits

The Target Group operates and maintains defined retirement benefit plans which provide certain retirees with various retirement subsidies. The cost of providing the benefits in the defined retirement benefit plans is actuarially determined and recognised over the eligible employees’ service period by utilising various actuarial assumptions and using the projected unit credit method in accordance with the accounting policy stated in Note 2(v) to the Financial Information. These assumptions include, without limitation, the selection of discount rate, annual rate of increase of per capita benefit payment and employees’ turnover rate etc. The discount rate is based on management’s review of local high quality corporate bonds. The annual rate of increase of benefit payments is based on the general local economic conditions. The employees’ turnover rate is based on historical trends of the Target Group. Additional information regarding the retirement benefit plans is disclosed in Note 36 to the Financial Information.

(g)

Taxation

The Target Group is subject to various taxes in different areas. Significant judgement is required in determining the provision for various tax charges. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the tax provisions in the period in which such determination is made.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. In assessing the amount of deferred tax assets that need to be recognised, the Target Group considers future taxable income and ongoing prudent and feasible tax planning strategies. In the event that the Target Group’s estimates of projected future taxable income and benefits from available tax strategies are changed, or changes in current tax regulations are enacted that would impact the timing or extent of the Target Group’s ability to utilise the tax benefits of net operating loss carry forwards in the future, adjustments to the recorded amount of net deferred tax assets and taxation expense are made.

REVENUES

The Target Group is principally engaged in the operation of civil aviation (including the provision of passenger, cargo and mail delivery), other extended transportation services, export and import trading, tour operations and the provision of freight forwarding services.

	Target Group
	Year ended 31 December									Six months ended 30 June
	2006			2007			2008			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000
										(Unaudited)

Revenues
Traffic revenues
— Passenger		6,301,485			7,467,893			8,400,729			4,057,528			3,714,386
— Cargo and mail		1,284,774			1,850,631			1,977,810			1,024,984			489,349
Revenue from tour operations		1,124,660			1,329,857			1,359,314			748,849			581,744
Revenue from export and import
trading		864,655			976,116			726,413			359,026			265,779
Revenue form freight forwarding
services		459,304			565,710			713,467			331,693			265,868
Others		54,796			170,911			285,139			214,798			157,070

		10,089,674			12,361,118			13,462,872			6,736,878			5,474,196

Less: Business tax (Note)		(247,625	)		(316,261	)		(308,780	)		(176,299	)		(146,176	)

		9,842,049			12,044,857			13,154,092			6,560,579			5,328,020

Note:

The Target Group’s traffic revenues are generally subject to PRC business tax levied at rates of 3% or 5%, pursuant to PRC business tax rules and regulations.

– 42 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

OTHER INCOME AND OTHER GAINS/(LOSSES)

	Target Group
	Year ended 31 December							Six months ended 30 June
	2006		2007			2008		2008		2009
	RMB’000		RMB’000			RMB’000		RMB’000		RMB’000
								(Unaudited)

Other income
— Government subsidies (Note (a))		3,968		45,377			81,637		42,407		314,875

Other gains/(losses)
— Gains/(losses) on disposal of
property, plant and equipment
(Note (b))		20,223		(120,780	)		14,877		123		(1,294	)

Notes:

(a)

The government subsidies represent subsidies granted by the local governments to the Target Group. The amount for the period ended 30 June 2009 mainly represents the refunds of civil aviation infrastructure levies paid and payable by the Target Group for the period from 1 July 2008 to 30 June 2009 pursuant to the relevant notice issued by Ministry of Finance and China Aviation Administration of China (‘‘CAAC’’).

(b)

The losses on disposal of property, plant and equipment in 2007 represent the loss arising from the sales of certain passenger freighters which were leased back by the Target Group under operating leases.

SEGMENT INFORMATION

The Target Company’s management reviews the Target Group’s internal reporting in order to assess performance and allocate resources. The Target Company’s management has determined the operating segments based on these reports.

Management considers the business from both of service/product and geographic perspectives. From a service/ product perspective, management assesses the performance of the following segments: (1) passenger (including cargo carried by passenger flights); (2) cargo; (3) tour operation; (4) import and export trading; and (5) freight forwarding. Performances of the other businesses carried out by the less material subsidiaries of the Target Group are assessed together by management as ‘‘all other segments’’. In addition, management further evaluates the revenues by analyzing on a geographic basis (domestic, Hong Kong, United States, Japan and other countries).

The Target Company’s management assesses the performance of the operating segments based on operating profit. Other information provided to the Target Company’s management is measured in a manner consistent with that in the Financial Information.

Sales between segments are carried out at arm’s length. The revenues from external parties reported to the Target Company’s management are measured in a manner consistent with that in the consolidated statement of comprehensive income.

– 43 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

The segment results for the year ended 31 December 2006 are as follows:

							Import and
							Tour		Export			Freight			All other
	Passenger			Cargo			Operations		Trading			Forwarding			segments			Total
	RMB’000			RMB’000			RMB’000		RMB’000			RMB’000			RMB’000			RMB’000

Traffic revenues		7,028,316			579,029			—		—			—			—			7,607,345
Other revenues and
operating income		52,489			13,613			1,119,234		866,721			558,898			217,703			2,828,658

Total segment
revenues		7,080,805			592,642			1,119,234		866,721			558,898			217,703			10,436,003
Inter-segment
revenues		(252,744	)		(40,629	)		—		(2,304	)		(105,149	)		(193,128	)		(593,954	)

Revenues		6,828,061			552,013			1,119,234		864,417			453,749			24,575			9,842,049

Operating profit/
(loss)		106,680			(35,561	)		18,822		17,506			29,231			6,033			142,711
Finance income																			143,102
Finance costs																			(273,895	)
Share of results of
associates																			5,831
Share of results of
jointly controlled
entities																			(1,629	)

Profit before income
tax																			16,120
Income tax																			(22,873	)

Loss for the year																			(6,753	)

Other segment items included in the consolidated statement of comprehensive income for the year ended 31 December 2006 are as follows:

					Import and
					Tour		Export		Freight		All other
	Passenger		Cargo		Operations		Trading		Forwarding		segments		Total
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Depreciation		623,095		4,368		4,999		272		5,795		5,708		644,237
Amortisation		8,409		8		206		—		224		1,258		10,105

– 44 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

The segment assets and liabilities at 31 December 2006 and capital expenditure for the year then ended are as follows:

							Import and
							Tour			Export			Freight			All other
	Passenger			Cargo			Operations			Trading			Forwarding			segments			Total
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Segment assets		10,070,563			358,912			301,144			114,997			129,057			289,216			11,263,889
Investments in
associates		—			—			—			—			—			51,792			51,792
Investments in jointly controlled entities		—			—			—			—			—			14,165			14,165

Total assets		10,070,563			358,912			301,144			114,997			129,057			355,173			11,329,846

Segment liabilities		(9,035,493	)		(324,883	)		(216,847	)		(84,362	)		(76,471	)		(165,251	)		(9,903,307	)

Capital expenditure
(Notes 17, 18 and 19)		1,937,196			30,581			4,757			253			8,566			132,135			2,113,488

The segment results for the year ended 31 December 2007 are as follows:

							Import and
							Tour		Export			Freight			All other
	Passenger			Cargo			Operations		Trading			Forwarding			segments			Total
	RMB’000			RMB’000			RMB’000		RMB’000			RMB’000			RMB’000			RMB’000

Traffic revenues		8,035,570			1,294,704			—		—			—			—			9,330,274
Other revenues and
operating income		101,644			99,934			1,323,345		1,015,310			652,092			296,017			3,488,342

Total segment
revenues		8,137,214			1,394,638			1,323,345		1,015,310			652,092			296,017			12,818,616
Inter-segment
revenues		(305,715	)		(130,917	)		—		(39,474	)		(93,764	)		(203,889	)		(773,759	)

Revenues		7,831,499			1,263,721			1,323,345		975,836			558,328			92,128			12,044,857

Operating (loss)/
profit		(397,810	)		(180,741	)		18,880		31,015			28,943			25,552			(474,161	)
Finance income																			283,481
Finance costs																			(374,964	)
Share of results of
associates																			6,265
Share of results of
jointly controlled
entities																			3,799

Loss before income
tax																			(555,580	)
Income tax																			(18,148	)

Loss for the year																			(573,728	)

– 45 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

Other segment items included in the consolidated statement of comprehensive income for the year ended 31 December 2007 are as follows:

					Import and
					Tour		Export		Freight		All other
	Passenger		Cargo		Operations		Trading		Forwarding		segments		Total
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Depreciation		706,137		7,219		4,941		292		6,359		10,861		735,809
Amortisation		10,400		63		363		—		138		141		11,105

The segment assets and liabilities at 31 December 2007 and capital expenditure for the year then ended are as follows:

							Import and
							Tour			Export			Freight			All other
	Passenger			Cargo			Operations			Trading			Forwarding			segments			Total
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Segment assets		11,324,382			699,962			393,529			149,999			159,853			336,255			13,063,980
Investments in
associates		—			—			—			—			—			54,257			54,257
Investments in jointly controlled entities		—			—			—			—			—			17,124			17,124

Total assets		11,324,382			699,962			393,529			149,999			159,853			407,636			13,135,361

Segment liabilities		(10,750,137	)		(773,223	)		(297,766	)		(115,355	)		(79,602	)		(230,555	)		(12,246,638	)

Capital expenditure
(Notes 17, 18 and 19)		2,186,685			22,104			16,617			28			4,608			70,558			2,300,600

– 46 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

The segment results for the year ended 31 December 2008 are as follows:

							Import and
							Tour		Export			Freight			All other
	Passenger			Cargo			Operations		Trading			Forwarding			segments			Total
	RMB’000			RMB’000			RMB’000		RMB’000			RMB’000			RMB’000			RMB’000

Traffic revenues		8,941,464			1,518,584			—		—			—			—			10,460,048
Other revenues and
operating income		321,133			155,579			1,352,174		729,679			805,095			274,741			3,638,401

Total segment
revenues		9,262,597			1,674,163			1,352,174		729,679			805,095			274,741			14,098,449
Inter-segment
revenues		(569,577	)		(108,766	)		—		(3,513	)		(100,360	)		(162,141	)		(944,357	)

Revenues		8,693,020			1,565,397			1,352,174		726,166			704,735			112,600			13,154,092

Operating (loss)/
profit		(1,022,079	)		(263,329	)		4,675		31,508			32,730			16,572			(1,199,923	)
Finance income																			296,975
Finance costs																			(396,834	)
Share of results of
associates																			8,087
Share of results of
jointly controlled entities																			1,245

Loss before income
tax																			(1,290,450	)
Income tax																			(15,403	)

Loss for the year																			(1,305,853	)

Other segment items included in the consolidated statement of comprehensive income for the year ended 31 December 2008 are as follows:

					Import and
					Tour		Export		Freight		All other
	Passenger		Cargo		Operations		Trading		Forwarding		segments		Total
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Depreciation		674,970		11,228		6,603		272		6,198		13,833		713,104
Amortisation		12,360		206		383		—		64		154		13,167

– 47 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

The segment assets and liabilities at 31 December 2008 and capital expenditure for the year then ended are as follows:

							Import and
							Tour			Export			Freight			All other
	Passenger			Cargo			Operations			Trading			Forwarding			segments			Total
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Segment assets		12,851,466			645,219			338,826			104,310			173,658			306,219			14,419,698
Investments in
associates		—			—			—			—			—			57,929			57,929
Investments in jointly controlled entities		—			—			—			—			—			18,369			18,369

Total assets		12,851,466			645,219			338,826			104,310			173,658			382,517			14,495,996

Segment liabilities		(13,442,256	)		(749,652	)		(244,735	)		(68,812	)		(78,375	)		(219,906	)		(14,803,736	)

Capital expenditure
(Notes 17, 18 and 19)		2,141,626			66,360			6,778			42			5,585			26,858			2,247,249

The segment results for the six months ended 30 June 2008 are as follows:

									(Unaudited)
									Import and
							Tour		Export		Freight			All other
	Passenger			Cargo			Operations		Trading		Forwarding			segments			Total
	RMB’000			RMB’000			RMB’000		RMB’000		RMB’000			RMB’000			RMB’000

Traffic revenues		4,284,458			776,549			—		—		—			—			5,061,007
Other revenues and
operating income		231,654			73,383			745,148		358,853		379,765			139,972			1,928,775

Total segment
revenue		4,516,112			849,932			745,148		358,853		379,765			139,972			6,989,782
Inter-segment
revenue		(320,586	)		—			—		—		(33,069	)		(75,548	)		(429,203	)

Revenues		4,195,526			849,932			745,148		358,853		346,696			64,424			6,560,579

Operating (loss)/
profit		(48,096	)		(162,004	)		8,902		14,206		19,978			8,384			(158,630	)
Finance income																		298,064
Finance costs																		(204,578	)
Share of results of
associates																		5,007
Share of results of
jointly controlled
entities																		440

Loss before income tax																		(59,697	)
Income tax																		(8,787	)

Loss for the period																		(68,484	)

– 48 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

Other segment items included in the consolidated statement of comprehensive income for the six months ended 30 June 2008 are as follows:

(Unaudited)

Import and

Tour

Export

Freight

All other

Passenger

Cargo

Operations

Trading

Forwarding

segments

Total

RMB’000

Depreciation

333,761

4,475

2,926

144

3,128

6,726

351,160

Amortisation

6,017

115

—

6,336

The segment results for the six months ended 30 June 2009 are as follows:

							Import and
							Tour			Export			Freight			All other
	Passenger			Cargo			Operations			Trading			Forwarding			segments			Total
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Traffic revenues		3,960,807			323,176			—			—			—			—			4,283,983
Other revenues and
operating income		103,483			68,547			578,200			267,033			297,330			130,868			1,445,461

Total segment
revenue		4,064,290			391,723			578,200			267,033			297,330			130,868			5,729,444
Inter-segment
revenue		(228,817	)		(19,993	)		(75	)		(1,334	)		(35,100	)		(116,105	)		(401,424	)

Revenues		3,835,473			371,730			578,125			265,699			262,230			14,763			5,328,020

Operating profit/
(loss)		166,799			(266,633	)		10,917			2,523			13,938			(10,446	)		(82,902	)
Finance income																				11,851
Finance costs																				(181,783	)
Share of results of
associates																				4,447
Share of results of
jointly controlled
entities																				2,943

Loss before income
tax																				(245,444	)
Income tax																				(20,811	)

Loss for the period																				(266,255	)

Other segment items included in the consolidated statement of comprehensive income for the six months ended 30 June 2009 are as follows:

					Import and
					Tour		Export		Freight		All other
	Passenger		Cargo		Operations		Trading		Forwarding		segments		Total
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Depreciation		381,902		6,844		1,733		128		2,968		12,872		406,447
Amortisation		6,568		1,400		—		—		21		80		8,069

– 49 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

The segment assets and liabilities at 30 June 2009 and capital expenditure for the period then ended are as follows:

							Import and
							Tour			Export			Freight			All other
	Passenger			Cargo			Operations			Trading			Forwarding			segments			Total
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Segment assets		14,774,909			432,667			323,430			100,807			180,809			306,896			16,119,518
Investments in
associates		—			—			—			—			—			55,085			55,085
Investments in jointly controlled entities		—			—			—			—			—			19,587			19,587

Total assets		14,774,909			432,667			323,430			100,807			180,809			381,568			16,194,190

Segment liabilities		(14,365,550	)		(813,708	)		(220,364	)		(64,252	)		(94,350	)		(236,183	)		(15,794,407	)

Capital expenditure
(Notes 17, 18 and 19)		949,621			20,805			—			—			1,086			1,539			973,051

Revenues (net of business tax) of the Target Group from passenger and cargo segments are further analyzed by management on geographical basis.

Traffic revenue from services within the PRC (excluding the Hong Kong Special Administrative Region (‘‘Hong Kong’’)) is classified as domestic operations. Traffic revenue from inbound and outbound services between the PRC, Hong Kong or overseas markets is attributed to the segments based on the origin and destination of each flight segment.

Revenue of other business segments are primarily generated from the activities conducted in the PRC.

	Target Group
	Year ended 31 December						Six months ended 30 June
	2006		2007		2008		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
							(Unaudited)

Domestic (the PRC, excluding
Hong Kong)		8,132,402		9,439,307		10,068,467		4,998,359		4,421,752
Hong Kong		517,045		726,608		717,708		360,142		281,019
United States		237,770		497,266		753,026		383,434		162,464
Japan		181,636		255,285		444,383		223,589		177,734
Other countries		773,196		1,126,391		1,170,508		595,055		285,051

Total		9,842,049		12,044,857		13,154,092		6,560,579		5,328,020

The major revenue-earning assets of the Target Group are its aircraft and related equipment, all of which are registered in the PRC. Since the Target Group’s aircraft are deployed flexibly across its route network, there is no suitable basis of allocating such assets and the related liabilities on geographical basis. Other than the aircraft as described above, all assets of the Target Group are located in the PRC.

(LOSS)/GAIN ON FAIR VALUE MOVEMENTS OF FUEL OPTION CONTRACTS

In the year ended 31 December 2008, the Target Group entered into fuel option contracts to reduce the risk of changes in market oil/petroleum prices against aircraft fuel costs. The fuel option contracts used by the Target Group was structured to include a combination of both put and call options which allowed the Target Group to lock in fuel prices for specified volumes within a price range. In the contracts, the call option price at which the Target Group was effectively entitled to buy fuel would be higher than that at which the counterparty was effectively entitled to sell.

– 50 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

No fuel hedging contract was entered into by the Target Group for the six months ended 30 June 2009, all the opened fuel hedging contracts as at 30 June 2009 are contracts entered into by the Target Group in 2008. None of the fuel hedging contracts entered into by the Target Group qualified for hedge accounting, the realised and unrealised mark to market gains/(losses) of the fuel hedging contracts during a period are recognised in the profit and loss in the consolidated statement of comprehensive income.

The fair value of the fuel option contract is determined by reference to mark-to-market values provided by the counterparty applying appropriate option valuation model (i.e. mean regression model using the Monte Carlo Simulation Process). Key parameters used in the valuation model include volatility, credit spread, long run mean and mean reverting ratio at date of valuation.

WAGES, SALARIES AND BENEFITS

	Target Group
	Year ended 31 December						Six months ended 30 June
	2006		2007		2008		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
							(Unaudited)

Wages, salaries, bonus and allowances		627,925		829,390		996,890		464,009		560,157
Employee welfare and benefits		84,989		127,415		128,533		60,485		62,853
Post-retirement benefits (note 36)		32,716		29,677		27,398		9,584		16,010
Pension funds		88,645		117,246		138,880		60,500		72,215
Medical insurance		32,171		44,884		56,741		23,455		29,165
Staff housing fund		35,540		43,466		63,994		36,539		37,964

		901,986		1,192,078		1,412,436		654,572		778,364

(a)

Emoluments of directors and supervisors

The aggregate amounts of emoluments payable to the Target Company’s directors and supervisors are as follows:

	Year ended 31 December						Six months ended 30 June
	2006		2007		2008		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
							(Unaudited)

Salaries and allowance		1,379		1,461		1,449		577		604
Bonus		—		—		—		—		—

Total		1,379		1,461		1,449		577		604

Certain directors of the Target Company received emoluments from the Target Company’s shareholders, part of which were in respect of their services to the Target Company and its subsidiaries. No apportionment has been made as it is impracticable to apportion this amount between their services to the Target Group and their services to the Target Company’s shareholders.

During the Relevant Periods, no directors and supervisors of the Target Company waived their emoluments.

– 51 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(b)

Five highest paid individuals

Two directors, whose emoluments are reflected in the above analysis were among the five highest paid individuals in the Target Group for the Relevant Periods. The emoluments payable to the remaining three highest paid individuals are as follows:

	Target Group
	Year ended 31 December						Six months ended 30 June
	2006		2007		2008		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
							(Unaudited)

Wages, salaries, bonus and
allowances		1,243		1,372		1,441		787		924

The emoluments o the five highest paid individual fell within the following band:

	Number of individuals
	Year ended 31 December						Six months ended 30 June
	2006		2007		2008		2008		2009
							(Unaudited)

Below HK$1,000,000		5		5		5		5		5

During the Relevant Period, no emoluments were paid by the Target Group to its’ directors, supervisors or the five highest paid individuals as an inducement to join or upon joining the Target Group, or as a compensation for loss of office.

10.

OPERATING PROFIT/(LOSS)

Operating profit/(loss) is stated after crediting and charging the following items:

	Target Group
	Year ended 31 December						Six months ended 30 June
	2006		2007		2008		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
							(Unaudited)

Crediting:
Gain on disposals of property, plant
and equipment		20,223		—		14,877		123		—

Charging:
Amortisation of intangible assets		5,367		7,707		10,105		4,918		6,631
Depreciation of property, plant and
equipment
— leased		—		17,539		64,636		29,875		52,765
— owned		644,237		718,270		648,468		321,285		353,682
Amortisation of lease prepayments		4,738		3,398		3,062		1,418		1,438
Consumption of flight equipment spare
parts		92,999		124,011		150,911		75,633		82,370
Provision for impairment of trade and
other receivables		3,948		13,599		1,449		—		2,407
Auditor’s remuneration		750		900		900		450		450
Loss on disposals of property, plant
and equipment		—		120,780		—		—		1,294
Cost of inventories		832,324		963,734		681,483		337,131		258,001

– 52 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

11.

FINANCE INCOME

	Target Group
	Year ended 31 December						Six months ended 30 June
	2006		2007		2008		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
							(Unaudited)

Exchange gains, net (Note)		135,888		272,440		280,705		291,806		3,793
Interest income		7,214		11,041		16,270		6,258		8,058

		143,102		283,481		296,975		298,064		11,851

Note:

The exchange gains for the Relevant Periods primarily relate to the translation of the Target Group’s foreign currency denominated borrowings and obligations under finance leases at exchange rates prevailing at each year/period end.

12.

FINANCE COSTS

	Target Group
	Year ended 31 December									Six months ended 30 June
	2006			2007			2008			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000
										(Unaudited)

Interest on loans from banks		303,358			399,117			423,892			209,061			209,333
Interest relating to short term debentures (Note 30)		25,040			12,440			34,196			23,137			—
Interest relating to notes payable		9,977			24,921			32,496			16,248			12,485
Interest relating to obligations under finance leases		—			12,487			27,173			16,594			18,886
Less:
Amounts capitalised to:
— Advanced payments on acquisition of aircraft (Note)		(62,062	)		(71,162	)		(114,751	)		(57,376	)		(56,332	)
— Construction in progress		(2,418	)		(2,839	)		(6,172	)		(3,086	)		(2,589	)

		273,895			374,964			396,834			204,578			181,783

Note:

The weighted average interest rate on the capitalised interest expenses for the years ended 31 December 2006, 2007 and 2008, six months ended 30 June 2008 and six months ended 30 June 2009 are 6.12%, 5.34%, 5.02%, 5.27% and 4.90% per annum respectively.

13.

INCOME TAX

Income tax charged to profits and loss in the consolidated statement of comprehensive income is as follows:

	Target Group
	Year ended 31 December									Six months ended 30 June
	2006			2007			2008			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000
										(Unaudited)

Provision for PRC income tax		23,940			20,367			15,985			9,164			21,200
Deferred taxation (Note 35)		(1,067	)		(2,219	)		(582	)		(377	)		(389	)

		22,873			18,148			15,403			8,787			20,811

– 53 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

For the years ended 31 December 2006 and 2007, the Target Company and certain of its subsidiaries (the ‘‘Pudong Subsidiaries’’) located in Pudong District, Shanghai, were entitled to a reduced rate of 15% pursuant to the preferential tax policy in Pudong, Shanghai. Other subsidiaries of the Target Group were generally subject to the standard rate of 33%. Under the Corporate Income Tax Law of the People’s Republic of China (the ‘‘New CIT Law’’) which was approved by the National People’s Congress on 16 March 2007 and became effective from 1 January 2008, the Target Company and the Pudong Subsidiaries are entitled to enjoy a transitional period to gradually increase the applicable corporate income tax rate to 25% in coming five years. For the year ended 31 December 2008 and six months ended 30 June 2009, the corporate income tax rate applicable to the Target Company and the Pudong Subsidiaries is 18% and 20% respectively. Other subsidiaries of the Target Group are generally subject to the PRC standard corporate tax rate of 25% under the New CIT Law for the year ended 31 December 2008 and six months ended 30 June 2009.

Tax on the Target Group’s consolidated statement of comprehensive income differs from the theoretical amount that would arise using the taxation rate of the Target Company as follows:

	Target Group
	Year ended 31 December									Six months ended 30 June
	2006			2007			2008			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000
										(Unaudited)

Profit/(loss) before income tax		16,120			(555,580	)		(1,290,450	)		(59,697	)		(245,444	)
Adjusted by:
Share of results of associates and jointly controlled entities		(4,202	)		(10,064	)		(9,332	)		(5,447	)		(7,390	)

		11,918			(565,644	)		(1,299,782	)		(65,144	)		(252,834	)

Tax calculated at enacted tax rate (2009: 20%; 2008: 18%; 2007: 15%; 2006: 15%)		1,787			(84,847	)		(233,961	)		(11,726	)		(50,568	)
Effect attributable to subsidiaries charged at tax rates of 25% in 2008 and 2009, and 33% in 2006 and 2007		(5,164	)		5,551			(1,271	)		967			2,909
Expenses not deductible for tax purposes		378			4,537			9,399			2,003			3,613
Effect of tax rate change on deferred tax		—			(2,378	)		—			—			—
Recognition of deductible temporary differences unrecognised in prior years		(1,848	)		—			—			(13,759	)		—
Written off of tax losses/deductible temporary differences recognised in prior years		—			11,998			3,812			—			—
Unrecognised tax losses for the year/ period		23,554			68,854			224,479			29,401			59,572
Unrecognised deductible temporary differences for the year/period		5,701			14,874			13,298			2,191			5,285
Income not subject to taxation		(1,535	)		(441	)		(353	)		(290	)		—

Tax charge		22,873			18,148			15,403			8,787			20,811

14.

DIVIDEND

In 2006, the dividend of the Target Company of RMB32.45 million (RMB0.06 per ordinary share) relating to 2005 was paid.

The board of directors of the Target Company did not recommend any dividend in respect of the Relevant Periods.

– 54 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

15.

PROFIT/(LOSS) ATTRIBUTABLE TO EQUITY HOLDERS OF THE TARGET COMPANY

Profit/(loss) attributable to equity holders of the Target Company is dealt with in the financial statements of the Target Company to the extent of profit of RMB65 million, loss of RMB424 million, loss of RMB988 million, profit of RMB82 million and loss of RMB12 million for the years ended 31 December 2006, 2007, 2008 and the six months ended 30 June 2008 and 2009 respectively.

16.

EARNINGS/(LOSS) PER SHARE

The calculation of basic earnings/(loss) per share is based on the profit/(loss) attributable to equity holders of the Target Company of profit of RMB8 million, loss of RMB532 million, loss of RMB1,199 million, profit of RMB34 million, and loss of RMB271 million for the years ended 31 December 2006, 2007 and 2008 and the six months ended 30 June 2008 and 30 June 2009 respectively and the weighted average number of shares of 1,082 million in issue during the years ended 31 December 2006, 2007 and 2008, six months ended 30 June 2008 and 1,091 million in issue during the six months ended 30 June 2009.

The Target Company has no potentially dilutive option or other instruments relating to ordinary shares.

17.

PROPERTY, PLANT AND EQUIPMENT

	Target Group
	Aircraft, engines and
	flight equipment
								Other
				Held under				property,
				finance				plant and			Construction
	Owned			leases		Buildings		equipment			in progress			Total
	RMB’000			RMB’000		RMB’000		RMB’000			RMB’000			RMB’000

Cost
At 1 January 2006		8,980,091			—		644,413		534,562			106,665			10,265,731
Transfers from construction in progress		—			—		50,213		61,349			(111,562	)		—
Transfers from advanced payments on acquisition of aircraft (Note 19)		725,565			—		—		—			—			725,565
Other additions		785,433			—		34,649		69,668			234,541			1,124,291
Disposals		(161,595	)		—		—		(33,513	)		—			(195,108	)

At 31 December 2006		10,329,494			—		729,275		632,066			229,644			11,920,479

Accumulated depreciation
At 1 January 2006		3,372,581			—		100,771		271,201			—			3,744,553
Charge for the year		551,555			—		26,967		65,715			—			644,237
Disposals		(134,971	)		—		—		(31,420	)		—			(166,391	)

At 31 December 2006		3,789,165			—		127,738		305,496			—			4,222,399

Net book amount
At 31 December 2006		6,540,329			—		601,537		326,570			229,644			7,698,080

At 1 January 2006		5,607,510			—		543,642		263,361			106,665			6,521,178

– 55 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

	Target Group
	Aircraft, engines and
	flight equipment
									Other
				Held under					property,
				finance					plant and			Construction
	Owned			leases		Buildings			equipment			in progress			Total
	RMB’000			RMB’000		RMB’000			RMB’000			RMB’000			RMB’000

Cost
At 1 January 2007		10,329,494			—		729,275			632,066			229,644			11,920,479
Transfers from construction in progress		—			—		147,131			93,246			(240,377	)		—
Transfers from advanced payments on acquisition of aircraft (Note 19)		—			351,326		—			—			—			351,326
Other additions		412,323			347,890		6,407			90,824			157,336			1,014,780
Disposals (Note 6(b))		(1,988,530	)		—		(12,343	)		(16,726	)		—			(2,017,599	)

At 31 December 2007		8,753,287			699,216		870,470			799,410			146,603			11,268,986

Accumulated depreciation
At 1 January 2007		3,789,165			—		127,738			305,496			—			4,222,399
Charge for the year		595,702			17,539		45,530			77,038			—			735,809
Disposals (Note 6(b))		(1,381,295	)		—		(3,331	)		(15,606	)		—			(1,400,232	)

At 31 December 2007		3,003,572			17,539		169,937			366,928			—			3,557,976

Net book amount
At 31 December 2007		5,749,715			681,677		700,533			432,482			146,603			7,711,010

At 1 January 2007		6,540,329			—		601,537			326,570			229,644			7,698,080

– 56 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

	Target Group
	Aircraft, engines and
	flight equipment
								Other
				Held under				property,
				finance				plant and			Construction
	Owned			leases		Buildings		equipment			in progress			Total
	RMB’000			RMB’000		RMB’000		RMB’000			RMB’000			RMB’000

Cost
At 1 January 2008		8,753,287			699,216		870,470		799,410			146,603			11,268,986
Transfers from construction in progress		—			—		30,846		62,118			(92,964	)		—
Transfers from advanced payments on acquisition of aircraft (Note 19)		—			513,774		—		—			—			513,774
Other additions		369,134			495,026		23,924		29,061			151,882			1,069,027
Disposals		(282,519	)		—		—		(19,291	)		—			(301,810	)

At 31 December 2008		8,839,902			1,708,016		925,240		871,298			205,521			12,549,977

Accumulated depreciation
At 1 January 2008		3,003,572			17,539		169,937		366,928			—			3,557,976
Charge for the year		527,918			64,636		33,355		87,195			—			713,104
Disposals		(282,519	)		—		—		(17,465	)		—			(299,984	)

At 31 December 2008		3,248,971			82,175		203,292		436,658			—			3,971,096

Net book amount
At 31 December 2008		5,590,931			1,625,841		721,948		434,640			205,521			8,578,881

At 1 January 2008		5,749,715			681,677		700,533		432,482			146,603			7,711,010

– 57 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

	Target Group
	Aircraft, engines and
	flight equipment
									Other
				Held under					property,
				finance					plant and			Construction
	Owned			leases			Buildings		equipment			in progress			Total
	RMB’000			RMB’000			RMB’000		RMB’000			RMB’000			RMB’000

Cost
At 1 January 2009		8,839,902			1,708,016			925,240		871,298			205,521			12,549,977
Transfers from construction in progress		—			—			20,605		35,980			(56,585	)		—
Transfers from advanced payments on acquisition of aircraft (Note 19)		182,670			—			—		—			—			182,670
Other additions		288,925			(36,345	)		6,340		62,293			23,030			344,243
Disposals		(72,654	)		—			—		(1,396	)		—			(74,050	)

At 30 June 2009		9,238,843			1,671,671			952,185		968,175			171,966			13,002,840

Accumulated depreciation
At 1 January 2009		3,248,971			82,175			203,292		436,658			—			3,971,096
Charge for the period		276,228			54,989			28,166		47,064			—			406,447
Disposals		(70,045	)		—			—		(1,127	)		—			(71,172	)

At 30 June 2009		3,455,154			137,164			231,458		482,595			—			4,306,371

Net book amount
At 30 June 2009		5,783,689			1,534,507			720,727		485,580			171,966			8,696,469

At 1 January 2009		5,590,931			1,625,841			721,948		434,640			205,521			8,578,881

– 58 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

	Target Company
	Aircraft, engines and
	flight equipment
								Other
				Held under				property,
				finance				plant and			Construction
	Owned			leases		Buildings		equipment			in progress			Total
	RMB’000			RMB’000		RMB’000		RMB’000			RMB’000			RMB’000

Cost
At 1 January 2006		8,967,276			—		603,808		418,846			67,402			10,057,332
Transfers from construction in progress		—			—		28,283		30,059			(58,342	)		—
Transfers from advanced payments on acquisition of aircraft (Note 19)		725,565			—		—		—			—			725,565
Other additions		783,002			—		4,686		17,147			132,572			937,407
Disposals		(161,595	)		—		—		(17,477	)		—			(179,072	)

At 31 December 2006		10,314,248			—		636,777		448,575			141,632			11,541,232

Accumulated depreciation
At 1 January 2006		3,370,885			—		92,791		230,886			—			3,694,562
Charge for the year		550,380			—		20,053		42,947			—			613,380
Disposals		(134,971	)		—		—		(16,633	)		—			(151,604	)

At 31 December 2006		3,786,294			—		112,844		257,200			—			4,156,338

Net book amount
At 31 December 2006		6,527,954			—		523,933		191,375			141,632			7,384,894

At 1 January 2006		5,596,391			—		511,017		187,960			67,402			6,362,770

– 59 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

	Target Company
	Aircraft, engines and
	flight equipment
									Other
				Held under					property,
				finance					plant and			Construction
	Owned			leases		Buildings			equipment			in progress			Total
	RMB’000			RMB’000		RMB’000			RMB’000			RMB’000			RMB’000

Cost
At 1 January 2007		10,314,248			—		636,777			448,575			141,632			11,541,232
Transfers from construction in progress		—			—		33,751			82,876			(116,627	)		—
Transfers from advanced payments on acquisition of aircraft (Note 19)		—			351,326		—			—			—			351,326
Other additions		399,172			347,890		—			31,802			108,503			887,367
Disposals (Note 6(b))		(1,988,530	)		—		(12,343	)		(14,783	)		—			(2,015,656	)

At 31 December 2007		8,724,890			699,216		658,185			548,470			133,508			10,764,269

Accumulated depreciation
At 1 January 2007		3,786,294			—		112,844			257,200			—			4,156,338
Charge for the year		593,288			17,539		31,756			46,091			—			688,674
Disposals (Note 6(b))		(1,381,295	)		—		(3,331	)		(14,006	)		—			(1,398,632	)

At 31 December 2007		2,998,287			17,539		141,269			289,285			—			3,446,380

Net book amount
At 31 December 2007		5,726,603			681,677		516,916			259,185			133,508			7,317,889

At 1 January 2007		6,527,954			—		523,933			191,375			141,632			7,384,894

– 60 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

	Target Company
	Aircraft, engines and
	flight equipment
								Other
				Held under				property,
				finance				plant and			Construction
	Owned			leases		Buildings		equipment			in progress			Total
	RMB’000			RMB’000		RMB’000		RMB’000			RMB’000			RMB’000

Cost
At 1 January 2008		8,724,890			699,216		658,185		548,470			133,508			10,764,269
Transfers from construction in progress		—			—		24,863		39,552			(64,415	)		—
Transfers from advanced payments on acquisition of aircraft (Note 19)		—			513,774		—		—			—			513,774
Other additions		339,890			495,026		4,874		559			104,727			945,076
Disposals		(282,519	)		—		—		(16,356	)		—			(298,875	)

At 31 December 2008		8,782,261			1,708,016		687,922		572,225			173,820			11,924,244

Accumulated depreciation
At 1 January 2008		2,998,287			17,539		141,269		289,285			—			3,446,380
Charge for the year		523,460			64,636		18,330		48,362			—			654,788
Disposals		(282,519	)		—		—		(15,290	)		—			(297,809	)

At 31 December 2008		3,239,228			82,175		159,599		322,357			—			3,803,359

Net book amount
At 31 December 2008		5,543,033			1,625,841		528,323		249,868			173,820			8,120,885

At 1 January 2008		5,726,603			681,677		516,916		259,185			133,508			7,317,889

– 61 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

	Target Company
	Aircraft, engines and
	flight equipment
									Other
				Held under					property,
				finance					plant and		Construction
	Owned			leases			Buildings		equipment		in progress			Total
	RMB’000			RMB’000			RMB’000		RMB’000		RMB’000			RMB’000

Cost
At 1 January 2009		8,782,261			1,708,016			687,922		572,225		173,820			11,924,244
Transfers from construction in progress		—			—			20,605		35,980		(56,585	)		—
Transfers from advanced payments on acquisition of aircraft (Note 19)		182,670			—			—		—		—			182,670
Other additions		275,131			(36,345	)		6,339		52,136		19,555			316,816
Disposals		(69,113	)		—			—		—		—			(69,113	)

At 30 June 2009		9,170,949			1,671,671			714,866		660,341		136,790			12,354,617

Accumulated depreciation
At 1 January 2009		3,239,228			82,175			159,599		322,357		—			3,803,359
Charge for the period		272,785			54,989			22,258		27,823		—			377,855
Disposals		(69,113	)		—			—		—		—			(69,113	)

At 30 June 2009		3,442,900			137,164			181,857		350,180		—			4,112,101

Net book amount
At 30 June 2009		5,728,049			1,534,507			533,009		310,161		136,790			8,242,516

At 1 January 2009		5,543,033			1,625,841			528,323		249,868		173,820			8,120,885

Note:

As at 31 December 2006, 2007 and 2008 and 30 June 2009, certain aircraft and buildings owned by the Target Group and the Target Company with an aggregate net book amount of approximately RMB4,547 million, RMB4,306 million, RMB4,035 million and RMB4,241 million respectively were pledged as collateral under certain loan arrangements (Note 32).

– 62 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

18.

LEASE PREPAYMENTS

	Target Group									Target Company
								As at									As at
	As at 31 December							30 June		As at 31 December							30 June
	2006		2007		2008			2009		2006		2007		2008			2009
	RMB’000		RMB’000		RMB’000			RMB’000		RMB’000		RMB’000		RMB’000			RMB’000

Cost
At beginning of the year/period		170,876		170,876		170,903			144,010		166,660		166,660		166,687			139,794
Additions		—		27		—			—		—		27		—			—
Disposals		—		—		(26,893	)		—		—		—		(26,893	)		—

At end of the year/period		170,876		170,903		144,010			144,010		166,660		166,687		139,794			139,794

Accumulated amortisation
At beginning of the year/period		17,584		22,322		25,720			25,328		14,954		18,281		21,638			21,204
Charge for the year/period		4,738		3,398		3,062			1,438		3,327		3,357		3,020			1,418
Disposals		—		—		(3,454	)		—		—		—		(3,454	)		—

At end of the year/period		22,322		25,720		25,328			26,766		18,281		21,638		21,204			22,622

Net book amount
At end of the year/period		148,554		145,183		118,682			117,244		148,379		145,049		118,590			117,172

Lease prepayments represent unamortised lease prepayments for land use rights.

The Target Group’s land use rights are located in the PRC and the majority of these land use rights have terms of 50 years from the date of grant. As at 31 December 2006, 2007 and 2008 and 30 June 2009, the majority of these land use rights had remaining terms ranging from 34 to 45 years, 33 to 44 years, 32 to 43 years and 31 to 42 years respectively.

19.

ADVANCED PAYMENTS ON ACQUISITION OF AIRCRAFT

	Target Group and Target Company
										As at
	As at 31 December									30 June
	2006			2007			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000

At beginning of the year/period		692,032			949,006			1,879,092			2,535,437
Additions		920,477			1,210,250			1,055,368			557,824
Interest capitalised (Note 12)		62,062			71,162			114,751			56,332
Transfers to property, plant and equipment (Note 17)		(725,565	)		(351,326	)		(513,774	)		(182,670	)

At end of the year/period		949,006			1,879,092			2,535,437			2,966,923

– 63 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

20.

INVESTMENTS IN SUBSIDIARIES

As at 31 December 2006, 2007 and 2008 and 30 June 2009, particulars of the principal subsidiaries, all of which are limited liability companies established and operating in the PRC, are as follows:

				Attributable equity interest

													As at
	Date of	Paid-up		As at 31 December									30 June
Company	establishment	capital		2006			2007			2008			2009			Principal activities
		RMB’000

Shanghai Airlines Cargo International Co., Ltd.	3 April 2006		464,050		55	%		55	%		55	%		55	%	Provision of international cargo carriage services

China United Airlines Co., Ltd.	21 September 1984		100,000		80	%		80	%		80	%		80	%	Provision of domestic and international airline transportation

Shanghai Airlines Travel Hotel Co., Ltd.	6 February 2005		53,000		100	%		100	%		100	%		100	%	Provision of hotel management, corporate management and investment consulting services

Shanghai Airlines Tours, International (Group) Co., Ltd.	29 August 1992		50,090		100	%		100	%		100	%		100	%	Tour operations, travel and air ticketing agency and transportation

Dahang International Transportation Co., Ltd.	16 December 1993		30,737		55	%		55	%		55	%		55	%	Freight forwarding, air freight forwarding and cargo freight forwarding

Shanghai Crane International Transportation Co., Ltd.	5 October 1997		20,000		55	%		55	%		55	%		55	%	Cargo transportation, freight forwarding and airport ground services

Shanghai Aviation Import & Export Co., Ltd.	1 December 1992		16,800		100	%		100	%		100	%		100	%	Direct export and import and provision of agency services for various products and techniques

Shanghai Airlines Holiday Tours Co., Ltd.	8 June 1995		12,220		100	%		100	%		100	%		100	%	Tour operations and air ticketing agency

– 64 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

21.

INVESTMENTS IN ASSOCIATES

	Target Group								Target Company
							As at								As at
	As at 31 December						30 June		As at 31 December						30 June
	2006		2007		2008		2009		2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Unlisted investments, at cost		44,041		44,216		45,216		45,216		40,000		40,000		40,000		40,000
Share of post acquisition results/reserves		7,751		10,041		12,713		9,869		—		—		—		—

		51,792		54,257		57,929		55,085		40,000		40,000		40,000		40,000

The movement on investments in associates is as follows:

	Target Group												Target Company
										As at									As at
	As at 31 December									30 June			As at 31 December						30 June
	2006			2007			2008			2009			2006		2007		2008		2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000		RMB’000		RMB’000		RMB’000

At beginning of the year/period		47,597			51,792			54,257			57,929			40,000		40,000		40,000		40,000
Costs of additional investments		1,078			175			1,000			—			—		—		—		—
Share of results of associates		5,831			6,265			8,087			4,447			—		—		—		—
Dividend received during the year/period		(2,714	)		(3,975	)		(5,415	)		(7,291	)		—		—		—		—

At end of the year/period		51,792			54,257			57,929			55,085			40,000		40,000		40,000		40,000

As at 31 December 2006, 2007 and 2008 and 30 June 2009, particulars of the principal associates, all of which are limited liability companies established and operating in the PRC, are as follows:

				Attributable equity interest
													As at
	Date of	Paid-up		As at 31 December									30 June
Company	establishment	capital		2006			2007			2008			2009			Principal activities
		RMB’000
New Shanghai International Tower Co., Ltd.	17 November 1992		166,575		20	%		20	%		20	%		20	%	Property development and property management

Shanghai Sidesun Technology Co., Ltd.	8 March 2001		8,000		30	%		30	%		30	%		30	%	Trading of computer and peripheral products, telecommunication equipment, installation of computer hardware, design of computer software and apparel trading, etc.

– 65 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

The Target Group’s aggregated share of the revenues, results, assets and liabilities of its associates are as follows:

	Year ended 31 December						Six months ended 30 June
	2006		2007		2008		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
							(Unaudited)

Revenues		30,541		34,717		36,824		22,799		20,704

Profit for the year/period		5,831		6,265		8,087		5,007		4,447

							As at
	As at 31 December						30 June
	2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000

Assets		100,290		99,257		100,971		101,974

Liabilities		48,498		45,000		43,042		46,889

22.

INVESTMENTS IN JOINTLY CONTROLLED ENTITIES

	Target Group									Target Company
								As at								As at
	As at 31 December							30 June		As at 31 December						30 June
	2006			2007		2008		2009		2006		2007		2008		2009
	RMB’000			RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Unlisted investments, at cost		15,500			15,500		15,500		15,500		15,000		15,000		15,000		15,000
Share of post acquisition results/reserves		(1,335	)		1,624		2,869		4,087		—		—		—		—

		14,165			17,124		18,369		19,587		15,000		15,000		15,000		15,000

The movement on investments in jointly controlled entities is as follows:

	Target Group											Target Company
									As at									As at
	As at 31 December								30 June			As at 31 December						30 June
	2006			2007			2008		2009			2006		2007		2008		2009
	RMB’000			RMB’000			RMB’000		RMB’000			RMB’000		RMB’000		RMB’000		RMB’000

At beginning of the year/period		16,219			14,165			17,124		18,369			15,000		15,000		15,000		15,000
Addition		500			—			—		—			—		—		—		—
Share of results		(1,629	)		3,799			1,245		2,943			—		—		—		—
Dividend received during the year/period		(925	)		(840	)		—		(1,725	)		—		—		—		—

At end of the year/period		14,165			17,124			18,369		19,587			15,000		15,000		15,000		15,000

– 66 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

Particulars of the principal jointly controlled entities, all of which are limited liability companies established and operating in the PRC are as follows:

				Attributable equity interest
													As at
	Date of	Paid-up		As at 31 December									30 June
Company	establishment	capital		2006			2007			2008			2009			Principal activities
		RMB’000

Shanghai Hute Aviation Tech. Co. Ltd.	9 April 2003		30,000		50	%		50	%		50	%		50	%	Development of aviation equipment, property management, investment and corporate image consulting services

Shanghai Airlines Holidays Ticket Services Co., Ltd.	8 May 2006		1,000		50	%		50	%		50	%		50	%	Provision of travel information, consulting and delivery services and travel agency

The Target Group’s aggregated share of the revenues, results, assets and liabilities of its jointly controlled entities is as follows:

	Year ended 31 December							Six months ended 30 June
	2006			2007		2008		2008		2009
	RMB’000			RMB’000		RMB’000		RMB’000		RMB’000
								(Unaudited)

Revenues		6,633			8,469		12,031		4,252		6,956

(Loss)/profit for the year/period		(1,629	)		3,799		1,245		440		2,943

							As at
	As at 31 December						30 June
	2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000

Assets		18,384		18,905		23,537		23,066

Liabilities		4,219		1,781		5,168		3,479

– 67 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

23.

AVAILABLE-FOR-SALE FINANCIAL ASSETS

	Target Group												Target Company
										As at									As at
	As at 31 December									30 June			As at 31 December						30 June
	2006			2007			2008			2009			2006		2007		2008		2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000		RMB’000		RMB’000		RMB’000

Equity investments listed in the PRC, at fair value		5,849			9,285			3,016			6,442			3,750		6,909		2,018		4,812
Unlisted equity investments (Note)		74,434			135,620			175,659			175,659			74,278		135,465		175,503		175,503
Less: provision for impairment		(156	)		(156	)		(156	)		(156	)		—		—		—		—

		80,127			144,749			178,519			181,945			78,028		142,374		177,521		180,315

Note:

The Company’s directors have considered that the range of reasonable estimates on the fair value of these unquoted investments is significant and the probabilities of the various estimates cannot be reasonably assessed, these investments therefore are be stated at cost less provision for impairment losses.

The movement on available-for-sale financial assets is as follows:

	Target Group										Target Company
									As at									As at
	As at 31 December								30 June		As at 31 December							30 June
	2006		2007			2008			2009		2006		2007		2008			2009
	RMB’000		RMB’000			RMB’000			RMB’000		RMB’000		RMB’000		RMB’000			RMB’000

At beginning of the year/period		76,369		80,127			144,749			178,519		75,718		78,028		142,374			177,521
Additions		—		63,034			40,038			—		—		61,186		40,038			—
Disposals		—		(595	)		(748	)		—		—		—		(740	)		—
Net fair value gains/(losses) transferred to equity		3,758		2,183			(5,520	)		3,426		2,310		3,160		(4,151	)		2,794

At end of the year/period		80,127		144,749			178,519			181,945		78,028		142,374		177,521			180,315

24.

OTHER LONG-TERM ASSETS

	Target Group								Target Company
							As at								As at
	As at 31 December						30 June		As at 31 December						30 June
	2006		2007		2008		2009		2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Deposits relating to aircraft under operating leases		280,036		310,307		305,799		305,678		267,386		268,823		260,165		260,062
Prepaid flight training fees		121,765		162,526		181,765		180,085		117,715		156,239		162,300		149,893
Rental and renovation deposits		7,705		1,569		44		—		3,643		1,569		44		—
Other long-term assets		35,200		30,800		26,400		56,445		35,200		30,800		26,400		24,200

		444,706		505,202		514,008		542,208		423,944		457,431		448,909		434,155

– 68 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

25.

TRADE RECEIVABLES

The credit terms given to trade customers are determined on an individual basis, with the credit periods generally ranging from half a month to three months.

The aging analysis of trade receivables is as follows:

	Target Group												Target Company
										As at												As at
	As at 31 December									30 June			As at 31 December									30 June
	2006			2007			2008			2009			2006			2007			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Within 3 months		545,568			767,191			482,312			469,883			257,186			318,161			197,529			202,035
3 to 6 months		23,196			24,571			18,271			9,142			2,320			8,550			90			64
6 to 12 months		16,631			10,264			24,344			6,446			—			—			368			—
Over 12 months		10,073			22,109			19,368			19,391			4,947			5,187			4,730			—

		595,468			824,135			544,295			504,862			264,453			331,898			202,717			202,099

Less: provision for impairment of receivables		(7,605	)		(19,490	)		(19,320	)		(15,600	)		(3,244	)		(5,830	)		(5,386	)		(692	)

		587,863			804,645			524,975			489,262			261,209			326,068			197,331			201,407

Trade receivables that were neither past due nor impaired relate to a large number of independent sales agents for whom there is no recent history of default.

As at 31 December 2006, 2007 and 2008 and 30 June 2009, trade receivables of RMB59 million, RMB65 million, RMB83 million and RMB34 million respectively were past due but not impaired. These relate to a number of independent sales agents for whom there is no recent history of default. As at 31 December 2006, 2007 and 2008 and 30 June 2009, the Target Group holds no collateral as security against any receivables. The ageing analysis of these trade receivables is as follows:

	Target Group								Target Company
							As at								As at
	As at 31 December						30 June		As at 31 December						30 June
	2006		2007		2008		2009		2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Up to 6 months		42,006		54,506		58,907		27,635		3,863		9,504		1,111		1,712
6 to 12 months		16,631		10,264		24,344		6,446		—		—		368		—

		58,637		64,770		83,251		34,081		3,863		9,504		1,479		1,712

As at 31 December 2006, 2007 and 2008 and 30 June 2009, the Target Group’s trade receivables of RMB5 million, RMB16 million, RMB17 million and RMB12 million respectively were impaired and fully provided for. The remaining impaired trade receivables relate to customers that were in financial difficulties and only a portion of the receivables is expected to be recovered. The factors considered by management in determining the impairment are described in Note 2(q).

– 69 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

Movements on the provision for impairment of trade receivables of the Target Group and the Target Company are as follows:

	Target Group												Target Company
										As at											As at
	As at 31 December									30 June			As at 31 December								30 June
	2006			2007			2008			2009			2006			2007		2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000		RMB’000			RMB’000

At beginning of the year/period		4,143			7,605			19,490			19,320			2,551			3,244		5,830			5,386
Receivables written off during the year/period as uncollectible		(387	)		—			—			(4,919	)		(287	)		—		—			(4,832	)
Provision for impairment of receivables		4,030			11,892			783			1,803			980			2,586		—			138
Unused amounts reversed		(181	)		(7	)		(953	)		(604	)		—			—		(444	)		—

At end of the year/period		7,605			19,490			19,320			15,600			3,244			5,830		5,386			692

The net impact of creation and release of provisions for impaired receivables have been included in ‘‘Provision for impairment of trade and other receivables’’ in the profit and loss in the consolidated statement of comprehensive income (Note 10). Amounts charged to the allowance account are generally written off, when there is no expectation of recovering additional cash.

The maximum exposure to credit risk at the reporting date is the carrying amount of receivable shown above.

The carrying amounts of the Target Group and the Target Company’s trade receivables are denominated in the following currencies:

	Target Group								Target Company
							As at								As at
	As at 31 December						30 June		As at 31 December						30 June
	2006		2007		2008		2009		2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Renminbi		561,162		767,990		490,236		458,944		257,439		324,761		188,335		195,420
US Dollars		25,192		36,510		26,237		24,487		2,261		1,162		547		156
Other currencies		1,509		145		8,502		5,831		1,509		145		8,449		5,831

		587,863		804,645		524,975		489,262		261,209		326,068		197,331		201,407

– 70 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

26.

PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

	Target Group								Target Company
							As at								As at
	As at 31 December						30 June		As at 31 December						30 June
	2006		2007		2008		2009		2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Prepaid aircraft operating lease rentals		63,683		102,191		88,329		82,026		46,534		63,459		72,664		66,141
Deposits with custom office		15,410		24,549		48,925		19,885		13,624		23,542		44,509		13,379
Rental deposits		20,165		23,650		22,607		28,203		1,265		1,294		2,390		4,143
Prepayments for acquisition of equipment and other assets		73,545		115,422		69,870		81,663		23,047		23,183		18,761		18,356
Prepayments for tour operations		78,415		76,362		64,483		50,254		—		—		—		—
Secured deposits relating to short-term borrowings (Note 32)		—		—		46,921		171,835		—		—		46,921		171,835
Advance payments to and payments on behalf of staff		35,513		41,207		41,556		38,690		31,796		34,573		39,760		38,152
Rebate receivable on aircraft acquisition		—		—		20,907		40,337		—		—		20,907		40,337
Custom duties and tax recoverable		34,976		21,424		17,689		21,783		4,610		1,795		3,311		3,561
Prepayments for fuel		550		123,826		8,523		4,477		—		—		—		—
Refundable of civil aviation infrastructure levies		—		—		—		129,655		—		—		—		112,096
Others		110,330		76,298		70,974		80,262		58,132		11,533		14,131		49,108

		432,587		604,929		500,784		749,070		179,008		159,379		263,354		517,108

27.

CASH AND CASH EQUIVALENTS

The carrying amounts of the Target Group’s and Target Company’s cash and cash equivalents are denominated in the following currencies:

	Target Group								Target Company
							As at								As at
	As at 31 December						30 June		As at 31 December						30 June
	2006		2007		2008		2009		2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Renminbi		576,461		772,884		961,852		1,826,607		285,255		249,640		369,153		1,389,372
US Dollars		34,411		151,483		45,665		54,539		17,789		134,465		37,907		30,690
HK Dollars		149		1,815		18,370		22,500		—		1,663		18,264		22,387
Japanese Yen		4,578		4,647		17,607		34,459		1,363		1,901		4,308		30,414
Euro		6,361		12,700		8,277		4,460		1,094		786		417		297
Other currencies		—		645		4,165		8,977		—		581		4,139		8,898

		621,960		944,174		1,055,936		1,951,542		305,501		389,036		434,188		1,482,058

– 71 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

28.

TRADE PAYABLES AND NOTES PAYABLE

The aging analysis of trade payables and notes payable is as follows:

	Target Group								Target Company
							As at								As at
	As at 31 December						30 June		As at 31 December						30 June
	2006		2007		2008		2009		2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Within 90 days		549,966		947,451		687,604		817,493		406,251		694,997		462,331		552,200
91 to 180 days		316,530		154,764		626,239		468,439		296,464		115,671		467,811		368,693
181 to 365 days		21,222		38,964		37,751		30,730		1,125		237		1,435		2,351
Over 365 days		10,173		18,736		27,323		23,399		688		1,348		7,553		7,082

		897,891		1,159,915		1,378,917		1,340,061		704,528		812,253		939,130		930,326

29.

OTHER PAYABLES AND ACCRUED EXPENSES

	Target Group								Target Company
							As at								As at
	As at 31 December						30 June		As at 31 December						30 June
	2006		2007		2008		2009		2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Accrued fuel cost		357,901		658,230		631,406		302,759		212,599		341,479		468,573		223,639
Accrued take-off and landing charges		182,357		266,724		366,773		448,210		164,829		232,888		341,757		418,825
Accrued aircraft overhaul expenses		75,375		143,628		202,552		228,900		73,323		142,584		191,732		159,064
Advance payments received from tour customers		116,090		162,708		144,255		130,448		—		—		—		—
Duties and levies payable		117,285		148,418		124,616		203,986		101,297		106,374		71,486		122,010
Other accrued operating expenses		41,338		78,386		96,832		154,927		37,802		44,369		67,276		98,825
Deposits received from ticket sales agents and cargo forward agents		116,402		106,705		91,947		77,074		99,153		78,022		69,019		58,392
Accrued salaries, wages and benefits		22,872		53,492		40,996		30,841		6,577		39,750		11,126		12,151
Deposits received from import and export customers		44,904		68,324		32,637		31,841		—		—		—		—
Interest payables		56,994		60,246		31,933		10,052		56,973		60,246		31,649		16,534
Current portion of post-retirement benefit obligations (Note 36)		1,378		1,503		1,727		1,881		1,371		1,496		1,648		1,802
Others		86,897		87,215		93,913		123,729		18,438		30,814		56,571		69,066

		1,219,793		1,835,579		1,859,587		1,744,648		772,362		1,078,022		1,310,837		1,180,308

30.

SHORT TERM DEBENTURES

On 10 January 2006, the Target Company issued a short term debenture with a par value of RMB100 per unit at 96.87% of its principal amount of RMB800 million with 1-year term. The debenture was redeemed by the Target Company in January 2007.

– 72 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

On 28 September 2007, the Target Company issued a short term debenture with a face value of RMB800 million at par value of RMB100 per unit with 363-day term. The fixed annual coupon and effective interest rate of this debenture is 5.8%. The debenture was redeemed by the Target Company in September 2008.

31.

OBLIGATIONS UNDER FINANCE LEASES

During the Relevant Periods, the Target Group and the Target Company had acquired aircraft under finance lease arrangements. Under the terms of the leases, the Target Group and the Target Company have options to purchase, at or near the end of the lease terms, certain aircraft at fair market value and others at either fair market value or at a percentage of the respective lessors’ defined cost of the aircraft. The obligations under finance leases are denominated in US Dollars.

The interest rates of finance lease obligations are floating at Nil for the year ended 31 December 2006, 6 months LIBOR plus 0.45% per annum for the year ended 31 December 2007, 3 months LIBOR plus 1.6% to 6 months LIBOR plus 0.45% per annum for the year ended 31 December 2008 and six months ended 30 June 2009.

The future minimum lease payments (including interest), and the present value of the minimum lease payments under finance leases are as follows:

	Target Group and Target Company
	As at 31 December 2006						As at 31 December 2007
					Present								Present
					value of								value of
	Minimum				minimum		Minimum						minimum
	lease				lease		lease						lease
	payments		Interest		payments		payments			Interest			payments
	RMB’000		RMB’000		RMB’000		RMB’000			RMB’000			RMB’000

Within one year		—		—		—		54,784			22,576			32,208
In the second year		—		—		—		54,590			20,930			33,660
In the third to fifth year inclusive		—		—		—		164,089			53,619			110,470
After the fifth year		—		—		—		381,686			59,068			322,618

Total		—		—		—		655,149			156,193			498,956
Less: amount repayable within one year		—		—		—		(54,784	)		(22,576	)		(32,208	)

Long-term portion		—		—		—		600,365			133,617			466,748

	Target Group and Target Company
	As at 31 December 2008									As at 30 June 2009
							Present									Present
							value of									value of
	Minimum						minimum			Minimum						minimum
	lease						lease			lease						lease
	payments			Interest			payments			payments			Interest			payments
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Within one year		103,891			34,461			69,430			108,626			36,765			71,861
In the second year		106,146			32,386			73,760			110,083			34,432			75,651
In the third to fifth year inclusive		329,018			83,566			245,452			339,860			88,077			251,783
After the fifth year		862,364			96,222			766,142			815,351			94,269			721,082

Total		1,401,419			246,635			1,154,784			1,373,920			253,543			1,120,377
Less: amount repayable within one year		(103,891	)		(34,461	)		(69,430	)		(108,626	)		(36,766	)		(71,861	)

Long-term portion		1,297,528			212,174			1,085,354			1,265,294			216,777			1,048,516

– 73 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

As at 31 December 2006, 2007 and 2008 and 30 June 2009, the fair value of obligations under finance leases of the Target Group and the Target Company are Nil, RMB506 million, RMB1,161 million and RMB1,124 million respectively, which are determined using the expected future payments discounted at market interest rates prevailing at the year end.

32.

BORROWINGS

	Target Group								Target Company
							As at								As at
	As at 31 December						30 June		As at 31 December						30 June
	2006		2007		2008		2009		2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Non-current
Long-term bank borrowings
— secured		3,120,188		2,530,206		1,991,397		2,055,715		3,120,188		2,530,206		1,991,397		2,055,715
— unsecured		217,107		385,999		790,278		799,073		217,107		357,999		762,278		769,073

		3,337,295		2,916,205		2,781,675		2,854,788		3,337,295		2,888,205		2,753,675		2,824,788

Current
Current portion of long-term bank borrowings
— secured		413,694		397,606		383,429		417,597		413,694		397,606		383,429		417,597
— unsecured		326,712		220,535		800,697		1,248,519		326,712		220,535		800,697		1,220,519
Short-term bank borrowings
— secured		2,700		—		47,842		170,735		—		—		47,842		170,735
— unsecured		1,910,804		3,264,440		4,852,100		5,366,269		1,779,654		2,896,940		4,498,600		5,017,769

		2,653,910		3,882,581		6,084,068		7,203,120		2,520,060		3,515,081		5,730,568		6,826,620

Total borrowings		5,991,205		6,798,786		8,865,743		10,057,908		5,857,355		6,403,286		8,484,243		9,651,408

The borrowings are repayable as follows:
Within one year		2,653,910		3,882,581		6,084,068		7,203,120		2,520,060		3,515,081		5,730,568		6,826,620
In the second year		529,977		616,146		753,387		763,704		529,977		616,146		725,387		763,704
In the third to fifth year inclusive		1,362,284		1,246,933		1,234,756		1,264,102		1,362,284		1,218,933		1,234,756		1,234,102
After the fifth year		1,445,034		1,053,126		793,532		826,982		1,445,034		1,053,126		793,532		826,982

Total borrowings		5,991,205		6,798,786		8,865,743		10,057,908		5,857,355		6,403,286		8,484,243		9,651,408

– 74 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(a)

The terms of the long-term bank loans are summarised as follows:

		Target Group								Target Company
								As at								As at
		As at 31 December						30 June		As at 31 December						30 June
	Interest rate and	2006		2007		2008		2009		2006		2007		2008		2009
Currency	final maturities	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

RMB	Fixed interest rates of 6.08% per annum with final maturities through to 2010		—		28,000		28,000		28,000		—		—		—		—
	Floating interest rates ranging from 0–10% discount of benchmark interest rates as stipulated by PBOC* with final maturities through to 2012		413,754		140,200		315,284		632,255		413,754		140,200		315,284		602,255
USD	Floating interest rates ranging from 6 month LIBOR +0.26% to 6 month LIBOR +3% with final maturities through to 2020		3,663,947		3,366,146		3,622,517		3,860,649		3,663,947		3,366,146		3,622,517		3,860,649

			4,077,701		3,534,346		3,965,801		4,520,904		4,077,701		3,506,346		3,937,801		4,462,904

* The People’s Bank of China (‘‘PBOC’’)

The fair value of long-term borrowings of the Target Group as at 31 December 2006, 2007 and 2008 and 30 June 2009 are RMB3,928 million, RMB3,401 million, RMB3,838 million and RMB4,471 million respectively and the Target Company as at 31 December 2006, 2007 and 2008 and 30 June 2009 are RMB3,928 million, RMB3,373 million, RMB3,807 million, and RMB4,409 million respectively, which are determined using the expected future payments discounted at prevailing market interest rates available to the Target Group and the Target Company for financial instruments with substantially the same terms and characteristics at the Relevant Periods.

As at 31 December 2006, 2007 and 2008 and 30 June 2009, the secured long-term bank borrowings of the Target Group for the purchases of aircraft were secured by the related aircraft and buildings with aggregate net book amounts of RMB4,547 million, RMB4,306 million, RMB4,035 million and RMB4,241 million respectively (Note 17).

– 75 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(b)

The terms of the short-term bank borrowings are summarised as follows:

		Target Group								Target Company
								As at								As at
		As at 31 December						30 June		As at 31 December						30 June
	Interest rate and	2006		2007		2008		2009		2006		2007		2008		2009
Currency	final maturities	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

RMB	Fixed interest rates (2006:5.02–5.85%; 2007:5.27–6.56%; 2008:5.02–6.90%; 2009: 4.37–6.72%)		1,085,000		1,710,000		2,598,600		1,250,000		1,045,000		1,560,000		2,598,600		1,250,000
	Floating interest rates ranging from 0–10% discount of benchmark interest rates as stipulated by PBOC		293,850		617,500		2,253,500		4,068,500		200,000		400,000		1,900,000		3,720,000
USD	Fixed interest rates (2009:2.48–2.54%;)		—		—		—		47,768		—		—		—		47,768
	Floating interest rates ranging from 6 month LIBOR +0.4% to 12 month LIBOR +2%		534,654		936,940		47,842		170,736		534,654		936,940		47,842		170,736

			1,913,504		3,264,440		4,899,942		5,537,004		1,779,654		2,896,940		4,546,442		5,188,504

As at 31 December 2008 and 30 June 2009, the secured short-term bank borrowings of the Target Group and the Target Company were secured by bank deposits of RMB47 million and RMB172 million respectively (Note 26).

(c)

The carrying amounts of the borrowings are denominated in the following currencies:

	Target Group								Target Company
							As at								As at
	As at 31 December						30 June		As at 31 December						30 June
	2006		2007		2008		2009		2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Currency
Renminbi		1,792,609		2,495,700		5,195,389		5,978,755		1,658,759		2,100,200		4,813,889		5,572,255
US Dollars		4,198,596		4,303,086		3,670,354		4,079,153		4,198,596		4,303,086		3,670,354		4,079,153

		5,991,205		6,798,786		8,865,743		10,057,908		5,857,355		6,403,286		8,484,243		9,651,408

– 76 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

33.

PROVISION FOR RETURN CONDITION CHECKS FOR AIRCRAFT UNDER OPERATING LEASES

	Target Group										Target Company
									As at										As at
	As at 31 December								30 June		As at 31 December								30 June
	2006			2007			2008		2009		2006			2007			2008		2009
	RMB’000			RMB’000			RMB’000		RMB’000		RMB’000			RMB’000			RMB’000		RMB’000

At beginning of the year/period		263,797			337,237			396,986		523,791		181,442			243,494			272,110		360,010
Additional provisions		73,440			86,989			126,805		75,272		62,052			55,856			87,900		50,976
Utilisation		—			(27,240	)		—		—		—			(27,240	)		—		—

At end of the year/period		337,237			396,986			523,791		599,063		243,494			272,110			360,010		410,986
Less: current portion		(35,510	)		—			—		—		(35,510	)		—			—		—

Long-term portion		301,727			396,986			523,791		599,063		207,984			272,110			360,010		410,986

Provision for return condition checks for aircraft under operating leases represents the present value of estimated costs of major return checks for aircraft under operating leases as the Target Group has the responsibility to fulfill certain return conditions under the relevant leases.

34.

OTHER LONG-TERM LIABILITIES

	Target Group								Target Company
							As at								As at
	As at 31 December						30 June		As at 31 December						30 June
	2006		2007		2008		2009		2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000

Long-term duties and levies payable		—		31,527		87,234		84,565		—		31,527		87,234		84,565
Fair value of unredeemed points awarded under the Target Group’s frequent flyer program		88,598		109,919		94,677		131,046		88,598		109,919		94,677		131,046
Others		—		—		17,990		17,990		—		—		14,490		14,490

		88,598		141,446		199,901		233,601		88,598		141,446		196,401		230,101

– 77 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

35.

DEFERRED TAXATION

Deferred income tax assets and liabilities are offset when there is a legally enforceable right of offset and when the deferred income taxes relate to the same authority. The following amounts, determined after appropriate offsetting, are shown in the balance sheets:

	Target Group												Target Company
										As at									As at
	As at 31 December									30 June			As at 31 December						30 June
	2006			2007			2008			2009			2006		2007		2008		2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000		RMB’000		RMB’000		RMB’000

Deferred tax assets
— Deferred tax asset to be utilised after 12 months		4,791			6,425			7,728			7,470			4,422		5,945		6,665		6,024
— Deferred tax asset to be utilised within 12 months		—			—			—			—			—		—		—		—

		4,791			6,425			7,728			7,470			4,422		5,945		6,665		6,024

Deferred tax liabilities
— Deferred tax liability to be realised after 12 months		—			—			—			—			—		—		—		—
— Deferred tax liability to be realised within 12 months		(217	)		(375	)		(142	)		(295	)		—		—		—		—

		(217	)		(375	)		(142	)		(295	)		—		—		—		—

Movements in the net deferred taxation assets/(liabilities) are as follows:

	Target Group											Target Company
									As at											As at
	As at 31 December								30 June			As at 31 December								30 June
	2006			2007			2008		2009			2006			2007			2008		2009
	RMB’000			RMB’000			RMB’000		RMB’000			RMB’000			RMB’000			RMB’000		RMB’000

At beginning of the year/period		4,012			4,574			6,050		7,586			3,860			4,422			5,945		6,665
Credited to profit and loss in the statement of comprehensive income (Note 13)		1,067			2,219			582		389			1,067			2,503			—		—
Charged/(credit) to equity		(505	)		(743	)		954		(800	)		(505	)		(980	)		720		(641	)

At end of the year/period		4,574			6,050			7,586		7,175			4,422			5,945			6,665		6,024

– 78 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

The deferred tax assets and liabilities (prior to the offsetting of balances within the same tax jurisdiction) were made up of the taxation effects of the following:

	Target Group												Target Company
										As at												As at
	As at 31 December									30 June			As at 31 December									30 June
	2006			2007			2008			2009			2006			2007			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Deferred tax assets:
Tax losses carried forward		—			20,507			16,068			15,047			—			20,507			16,068			15,047
Impairment provision for obsolete flight equipment spare parts		1,660			1,009			1,069			816			1,660			1,009			1,069			816
Impairment provision for receivables		512			613			1,220			1,533			143			133			157			87
Provision for overhaul expenses and return condition checks for aircraft under operating leases		10,632			6,773			19,291			22,959			10,632			6,773			19,291			22,959
Provision for frequent flyer program		10,010			16,088			18,892			18,415			10,010			16,088			18,892			18,415
Financial derivative instrument		—			—			34,492			9,639			—			—			34,492			9,639
Provision for post- retirement benefits		14,376			10,618			9,297			7,956			14,376			10,618			9,297			7,956

		37,190			55,608			100,329			76,365			36,821			55,128			99,266			74,919

Deferred tax liabilities:
Depreciation and amortisation		(21,877	)		(35,001	)		(65,386	)		(63,070	)		(21,877	)		(35,001	)		(65,386	)		(63,070	)
Write back of long-aged sales in advance of carriage		(10,176	)		(13,198	)		(26,951	)		(4,920	)		(10,176	)		(13,198	)		(26,951	)		(4,920	)
Available-for-sale financial assets		(563	)		(1,359	)		(406	)		(1,200	)		(346	)		(984	)		(264	)		(905	)

		(32,616	)		(49,558	)		(92,743	)		(69,190	)		(32,399	)		(49,183	)		(92,601	)		(68,895	)

– 79 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

Movements of the net deferred tax assets of the Target Group for the Relevant Periods are as follows:

				(Charged)/credited to
	At the			Statement of
	beginning			comprehensive			Charged to			At end
	of the year			income			equity			of the year
	RMB’000			RMB’000			RMB’000			RMB’000

For the year ended 31 December 2006
Impairment provision for obsolete flight equipment spare parts		1,761			(101	)		—			1,660
Impairment provision for receivables		434			78			—			512
Provision for overhaul expenses and return condition checks for aircraft under operating leases		5,380			5,252			—			10,632
Provision for frequent flyer program		3,368			6,642			—			10,010
Provision for post-retirement benefits		7,736			6,640			—			14,376

		18,679			18,511			—			37,190

Depreciation and amortisation		(8,660	)		(13,217	)		—			(21,877	)
Write back of long-aged sales in advance of carriage		(5,444	)		(4,732	)		—			(10,176	)
Available-for-sale financial assets		(563	)		505			(505	)		(563	)

		(14,667	)		(17,444	)		(505	)		(32,616	)

Net deferred tax assets		4,012			1,067			(505	)		4,574

For the year ended 31 December 2007
Tax losses carried forward		—			20,507			—			20,507
Impairment provision for obsolete flight equipment spare parts		1,660			(651	)		—			1,009
Impairment provision for receivables		512			101			—			613
Provision for overhaul expenses and return condition checks for aircraft under operating leases		10,632			(3,859	)		—			6,773
Provision for frequent flyer program		10,010			6,078			—			16,088
Provision for post-retirement benefits		14,376			(3,758	)		—			10,618

		37,190			18,418			—			55,608

Depreciation and amortisation		(21,877	)		(13,124	)		—			(35,001	)
Write back of long-aged sales in advance of carriage		(10,176	)		(3,022	)		—			(13,198	)
Available-for-sale financial assets		(563	)		(53	)		(743	)		(1,359	)

		(32,616	)		(16,199	)		(743	)		(49,558	)

Net deferred tax assets		4,574			2,219			(743	)		6,050

– 80 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

				(Charged)/credited to
	At the			Statement of
	beginning			comprehensive			Charged to			At end
	of the year			income			equity			of the year
	RMB’000			RMB’000			RMB’000			RMB’000

For the year ended 31 December 2008
Tax losses carried forward		20,507			(4,439	)		—			16,068
Impairment provision for obsolete flight equipment spare parts		1,009			60			—			1,069
Impairment provision for receivables		613			607			—			1,220
Provision for overhaul expenses and return condition checks for aircraft under operating leases		6,773			12,518			—			19,291
Provision for frequent flyer program		16,088			2,804			—			18,892
Financial derivative instrument		—			34,492			—			34,492
Provision for post-retirement benefits		10,618			(1,321	)		—			9,297

		55,608			44,721			—			100,329

Depreciation and amortisation		(35,001	)		(30,385	)		—			(65,386	)
Write back of long-aged sales in advance of carriage		(13,198	)		(13,753	)		—			(26,951	)
Available-for-sale financial assets		(1,359	)		(1	)		954			(406	)

		(49,558	)		(44,139	)		954			(92,743	)

Net deferred tax assets		6,050			582			954			7,586

For the six months ended 30 June 2009
Tax losses carried forward		16,068			(1,021	)		—			15,047
Impairment provision for obsolete flight equipment spare parts		1,069			(253	)		—			816
Impairment provision for receivables		1,220			313			—			1,533
Provision for overhaul expenses and return condition checks for aircraft under operating leases		19,291			3,668			—			22,959
Provision for frequent flyer program		18,892			(477	)		—			18,415
Derivative financial instrument		34,492			(24,853	)		—			9,639
Provision for post-retirement benefits		9,297			(1,341	)		—			7,956

		100,329			(23,964	)		—			76,365

Depreciation and amortisation		(65,386	)		2,316			—			(63,070	)
Write back of long-aged sales in advance of carriage		(26,951	)		22,031			—			(4,920	)
Available-for-sale financial assets		(406	)		6			(800	)		(1,200	)

		(92,743	)		24,353			(800	)		(69,190	)

Net deferred tax assets		7,586			389			(800	)		7,175

– 81 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

In accordance with the PRC tax law, tax losses can be carried forward to offset against future taxable income for a period of five years. For the years ended 31 December 2006, 2007 and 2008 and six months ended 30 June 2009, the Target Group had tax losses carried forward of approximately RMB81 million, RMB627 million, RMB1,855 million and RMB2,131 million respectively (The Target Company: 2006 : Nil; 2007 : RMB369 million; 2008 : RMB1,292 million; 2009 : RMB1,292 million respectively) which will expire between 2011 and 2014, and which are available to set off against the Target Group and the Target Company’s future taxable income.

As at 31 December 2006, 2007 and 2008, and 30 June 2009, the Target Group did not recognise deferred tax assets of RMB24 million, RMB132 million, RMB445 million, and RMB519 million respectively (The Target Company: 2006 : Nil; 2007 : RMB67 million; 2008 : RMB304 million; 2009 : RMB307 million respectively) that arise from tax losses available as management did not consider it probable that such tax losses would be realised before they expire.

36.

POST-RETIREMENT BENEFIT OBLIGATIONS

The Target Group provides certain funded and unfunded post-retirement benefits to certain employees. The expected cost of providing these post-retirement benefits is actuarially determined and recognized by using projected unit credit method, which involves a number of assumptions and estimates, including inflation rate, discount rate and employee’s turnover ratio.

The post-retirement benefit obligations recognized in the balance sheets are as follows:

	Target Group												Target Company
										As at												As at
	As at 31 December									30 June			As at 31 December									30 June
	2006			2007			2008			2009			2006			2007			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Present value of funded post-retirement benefit obligations		349,791			291,805			398,773			379,784			349,791			291,805			398,772			379,783
Fair value of plan assets		(32,394	)		(43,914	)		(73,156	)		(73,659	)		(32,394	)		(43,914	)		(73,156	)		(73,659	)
Present value of unfunded post- retirement benefit obligations		22,112			19,410			43,606			41,902			—			—			—			—
Unrecognised actuarial gain/(losses)		58,622			146,165			33,840			67,135			58,622			141,809			43,472			73,249

Post-retirement benefit obligations		398,131			413,466			403,063			415,162			376,019			389,700			369,088			379,373
Less: current portion (Note 29)		(1,378	)		(1,503	)		(1,727	)		(1,881	)		(1,371	)		(1,496	)		(1,648	)		(1,802	)

Long term portion		396,753			411,963			401,336			413,281			374,648			388,204			367,440			377,571

– 82 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

Changes in post-retirement benefit obligations are as follows:

	Target Group												Target Company
										As at												As at
	As at 31 December									30 June			As at 31 December									30 June
	2006			2007			2008			2009			2006			2007			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

At 1 January		380,914			398,131			413,466			403,063			358,802			376,019			389,700			369,088
Total expenses charged in the profit and loss in the statement of comprehensive income		32,717			29,677			27,398			16,010			32,717			27,884			17,019			14,062
Payments		(15,500	)		(14,342	)		(37,801	)		(3,911	)		(15,500	)		(14,203	)		(37,631	)		(3,777	)

At 31 December/30 June		398,131			413,466			403,063			415,162			376,019			389,700			369,088			379,373

The movement in the fair value of plan assets of the year/period is as follows:

	Target Group												Target Company
										As at												As at
	As at 31 December									30 June			As at 31 December									30 June
	2006			2007			2008			2009			2006			2007			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

At 1 January		19,783			32,394			43,914			73,156			19,783			32,394			43,914			73,156
Expected return on plan assets		1,825			2,632			4,222			2,586			1,825			2,632			4,222			2,586
Actuarial (losses)/gain		(1,788	)		(1,530	)		(6,985	)		(3,206	)		(1,788	)		(1,530	)		(6,985	)		(3,206	)
Employer contributions		12,574			10,418			32,393			1,312			12,574			10,418			32,393			1,312
Benefits paid from the plan assets		—			—			(388	)		(189	)		—			—			(388	)		(189	)

At 31 December/30 June		32,394			43,914			73,156			73,659			32,394			43,914			73,156			73,659

The costs of post-retirement benefits are recognised under wages, salaries and benefits in the statement of comprehensive income as follows:

	Target Group												Target Company
										As at												As at
	As at 31 December									30 June			As at 31 December									30 June
	2006			2007			2008			2009			2006			2007			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Current service cost		20,620			18,952			22,498			10,160			20,621			18,004			13,058			9,129
Interest cost		13,921			14,566			15,286			8,449			13,921			13,721			14,347			7,623
Actuarial gain		—			(1,209	)		(6,164	)		(13	)		—			(1,209	)		(6,164	)		(104	)
Expected return on plan assets		(1,825	)		(2,632	)		(4,222	)		(2,586	)		(1,825	)		(2,632	)		(4,222	)		(2,586	)

Total (Note 9)		32,716			29,677			27,398			16,010			32,717			27,884			17,019			14,062

– 83 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

The principle actuarial assumptions used are as follows:

	Target Group												Target Company
										As at												As at
	As at 31 December									30 June			As at 31 December									30 June
	2006			2007			2008			2009			2006			2007			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Discount rate		3.75	%		4.75	%		3.75	%		4.00	%		3.75	%		4.75	%		3.75	%		4.00	%
Annual rate of increase of per capita benefit payment		4	%		4	%		4	%		4	%		4	%		4	%		4	%		4	%
Expected return on plan
assets		7	%		7	%		7	%		7	%		7	%		7	%		7	%		7	%
Employee turnover rate		3	%		3	%		3	%		3	%		3	%		3	%		3	%		3	%

37.

SHARE CAPITAL

	Target Company
							As at
	As at 31 December						30 June
	2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000

Registered, issued and fully paid of RMB1.00 each
A Shares with lock-up periods		691,500		453,851		314,048		222,222
A Shares without lock-up periods		390,000		627,649		767,452		1,081,500

		1,081,500		1,081,500		1,081,500		1,303,722

Pursuant to the Target Company’s Articles of Association, all shares of the Company are registered ordinary shares and rank pari passu to each other.

On 6 January 2006, the shareholders of the Target Company approved a share conversion scheme. Pursuant to the approved share conversion scheme, for every 10 circulating shares held in the Target Company, each holder of circulating shares received 3 circulating shares from the private holders of the non-circulating shares in exchange for their permission to transfer the non-circulating shares held by the private investors into circulating shares. In this connection, the private investors of the non-circulating shares granted 90 million shares in total to the holders of the circulating shares. In addition, the non-circulating shares held by the private investors were granted the status of listing with a lock-up periods ranging from 12 to 36 months starting from 14 February 2006.

In June 2009, as approved by the Target Company’s shareholders and China Securities Regulatory Commission, the Target Company issued 222,222,200 new A shares at RMB4.5 per share through private placement to one of the Target Company’s shareholders, Jin Jiang International Holdings Co., Ltd. (‘‘Jin Jiang International’’) for cash of approximately RMB1 billion. After netting off the costs for the share issue, the net proceeds from the share issue was RMB980,440,000, of which RMB222,222,000 was recorded as share capital, with the remaining RMB758,218,000 recorded in share premium. The shares issued to Jin Jiang International are subject to a lock-up period of 36 months from 25 June 2009.

– 84 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

38.

RESERVES

	Target Group
			Statutory
			and					Retained
			discretionary					profits/
	Share		reserve		Capital			(accumulated
	premium		(Note (a))		surplus			losses)			Total
	RMB’000		RMB’000		RMB’000			RMB’000			RMB’000

At 1 January 2006		470,074		134,286		19,704			(315,301	)		308,763
Profit attributable to equity holders of the Target Company		—		—		—			8,430			8,430
Other comprehensive income:		—		—		5,079			—			5,079
— Fair value movements of available-for-sale financial assets, net of tax		—		—		3,253			—			3,253
— Other income directly charged to reserves		—		—		1,826			—			1,826

Total comprehensive income for the year ended 31 December 2006		—		—		5,079			8,430			13,509
Dividends paid		—		—		—			(32,447	)		(32,447	)
Appropriations to statutory and discretionary reserves		—		5,304		—			(5,304	)		—

At 31 December 2006		470,074		139,590		24,783			(344,622	)		289,825

At 1 January 2007		470,074		139,590		24,783			(344,622	)		289,825
Loss attributable to equity holders of the Target Company		—		—		—			(531,971	)		(531,971	)
Other comprehensive income:		—		—		3,169			—			3,169
— Fair value movements of available-for-sale financial assets, net of tax		—		—		1,440			—			1,440
— Other income directly charged to reserves		—		—		1,729			—			1,729

Total comprehensive income/(loss) for the year ended 31 December 2007		—		—		3,169			(531,971	)		(528,802	)

At 31 December 2007		470,074		139,590		27,952			(876,593	)		(238,977	)

At 1 January 2008		470,074		139,590		27,952			(876,593	)		(238,977	)
Loss attributable to equity holders of the Target Company		—		—		—			(1,199,420	)		(1,199,420	)
Other comprehensive loss:		—		—		(4,575	)		—			(4,575	)
— Fair value movements of available-for-sale financial assets, net of tax		—		—		(4,566	)		—			(4,566	)
— Other loss directly charged to reserves		—		—		(9	)		—			(9	)

Total comprehensive expense for the year ended 31 December 2008		—		—		(4,575	)		(1,199,420	)		(1,203,995	)

At 31 December 2008		470,074		139,590		23,377			(2,076,013	)		(1,442,972	)

– 85 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

	Target Group
			Statutory
			and					Retained
			discretionary					profits/
	Share		reserve		Capital			(accumulated
	premium		(Note (a))		surplus			losses)			Total
	RMB’000		RMB’000		RMB’000			RMB’000			RMB’000

At 1 January 2009		470,074		139,590		23,377			(2,076,013	)		(1,442,972	)
New shares issue (Note 37)		758,218		—		—			—			758,218
Loss attributable to equity holders of the Target Company		—		—		—			(270,547	)		(270,547	)
Other comprehensive income:		—		—		2,449			—			2,449
— Fair value movements of available- for-sale financial assets, net of tax		—		—		2,626			—			2,626
— Other income/(loss) directly charged to reserves		—		—		(177	)		—			(177	)

Total comprehensive income/(loss) for the six months ended 30 June 2009		—		—		2,449			(270,547	)		(268,098	)

At 30 June 2009		1,228,292		139,590		25,826			(2,346,560	)		(952,852	)

Unaudited
At 1 January 2008		470,074		139,590		27,952			(876,593	)		(238,977	)
Profit attributable to equity holders of the Target Company		—		—		—			33,571			33,571
Other comprehensive loss:		—		—		(4,976	)		—			(4,976	)
— Fair value movements of available- for-sale financial assets, net of tax		—		—		(4,486	)		—			(4,486	)
— Other loss directly charged to reserves		—		—		(490	)		—			(490	)

Total comprehensive (loss)/income for the six months ended 30 June 2008		—		—		(4,976	)		33,571			28,595

At 30 June 2008		470,074		139,590		22,976			(843,022	)		(210,382	)

– 86 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

	Target Company
			Statutory
			and					Retained
			discretionary					profits/
	Share		reserve		Capital			(accumulated
	premium		(Note (a))		surplus			losses)			Total
	RMB’000		RMB’000		RMB’000			RMB’000			RMB’000

At 1 January 2006		470,074		134,286		17,261			(286,208	)		335,413
Profit for the year		—		—		—			64,885			64,885
Other comprehensive income:		—		—		2,344			—			2,344
— Fair value movements of available-for-sale financial assets, net of tax		—		—		1,805			—			1,805
— Other income directly charged to reserves		—		—		539			—			539

Total comprehensive income for the year ended 31 December 2006		—		—		2,344			64,885			67,229

Dividends paid		—		—		—			(32,445	)		(32,445	)
Appropriations to statutory and discretionary reserves		—		5,304		—			(5,304	)		—

At 31 December 2006		470,074		139,590		19,605			(259,072	)		370,197

At 1 January 2007		470,074		139,590		19,605			(259,072	)		370,197
Loss for the year		—		—		—			(423,799	)		(423,799	)
Other comprehensive income:		—		—		2,581			—			2,581
— Fair value movements of available-for-sale financial assets, net of tax		—		—		2,180			—			2,180
— Other income directly charged to reserves		—		—		401			—			401

Total comprehensive income/(loss) for the year ended 31 December 2007		—		—		2,581			(423,799	)		(421,218	)

At 31 December 2007		470,074		139,590		22,186			(682,871	)		(51,021	)

At 1 January 2008		470,074		139,590		22,186			(682,871	)		(51,021	)
Loss for the year		—		—		—			(987,819	)		(987,819	)
Other comprehensive loss:		—		—		(3,430	)		—			(3,430	)
— Fair value movements of available-for-sale financial assets, net of tax		—		—		(3,431	)		—			(3,431	)
— Other income directly charged to reserves		—		—		1			—			1

Total comprehensive loss for the year ended 31 December 2008		—		—		(3,430	)		(987,819	)		(991,249	)

At 31 December 2008		470,074		139,590		18,756			(1,670,690	)		(1,042,270	)

– 87 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

	Target Company
			Statutory
			and					Retained
			discretionary					profits/
	Share		reserve		Capital			(accumulated
	premium		(Note (a))		surplus			losses)			Total
	RMB’000		RMB’000		RMB’000			RMB’000			RMB’000

At 1 January 2009		470,074		139,590		18,756			(1,670,690	)		(1,042,270	)
New share issue (Note 37)		758,218		—		—			—			758,218
Loss for the period		—		—		—			(11,853	)		(11,853	)
Other comprehensive income:		—		—		1,972			—			1,972
Fair value movements of available for sale investments		—		—		2,153			—			2,153
Other loss directly charge to reserve		—		—		(181	)		—			(181	)


Total comprehensive income/(loss) for the six months ended 30 June 2009		—		—		1,972			(11,853	)		(9,881	)

At 30 June 2009		1,228,292		139,590		20,728			(1,682,543	)		(293,933	)


Unaudited
At 1 January 2008		470,074		139,590		22,186			(682,871	)		(51,021	)
Profit for the period		—		—		—			82,370			82,370
Other comprehensive loss:		—		—		(4,485	)		—			(4,485	)
Fair value movements of available for sale investments		—		—		(4,485	)		—			(4,485	)

Total comprehensive (loss)/income for the six months ended 30 June 2008		—		—		(4,485	)		82,370			77,885

At 30 June 2008		470,074		139,590		17,701			(600,501	)		26,864

Note:

(a)

Statutory and Discretionary Reserves

In accordance with the PRC regulations and the Articles of Association of the companies within the Target Group, before distributing the net profit of each year, each of the companies registered in the PRC is required to set aside 10% of its statutory net profit for the year after offsetting any prior year’s losses as determined under Accounting Standards for Business Enterprises (2006) of the PRC (‘‘PRC GAAP’’) to the statutory common reserve fund. When the balance of such reserve reaches 50% of each company’s share capital, any further appropriation is optional. The statutory common reserve fund can be utilised to offset prior years’ losses or to issue new shares to shareholders in proportion to their existing shareholdings or to increase the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital.

Each of the Target Group companies is permitted to transfer 5% of its profit for the year as determined under the PRC GAAP, to a discretionary common reserve fund. The transfer to this reserve is subject to approval at shareholders’ meetings.

The Target Company made RMB 5,304,000 to discretionary common reserve fund in year ended 31 December 2006. No profit appropriation by the Target Company to the discretionary common reserve fund was made in the years ended 31 December 2007 and 2008 and the six months ended 30 June 2008 and 30 June 2009.

– 88 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

39.

NOTE TO CONSOLIDATED CASH FLOW STATEMENTS

(a)

Cash generated from operations

											Six months ended
		Year ended 31 December									30 June
		2006			2007			2008			2008			2009
	Note	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000
								(Unaudited)

Profit/(loss) before income tax			16,120			(555,580	)		(1,290,450	)		(59,697	)		(245,444	)
Adjustments for:
Depreciation of property, plant and equipment			644,237			735,809			713,104			351,160			406,447
(Gains)/losses on disposals of property, plant and equipment			(20,223	)		120,780			(14,877	)		(123	)		1,294
Share of results of associates			(5,831	)		(6,265	)		(8,087	)		(5,007	)		(4,447	)
Share of results of jointly controlled entities			1,629			(3,799	)		(1,245	)		(440	)		(2,943	)
Amortisation of lease prepayments and intangible assets			10,105			11,105			13,167			6,336			8,069
Net foreign exchange gains			(135,888	)		(272,440	)		(280,705	)		(291,806	)		(3,793	)
Loss/(gain) arising from fair value movements of derivative financial instrument			—			—			172,458			—			(114,421	)
Consumption of flight equipment spare parts			92,999			124,011			150,911			75,633			82,370
Provision for impairment of trade and other receivables			3,948			13,599			1,449			—			2,407
Provision for frequent flyer programme			18,571			21,321			(15,242	)		10,956			36,369
Provision for return condition checks for aircraft under operating leases			73,440			86,989			126,805			51,701			75,272
Provision for post-retirement benefit obligation			32,717			29,677			27,398			8,675			16,010
Interest income			(7,214	)		(11,041	)		(16,270	)		(6,258	)		(8,058	)
Interest expenses			273,895			374,964			396,834			204,578			181,783
Loss on disposal of available-for-sale financial assets			—			(2,054	)		6,099			—			—

Operating profit/(loss) before working capital changes			998,505			667,076			(18,651	)		345,708			430,915

Changes in working capital
Flight equipment spare parts			(191,860	)		(148,162	)		(235,106	)		(131,588	)		(91,703	)
Trade receivables			(163,346	)		(230,381	)		278,221			40,507			39,433
Amount due from related companies			(225	)		(1,531	)		(3,984	)		14,683			2,805
Prepayments, deposits and other receivables			102,786			(232,838	)		134,316			(74,333	)		(123,429	)
Sales in advance of carriage			18,151			34,384			46,312			7,951			(43,997	)
Trade payables and notes payables			135,049			189,003			169,263			(74,911	)		(61,230	)
Amounts due to related companies			—			2,445			2,068			(2,445	)		7,826
Other payables and accrued expenses			635,139			614,140			52,097			(330,263	)		(100,009	)
Other long-term liabilities			—			—			17,990			(37,218	)		(2,669	)
Payments for return condition checks for aircraft under operating leases			—			(27,240	)		—			—			—
Post-retirement benefit obligations			(15,500	)		(14,342	)		(37,801	)		(18,816	)		(3,911	)

Cash generated from operations			1,518,699			852,554			404,725			(260,725	)		54,031

– 89 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(b)

Non-cash transactions

								Six months ended
		Year ended 31 December						30 June
		2006		2007		2008		2008		2009
	Note	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
								(Unaudited)

Financing activities not affecting cash:
Finance lease obligations incurred for acquisition of aircraft			—		522,126		736,152		—		—

40.

COMMITMENTS

(a)

Capital commitments

The Target Group and the Target Company had the following capital commitments:

	Target Group and Target Company
							As at
	As at 31 December						30 June
	2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000

Authorised and contracted for:
— Aircraft, engines and flight equipment		11,062,187		10,453,109		8,719,934		8,130,733
— Other property, plant and equipment		92,161		68,533		32,116		—

		11,154,348		10,521,642		8,752,050		8,130,733
Authorised but not contracted for:
— Other property, plant and equipment		74,800		60,760		146,930		108,020

		11,229,148		10,582,402		8,898,980		8,238,753

Contracted expenditures for the above aircraft and flight equipment, including deposits prior to delivery, subject to adjustments based on future inflation increases built into the contracts and discounts available upon delivery of the aircraft, if any, were expected to be paid as follows:

	Target Group and Target Company
							As at
	As at 31 December						30 June
	2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000

Within one year		1,194,338		1,133,524		1,533,090		1,852,686
In the second year		1,211,750		1,638,517		1,867,702		1,745,552
In the third year		1,607,061		1,996,140		1,722,215		1,946,547
In the fourth year		1,745,057		1,840,648		1,622,188		1,338,945
After the fourth year		5,303,981		3,844,280		1,974,739		1,247,003

		11,062,187		10,453,109		8,719,934		8,130,733

– 90 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(b)

Operating lease commitments

As at the balance sheet date, the Target Group and the Target Company had commitments under operating leases to pay future minimum lease rentals as follows:

	Target Group
							As at
	As at 31 December						30 June
	2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000

Aircraft, engines and flight equipment
Within one year		943,476		1,075,939		1,135,156		1,130,667
In the second year		850,292		1,041,870		1,110,454		1,087,212
In the third to fifth year inclusive		2,406,103		2,782,238		2,805,816		2,641,298
After the fifth year		1,683,051		1,924,848		1,760,655		1,383,994

		5,882,922		6,824,895		6,812,081		6,243,171

Land and buildings
Within one year		—		53,536		81,369		81,525
In the second year		—		81,369		81,525		81,525
In the third to fifth year inclusive		—		223,431		208,506		201,044
After the fifth year		—		1,527,936		1,461,335		1,428,035

		—		1,886,272		1,832,735		1,792,129

		5,882,922		8,711,167		8,644,816		8,035,300

	Target Company
							As at
	As at 31 December						30 June
	2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000

Aircraft, engines and flight equipment
Within one year		591,473		741,620		777,818		768,912
In the second year		580,759		736,641		764,959		755,517
In the third to fifth year inclusive		1,745,025		1,948,723		1,867,024		1,727,824
After the fifth year		1,216,972		1,168,256		1,022,697		785,930

		4,134,229		4,595,240		4,432,498		4,038,183

– 91 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

41.

RELATED PARTY TRANSACTIONS

Shanghai Alliance Investment Limited (‘‘Shanghai Alliance’’) is the single largest shareholder of the Target Company and owns approximately 29.64% of the Target Company’s shares as at 30 June 2009. Shanghai Alliance had owned 35.75% of the Target Company’s shares throughout the Relevant Periods until the completion of the Target Company’s new share issued to Jin Jiang International in June 2009 (Note 37), thereafter which Shanghai Alliance’s share percentage in the Target Company has been diluted to 29.64%. The aviation industry in the PRC is administrated by CAAC. Shanghai Alliance and the Target Group is ultimately controlled by the PRC government, which also controls a significant portion of the productive assets and entities in the PRC (collectively referred as the ‘‘SOEs’’).

(a)

Related party transactions

The Target Group sells air tickets through sales agents and is therefore likely to have extensive transactions with other state-controlled enterprises, and the employees and their close family members of SOEs while such employees are on corporate business. These transactions are carried out on normal commercial terms that are consistently applied to all of the Target Group’s customers. Due to the large volume and the pervasiveness of these transactions, the Target Company’s management is unable to determine the aggregate amount of the transactions for disclosure. Therefore, retail transactions with these related parties are not disclosed herein. The directors of the Target Company believe that meaningful related party disclosures on these retail transactions have been adequately made.

During the Relevant Periods, the Target Group has entered the following major transactions with the related parties:

											Six months ended
		Year ended 31 December									30 June
		2006			2007			2008			2008			2009
Nature of transaction	Related party	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000
											(unaudited)

With jointly controlled entity
Equipment manufacturing and maintenance	Shanghai Hute Aviation Tech. Co. Ltd		10,715			17,296			18,260			8,145			13,490


With CAAC and its affiliates:
Civil aviation infrastructure levies paid	CAAC		(183,320	)		(220,252	)		(235,739	)		(114,881	)		(130,468	)
Aircraft insurance premiums paid/ payable through CAAC which entered into the insurance policy on behalf of the Target Group	CAAC		(39,026	)		(42,445	)		(32,714	)		(15,483	)		(15,210	)

With other SOE
Take-off and landing fee charges	State-controlled airports		(655,958	)		(755,028	)		(828,494	)		(392,137	)		(463,495	)
Purchase of aircraft fuel	State-controlled fuel suppliers		(2,339,314	)		(2,742,042	)		(3,681,050	)		(1,564,395	)		(1,134,289	)
Interest income	State-controlled banks		7,125			10,473			15,638			6,015			7,909
Interest expense on loans	State-controlled banks		(251,210	)		(361,391	)		(395,733	)		(200,410	)		(213,695	)
Purchase of food and beverages for passenger business	State-controlled enterprises		(106,498	)		(98,294	)		(110,035	)		(50,687	)		(59,099	)

– 92 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(b)

Balances with related companies

(i)

Amounts due from/to related companies

Amounts due from/to related parties at balance sheet date are trade in nature, interest free and payable within normal credit terms given to trade customers/trade creditors.

(ii)

Amounts due from subsidiaries

Amounts due from subsidiaries are interests bearing at interest rates ranging from 5.51% to 5.56%, 5.51% to 6.50%, 5.51% to 7.10%, 5.13% to 5.58% per annum respectively for the years ended 31 December 2006, 2007, 2008 and six months ended 30 June 2009, all balances are repayable within one year.

In addition, as at 31 December 2006, 2007, 2008 and 30 June 2009, the Target Company provided guarantees to certain of its subsidiaries for borrowings of approximately RMB101 million, RMB142 million, RMB132 million, and RMB127 million respectively.

(iii)

State-controlled banks and other financial institutions

	Average interest rate
										As at
	As at 31 December									30 June
	2006			2007			2008			2009

Bank deposits (included in cash and cash equivalents)		0.7	%		0.7	%		0.4	%		0.4	%
Long-term bank borrowings		5.783	%		5.724	%		4.503	%		3.571	%

	Target Group
							As at
	As at 31 December						30 June
	2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000

Bank deposits (included in cash and cash equivalents)		599,549		908,346		1,031,909		1,915,132
Long-term bank borrowings		3,338,230		2,999,423		3,587,600		4,204,280

	Target Company
							As at
	As at 31 December						30 June
	2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000

Bank deposits (included in cash and cash equivalents)		286,972		354,788		412,673		1,449,274
Long-term bank borrowings		3,338,230		2,971,423		3,559,600		4,146,280

– 93 –

APPENDIX I

FINANCIAL INFORMATION OF SHANGHAI AIRLINES

(c)

Key management compensation

	Target Group
	Year ended 31 December						Six months ended 30 June
	2006		2007		2008		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
							(Unaudited)

Salaries, bonus, allowances and benefits		3,632		3,708		4,218		2,374		2,476

42.

POST BALANCE SHEET EVENTS

On 10 July 2009, the Target Company entered into an agreement with the Company in relation to a proposed absorption of the Target Company by the Company through share exchanges at the rate of 1.3 A Shares of the Company in exchange of 1 share of the Target Company (i.e. in aggregate a maximum of 1,694,838,860 A Shares of the Company in exchange of 1,303,722,200 shares of the Target Company). An extraordinary shareholders’ meeting will be convened to approve the proposed absorption (the ‘‘Absorption Proposal’’).

Upon full implementation of the terms of the Absorption Proposal, after the approvals by the shareholders of the Company and the Target Company, together with the requisite consents and approvals from the relevant government authorities have been obtained, all the assets, business, staff and rights of the Target Company, including but not limited to all operating licence, registration and filing and route operating rights, will be absorbed into and all the liabilities of the Target Company will be assumed by the Company or a wholly owned subsidiary of the Company to be used to absorb all the assets and assume all the liabilities of the Target Company.

III.	SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared for the Target Company or any of its subsidiaries in respect of any period subsequent to 30 June 2009. No dividend or distribution has been declared, made or paid by the Target Company or any of its subsidiaries in respect of any period subsequent to 30 June 2009.

	Yours faithfully,

	PricewaterhouseCoopers
	Certified Public Accountants

	Hong Kong, 25 August 2009

– 94 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

A.	SUMMARY OF FINANCIAL INFORMATION

The following is a summary of the consolidated financial information of the Group for the three years ended 31 December 2006, 2007 and 2008, as extracted from the relevant annual reports of the Company which are not subject to any qualified opinion, and the unaudited condensed consolidated income statement data of the Group for the six months ended 30 June 2008 and 2009 as extracted from the interim result announcement of the Company for the six month ended 30 June 2009. The figures for the years ended 31 December 2006 and 2007 have been restated as a result of the changes of accounting policy for property, plant and equipment and the early adoption of IFRIC 13 ‘‘Customer loyalty programmes’’ in the year ended 31 December 2008.

Results

Expressed in RMB millions

										Six months ended
	Year ended 31 December									30 June
	2006			2007			2008			2008			2009
	(Restated)			(Restated)						(Unaudited)			(Unaudited)

Revenues		37,557			42,534			41,073			20,267			17,130

(Loss)/profit before tax		(3,338	)		378			(15,256	)		(107	)		1,012
Income tax		163			(24	)		(73	)		(45	)		16

(Loss)/profit for the year		(3,175	)		354			(15,329	)		(152	)		1,028

Attributable to:
Equity holders of the Company		(3,035	)		379			(15,269	)		(175	)		985
Minority interests		(140	)		(25	)		(60	)		23			43

		(3,175	)		354			(15,329	)		(152	)		1,028

Financial Position

Expressed in RMB millions

	As at 31 December							30 June
	2006		2007		2008			2009
	(Restated)		(Restated)					(Unaudited)

Total assets		60,739		67,741		73,052			72,840
Total liabilities		58,052		64,809		85,691			77,410

		2,687		2,933		(12,639	)		(4,570	)

Minority interests		649		572		458			501
Capital and reserves attributable to equity holders of the Company		2,038		2,361		(13,097	)		(5,071	)

		2,687		2,933		(12,639	)		(4,570	)

– 95 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

B.	UNAUDITED INTERIM FINANCIAL INFORMATION OF THE GROUP FOR THE SIX MONTHS ENDED 30 JUNE 2009

The following are the unaudited condensed consolidated interim financial information of the Group prepared under IFRS for the six months ended 30 June 2009 which are extracted from the interim result announcement of the Company.

Prepared in accordance with International Financial Reporting Standards (‘‘IFRS’’)

Condensed Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2009

			(Unaudited)
			Six months ended 30 June
						Restated
			2009			2008
	Note		RMB’000			RMB’000

Revenues		4		17,130,451			20,267,185
Other income		5		1,112,871			180,031
Other gains		5		—			220,498
Operating expenses
Aircraft fuel				(5,121,130	)		(8,662,568	)
Gain on fair value movements of fuel option contracts		6		2,793,718			451,043
Take-off and landing charges				(2,673,337	)		(2,654,302	)
Depreciation and amortisation				(2,529,044	)		(2,292,718	)
Wages, salaries and benefits				(2,270,011	)		(2,028,985	)
Aircraft maintenance				(1,209,545	)		(1,081,840	)
Food and beverages				(612,623	)		(658,058	)
Aircraft operating lease rentals				(1,267,175	)		(1,362,399	)
Other operating lease rentals				(191,595	)		(167,780	)
Selling and marketing expenses				(859,817	)		(801,723	)
Civil aviation infrastructure levies				(426,846	)		(373,380	)
Ground services and other charges				(130,777	)		(78,549	)
Office, administrative and other expenses				(1,718,508	)		(1,945,791	)
Total operating expenses				(16,216,690	)		(21,657,050	)

Operating profit/(loss)				2,026,632			(989,336	)
Finance income		7		145,937			1,960,625
Finance costs		8		(1,130,929	)		(1,130,898	)
Share of results of associates				(37,397	)		45,700
Share of results of jointly controlled entities				8,170			6,869

Profit/(loss) before income tax				1,012,413			(107,040	)
Income tax		9		15,446			(44,664	)

Profit/(loss) for the period				1,027,859			(151,704	)

– 96 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

		(Unaudited)
		Six months ended 30 June
				Restated
		2009		2008
	Note	RMB’000		RMB’000

Other comprehensive income/(loss)
Fair value movements of available for sale investments held by associates			788		(19,196	)
Cash flow hedges, net of tax			55,857		(22,900	)
Other comprehensive income/(loss) for the period			56,645		(42,096	)

Total comprehensive income/(loss) for the period			1,084,504		(193,800	)

Profit/(loss) attributable to:
Equity holders of the Company			984,654		(175,318	)
Minority interests			43,205		23,614

			1,027,859		(151,704	)

Total comprehensive income/(loss) attributable to:
Equity holders of the Company			1,041,299		(217,414	)
Minority interests			43,205		23,614

			1,084,504		(193,800	)

Earnings/(loss) per share attributable to the equity holders of the Company during the period
— Basic and diluted	10	RMB0.20		RMB(0.04)

– 97 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Condensed Consolidated Balance Sheet

As at 30 June 2009

			(Unaudited)			(Audited)
			30 June			31 December
			2009			2008
	Note		RMB’000			RMB’000

Non-current assets
Intangible assets				116,402			164,851
Property, plant and equipment		13		53,351,228			52,678,473
Lease prepayments				983,767			996,521
Advanced payments on acquisition of aircraft		14		5,667,142			6,413,554
Investments in associates				703,710			980,319
Investments in jointly controlled entities				370,502			362,332
Available-for-sale financial assets				61,268			31,268
Other long-term assets				874,585			941,556
Deferred tax assets				110,475			81,947
Derivative assets				—			988
				62,239,079			62,651,809
Current assets
Flight equipment spare parts				918,384			871,364
Trade receivables		15		1,263,507			1,146,522
Amounts due from related companies				204,757			208,289
Prepayments, deposits and other receivables				3,954,369			4,126,219
Cash and cash equivalents				3,796,963			3,451,010
Derivative assets				208			123,010
Non-current assets held for sale				462,700			473,667
				10,600,888			10,400,081
Current liabilities
Sales in advance of carriage				1,119,648			1,013,878
Trade payables and notes payable		16		4,420,470			5,144,858
Amounts due to related companies				476,539			413,126
Other payables and accrued expenses				11,407,689			12,147,175
Current portion of obligations under finance leases		17		2,018,328			1,916,989
Current portion of borrowings		18		22,723,843			26,513,320
Income tax payable				22,285			39,002
Current portion of provision for return check conditions for aircraft under operating leases				333,547			213,830
Derivative liabilities				2,229,316			6,456,075
				44,751,665			53,858,253

Net current liabilities				(34,150,777	)		(43,458,172	)

Total assets less current liabilities				28,088,302			19,193,637

– 98 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

			(Unaudited)			(Audited)
			30 June			31 December
			2009			2008
	Note		RMB’000			RMB’000

Non-current liabilities
Obligations under finance leases		17		18,379,006			18,891,910
Borrowings		18		9,851,317			8,588,052
Provision for return check conditions for aircraft under operating leases				1,344,391			1,320,188
Other long-term liabilities				1,264,318			1,320,759
Post-retirement benefit obligations				1,648,420			1,469,124
Deferred tax liabilities				41,139			57,589
Derivative liabilities				129,578			185,524
				32,658,169			31,833,146

Net liabilities				(4,569,867	)		(12,639,509	)

Equity
Capital and reserves attributable to the equity holders of the Company
— Share capital		19		7,741,700			4,866,950
— Reserves				(12,812,664	)		(17,964,351	)
				(5,070,964	)		(13,097,401	)
Minority interests				501,097			457,892

Total equity				(4,569,867	)		(12,639,509	)

– 99 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Condensed Consolidated Cash Flow Statement

For the six months ended 30 June 2009

	(Unaudited)
	Six months ended 30 June
	2009			2008
	RMB’000			RMB’000

Net cash (outflow)/inflow from operating activities		(563,422	)		1,215,900
Net cash outflow from investing activities		(1,840,210	)		(2,990,581	)
Net cash inflow from financing activities		2,746,009			4,772,018

Net increase in cash and cash equivalents		342,377			2,997,337
Cash and cash equivalents at 1 January		3,451,010			1,655,244
Exchange adjustments		3,576			(34,782	)

Cash and cash equivalents at 30 June		3,796,963			4,617,799

– 100 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Condensed Consolidated Statement of Changes in Shareholders’ Equity

For the six months ended 30 June 2009

	Attributable to equity holders of the Company
			Other			Accumulated						Minority
	Share capital		reserves			losses			Subtotal			interests			Total equity
	RMB’000		RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Six months ended 30 June 2009 (Unaudited)
Balance at 1 January 2009		4,866,950		117,911			(18,082,262	)		(13,097,401	)		457,892			(12,639,509	)
Total comprehensive income for the period ended 30 June 2009		—		56,645			984,654			1,041,299			43,205			1,084,504
Issuance of new shares (Note 19)		2,874,750		4,110,388			—			6,985,138			—			6,985,138

Balance at 30 June 2009		7,741,700		4,284,944			(17,097,608	)		(5,070,964	)		501,097			(4,569,867	)

Six months ended 30 June 2008
(Unaudited)
Balance at 1 January 2008 (restated, Note 3(b)(i))		4,866,950		307,351			(2,813,730	)		2,360,571			571,985			2,932,556
Total comprehensive (loss)/income for the period ended 30 June 2008		—		(42,096	)		(175,318	)		(217,414	)		23,614			(193,800	)
Dividends paid to minority interests in subsidiaries		—		—			—			—			(51,700	)		(51,700	)

Balance at 30 June 2008		4,866,950		265,255			(2,989,048	)		2,143,157			543,899			2,687,056

– 101 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Notes to the Condensed Consolidated Interim Financial Information

Corporate Information

China Eastern Airlines Corporation Limited (the ‘‘Company’’), a joint stock company limited by shares was incorporated in the People’s Republic of China (the ‘‘PRC’’) on 14 April 1995. The address of its registered office is 66 Airport Street, Pudong International Airport, Shanghai, the PRC. The Company and its subsidiaries (together, the ‘‘Group’’) are principally engaged in the operation of civil aviation, including the provision of passenger, cargo, and mail delivery and other extended transportation services.

The Company is majority owned by China Eastern Air Holding Company (‘‘CEA Holding’’), a state-owned enterprise incorporated in the PRC.

The Company’s shares are traded on The Stock Exchange of Hong Kong Limited, The New York Stock Exchange and The Shanghai Stock Exchange.

This condensed consolidated interim financial information has not been audited.

Basis of preparation

This unaudited condensed consolidated interim financial information for the six months ended 30 June 2009 (the ‘‘Current Period’’) has been prepared in accordance with International Accounting Standard (‘‘IAS’’) 34 ‘‘Interim Financial Reporting’’. The unaudited condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2008, which have been prepared in accordance with IFRS.

In preparing the interim financial information, the Directors have given careful consideration to the going concern status of the Group in the context of the Group’s current working capital difficulties.

As at 30 June 2009, the Group’s accumulated losses were approximately RMB17.10 billion; its current liabilities exceeded its current assets by approximately RMB34.15 billion; and total liabilities exceeded total assets by approximately RMB4.57 billion.

Against this background, the Directors have taken active steps to seek additional sources of finance and improve the Group’s liquidity position. As at 30 June 2009, the unutilised banking facilities available to the Group amounted to RMB48.79 billion. On 31 July 2009, a banking credit facility of RMB30 billion obtained by CEA Holding was granted to the Company (see Note 24(c) — ‘‘Post balance sheet events’’ for details). In addition, on 10 July 2009, a resolution to issue new shares to certain strategic investors for a total amount of RMB7 billion was passed by the Board and will be submitted for shareholders’ approval in the coming extraordinary general meeting (see Note 24(a) — ‘‘Post balance sheet events’’ for details).

With the additional credit facilities and proposed new share issue described in the preceding paragraph, and based on history of obtaining necessary financing and its relationships with its bankers and creditors, the Board considers that the Group will be able to obtain sufficient financing to enable it to operate and meet its liabilities as and when they fall due. Accordingly, it is appropriate that the financial information be prepared on a going concern basis and do not include any adjustments that would be required should the Company and the Group fail to continue as a going concern.

Accounting policies

Except as described in note 3(a) below, the accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 December 2008, as described therein.

– 102 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

(a)

Standards, amendment and interpretations effective in 2009

The Group has adopted the following new standards and amendments to standards which are relevant to the Group’s operations and are mandatory for the financial year beginning 1 January 2009.

IAS 1 (revised), ‘‘Presentation of financial statements’’. The revised standard prohibits the presentation of items of income and expenses (that is ‘‘non-owner changes in equity’’) in the statement of changes in equity, requiring ‘‘non-owner changes in equity’’ to be presented separately from owner changes in equity. All ‘‘non-owner changes in equity’’ are required to be shown in a performance statement.

Entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income).

The Group has elected to present one performance statement: the statement of comprehensive income. The interim financial information has been prepared in accordance with the revised disclosure requirements.

IFRS 8, ‘‘Operating segments’’. IFRS 8 replaces IAS 14, ‘‘Segment reporting’’. It requires a ‘‘management approach’’ under which segment information is presented on the same basis as that used for internal reporting purposes.

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker has been identified as the Board that makes strategic decisions. The interim financial information has been prepared in accordance with the revised disclosure requirements.

Amendment to IFRS 7, ‘‘Financial instruments: disclosures’’. The amendment increases the disclosure requirements about fair value measurement and reinforces existing principles for disclosure about liquidity risk. The amendment introduces a three-level hierarchy for fair value measurement disclosures and requires some specific quantitative disclosures for financial instruments in the lowest level in the hierarchy. It also requires entities to provide additional disclosures about the relative reliability of fair value measurements. These disclosures will help to improve comparability between entities about the effects of fair value measurements. In addition, the amendment clarifies and enhances the existing requirements for the disclosure of liquidity risk primarily requiring a separate liquidity risk analysis for derivative and non-derivative financial liabilities. Adoption of the amended standard does not have impact on the disclosure of this interim financial information but the Group will make the relevant additional disclosures, where appropriate, in its financial statements for the year ending 31 December 2009.

The Group has not early adopted new standards, amendments to standards and interpretations which have been issued but are not effective for 2009. The Group is assessing the impact of these new standards, amendments to standards and interpretations but is not yet in a position to state whether any substantial changes to the Group’s accounting policies or to the presentation of the financial statements will be required.

– 103 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

(b)

Comparatives

(i)

Changes of accounting policy in second half year of 2008 which were not reflected in the interim financial information for the six months ended 30 June 2008

In preparing the financial statements for the year ended 31 December 2008, the Group has made the following changes of accounting policy which were not reflected in the interim financial information for the six months ended 30 June 2008.

(1)

IFRIC 13, ‘‘Customer loyalty programmes’’ was early adopted by the Group in 2008. IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. The Company operates a frequent-flyer programme called ‘‘Eastern Miles’’ (the ‘‘programme’’). Historically, the incremental cost of providing awards in exchange for redemption of miles earned by members was accrued as an operating cost and a liability in the balance sheet. After the adoption of IFRIC 13, revenue is allocated between the ticket sold and miles earned by members. The portion allocated to miles earned is deferred and recognised when the miles have been redeemed or have expired.

(2)

Under IFRS, the Company has the option to use the revaluation model or historical cost model to account for its property, plant and equipment (‘‘PP&E’’). Prior to 2008, the Company adopted the revaluation model in accordance with IAS 16 as a result of Chinese regulatory requirements to revalue PP&E in connection with its listing in 1997. In 2008, the Company changed its IFRS accounting policy in respect of PP&E from the revaluation model to the historical cost model. The purposes of the change are set out in the notes to the financial statements for the year ended 31 December 2008.

The effect of the adoption of IFRIC 13 and change of accounting policy for PP&E on the consolidated interim financial information for the six months ended 30 June 2008 is set out below:

							Effect of
							change of
	2008 as			Effect of			accounting
	previously			adoption of			policy for			2008 as
	presented			IFRIC 13			PP&E			restated
	RMB’000			RMB’000			RMB’000			RMB’000

Impact on consolidated statement of comprehensive income
Consolidated loss for the period		(188,883	)		(40,320	)		77,499			(151,704	)
Loss per share attributable to equity holders of The Company	RMB(0.04)			RMB(0.008)			RMB0.016			RMB(0.04)

Impact on consolidated balance sheet at 1 January 2008
Consolidated net assets		3,612,729			(345,115	)		(335,058	)		2,932,556
Capital and reserves attributable to the equity holders of the Company		3,027,763			(345,115	)		(322,077	)		2,360,571
Minority interests		584,966			—			(12,981	)		571,985

The comparative of this financial information has been restated to reflect the effect of the above changes of accounting policy.

– 104 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

(ii)

Other reclassification

Where necessary, prior period amounts have been reclassified to conform to changes in presentation in the Current Period.

Revenues and segment information

(a)

Revenues

The Group is principally engaged in the operation of civil aviation, including the provision of passenger, cargo, mail delivery and other extended transportation services.

	(Unaudited)
	Six months ended 30 June
				Restated
	2009			2008
	RMB’000			RMB’000

Revenues
— Passenger		15,024,026			16,806,864
— Cargo and mail		1,564,178			2,838,951
Ground service income		511,763			609,806
Cargo handling income		138,959			181,122
Commission income		89,112			91,761
Others		241,457			259,108

		17,569,495			20,787,612
Less: Business tax (Note)		(439,044	)		(520,427	)

		17,130,451			20,267,185

Note:

The Group’s traffic revenues, commission income, ground service income, cargo handling income and other revenues are subject to PRC business tax levied at rates ranging from 3% to 5%, pursuant to the PRC tax rules and regulations.

(b)

Segment information

The chief operating decision-maker has been identified as the Board. The Board reviews the Group’s internal reporting in order to assess performance and allocate resources. Management has determined the operating segments based on these reports.

The Group has two business segments, namely passenger and cargo and logistics, which are structured and managed separately, according to the nature of their operations and the services they provide.

(1)

Passenger business segment includes cargo carried by passenger flights.

(2)

Inter-segment transfers or transactions are entered into under normal commercial terms and conditions that would also be available to unrelated third parties.

– 105 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

The segment results for the six months ended 30 June 2009 are as follows:

	(Unaudited)
				Cargo and
	Passenger			logistics			Unallocated			Total
	RMB’000			RMB’000			RMB’000			RMB’000

Traffic revenues		15,312,411			858,126			—			16,170,537
Other revenues and operating income		740,273			411,826			110,230			1,262,329

Total segment revenue		16,052,684			1,269,952			110,230			17,432,866
Inter-segment revenue		(227,738	)		—			(74,677	)		(302,415	)

Revenues		15,824,946			1,269,952			35,553			17,130,451

Operating profit/(loss) — segment results		2,243,816			(246,066	)		28,882			2,026,632

The segment results for the six months ended 30 June 2008 are as follows:

	(Unaudited)
				Cargo and
	Passenger			logistics		Unallocated			Total
	RMB’000			RMB’000		RMB’000			RMB’000

Restated
Traffic revenues		17,471,476			1,682,290		—			19,153,766
Other revenues and operating income		716,753			546,148		131,791			1,394,692

Total segment revenue		18,188,229			2,228,438		131,791			20,548,458
Inter-segment revenue		(204,678	)		—		(76,595	)		(281,273	)

Revenues		17,983,551			2,228,438		55,196			20,267,185

Operating (loss)/profit — segment results		(1,248,089	)		217,469		41,284			(989,336	)

The Group’s two business segments operate in four main geographical areas, even though they are managed on a worldwide basis.

The Group’s revenues (net of business tax) by geographical segment are analysed based on the following criteria:

(1)

– 106 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

(2)

Revenue from ticket handling services, airport ground services and other miscellaneous services are classified on the basis of where the services are performed.

	(Unaudited)
	Six months ended 30 June
			Restated
	2009		2008
	RMB’000		RMB’000

Domestic (the PRC, excluding Hong Kong)		11,819,726		11,413,140
Hong Kong		907,905		1,252,177
Japan		1,294,072		1,726,060
Other countries		3,108,748		5,875,808

Total		17,130,451		20,267,185

Other income and other gains

	(Unaudited)
	Six months ended 30 June
	2009		2008
	RMB’000		RMB’000

Other income
— Refund of civil aviation infrastructure levies (Note (a))		830,622		—
— Other government subsidies (Note (b))		282,249		180,031

		1,112,871		180,031

Other gains
— Gains on disposal of property, plant and equipment		—		220,498

		1,112,871		400,529

Note:

(a)

Pursuant to Cai Jian (2009) No. 4, the civil aviation infrastructure levies collected from PRC domestic airlines for the period from 1 July 2008 to 30 June 2009 would be refunded. The amount for the Current Period represents the refunds of civil aviation infrastructure levies received and receivable by the Group.

(b)

Other government subsidies represent (i) subsidies granted by the local government to the Group; and (ii) other subsidies granted by various local municipalities to encourage the Group to operate certain routes to cities where these municipalities are located.

Gain on fair value movements of fuel option contracts

In 2008, the Group entered into fuel hedging contracts to reduce the risk of changes in market oil/petroleum prices as a hedge against aircraft fuel costs. The fuel hedging contracts used by the Group are normally structured to include a combination of both put and call options which allow the Group to lock in fuel prices for specified volumes within a price range. In each hedging contract, the call options price at which the Group is effectively entitled to buy fuel will be higher than that at which the counterparty is effectively entitled to sell.

No fuel hedging contract was entered into by the Group for the Current Period, all the opened fuel hedging contracts as at 30 June 2009 are contracts entered into by the Group prior to 2009. None of the fuel hedging contracts entered into by the Group qualified for hedge accounting, the realised and unrealised mark to market gains/(losses) of the fuel hedging contracts during a period are recognised in the profit and loss accounts.

– 107 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Finance income

	(Unaudited)
	Six months ended 30 June
			Restated
	2009		2008
	RMB’000		RMB’000

Exchange gains, net (Note)		16,425		1,891,422
Interest income		52,937		55,572
Gains/(losses) arising from fair value movements of forward foreign exchange
contracts		76,575		13,631

		145,937		1,960,625

Note:

The exchange gains primarily related to the retranslation of the Group’s foreign currency denominated borrowings and obligations under finance leases at period end rates.

Finance costs

	(Unaudited)
	Six months ended 30 June
	2009			2008
	RMB’000			RMB’000

Interest relating to obligations under finance leases		264,002			337,358
Interest on loans from banks, financial institutions and other payables		930,204			932,259
Losses arising from fair value movements of interest rate swaps		59,060			35,687

		1,253,266			1,305,304
Less: amounts capitalised into advanced payments on acquisition of aircraft (Note 14)		(122,337	)		(174,406	)

		1,130,929			1,130,898

Interest capitalised for the Current Period is based on average interest rate of 4.58% (2008: 5.82%) per annum.

Income tax

Income tax is (credited)/charged to the consolidated statement of comprehensive income as follows:

	(Unaudited)
	Six months ended 30 June
	2009			2008
	RMB’000			RMB’000

Provision for PRC income tax		29,532			46,103
Deferred taxation		(44,978	)		(1,439	)

		(15,446	)		44,664

Prior to 2008, the Company and certain of its subsidiaries (the ‘‘Pudong Subsidiaries’’) located in Pudong District, Shanghai, were entitled to a reduced rate of 15% pursuant to the preferential tax policy in Pudong, Shanghai. Under the Corporate Income Tax Law of the People’s Republic of China (the ‘‘New CIT Law’’) which was approved by the National People’s Congress on 16 March 2007 and became effective from 1 January 2008, the Company and the Pudong Subsidiaries are entitled to enjoy a transitional period to gradually increase the applicable corporate income tax rate to 25% in coming five years. For the year ending 31 December 2009, the corporate income tax rate applicable to the Company and the Pudong Subsidiaries is 20% (2008: 18%). Other subsidiaries of the Company, except for those incorporated in Hong Kong and being subject to the Hong Kong corporate income tax rate of 16.5% (2008: 16.5%), are generally subject to the PRC standard corporate tax rate of 25% (2008: 25%) under the New CIT Law.

– 108 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

The Group operates international flights to overseas destinations. There was no material overseas taxation for the six months ended 30 June 2009, as there are double tax treaties between the PRC and the corresponding jurisdictions (including Hong Kong) relating to aviation businesses.

10.

Earnings/(loss) per share

The calculation of basic earnings/(loss) per share is based on the unaudited consolidated profit attributable to equity holders of the Company of RMB984,654,000 (2008: loss of RMB175,318,000) and the weighted average number of shares of 4,954,304,000 (2008: 4,866,950,000) in issue during the period.

The Company has no potentially dilutive option or other instruments relating to ordinary shares.

11.

Dividend

The Board of the Company does not recommend the payment of an interim dividend for the six months ended 30 June 2009 (2008: Nil).

12.

Profit appropriation

No appropriation to the statutory reserves has been made during the six months ended 30 June 2009. Such appropriations will be made at year end in accordance with the PRC regulations and the Articles of Association of individual group companies.

13.

Property, plant and equipment

	(Unaudited)
	Six months ended 30 June 2009
	Aircraft,
	engines and
	flight
	equipment			Others			Total
	RMB’000			RMB’000			RMB’000

Carrying amounts at 1 January 2009		47,759,942			4,918,531			52,678,473
Transfers from advanced payments on acquisition of aircraft (Note 14)		1,009,795			—			1,009,795
Additions through sales and finance lease back		590,253			—			590,253
Other additions		1,870,709			262,521			2,133,230
Depreciation charged for the period		(2,211,713	)		(249,770	)		(2,461,483	)
Disposals		(590,253	)		(8,787	)		(599,040	)

Carrying amounts at 30 June 2009		48,428,733			4,922,495			53,351,228

– 109 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

				(Unaudited)
	Six months ended 30 June 2008
	Aircraft,
	engines and
	flight
	equipment			Others			Total
	RMB’000			RMB’000			RMB’000

Restated
Carrying amounts at 1 January 2008		42,758,022			4,511,732			47,269,754
Transfers from advanced payments on acquisition of aircraft (Note 14)		883,151			—			883,151
Other additions		1,702,237			295,368			1,997,605
Depreciation charged for the period		(1,977,548	)		(248,847	)		(2,226,395	)
Disposals		(78,920	)		(31,636	)		(110,556	)

Carrying amounts at 30 June 2008		43,286,942			4,526,617			47,813,559

14.

Advanced payments on acquisition of aircraft

	(Unaudited)			(Unaudited)
	30 June			30 June
	2009			2008
	RMB’000			RMB’000

At beginning of period		6,413,554			6,695,573
Additions		141,046			3,439,877
Interest capitalised (Note 8)		122,337			174,406
Transfers to property, plant and equipment (Note 13)		(1,009,795	)		(883,151	)

At end of period		5,667,142			9,426,705

15.

Trade receivables

The credit terms given to trade customers are determined on an individual basis, with credit periods generally ranging from half a month to two months.

The aging analysis of trade receivables is as follows:

	(Unaudited)			(Audited)
	30 June			31 December
	2009			2008
	RMB’000			RMB’000

Within 90 days		1,233,809			1,088,951
91 to 180 days		11,541			24,282
181 to 365 days		17,212			30,451
Over 365 days		106,420			103,919

		1,368,982			1,247,603
Less: provision for impairment of receivables		(105,475	)		(101,081	)

Trade receivables		1,263,507			1,146,522

– 110 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

16.

Trade payables and notes payable

The aging analysis of trade payables and notes payable is as follows:

	(Unaudited)		(Audited)
	30 June		31 December
	2009		2008
	RMB’000		RMB’000

Within 90 days		2,537,978		3,310,710
91 to 180 days		1,483,059		1,249,400
181 to 365 days		126,822		267,785
Over 365 days		272,611		316,963

		4,420,470		5,144,858

17.

Obligations under finance leases

	(Unaudited)			(Audited)
	30 June			31 December
	2009			2008
	RMB’000			RMB’000

Within one year		2,018,328			1,916,989
In the second year		2,116,774			2,016,172
In the third to fifth year inclusive		6,711,864			6,203,330
After the fifth year		9,550,368			10,672,408

Total		20,397,334			20,808,899
Less: amount repayable within one year		(2,018,328	)		(1,916,989	)

Long-term portion		18,379,006			18,891,910

18.

Borrowings

	(Unaudited)			(Audited)
	30 June			31 December
	2009			2008
	RMB’000			RMB’000

Long-term bank borrowings
— Secured		4,997,694			4,483,950
— Unsecured		11,158,408			11,143,593

		16,156,102			15,627,543
Less: current portion		(6,304,785	)		(7,039,491	)

Non-current portion		9,851,317			8,588,052

Short-term bank borrowings		16,419,058			19,473,829

– 111 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

19.

Share capital

	(Unaudited)		(Audited)
	30 June		31 December
	2009		2008
	RMB’000		RMB’000

Registered, issued and fully paid of RMB1.00 each

A Shares
— Listed shares with trading moratorium held by CEA Holding and employees (Note (b))		4,341,375		2,904,000
— Listed shares without trading moratorium		396,000		396,000
H Shares (Note (b))		3,004,325		1,566,950

		7,741,700		4,866,950

Notes:

(a)

Pursuant to articles 49 and 50 of the Company’s Articles of Association, each of the restricted shares, the listed A Shares and the listed H Shares are all registered ordinary shares and carry equal rights.

(b)

On 5 June 2009, China Securities Regulatory Commission (the ‘‘CSRC’’) approved the Company’s application for non-public issue of 1,437,375,000 A Shares at nominal value of RMB1.00 each. CEA Holding subscribed for all the shares under this issue and undertook that it would not transfer the subscribed A Shares within 36 months from the completion date of the issue. The issue price was RMB3.87 per share and the total proceed of RMB5,562,641,000 (the ‘‘Proceeds of A Shares’’) from the issue was received by the Company in June 2009 and verified by a PRC Certified Public Accountants firm.

On 19 May 2009, CSRC approved the Company’s application for additional issue of 1,437,375,000 H Shares at nominal value of RMB1.00 each. CES Global Holding (Hong Kong) Limited (‘‘CES Global’’), a wholly owned Hong Kong incorporated subsidiary of CEA Holding, subscribed for all the shares under this issue and undertook that it would not transfer the subscribed H Shares within 36 months from the completion date of the issue. The issue price was HKD1.13 per share and the total proceed of HKD1,630,342,000, equivalent to RMB1,437,375,000 (the ‘‘Proceeds of H Shares’’) from the issue was received by the Company in June 2009 and verified by a PRC Certified Public Accountants firm.

The total amount of the aforementioned Proceeds of A Shares and Proceeds of H Shares were RMB7,00,016,000, after deducting the share issue expenses of RMB14,878,000 for the share issues, the net proceeds raised from the above share issues amounted to RMB6,985,138,000, of which RMB2,874,750,000 is recorded as share capital and the remaining RMB4,110,388,000 is recorded as share premium.

– 112 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

20.

Commitments

(a)

Capital commitments

The Group had the following capital commitments:

	(Unaudited)		(Audited)
	30 June		31 December
	2009		2008
	RMB’000		RMB’000

Authorised and contracted for:
— Aircraft, engines and flight equipment		62,127,225		52,533,736
— Other property, plant and equipment		90,681		130,180

		62,217,906		52,663,916

Authorised but not contracted for:
— Other property, plant and equipment		4,200,991		5,235,712

		66,418,897		57,899,628

(b)

Operating lease commitments

The Group had commitments under operating leases to pay future minimum lease rentals as follows:

	(Unaudited)				(Audited)
	30 June 2009				31 December 2008
	Aircraft,				Aircraft,
	engines and				engines and
	flight		Land and		flight		Land and
	equipment		buildings		equipment		buildings
	RMB’000		RMB’000		RMB’000		RMB’000

Within one year		2,430,019		255,483		2,671,355		202,540
In the second year		1,933,677		143,537		2,330,080		124,643
In the third to fifth year inclusive		4,100,844		337,770		4,598,624		325,423
After the fifth year		3,576,329		2,462,209		4,100,560		2,398,361

		12,040,869		3,198,999		13,700,619		3,050,967

21.

Related party transactions

The Group is controlled by CEA Holding, which owns approximately 74.64% of the Company’s shares as at 30 June 2009 (2008 : 59.67%). The aviation industry in the PRC is administrated by the CAAC. CEA Holding and accordingly the Group are ultimately controlled by the PRC government, which also controls a significant portion of the productive assets and entities in the PRC (collectively referred as the ‘‘SOEs’’).

(a)

Related party transactions

The Group sells air tickets through sales agents and is therefore likely to have extensive transactions with other state-controlled enterprises, and the employees and their close family members of SOEs while such employees are on corporate business. These transactions are carried out on normal commercial terms that are consistently applied to all of the Group’s customers. Due to the large volume and the pervasiveness of these transactions, management is unable to determine the aggregate amount of the transactions for disclosure. Therefore, retail transactions with these related parties are not disclosed herein. The Directors of the Company believe that meaningful related party disclosures on these retail transactions have been adequately made.

– 113 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

During the Current Period, the Group has entered into the following major transactions with the related parties:

			(Unaudited)
			Six months ended
			30 June
Nature of transactions		Related party	2009		2008
			RMB’000		RMB’000

(i)	With CEA Holding or companies directly or indirectly held by CEA Holding:

	Interest income on deposits at an average rate of 0.36% (2008: 0.36%) per annum	Eastern Air Group Finance Co., Ltd (‘‘EAGF’’)*		11,282		11,965

	Interest expense on loans at rate of 4.61% (2008: 4.87%) per annum	EAGF*		124,334		11,978

	Entrusted short-term loan from CEA Holding through EAGF at interest rate of 4.37% per annum and repayable within 6 months	CEA Holding and EAGF*		5,550,000		—

	Automobile maintenance fee	CEA Development Co. Ltd		13,566		14,886

	Land and building rental	CEA Holding		27,570		27,700

	Handling charges of 0.1% to 2% for the purchase of aircraft, flight spare parts, other property, plant and flight equipment	Eastern Aviation Import & Export Co., Ltd (‘‘EAIEC’’)*		21,256		20,462

	Equipment manufacturing and maintenance	Shanghai Eastern Aviation Equipment Manufacturing Corporation		4,320		4,656

	Ticket reservation service charges for utilisation of computer reservation system	Travel Sky Technology Limited***		129,433		115,581

	Repairs and maintenance expense for aircraft and engines	Shanghai Eastern Union Aviation Wheels & Brakes Overhaul Engineering Co., Ltd (‘‘Wheels & Brakes’’)**		29,808		29,296

		Shanghai Technologies Aerospace Co., Ltd (‘‘STA’’)**		59,808		50,664

	Supply of food and beverages	Shanghai Eastern Air Catering Co., Ltd (‘‘SEAC’’)***		115,534		77,078

		Qingdao Eastern Air Catering Investment Co., Ltd.***		12,287		13,104

		Xian Eastern Air Catering Investment Co., Ltd.***		18,529		18,300

– 114 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

			(Unaudited)
			Six months ended
			30 June
Nature of transactions		Related party	2009		2008
			RMB’000		RMB’000

		Yunnan Eastern Air Catering Investment Co., Ltd.***		8,246		20,038

	Advertising expense	Eastern Aviation Advertising Services Co., Ltd (‘‘CAASC’’)*		638		2,682

	Commission expense on air tickets sold on behalf of the Group	Shanghai Dongmei Aviation Travel Co., Ltd (‘‘SDATC’’)*		82		5,133

		Shanghai Tourism (HK) Co., Ltd***		52		2,370

(ii)	With CAAC and its affiliates:

	Civil aviation infrastructure levies paid	CAAC		426,846		373,380

	Aircraft insurance premium paid through CAAC which entered into the insurance policy on behalf of the Group	CAAC		67,569		77,311

(iii)	With other state-controlled enterprises:

	Take-off and landing fees charges	State-controlled airports		1,615,974		1,285,297

	Purchase of aircraft fuel	State-controlled fuel suppliers		4,462,944		6,353,798

	Interest income on deposits at an average rate of 0.36% (2008: 0.72%) per annum	State-controlled banks		15,795		8,081

	Interest expense on loans at an average rate of 5.40% (2008: 5.72%) per annum	State-controlled banks		706,357		827,886

	Commission expense on air tickets sold on behalf of the Group	Other PRC airlines		21,209		35,018

	Supply of food and beverages	Other state-controlled enterprises		226,160		198,353

– 115 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

(b)

Balances with related parties

(i)

Amounts due from related companies

	(Unaudited)		(Audited)
	30 June		31 December
Company	2009		2008
	RMB’000		RMB’000

EAIEC*		189,017		181,788
Other related companies		15,740		26,501

		204,757		208,289

All the amounts due from related companies are trade in nature, interest free and payable within normal credit terms given to trade customers.

(ii)

Amounts due to related companies

	(Unaudited)			(Audited)
	30 June			31 December
	2009			2008
Company	RMB’000			RMB’000

EAIEC*		(365,001	)		(241,560	)
CEA Holding		(84,813	)		(69,497	)
SEAC***		(6,688	)		(46,580	)
Other related companies		(20,037	)		(55,489	)

		(476,539	)		(413,126	)

Except for amount due to CEA Holding, which is reimbursement in nature, all other amounts due to related companies are trade in nature, interest free and payable within normal credit terms given by trade creditors.

(iii)

Short-term deposits and short-term loans with EAGF, a 25% associate of the Group

	(Unaudited)		(Audited)
	30 June		31 December
	2009		2008
	RMB’000		RMB’000

Included in ‘‘Prepayments, Deposits and Other Receivables’’ are short-term deposits with an average interest rate of 0.4% (2008: 0.4%) per annum		707,309		1,202,892

Included in ‘‘Borrowings’’ are short-term loans with an average interest rate of 4.4% (2008: 4.3%) per annum		945,151		295,181

– 116 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

(iv)

State-controlled banks and other financial institutions

	(Unaudited)		(Audited)
	30 June		31 December
	2009		2008
	RMB’000		RMB’000

Included in ‘‘Cash and Cash Equivalents’’ are bank deposits with an average interest rate of 0.4% (2008: 0.4%) per annum		2,612,384		1,762,245

Included in ‘‘Borrowings’’ are long-term loans with an average interest rate of 5.0% (2008: 5.3%) per annum		14,945,495		14,577,150

(c)

Guarantees by holding company

Certain unsecured bank borrowings of the Group totaling of RMB457 million (2008 : RMB357 million) were guaranteed by CEA Holding (Note 18). No bank borrowing of the Company was guaranteed by CEA Holding as at 30 June 2009 (2008 : Nil).

Notes:

EAGF is a 25% associate of the Group. SDATC is a 27.16% associate of the Group, CAASC and EAIEC are both 45% associates of the Group.

Wheels & Brakes and STA are 40% and 51% jointly controlled entities of the Group respectively.

***

These companies are related companies of the Group as they are either, directly or indirectly, controlled by, under the joint control or significant influence of CEA Holding.

22.

Seasonality

The civil aviation industry is subject to seasonal fluctuations, with peak demand during the holiday season in the second half of the year. As such, the revenues and results of the Group in the first half of the year are generally lower than those in the second half of the year.

23.

Contingent liabilities

In 2005, the family members of certain victims in the aircraft (the aircraft was then owned and operated by China Eastern Air Yunnan Company) accident, which occurred in Baotou on 21 November 2004, sued the Company in a U.S. court for compensation. On 5 July 2007, pursuant to several conditions with which the Company has complied, the Superior Court of the State of California ordered the action stayed on the grounds of forum non convenience for the purpose of permitting proceedings in the PRC. On 20 February 2008, the plaintiffs filed a motion with the Superior Court of the State of California to lift the stay, but the motion was rejected by the court on 6 May 2008. The plaintiffs filed a second motion to lift the stay on 10 July 2008. On 27 August 2008, the Superior Court of the State of California rejected the motion of the plaintiffs again. After the case entered the procedures on appeal in the California Court of Appeal, the Court of Appeal of California issued an opinion on 26 February 2009, dismissing the appeal of the plaintiffs and affirming the original order. On 16 March 2009, the Chinese counsel of the plaintiff sued the Company on behalf of the family members of victims in the Beijing No. 2 Intermediate People’s Court. The case is under the filing procedure and no official summons from the court has been received by the Company. The management of the Group believes that even if there would be a negative outcome for this case, it will not have an adverse effect on the financial condition and results of operations of the Company.

– 117 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

24.

Post balance sheet events

(a)

Specific mandates in relation to issuance of new A Shares and new H Shares

On 10 July 2009, the Board resolved to convene an extraordinary shareholders’ meeting and the class meetings of the holders of A Shares of the Company (‘‘A Shares’’) and H Shares of the Company (‘‘H Shares’’) respectively on 7 September 2009 for the grant of (i) an A Share Specific Mandate to the Board to issue not more than 1,350,000,000 new A Shares to not more than 10 specific investors (subject to the maximum number as permitted by PRC laws and regulations at the time of the issuance) including CEA Holding, at the subscription price of not less than RMB4.75 per A Share; and (ii) a H Share Specific Mandate to the Board to issue not more than 490,000,000 new H Shares to CES Global, at the subscription price of not less than HK$1.40 per H Share.

(b)

Proposed absorption of Shanghai Airlines through exchange of shares

On 10 July 2009, the Company entered into an agreement with Shanghai Airlines Co., Ltd (‘‘Shanghai Airlines’’) in relation to a proposed absorption of Shanghai Airlines through share exchanges at the rate of 1.3 A Shares in exchange of 1 share of Shanghai Airlines (i.e. in aggregate a maximum of 1,694,838,860 A Shares in exchange of 1,303,722,200 shares of Shanghai Airlines). A separate extraordinary shareholders’ meeting and respective class meetings will be convened to approve the proposed absorption (the ‘‘Absorption Proposal’’).

Upon full implementation of the terms of the Absorption Proposal, after the approvals by the shareholders of the Company and Shanghai Airlines, together with the requisite consents and approvals from the relevant government authorities has been obtained, all the assets, business, staff and rights of Shanghai Airlines, including but not limited to all operating licence, registration and filing and route operating rights, will be absorbed into and all the liabilities of Shanghai Airlines will be assumed by the Company or a wholly owned subsidiary of the Company to be used to absorb all the assets and assume all the liabilities of Shanghai Airlines.

(c)

Additional credit facilities

On 31 July 2009, the Company was granted by CEA Holding to use a four year credit facility of RMB30 billion that CEA Holding obtained from China Development Bank.

– 118 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

C.	AUDITED CONSOLIDATED FINANCIAL INFORMATION OF THE GROUP FOR THE YEAR ENDED 31 DECEMBER 2008

Set out below are the audited consolidated financial statements and notes to the consolidated financial statements of the Group for the year ended 31 December 2008, which are extracted from pages 112 to 264 of the annual report of the Company for the year ended 31 December 2008.

Consolidated Income Statement

(Prepared in accordance with International Financial Reporting Standards)

For the year ended 31 December 2008

			2008			2007
	Note		RMB’000			RMB’000
						(Restated)
						(Note 2(b))

Revenues		5		41,072,557			42,533,893
Other operating income		6		405,163			487,562
Other gains		6		267,084			—

Operating expenses
Aircraft fuel				(18,488,242	)		(15,117,147	)
(Loss)/gain on fair value movements of financial derivatives		8		(6,400,992	)		83,965
Take-off and landing charges				(5,279,590	)		(5,174,183	)
Depreciation and amortisation				(4,781,562	)		(4,719,735	)
Wages, salaries and benefits		9		(4,545,312	)		(4,327,397	)
Aircraft maintenance				(3,272,981	)		(2,392,039	)
Impairment losses		10		(2,976,678	)		(227,456	)
Food and beverages				(1,321,268	)		(1,230,754	)
Aircraft operating lease rentals				(2,734,802	)		(2,850,873	)
Other operating lease rentals				(369,236	)		(292,844	)
Selling and marketing expenses				(1,562,945	)		(1,805,342	)
Civil aviation infrastructure levies				(769,849	)		(781,613	)
Ground services and other charges				(268,873	)		(224,466	)
Office, administrative and other expenses				(4,055,679	)		(3,833,938	)
Total operating expenses				(56,828,009	)		(42,893,822	)

Operating (loss)/profit		11		(15,083,205	)		127,633
Finance income		12		2,061,625			2,140,457
Finance costs		13		(2,328,147	)		(1,978,550	)
Share of results of associates		23		69,668			58,312
Share of results of jointly controlled entities		24		24,050			30,086

(Loss)/profit before income tax				(15,256,009	)		377,938
Income tax		14		(73,916	)		(23,763	)

(Loss)/profit for the year				(15,329,925	)		354,175

– 119 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

			2008			2007
	Note		RMB’000			RMB’000
						(Restated)
						(Note 2(b))

Attributable to:
Equity holders of the Company				(15,268,532	)		378,568
Minority interests				(61,393	)		(24,393	)

				(15,329,925	)		354,175

(Loss)/earnings per share attributable to the equity holders of the Company during the year
— basic and diluted		17	RMB(3.14		)	RMB0.08

The notes on pages 121 to 264 are an integral part of these financial statements.

– 120 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Consolidated Balance Sheet

(Prepared in accordance with International Financial Reporting Standards)

As at 31 December 2008

			2008			2007
	Note		RMB’000			RMB’000
						(Restated)
						(Note 2(b))

Non-current assets
Intangible assets		18		164,851			1,244,706
Property, plant and equipment		19		52,678,473			47,269,754
Lease prepayments		20		996,521			967,497
Advanced payments on acquisition of aircraft		21		6,413,554			6,695,573
Investments in associates		23		980,319			601,119
Investments in jointly controlled entities		24		362,332			336,966
Available-for-sale financial assets				31,268			53,236
Other long-term assets		25		941,556			660,751
Deferred tax assets		35		81,947			113,211
Derivative assets		38		988			6,077
				62,651,809			57,948,890
Current assets
Flight equipment spare parts				871,364			1,124,936
Trade receivables		26		1,146,522			2,096,007
Amounts due from related companies		44		208,289			65,455
Prepayments, deposits and other receivables		27		4,126,219			2,555,649
Cash and cash equivalents		28		3,451,010			1,655,244
Derivative assets		38		123,010			89,470
Non-current assets held for sale		41		473,667			2,205,450
				10,400,081			9,792,211
Current liabilities
Sales in advance of carriage				1,013,878			1,211,209
Trade payables and notes payable		29		5,144,858			3,137,880
Amounts due to related companies		44		413,126			671,593
Other payables and accrued expenses		30		12,147,175			9,591,245
Current portion of obligations under finance leases		31		1,916,989			2,545,223
Current portion of borrowings		32		26,513,320			18,494,521
Income tax payable				39,002			90,867
Current portion of provision for aircraft overhaul expenses		33		213,830			—
Derivative liabilities		38		6,456,075			20,238
Liabilities directly associated with non-current assets held for sale		41		—			127,239
				53,858,253			35,890,015

Net current liabilities				(43,458,172	)		(26,097,804	)

Total assets less current liabilities				19,193,637			31,851,086

– 121 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

			2008			2007
	Note		RMB’000			RMB’000
						(Restated)
						(Note 2(b))

Non-current liabilities
Obligations under finance leases		31		18,891,910			13,906,987
Borrowings		32		8,588,052			11,369,307
Provision for aircraft overhaul expenses		33		1,320,188			956,910
Other long-term liabilities		34		1,320,759			1,242,697
Deferred tax liabilities		35		57,589			50,369
Post-retirement benefit obligations		36(b)		1,469,124			1,370,702
Derivative liabilities		38		185,524			21,558
				31,833,146			28,918,530

Net (liabilities)/assets				(12,639,509	)		2,932,556

Equity
Capital and reserves attributable to the equity holders of the Company
Share capital		39		4,866,950			4,866,950
Reserves		40		(17,964,351	)		(2,506,379	)
				(13,097,401	)		2,360,571
Minority interests				457,892			571,985

Total equity				(12,639,509	)		2,932,556

The notes on pages 121 to 264 are an integral part of these financial statements.

– 122 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Company’s Balance Sheet

(Prepared in accordance with International Financial Reporting Standards)

As at 31 December 2008

			2008			2007
	Note		RMB’000			RMB’000
						(Restated)
						(Note 2(b))

Non-current assets
Intangible assets		18		164,579			939,674
Property, plant and equipment		19		44,512,840			38,580,747
Lease prepayments		20		420,272			425,136
Advanced payments on acquisition of aircraft		21		6,413,554			6,695,573
Investments in subsidiaries		22		2,523,715			2,473,716
Investments in associates		23		762,058			377,872
Investments in jointly controlled entities		24		301,802			301,802
Available-for-sale financial assets				15,520			37,487
Other long-term assets		25		765,351			498,849
Derivative assets		38		988			6,077
				55,880,679			50,336,933
Current assets
Flight equipment spare parts				707,587			864,204
Trade receivables		26		750,495			1,375,156
Amounts due from related companies		44		1,518,341			1,618,332
Prepayments, deposits and other receivables		27		3,706,776			2,150,609
Cash and cash equivalents		28		2,361,941			1,040,897
Derivative assets		38		123,010			89,470
Non-current assets held for sale		41		473,667			764,120
				9,641,817			7,902,788
Current liabilities
Sales in advance of carriage				1,013,878			1,211,209
Trade payables and notes payable		29		4,747,230			2,662,716
Amounts due to related companies		44		695,803			777,422
Other payables and accrued expenses		30		10,486,958			8,304,694
Current portion of obligations under finance leases		31		1,715,062			2,316,781
Current portion of borrowings		32		24,063,433			15,943,774
Current portion of provision for aircraft overhaul expenses		33		139,710			—
Derivative liabilities		38		6,456,075			20,238
Liabilities directly associated with non-current assets held for sale		41		—			127,239
				49,318,149			31,364,073

Net current liabilities				(39,676,332	)		(23,461,285	)

Total assets less current liabilities				16,204,347			26,875,648

– 123 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

			2008			2007
	Note		RMB’000			RMB’000
						(Restated)
						(Note 2(b))

Non-current liabilities
Obligations under finance leases		31		16,814,109			11,455,722
Borrowings		32		7,045,080			9,650,583
Provision for aircraft overhaul expenses		33		1,028,980			737,371
Other long-term liabilities		34		1,235,953			1,159,773
Post-retirement benefit obligations		36(b)		1,286,878			1,195,070
Derivative liabilities		38		185,524			21,558
				27,596,524			24,220,077

Net (liabilities)/assets				(11,392,177	)		2,655,571

Equity
Capital and reserves attributable to the equity holders of the Company
Share capital		39		4,866,950			4,866,950
Reserves		40		(16,259,127	)		(2,211,379	)

Total equity				(11,392,177	)		2,655,571

The notes on pages 121 to 264 are an integral part of these financial statements.

– 124 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Consolidated Cash Flow Statement

(Prepared in accordance with International Financial Reporting Standards)

For the year ended 31 December 2008

			2008			2007
	Note		RMB’000			RMB’000
Cash flows from operating activities
Cash generated from operations		42(a)		2,942,466			3,142,834
Income tax paid				(86,931	)		(62,549	)
Net cash inflow from operating activities				2,855,535			3,080,285
Cash flows from investing activities
Additions of property, plant and equipment				(1,289,350	)		(1,592,310	)
Proceeds from disposal of property, plant and equipment				1,856,358			70,681
Acquisition of land use rights				(53,117	)		—
Advanced payments on acquisition of aircraft				(3,603,824	)		(3,737,079	)
Refunds of advanced payments upon deliveries of aircraft				2,422,252			3,064,580
Repayment of other payables (instalment payment for acquisition of an airline business)				(30,000	)		(30,000	)
Interest received				90,635			96,849
Dividend received				29,679			22,367
Capital injections in a jointly controlled entity				—			(92,416	)
Capital injections in associates				(384,186	)		—
Proceeds from disposal of interest in an associate				3,698			—
Proceeds on disposal of available-for-sale financial assets				32,972			—
Proceeds from disposal of interest in a subsidiary				—			441,002
Net cash outflow from investing activities				(924,883	)		(1,756,326	)

Cash flows from financing activities
Proceeds from draw down of short-term bank loans				25,403,301			18,464,695
Repayments of short-term bank loans				(19,986,723	)		(16,020,304	)
Proceeds from draw down of long-term bank loans				4,748,071			3,383,349
Repayments of long-term bank loans				(3,922,593	)		(2,985,480	)
Principal repayments of finance lease obligations				(2,593,656	)		(2,974,718	)
Payments of restricted bank deposit				(1,365,116	)		—
Interest paid				(2,741,980	)		(2,240,721	)
Refunds of deposits pledged for finance leases upon maturities				419,604			779,646
Dividends paid to minority shareholders of subsidiaries				(52,700	)		(46,400	)
Net cash outflow from financing activities				(91,792	)		(1,639,933	)

Net increase/(decrease) in cash and cash equivalents				1,838,860			(315,974	)
Cash and cash equivalents at 1 January				1,655,244			1,987,486
Exchange adjustments				(43,094	)		(16,268	)

Cash and cash equivalents at 31 December				3,451,010			1,655,244

The notes on pages 121 to 264 are an integral part of these financial statements.

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APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Consolidated Statement of Changes in Equity

(Prepared in accordance with International Financial Reporting Standards)

For the year ended 31 December 2008

	Attributable to equity holders of the Company
	Share		Other			Accumulated						Minority			Total
	capital		reserves			losses			Subtotal			interests			equity
	RMB’000		RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Balance at 1 January 2007 as previously presented		4,866,950		1,282,877			(3,334,930	)		2,814,897			661,746			3,476,643
Effect of early adoption of IFRIC 13 (Note 2(b)(i))		—		—			(362,606	)		(362,606	)		—			(362,606	)
Effect of change of accounting policy on property, plant and equipment (Note 2(b)(ii))		—		(490,688	)		76,430			(414,258	)		(12,981	)		(427,239	)

Balance at 1 January 2007 as restated		4,866,950		792,189			(3,621,106	)		2,038,033			648,765			2,686,798

Cash flow hedges, net of tax		—		(78,197	)		—			(78,197	)		—			(78,197	)
Fair value movements of available for sale investments held by associates (Note 23)		—		22,167			—			22,167			—			22,167

Net income recognised directly in equity		—		(56,030	)		—			(56,030	)		—			(56,030	)
Profit/(loss) for the year		—		—			378,568			378,568			(24,393	)		354,175

Total recognised income and expense for 2007		—		(56,030	)		378,568			322,538			(24,393	)		298,145

Dividend paid to minority interests in subsidiaries		—		—			—			—			(46,400	)		(46,400	)
Disposal of a subsidiary		—		—			—			—			(5,987	)		(5,987	)
Adjustment to statutory and discretionary reserves		—		(428,808	)		428,808			—			—			—

		—		(428,808	)		428,808			—			(52,387	)		(52,387	)

Balance at 31 December 2007		4,866,950		307,351			(2,813,730	)		2,360,571			571,985			2,932,556

Balance at 1 January 2008, as previously presented		4,866,950		798,039			(2,637,226	)		3,027,763			584,966			3,612,729
Effect of early adoption of IFRIC 13 (Note 2(b)(i))		—		—			(345,115	)		(345,115	)		—			(345,115	)
Effect of change of accounting policy on property, plant and equipment (Note 2(b)(ii))		—		(490,688	)		168,611			(322,077	)		(12,981	)		(335,058	)

Balance at 1 January 2008, as restated		4,866,950		307,351			(2,813,730	)		2,360,571			571,985			2,932,556

Cash flow hedges, net of tax		—		(170,360	)		—			(170,360	)		—			(170,360	)
Fair value movements of available for sale investments held by associates (Note 23)		—		(19,080	)		—			(19,080	)		—			(19,080	)

Net loss recognised directly in equity		—		(189,440	)		—			(189,440	)		—			(189,440	)
Loss for the year		—		—			(15,268,532	)		(15,268,532	)		(61,393	)		(15,329,925	)

Total recognised income and expense for 2008		—		(189,440	)		(15,268,532	)		(15,457,972	)		(61,393	)		(15,519,365	)

Dividend paid to minority interests in subsidiaries		—		—			—			—			(52,700	)		(52,700	)

		—		—			—			—			(52,700	)		(52,700	)

Balance at 31 December 2008		4,866,950		117,911			(18,082,262	)		(13,097,401	)		457,892			(12,639,509	)

The notes on pages 121 to 264 are an integral part of these financial statements.

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APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Notes to the Financial Statements

(Prepared in accordance with International Financial Reporting Standards)

For the year ended 31 December 2008

CORPORATE INFORMATION

The Company is majority owned by China Eastern Air Holding Company (‘‘CEA Holding’’), a state-owned enterprise incorporated in the PRC.

The Company’s shares are traded on The Stock Exchange of Hong Kong Limited, The New York Stock Exchange and The Shanghai Stock Exchange.

These financial statements have been approved for issue by the Board of Directors on 15 April 2009.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

(a)

Basis of preparation

The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (‘‘IFRS’’) and the disclosure requirements of the Hong Kong Companies Ordinance. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4.

In preparing the financial statements, the directors have given careful consideration to the going concern status of the Group in the context of the Group’s current working capital difficulties.

The Group’s accumulated losses were approximately RMB18.08 billion as at 31 December 2008; its current liabilities exceeded its current assets by approximately RMB43.46 billion; and total liabilities exceeded total assets by approximately RMB12.64 billion.

Against this background, the directors have taken active steps to seek additional sources of finance and improve the Group’s liquidity position. At 31 December 2008, the Group had total credit facilities of RMB13.5 billion from certain banks. Since 31 December 2008, the Company has successfully obtained additional credit facilities in an aggregate amount of RMB36 billion from certain banks and financial institutions (see Note 47 — ‘‘Post balance sheet events’’ for details). The directors believe that, based on experience to date, it is likely that these facilities will be rolled over in future years if required. In addition, a resolution to issue additional shares to China Eastern Air Holding Company (‘‘CEA Holding’’), the Company’s shareholder, and CES Global Holding (Hong Kong) Limited (‘‘CES Global’’), a wholly-owned subsidiary of CEA Holding, for a total amount of RMB7 billion was approved in the extraordinary general meetings held on 26 February 2009 (see Note 47 — ‘‘Post balance sheet events’’ for details).

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APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

With the additional credit facilities and approved capital injection described in the preceding paragraph, and based on the Group’s history of obtaining finance and its relationships with its bankers and creditors, the Board of Directors considers that the Group will be able to obtain sufficient financing to enable it to operate and meet its liabilities as and when they fall due. Accordingly, it is appropriate that these financial statements should be prepared on a going concern basis and do not include any adjustments that would be required should the Company and the Group fail to continue as a going concern.

(i)

Standards, amendment and interpretations effective in 2008

IFRIC 14, ‘IAS 19 — The limit on a defined benefit asset, minimum funding requirements and their interaction’, provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. This interpretation does not have any impact on the Group’s financial statements, as the Group has a pension deficit and is not subject to any minimum funding requirements.

IFRIC 11, ‘IFRS 2 — Group and treasury share transactions’, provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parent’s shares) should be accounted for as equity-settled or cash-settled share- based payment transactions in the stand-alone accounts of the parent and group companies. This interpretation does not have an impact on the Group’s financial statements.

(ii)

Standards, amendments and interpretations to existing standards that are not yet effective and which are relevant for the Group’s operations

The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after 1 January 2009 or later periods, but the Group has not early adopted them:

IAS 1 (Revised), ‘Presentation of financial statements’ (effective from 1 January 2009). The revised standard will prohibit the presentation of items of income and expenses (that is, ‘non- owner changes in equity’) in the statement of changes in equity, requiring ‘non-owner changes in equity’ to be presented separately from owner changes in equity. All non-owner changes in equity will be required to be shown in a performance statement, but entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the consolidated income statement and statement of comprehensive income). Where entities restate or reclassify comparative information, they will be required to present a restated balance sheet as at the beginning comparative period in addition to the current requirement to present balance sheets at the end of the current period and comparative period. The Group will apply IAS (Revised) from 1 January 2009. It is likely that both the consolidated income statement and statement of comprehensive income will be presented as performance statements.

IFRS 8, ‘Operating segments’ (effective from 1 January 2009). IFRS replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, ‘Disclosures about segments of an enterprise and related information’. The new standard requires a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. The Group will apply IFRS 8 from 1 January 2009, The expected impact is still being assessed in detail by management.

IAS 27 (Revised) ‘‘Consolidated and Separate Financial Statements’’ (effective from annual period beginning on or after 1 July 2009). The amendment requires non-controlling interests (i.e. minority interests) to be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent. Total comprehensive income must be attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control are accounted for within equity. When control of a subsidiary is lost, the assets and liabilities and related equity components of the former subsidiary are derecognised. Any gain or loss is recognised in profit or loss. Any investment retained in the former subsidiary is measured at its fair value at the date when control is lost. The Group will apply IAS 27 (Revised) from 1 January 2010.

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APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

IFRS 3 (Revised) ‘‘Business Combinations’’ (effective for business combinations with acquisition date on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The amendment may bring more transactions into acquisition accounting as combinations by contract alone and combinations of mutual entities are brought into the scope of the standard and the definition of a business has been amended slightly. It now states that the elements are ‘capable of being conducted’ rather than ‘are conducted and managed’. It requires considerations (including contingent consideration), each identifiable asset and liability to be measured at its acquisition-date fair value, except leases and insurance contracts, reacquired right, indemnification assets as well as some assets and liabilities required to be measured in accordance with other IFRSs. They are income taxes, employee benefits, share-based payment and non current assets held for sale and discontinued operations. Any non-controlling interest in an acquiree is measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets. All acquisition related cost should be expensed. The Group will apply IFRS 3 (Revised) prospectively to all business combinations from 1 January 2010.

IAS 36 (Amendment), ‘Impairment of assets’ (effective from 1 January 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. Where fair value less costs to sell is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-in-use calculation should be made. The Group will apply the IAS 36 (Amendment) and provide the required disclosure where applicable for impairment tests from 1 January 2009.

IAS 38 (Amendment), ‘Intangible assets’ (effective from 1 January 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. A prepayment may only be recognised in the event that payment has been made in advance of obtaining right of access to goods or receipt of services. The Group will apply the IAS 38 (Amendment) from 1 January 2009, but it is not expected to have any impact on the Group’s financial statements.

IAS 19 (Amendment), ‘Employee benefits’ (effective from 1 January 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. The amendment clarifies that a plan amendment that results in a change in the extent to which benefit promises are affected by future salary increases is a curtailment, while an amendment that changes benefits attributable to past service gives rise to a negative past service cost if it results in a reduction in the present value of the defined benefit obligation. The definition of return on plan assets has been amended to state that plan administration costs are deducted in the calculation of return on plan assets only to the extent that such costs have been excluded from measurement of the defined benefit obligation. The distinction between short term and long term employee benefits will be based on whether benefits are due to be settled within or after 12 months of employee service being rendered. IAS 37, ‘Provisions, contingent liabilities and contingent assets’, requires contingent liabilities to be disclosed, not recognised. IAS 19 has been amended to be consistent. The Group will apply the IAS 19 (Amendment) from 1 January 2009. The expected impact is still being assessed in detail by management.

IFRS 7 (Amendment), ‘Financial instruments: Disclosure’ (effective from 1 January 2009). The amendment forms part of the IASB’s response to the financial crisis aims at improving transparency and enhance accounting guidance. The amendment increases the disclosure requirements about fair value measurement and reinforces existing principles for disclosure about liquidity risk. The amendment introduces a three-level hierarchy for fair value measurement disclosure and requires some specific quantitative disclosures for financial instruments in the lowest level in the hierarchy. In addition, the amendment clarifies and enhances existing requirements for the disclosure of liquidity risk primarily requiring a separate liquidity risk analysis for derivative and non-derivative financial liabilities. The Group will apply the IFRS 7 (Amendment) and provide the required disclosure, where applicable, prospectively from 1 January 2009.

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APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

(b)

Changes of accounting policy

(i)

Early adoption of IFRIC 13, ‘Customer loyalty programmes’

IFRIC 13, ‘Customer loyalty programmes’ was early adopted by the Group in 2008. IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. The Company operates a frequent-flyer programme called ‘‘Eastern Miles’’ (the ‘‘programme’’). Historically, the incremental cost of providing awards in exchange for redemption of miles earned by members was accrued as an operating cost and a liability in the balance sheet. After the adoption of IFRIC 13, revenue is allocated between the ticket sold and miles earned by members. The portion allocated to miles earned is deferred and recognised when the miles have been redeemed or have expired.

This change in accounting policy has been accounted for retrospectively, and the comparative financial statements have also been restated. The effect of the change is set out in Note 2(b)(iii).

The Group’s consolidated loss for the year ended 31 December 2008 and consolidated net liabilities at 31 December 2008 would have decreased by RMB25 million and RMB320 million respectively if the previous policies had still been applied in 2008.

(ii)

Change of accounting policy for property, plant and equipment

Under IFRS, the Company has the option to use the revaluation model or historical cost model to account for its property, plant and equipment (‘‘PP&E’’). Previously, the Company adopted the revaluation model in accordance with IAS 16 as a result of Chinese regulatory requirements to revalue PP&E in connection with its listing in 1997. Under PRC Accounting Standards, the one time revaluation for listing purposes was treated as deemed cost and the historical cost model was adopted subsequent to the initial revaluation. In 2008, the Company changed its IFRS accounting policy in respect of PP&E from the revaluation model to the historical cost model. Whilst this change was made primarily to increase the relevance of financial data to the users of the financial statements and for the reasons set out below, management also made reference to Interpretation 2 of Chinese Accounting Standards (‘‘CAS’’) issued by the Ministry of Finance in August 2008 which aims to drive the elimination of differences between IFRS and CAS. The change was made after taking into consideration the following factors:

the alignment of the Group’s accounting policy with industry peers — management considers that the historical cost model will improve comparability of certain financial performance data and results of operations of the Group with other airlines. Very few of the leading global airlines currently use the valuation model and valuation data is not generally used in airline industry analysis that is made available to stakeholders or internally by management.

increased comparability between finance and operating leased aircraft — depreciation cost of a finance leased aircraft is based on revalued amount whereas operating lease payments are based on cost and aircraft held under operating leases are not recognised as assets subject to valuation. Management therefore consider that the change to the cost model increases the level of consistency in accounting for aircraft which are not distinguished from an operational perspective.

the high degree of subjectivity and risk of cyclical volatility associated with external valuation and second hand aircraft fair values — the market value of second hand aircraft can be volatile and is influenced by transactions in global markets that may have little relevance to the operating environment in China. When purchasing or financing aircraft under finance leases, management intend to use these aircraft in the business for the remainder of their useful lives. Management do not believe that financial statements that reflect, often subjective, movements in second hand values provide meaningful information to investors.

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APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

This change in accounting policy has been accounted for retrospectively, and the comparative financial statements have also been restated. The effect of the change is not considered material to the financial statements but is set out in Note 2(b)(iii).

The Group’s consolidated loss for the year ended 31 December 2008 and consolidated net liabilities at 31 December 2008 would have increased by RMB216 million and decreased by RMB119 million respectively if the previous policies had still been applied in 2008.

(iii)

Impact on prior year balances

						Effect of
						change of
	2007 as		Effect of			accounting
	previously		adoption of			policy for			2007 as
	presented		IFRIC 13			PP&E			restated
	RMB’000		RMB’000			RMB’000			RMB’000

Impact on consolidated income statements
Consolidated profit for the year		244,503		17,491			92,181			354,175
Earnings per share attributable to equity holders of the Company	RMB0.06		RMB0.003			RMB0.02			RMB0.08

Impact on consolidated balance sheet
Consolidated net assets		3,612,729		(345,115	)		(335,058	)		2,932,556
Capital and reserves attributable to the equity holders of the Company		3,027,763		(345,115	)		(322,077	)		2,360,571
Minority interests		584,966		—			(12,981	)		571,985

(c)

Consolidation

The Group’s consolidated financial statements include the financial statements of the Company and all of its subsidiaries made up to 31 December.

(i)

Subsidiaries

Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.

Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group, including those acquired from holding companies. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest.

The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the consolidated income statement.

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APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

In the Company’s balance sheet, the investments in subsidiaries are stated at cost less provision for impairment losses. The results of subsidiaries are accounted for by the Company on the basis of dividend received and receivable.

(ii)

Transactions with minority interests

The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the consolidated income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.

(iii)

Associates

Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group’s investments in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition.

The Group’s share of its associates’ post-acquisition profits or losses is recognised in the consolidated income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

Dilution gains and losses in associates are recognised in the consolidated income statement.

In the Company’s balance sheet, the investments in associates are stated at cost less provision for impairment losses (Note 2(n)). The results of associates are accounted for by the Company on the basis of dividend received and receivable.

(iv)

Jointly controlled entities

A jointly controlled entity is an entity in which the Group has joint control over its economic activity established under a contractual arrangement. The Group’s investments in jointly controlled entities includes goodwill (net of any accumulated impairment loss) identified on acquisition.

The Group’s interests in jointly controlled entities are accounted for by the equity method of accounting based on the audited financial statements or management accounts of the jointly controlled entities. The Group’s share of its jointly controlled entities’ post-acquisition profits or losses is recognised in the consolidated income statement, and its share of post-acquisition movements is adjusted against the carrying amount of the investment. When the Group’s share of losses in a jointly controlled entity equals or exceeds its interest in that entity, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the jointly controlled entity.

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APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

The Group recognises the portion of gains or losses on the sale of assets by the Group to the joint venture that it is attributable to the other venturers. The Group does not recognise its share of profits or losses from the joint venture that result from the Group’s purchase of assets from the joint venture until it resells the assets to an independent party. However, a loss on the transaction is recognised immediately if the loss provides evidence of a reduction in the net realisable value of current assets, or an impairment loss.

In the Company’s balance sheet, the investments in jointly controlled entities are stated at cost less provision for impairment losses. The results of jointly controlled entities are accounted for by the Company on the basis of dividends received and receivable.

(d)

Segmental reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments.

(e)

Foreign currency translation

(i)

Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘‘functional currency’’). The financial statements are presented in Chinese Renminbi (‘‘RMB’’), which is the Company’s functional and presentation currency.

(ii)

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges or qualifying net investment hedges.

(f)

Revenue recognition and sales in advance of carriage

Revenue comprises the fair value of the consideration received or receivable for the sale of goods and the provision of services in the ordinary course of the Group’s activities. Revenue is shown net of business and value-added taxes, returns, rebates and discounts and after eliminating sales within the Group.

The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

(i)

Traffic revenue

(ii)

Commission income

Commission income represents amounts earned from other carriers in respect of sales made by the Group on their behalf, and is recognised in the income statement upon ticket sales.

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APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

(iii)

Other revenue

Revenues from other operating businesses, including income derived from the provision of ground services and cargo handling services, are recognised when the services are rendered.

Rental income from subleases of aircraft is recognised on a straight-line basis over the terms of the respective leases. Rental income from leasing office premises and cargo warehouses is recognised on a straight-line basis over the lease term.

(g)

Government grants

Grants from the Government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions.

Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate.

Government grants relating to property, plant and equipment are included in non-current liabilities as deferred government grants and are credited to the income statement on a straight-line basis over the expected lives of the related assets.

(h)

Maintenance and overhaul costs

In respect of aircraft and engines under operating leases, the Group has the responsibility to fulfill certain return conditions under the leases. Provision for the estimated cost of these return condition checks is made on a straight line basis over the term of the leases.

In respect of aircraft and engines owned by the Group or held under finance leases, overhaul costs are capitalised as a component of property, plant and equipment and are depreciated over the appropriate maintenance cycles (Note 2(m)).

All other repairs and maintenance costs are charged to the income statement as and when incurred.

(i)

Interest income

Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate.

(j)

Borrowing costs

(k)

Current and deferred tax

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the jurisdictions where the Company and its subsidiaries, associates and jointly controlled entities operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

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APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and jointly controlled entities, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

(l)

Intangible assets

(i)

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill on acquisition of subsidiaries is included in ‘‘intangible assets’’. Goodwill on acquisition of associates and jointly controlled entities is included in ‘‘investments in associates’’ and ‘‘investments in jointly controlled entities’’ and is tested for impairment as part of the overall balances. Separately recognised goodwill is tested for impairment at least annually or whenever there is an indication of impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.

(ii)

Sponsorship fees

Sponsorship fees paid and payable in relation to the 2010 Shanghai Expo have been capitalised and are being amortised on a straight-line basis over the period of the sponsorship program. The cost of the intangible asset is calculated based on the expected cash payment and the fair value of the services to be provided.

(iii)

Computer software costs

Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised using the straight-line method over their estimated useful lives of 5 to 6 years. Costs associated with developing or maintaining computer software programmes are recognised as expense when incurred.

(m)

Property, plant and equipment

Property, plant and equipment is recognised initially at cost which comprises purchase price, and any directly attributable costs of bringing the assets to the condition for their intended use.

Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately.

– 135 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Except for components related to overhaul costs, the depreciation method of which has been described in the preceding paragraph, other depreciation of property, plant and equipment is calculated using the straight-line method to write down their costs or revalued amounts to their residual values over their estimated useful lives, as follows:

Aircraft, engines and flight equipment	10 to 20 years
Buildings	15 to 35 years
Other property, plant and equipment	5 to 20 years

Gains and losses on disposals are determined by comparing the proceeds with the assets’ carrying amount and are recognised in the income statement.

Construction in progress represents buildings under construction and plant and equipment, being mainly flight simulators, pending installation. This includes the costs of construction or acquisition and interest capitalised. No depreciation is provided on construction in progress until the asset is completed and ready for use.

(n)

Impairment of investments in subsidiaries, associates, jointly controlled entities and non-financial assets

(o)

Lease prepayments

Lease prepayments represent acquisition costs of land use rights less accumulated amortisation. Amortisation is provided over the lease period of the land use rights on a straight-line basis.

(p)

Advanced payments on acquisition of aircraft

(q)

Flight equipment spare parts

– 136 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

(r)

Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the assets is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement. When a trade receivable is uncollectible, it is written off against the provision account for trade receivables. Subsequent recoveries of amounts previously written off are credited in the income statement.

(s)

Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less.

(t)

Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any differences between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

(u)

Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated.

(v)

Leases

(i)

A Group company is the lessee

Finance leases

The Group leases certain property, plant and equipment. Leases of property, plant and equipment where the Group has acquired substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments.

Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in other short-term and other long-term payables. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Leased assets are depreciated using a straight-line basis over their expected useful lives to residual values.

– 137 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

For sale and leaseback transactions resulting in a finance lease, differences between sales proceeds and net book values are deferred and amortised over the minimum lease terms.

Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

For sale and leaseback transactions resulting in an operating lease, differences between sales proceeds and net book values are recognised immediately in the income statement, except to the extent that any profit or loss is compensated for by future lease payments at above or below market value.

(ii)

A Group company is the lessor

Assets leased out under operating leases are included in property, plant and equipment in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar property, plant and equipment. Rental income is recognised on a straight-line basis over the lease term.

(w)

Retirement benefits

The Group participates in defined contribution retirement schemes regarding pension and medical benefits for employees organised by the municipal governments of the relevant provinces. The contributions to the schemes are charged to the income statement as and when incurred.

In addition, the Group provides retirees with post-retirement benefits including retirement subsidies, transportation subsidies, social function activity subsidies as well as other welfare. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are charged or credited to the income statement over the employees’ expected average remaining working lives.

Past-service costs are recognised immediately in the income statement, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period.

(x)

Derivative financial instruments

– 138 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

The Group documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

Derivative financial instruments that do not qualify for hedge accounting are accounted for as trading instruments and any unrealised gains or losses, being changes in fair value of the derivatives, are recognised in the income statement immediately.

Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly effective, are recorded in the income statement, along with any changes in the fair value of the hedged assets or liabilities that are attributable to the hedged risk.

Derivative financial instruments that qualify for hedge accounting and which are designated as a specific hedge of the variability in cashflows of a highly probable forecast transaction, are accounted for as follows:

(i)

the effective portion of any change in fair value of the derivative financial instrument is recognised directly in equity. Where the forecast transaction or firm commitment results in the recognition of an asset or a liability, the gains and losses previously deferred in equity are included in the initial measurement of the cost of the asset or liability. Otherwise, the cumulative gain or loss on the derivative financial instrument is removed from equity and recognised in the income statement in the same period during which the hedged forecast transaction affects net profit or loss.

(ii)

the ineffective portion of any change in fair value is recognised in the income statement immediately.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the income statement when the committed or forecast transaction ultimately occurs. When a committed or forecast transaction is no longer expected to occur, the cumulative gain or loss that was recorded in equity is immediately transferred to the income statement.

(y)

Available-for-sale financial assets

Investments in securities other than subsidiaries, associates and jointly controlled entities, being held for non- trading purposes, are classified as available-for-sale financial assets and are recognised on the trade-date — the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs. At each balance sheet date, the fair value is remeasured, with any resulting gain or loss being recognised directly in equity, except for impairment losses. When these investments are derecognised, the cumulative gain or loss previously recognised directly in equity is recognised in the income statement.

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the securities below its cost is considered an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss, measured as the difference between the acquisition cost and the current fair value less any impairment loss on that financial asset previously recognised in the income statement, is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement.

– 139 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

(z)

Dividend distribution

Dividend distribution to the Company’s shareholders is recognised as a liability in the financial statements in the period in which the dividends are approved by the Company’s shareholders.

(aa)

Comparatives

Where necessary, prior year amounts have been reclassified to conform with changes in presentation in the current year. The major reclassifications for the 2007 comparative figures include reclassification of certain items in the consolidated cash flow statement between ‘‘financing activities’’ and ‘‘operating activities’’.

FINANCIAL RISK MANAGEMENT

(a)

Financial risk factors

The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and fuel price risk), credit risk, and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to manage certain risk exposures.

Risk management is carried out by a central treasury department (the ‘‘Group Treasury’’) under policies approved by the Board of Directors. The Group Treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest-rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments.

(i)

Foreign currency risk

Since 21 July 2005, the PRC government reformed the Renminbi exchange rate system and established a floating exchange rate system in which the exchange rate would be adjusted and managed based on market supply and demand with reference to a basket of foreign currencies. The fluctuation in Renminbi exchange rate is affected by the domestic and international economy, the political situation and the currency supply and demand of the currency, and thus the Renminbi exchange rate in the future may therefore be very different from the current exchange rate.

The Group operates its business in many countries and territories. The Group generates its revenue in different currencies, and its foreign currency liabilities at the end of the period are much higher than its foreign currency assets. The Group’s major liability item (purchases and leases of aircraft) is mainly priced and settled in currencies such as US dollars. In addition, fluctuations in exchange rates will affect the Group’s costs incurred from foreign purchases such as aircraft, flight equipment and aviation fuel, and take-off and landing charges in foreign airports.

The Group also has exposure to foreign currency risk in respect of net cash inflow denominated in Japanese Yen from ticket sales in overseas branch office after payment of expenses. The Group entered into certain foreign exchange forward option contracts to manage this foreign currency risk. Details of foreign currency forward contracts are disclosed in Note 38(b) to the financial statements.

– 140 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

The following table details the Group’s and the Company’s exposure at the balance sheet date to major currency risk.

	Group
	2008									2007
	USD			Euro			JPY			USD			Euro			JPY
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Trade and other receivables		981,740			42,706			56,003			1,019,596			54,185			420,927
Cash and cash equivalents		494,249			126,695			37,657			736,951			92,205			70,996
Trade and other payables		(417,910	)		(1,476	)		(363	)		(317,867	)		(6,017	)		(16	)
Obligations under finance leases		(19,444,259	)		—			(83,971	)		(15,417,522	)		—			(1,034,688	)
Borrowings		(13,007,687	)		(111,658	)		—			(17,196,836	)		(130,145	)		—
Currency derivatives at notional value		825,170			—			—			241,052			—			—

Net balance sheet exposure		(30,568,697	)		56,267			9,326			(30,934,626	)		10,228			(542,781	)

	Company
	2008									2007
	USD			Euro			JPY			USD			Euro			JPY
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Trade and other receivables		898,975			24,620			55,929			876,175			2,366			419,604
Cash and cash equivalents		441,671			95,622			22,705			460,383			60,122			57,480
Trade and other payables		(414,591	)		(1,021	)		(363	)		(315,576	)		(5,833	)		(16	)
Obligations under finance leases		(17,164,531	)		—			(83,971	)		(12,737,815	)		—			(1,034,688	)
Borrowings		(12,734,767	)		(111,658	)		—			(16,874,186	)		(130,145	)		—
Currency derivatives at notional value		825,170			—			—			241,052			—			—

Net balance sheet exposure		(28,148,073	)		7,563			(5,700	)		(28,349,967	)		(73,490	)		(557,620	)

The following table indicates the approximate change in the Group’s and the Company’s profit and loss and other components of consolidated equity in response to a 5% appreciation of the RMB against the following major currencies at the balance sheet date.

	Group
	2008					2007
				Effect					Effect
	Effect			on other		Effect			on other
	on profit			components		on profit			components
	and loss			of equity		and loss			of equity
	RMB’000			RMB’000		RMB’000			RMB’000

US dollars		1,495,352			34,364		1,555,851			1,228

Euro		(2,813	)		—		(511	)		—

Japanese Yen		(466	)		—		27,139			—

– 141 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

	Company
	2008					2007
				Effect				Effect
	Effect			on other		Effect		on other
	on profit			components		on profit		components
	and loss			of equity		and loss		of equity
	RMB’000			RMB’000		RMB’000		RMB’000

US dollars		1,374,321			34,364		1,426,618		1,228

Euro		(378	)		—		3,675		—

Japanese Yen		285			—		27,881		—

(ii)

Interest rate risk

The Group’s interest-rate risk primarily arises from borrowings. Borrowings issued at variable rates expose the Group to cash flow interest-rate risk. Borrowings issued at fixed rates expose the Group to fair value interest-rate risk. During 2008 and 2007, the Group’s borrowings at variable rates were primarily denominated in US dollars. The interest rates and terms of repayment of borrowings made to the Group and interest rate swaps are disclosed in Notes 32 and 38(a) to the financial statements.

To hedge against the variability in the cash flows arising from a change in market interest rates, the Group has entered into certain interest rate swaps to swap variable rates into fixed rates. The Group also entered certain interest rate swaps to swap fixed assets into variable rates.

The following table details the Group’s and the Company’s interest rate profile of the interest-bearing financial instruments at the balance sheet date.

	Group						Company
	2008			2007			2008			2007
	RMB’000			RMB’000			RMB’000			RMB’000

Floating rate instruments
Borrowings		(12,171,844	)		(9,734,862	)		(11,898,923	)		(9,477,525	)
Obligation under finance leases		(20,482,615	)		(14,570,519	)		(18,213,044	)		(11,992,404	)
Interest rate swaps at notional amount		2,165,429			3,342,023			2,165,429			3,342,023

		(30,489,030	)		(20,963,358	)		(27,946,538	)		(18,127,906	)

	Group						Company
	2008			2007			2008			2007
	RMB’000			RMB’000			RMB’000			RMB’000

Fixed rate instruments
Cash and cash equivalents		3,451,010			1,655,244			2,361,941			1,040,897
Borrowings		(22,929,528	)		(20,128,966	)		(19,209,590	)		(16,116,832	)
Obligation under finance leases		(326,284	)		(1,881,691	)		(316,127	)		(1,780,598	)
Interest rate swaps at notional amount		1,053,352			1,217,691			1,053,352			1,217,691

		(18,751,450	)		(19,137,722	)		(16,110,424	)		(15,638,842	)

– 142 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

The following table indicates the approximate change in the Group’s and the Company’s profit and loss and other components of equity if interest rate had been 0.25% higher with all other variables held constant.

2008

2007

Effect

on other

Effect

on other

on profit

components

on profit

components

and loss

of equity

and loss

of equity

RMB’000

Floating rate instruments

(77,592

)

10,299

(57,681

)

27,872

(iii)

Fuel price risk

The Group’s results of operations may be significantly affected by fluctuations in fuel prices which is a significant expense for the Group. Aircraft fuel accounts for 33% of the Group’s operating expenses (2007 : 35%). The Group has entered into certain financial derivatives to hedge against fuel price risk. Details of fuel option contracts are disclosed in Note 38(c) to the financial statements.

For the year 2008, if fuel price had been 5% higher/lower with all other variables held constant (excluding the impact of fuel option contracts), the Group’s fuel cost would have been RMB900 million higher/lower.

For the years ended, if fuel price had been 5% higher/lower with all other variables held constant, the impact on financial derivatives is shown below.

	2008					2007
	Effect			Effect on other		Effect			Effect on other
	on profit and loss RMB’000			components of equity RMB’000		on profit and loss RMB’000			components of equity RMB’000

Net increase in fuel price		497,879			—		8,766			—
Net decrease in fuel price		(500,690	)		—		(17,531	)		—

(iv)

Credit risk

The Group’s credit risk is primarily attributable to cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to sales agents. The Group has a credit policy in place to monitor the exposures to these credit risks on an on- going basis.

The Group has policies in place to ensure that sales of blank tickets are only made available to sales agents with an appropriate credit history. A major portion of sales are conducted through sales agents and the majority of these agents are connected to various settlement plans and/or clearing systems which impose requirements on the credit standing.

A significant portion of the Group’s air tickets are sold by agents participating in the Billing and Settlements Plan (‘‘BSP’’), a clearing system between airlines and sales agents organised by the International Air Transportation Association. The balance due from BSP agents amounted to approximately RMB515 million as at 31 December 2008 (2007 : RMB896 million).

Except for the above, the Group has no significant concentration of credit risk, with the exposure spreading over a number of counterparties.

– 143 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Further quantitative disclosures in respect of the Group’s exposure to credit risk arising from trade receivables are set out in Note 26.

The Group’s cash management policy is to deposit cash and cash equivalents mainly in state-owned banks and other banks, which are highly rated by an international credit rating company. The Group also deposits cash and cash equivalents in an associate financial institution owned by its holding company (Note 44(b)(iii)). The management does not expect any loss to arise from non-performance by these banks and the financial institution.

Transactions in relation to derivative financial instruments are only carried out with financial institutions of high reputation. The Group has policies that limit the amount of credit exposure to any one financial institution. Management does not expect any losses from non-performance by these banks.

(v)

Liquidity risk

The Group’s primary cash requirements have been for additions of and upgrades to aircraft, engines and flight equipment and payments on related borrowings. The Group finances its working capital requirements through a combination of funds generated from operations and both short and long term bank loans. The Group generally finances the acquisition of aircraft through long-term finance leases and bank loans.

The Group operates with a working capital deficit. As at 31 December 2008, the Group’s net current liabilities amounted to RMB43,458 million (2007 : RMB26,098 million). For the year ended 31 December 2008, the Group recorded a net cash inflow from operating activities of RMB2,856 million (2007 : inflow RMB3,080 million), a net cash outflow from investing activities and financing activities of RMB1,017 million (2007 : outflow RMB3,396 million), and an increase in cash and cash equivalents of RMB1,796 million (2007 : decrease RMB332 million).

The Directors of Company believe that cash from operations and short and long term bank borrowings will be sufficient to meet the Group’s operating cashflow. Due to the dynamic nature of the underlying businesses, the Group’s treasury policy aims at maintaining flexibility in funding by keeping credit lines available. The Directors of the Company believe that the Group has obtained sufficient general credit facilities from PRC banks for financing future capital commitments and for working capital purposes (see Notes 2(a) and 47).

– 144 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Management monitors rolling forecasts of the Group’s liquidity reserves on the basis of expected cash flows:

The table below analysis the Group’s financial liabilities that will be settled into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant.

	Group
	Less than		Between 1		Between 2		Over
	1 year		and 2 years		and 5 years		5 years
	RMB’000		RMB’000		RMB’000		RMB’000

At 31 December 2008
Borrowings		27,785,310		4,515,962		3,969,413		846,074
Derivative financial instruments		6,456,075		15,448		19,416		150,660
Obligations under finance leases		2,765,969		2,704,499		7,805,669		11,868,053
Trade and other payables		16,561,603		—		320,354		410,076

Total		53,568,957		7,235,909		12,114,852		13,274,863

At 31 December 2007
Borrowings		18,494,521		5,927,098		4,216,517		1,225,692
Derivative financial instruments		20,238		441		5,120		15,997
Obligations under finance leases		2,545,223		1,567,253		4,205,352		8,134,382
Trade and other payables		12,075,177		—		339,064		314,884

Total		33,135,159		7,494,792		8,766,053		9,690,955

	Company
	Less than		Between 1		Between 2		Over
	1 year		and 2 years		and 5 years		5 years
	RMB’000		RMB’000		RMB’000		RMB’000

At 31 December 2008
Borrowings		25,146,504		3,849,229		3,156,324		530,386
Derivative financial instruments		6,456,075		15,448		19,416		150,660
Obligations under finance leases		2,458,559		2,400,584		6,892,822		10,534,868
Trade and other payables		14,594,713		—		229,399		410,076

Total		48,655,851		6,265,261		10,297,961		11,625,990

At 31 December 2007
Borrowings		15,943,774		5,515,186		3,266,554		868,843
Derivative financial instruments		20,238		441		5,120		15,997
Obligations under finance leases		2,316,781		1,342,166		3,494,960		6,618,596
Trade and other payables		10,384,462		—		268,064		314,884

Total		28,665,255		6,857,793		7,034,698		7,818,320

(b)

Capital risk management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

– 145 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings less cash and cash equivalents. Total capital is calculated as equity, as shown in the consolidated balance sheet, plus net debt.

The gearing ratios at 31 December 2008 and 2007 were as follows:

	2008			2007
	RMB’000			RMB’000

Total borrowings		35,101,372			29,863,828
Less: Cash and cash equivalents		(3,451,010	)		(1,655,244	)

Net debt		31,650,362			28,208,584
Total equity		(12,639,509	)		2,932,556

Total capital		19,010,853			31,141,140

Gearing ratio		1.66			0.91

(c)

Fair value estimation of financial assets and liabilities

The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price; the quoted market price used for financial liabilities is the current asking price.

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of interest-rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward foreign exchange contracts is determined using forward exchange market rates at the balance sheet date. The fair value of fuel option contracts is determined by reference to mark-to-market values provided by counterparties and independent third parties applying appropriate option valuation models.

The fair values of other long-term receivables are based on cash flows discounted using a rate based on the borrowing rate. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments (Notes 31 and 32).

– 146 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Estimates and judgments used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

(a)

Estimated impairment of property, plant and equipment and intangible assets

The Group tests whether property, plant and equipment and intangible assets have been impaired in accordance with the accounting policy stated in Note 2(n) to the financial statements. The recoverable amounts of cash generating units have been determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management and the key assumption which are disclosed in Note 18(a).

(b)

Revenue recognition

The Group recognises passenger, cargo and mail revenues in accordance with the accounting policy stated in Note 2(f) to the financial statements. Unused tickets are recognised in traffic revenues based on current estimates. Management annually evaluates the balance in the Sales in advance of carriage account (‘‘SIAC’’) and records any adjustments, which can be material, in the period the evaluation is completed.

(c)

Frequent flyer programme

The Company operates a frequent flyer programme called ‘‘Eastern Miles’’ that provides travel awards to programme members based on accumulated miles. A portion of passengers revenue attributable to the award of frequent flyer benefits is deferred and recognised when the miles have been redeemed or have expired. The deferment of revenue is estimated based on historical trends of redemptions, which is then used to project the expected utilisation of these benefits. Any remaining unutilised benefits are recognised as deferred revenue.

(d)

Depreciation of components related to overhaul costs

Depreciation of components related to airframe and engine overhaul costs are based on the Group’s historical experience with similar airframe and engine models and taking into account anticipated overhauls costs, timeframe between each overhaul, ratio of actual flying hours and estimated flying hours between overhauls. Different judgments or estimates could significantly affect the estimated depreciation charge and materially impact the results of operations.

(e)

Provision for costs of return condition checks for aircraft and engines under operating leases

Provision for the estimated costs of return condition checks for aircraft and engines under operating leases is made based on the estimated costs for such return condition checks and taking into account anticipated flying hours, flying cycle and timeframe between each overhaul. These judgments or estimates are based on historical experience on returning similar airframe and engine models, actual costs incurred and aircraft and engines status. Different judgments or estimates could significantly affect the estimated provision for costs of return condition checks.

– 147 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

(f)

Retirement benefits

The Group operates and maintains defined retirement benefit plans which provide retirees with benefits including transportation subsidies, social activity subsidies as well as other welfare. The cost of providing the aforementioned benefits in the defined retirement benefit plan is actuarially determined and recognised over the employees’ service period by utilising various actuarial assumptions and using the projected unit credit method in accordance with the accounting policy stated in Note 2(w) to the financial statements. These assumptions include, without limitation, the selection of discount rate, annual rate of increase of per capita benefit payment and employees’ turnover rate. The discount rate is based on management’s review of local high quality corporate bonds. The annual rate of increase of benefit payments is based on the general local economic conditions. The employees’ turnover rate is based on historical trends of the Group. Additional information regarding the retirement benefit plans is disclosed in Note 36 to the financial statements.

(g)

Deferred income tax

In assessing the amount of deferred tax assets that need to be recognised in accordance with the accounting policy stated in Note 2(k) to the financial statements, the Group considers future taxable income and ongoing prudent and feasible tax planning strategies. In the event that the Group’s estimates of projected future taxable income and benefits from available tax strategies are changed, or changes in current tax regulations are enacted that would impact the timing or extent of the Group’s ability to utilise the tax benefits of net operating loss carry forwards in the future, adjustments to the recorded amount of net deferred tax assets and taxation expense would be made.

REVENUES

The Group is principally engaged in the operation of civil aviation, including the provision of passenger, cargo, mail delivery and other extended transportation services.

	Group
	2008			2007
	RMB’000			RMB’000

Revenues
Traffic revenues
— Passenger		34,221,555			36,077,309
— Cargo and mail		5,465,784			5,633,117
Ground service income		1,279,444			1,001,809
Cargo handling income		345,048			364,638
Commission income		187,073			156,713
Others		464,717			393,166

		41,963,621			43,626,752
Less: Business tax (Note)		(891,064	)		(1,092,859	)

		41,072,557			42,533,893

Note:

Except for traffic revenues derived from inbound international and regional flights, which are not subject to the People’s Republic of China (‘‘PRC’’) business tax, the Group’s traffic revenues, commission income, ground service income, cargo handling income and other revenues are subject to PRC business tax levied at rates ranging from 3% to 5%, pursuant to PRC business tax rules and regulations.

– 148 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

OTHER OPERATING INCOME AND OTHER GAINS

	Group
	2008		2007
	RMB’000		RMB’000

Other operating income
— Government subsidies (Note (a))		405,163		487,562

Other gains
— Gains on disposal of property, plant and equipment (Note (b))		267,084		—

Note:

(a)

The government subsidies represent (i) subsidies granted by the Central Government and local government to the Group; and (ii) other subsidies granted by various local municipalities to encourage the Group to operate certain routes to cities where these municipalities are located.

(b)

The gains on disposal of property, plant and equipment represent (i) the gain arising from the sales of certain cargo freighters and engines which were leased back under operating lease and (ii) the disposal of certain aircraft recorded in ‘‘non-current assets held for sale’’ in 2007.

SEGMENT INFORMATION

In accordance with the Group’s internal financial reporting, the Group has determined that business segments be presented as the primary reporting format and geographical as the secondary reporting format.

(a)

Primary reporting format by business segment

The Group has two business segments, namely passenger and cargo and logistics, which are structured and managed separately, according to the nature of their operations and the services they provide.

(1)

Passenger business segment includes cargo carried by passenger flights.

(2)

Inter-segment transfers are transactions that are entered into under normal commercial terms and conditions that would also be available to unrelated third parties.

– 149 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

The segment results for the year ended 31 December 2008 are as follows:

				Cargo and
	Passenger			logistics			Unallocated			Total
	RMB’000			RMB’000			RMB’000			RMB’000

Traffic revenues		35,527,984			3,316,285			—			38,844,269
Other revenues and operating income		1,476,812			1,092,067			257,033			2,825,912

Total segment revenue		37,004,796			4,408,352			257,033			41,670,181
Inter-segment revenue		(426,411	)		—			(171,213	)		(597,624	)

Revenues		36,578,385			4,408,352			85,820			41,072,557

Operating (loss)/profit — segment results		(15,148,592	)		(4,392	)		69,779			(15,083,205	)
Finance income		1,960,490			100,781			354			2,061,625
Finance costs		(2,156,695	)		(146,944	)		(24,508	)		(2,328,147	)
Share of results of associates		—			—			69,668			69,668
Share of results of jointly controlled entities		—			—			24,050			24,050

(Loss)/profit before income tax		(15,344,797	)		(50,555	)		139,343			(15,256,009	)
Income tax		10,217			(73,952	)		(10,181	)		(73,916	)

(Loss)/profit for the year		(15,334,580	)		(124,507	)		129,162			(15,329,925	)

Other segment items included in the consolidated income statement for the year ended 31 December 2008 are as follows:

			Cargo and
	Passenger		logistics		Unallocated		Total
	RMB’000		RMB’000		RMB’000		RMB’000

Depreciation		4,052,309		427,620		60,600		4,540,529
Amortisation		229,350		11,097		586		241,033
Impairment losses		2,833,565		143,113		—		2,976,678

The segment assets and liabilities at 31 December 2008 and capital expenditure for the year then ended are as follows:

				Cargo and
	Passenger			logistics			Unallocated			Total
	RMB’000			RMB’000			RMB’000			RMB’000

Segment assets		66,377,081			4,160,865			1,171,293			71,709,239
Investments in associates		—			—			980,319			980,319
Investments in jointly controlled entities		—			—			362,332			362,332

Total assets		66,377,081			4,160,865			2,513,944			73,051,890

Segment liabilities		(81,763,440	)		(3,415,065	)		(512,894	)		(85,691,399	)

Capital expenditure (Notes 18, 19, 20 and 21)		11,332,697			177,589			20,513			11,530,799

– 150 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

The segment results for the year ended 31 December 2007 are as follows:

				Cargo and
	Passenger			logistics			Unallocated			Total
	RMB’000			RMB’000			RMB’000			RMB’000

Traffic revenues		37,550,127			3,113,488			—			40,663,615
Other revenues and operating income		1,208,760			900,529			208,456			2,317,745

Total segment revenue		38,758,887			4,014,017			208,456			42,981,360
Inter-segment revenue		(348,643	)		—			(98,824	)		(447,467	)

Revenues		38,410,244			4,014,017			109,632			42,533,893

Operating (loss)/profit — segment results		(93,051	)		181,823			38,861			127,633
Finance income		2,055,187			84,481			789			2,140,457
Finance costs		(1,799,454	)		(164,685	)		(14,411	)		(1,978,550	)
Share of results of associates		—			—			58,312			58,312
Share of results of jointly controlled entities		—			—			30,086			30,086

Profit before income tax		162,682			101,619			113,637			377,938
Income tax		38,835			(58,123	)		(4,475	)		(23,763	)

Profit for the year		201,517			43,496			109,162			354,175

Other segment items included in the income statement for the year ended 31 December 2007 are as follows:

			Cargo and
	Passenger		logistics		Unallocated		Total
	RMB’000		RMB’000		RMB’000		RMB’000

Depreciation		3,899,072		646,364		42,749		4,588,185
Amortisation		119,913		11,051		586		131,550
Impairment loss		227,456		—		—		227,456

The segment assets and liabilities at 31 December 2007 and capital expenditure for the year then ended are as follows:

				Cargo and
	Passenger			logistics			Unallocated			Total
	RMB’000			RMB’000			RMB’000			RMB’000

Segment assets		60,390,659			5,286,774			1,125,583			66,803,016
Investments in associates		—			—			601,119			601,119
Investments in jointly controlled entities		—			—			336,966			336,966

Total assets		60,390,659			5,286,774			2,063,668			67,741,101

Segment liabilities		(60,129,187	)		(4,196,729	)		(482,629	)		(64,808,545	)

Capital expenditure (Notes 18, 19, 20 and 21)		11,807,855			788,078			212,607			12,808,540

(b)

Secondary reporting format by geographical segment

The Group’s two business segments operate in four main geographical areas, even though they are managed on a worldwide basis.

– 151 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

The Group’s revenues (net of business tax) by geographical segment are analyzed based on the following criteria:

(1)

(2)

Revenue from ticket handling services, airport ground services and other miscellaneous services are classified on the basis of where the services are performed.

	Group
	2008 RMB’000		2007 RMB’000

Domestic (the PRC, excluding Hong Kong)		24,333,387		24,133,540
Hong Kong		2,474,088		2,694,857
Japan		3,512,222		3,643,244
Other countries		10,752,860		12,062,252

Total		41,072,557		42,533,893

The major revenue-earning assets of the Group are its aircraft, all of which are registered in the PRC. Since the Group’s aircraft are deployed flexibly across its route network, there is no suitable basis of allocating such assets and the related liabilities to geographical segments and hence segment assets and capital expenditure by geographic segment have not been presented.

(LOSS)/GAIN ON FINANCIAL DERIVATIVES

	Group
	2008 RMB’000			2007 RMB’000

(Loss)/gain arising from fair value movements of financial derivatives
— Fuel option contracts (Note 38(c))		(6,255,791	)		96,576
— Interest rate swaps (Note 38(a))		(49,535	)		(8,824	)
— Forward foreign exchange contracts (Note 38(b))		(95,666	)		(3,787	)

		(6,400,992	)		83,965

WAGES, SALARIES AND BENEFITS

	Group
	2008 RMB’000		2007 RMB’000

Wages, salaries, bonus and allowances		3,259,465		3,198,734
Employee welfare and benefits		227,206		246,626
Defined contribution retirement schemes (Note 36(a))		452,879		373,253
Post-retirement benefits (Note 37(b))		200,603		170,670
Staff housing fund (Note 37(a))		281,776		285,000
Staff housing allowance (Note 37(b))		123,383		53,114

		4,545,312		4,327,397

– 152 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

(a)

Emoluments of directors, supervisors and senior management

Details of the emoluments paid to the Company’s Directors, supervisors and senior management are as follows:

	2008
	Salaries and
	allowance		Bonus		Total
	RMB’000		RMB’000		RMB’000

Executive Directors
Liu Shaoyong*		—		—		—
Ma Xulun*		—		—		—
Li Fenghua*		—		—		—
Luo Chaogeng*		—		—		—
Cao Jianxiong*		—		—		—
Li Jun*		—		—		—
Luo Zhuping		173		—		173
Independent non-executive Directors
Hu Honggao		120		—		120
Peter Lok		117		—		117
Wu Baiwang		120		—		120
Zhou Ruijin		120		—		120
Xie Rong		120		—		120
Supervisors		—		—		—
Liu Jiangbo*		—		—		—
Xu Zhao*		—		—		—
Yang Jie		45		—		45
Wang Taoying		162		—		162
Liu Jiashun*		—		—		—
Vice executive Directors
Zhang Jianzhong		203		—		203
Li Yangmin		188		—		188
Fan Ru		654		—		654
Finance controller
Luo Weide		189		—		189

Total		2,211		—		2,211

– 153 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

	2007
	Salaries and
	allowance		Bonus		Total
	RMB’000		RMB’000		RMB’000

Executive Directors
Li Fenghua*		—		—		—
Luo Chaogeng*		—		—		—
Cao Jianxiong*		—		—		—
Li Jun*		—		—		—
Luo Zhuping		187		—		187
Independent non-executive Directors
Hu Honggao		120		—		120
Peter Lok		117		—		117
Wu Baiwang		120		—		120
Zhou Ruijin		120		—		120
Xie Rong		120		—		120
Supervisors
Liu Jiangbo*		—		—		—
Xu Zhao*		—		—		—
Yang Jie		144		—		144
Wang Taoying		169		—		169
Liu Jiashun*		—		—		—
Vice executive Directors
Zhang Jianzhong		220		—		220
Li Yangmin		202		—		202
Fan Ru		676		—		676
Finance controller
Luo Weide		207		—		207

Total		2,402		—		2,402

Certain directors of the Company received emoluments from CEA Holding, the parent company, part of which were in respect of their services to the Company and its subsidiaries. No apportionment has been made as it is impracticable to apportion this amount between their services to the Group and their services to CEA Holding.

During the year ended 31 December 2008, no Directors and supervisors waived their emoluments (2007 : Nil).

(b)

Five highest paid individuals

One of the vice executive Directors, whose emoluments are reflected in the above analysis was among the five highest paid individuals in the Group for 2008. The emoluments payable to the remaining four (2007 : four) highest paid individuals are as follows:

	Group
	2008		2007
	RMB’000		RMB’000

Wages, salaries, bonus and allowances		2,505		2,430

The emoluments fell within the following band:

	Number of individuals
	2008		2007

Below HK$1,000,000		5		4

– 154 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

During the year ended 31 December 2008, no emoluments were paid by the Group to the Directors, supervisors or the five highest paid individuals as an inducement to join or upon joining the Group, or as a compensation for loss of office (2007 : Nil).

10.

IMPAIRMENT LOSSES

	Group
	2008 RMB’000		2007 RMB’000

Goodwill impairment (Note (a))		993,143		—
Impairment charge on property, plant and equipment (Note (b))		1,441,904		—
Impairment charge on non-current assets held for sale (Note (c))		235,273		130,921
Other impairment charge		306,358		96,535

		2,976,678		227,456

Note:

(a)

For the year ended 31 December 2008, the Group recognised an impairment charge of RMB993 million against goodwill which had previously been recognised in connection with the Group’s acquisition of Yunnan Airline, Xibei Airline and Wuhan Airline (Note 18).

(b)

In view of the decline in demand on the air transportation market under the current economic environment, the Group performed an impairment test on property, plant and equipment (‘‘PP&E’’) as at 31 December 2008, based on which an impairment provision of RMB1,442 million was made against certain aircraft model and the related equipment which reflects their relatively lower operation efficiency and which management intend to retire in the near future. In determining the recoverable amounts of the related assets, management has compared the value in use and the fair value less costs to sell of the related assets, primarily determined by reference to estimated market values (Note 19).

(c)

After assessing the fair value less costs to sell as at the balance sheet date which was primarily determined by reference to estimated market value, an additional impairment loss of RMB235 million was made against certain aircraft and related flight equipment which have been classified as ‘‘non-current assets held for sale’’ (Note 41).

11.

OPERATING (LOSS)/PROFIT

Operating (loss)/profit is stated after crediting and charging the following items:

			Group
	Note		2008 RMB’000		2007 RMB’000

Crediting:
Gain on disposals of property, plant and equipment		6		267,084		—
Charging:
Amortisation of intangible assets		18		110,151		106,703
Depreciation of property, plant and equipment
— leased		19		1,913,877		1,868,481
— owned		19		2,626,652		2,719,704
Amortisation of lease prepayments		20		25,940		24,847
Consumption of flight equipment spare parts				476,282		468,888
Provision for impairment of trade and other receivables				34,760		10,481
Auditors’ remuneration				18,000		18,439

– 155 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

12.

FINANCE INCOME

	Group
	2008		2007
	RMB’000		RMB’000

Exchange gains, net (Note)		1,957,591		2,023,032
Interest income		89,275		96,849
Actual settled gains on financial instruments
— forward foreign exchange contracts		14,759		20,576

		2,061,625		2,140,457

Note:

The exchange gain for the year ended 31 December 2008 primarily relates to the translation of the Group’s foreign currency denominated borrowings and obligations under finance leases at year-end exchange rates.

13.

FINANCE COSTS

	Group
	2008 RMB’000			2007 RMB’000

Interest relating to obligations under finance leases		651,121			731,885
Interest on loans from banks and financial institutions		1,945,212			1,629,090
Interest relating to notes payable		84,050			72,779
Interest relating to long-term payables		—			3,406
Actual settled gains on financial instruments
— Interest rate swaps (Note 38(a))		(10,083	)		(59,111	)

		2,670,300			2,378,049
Less: Amounts capitalised into advanced payments on acquisition of aircraft (Note 21)		(342,153	)		(399,499	)

		2,328,147			1,978,550

14.

INCOME TAX

Income tax charged/(credited) to the consolidated income statement is as follows:

	Group
	2008		2007
	RMB’000		RMB’000

Provision for PRC income tax		35,432		72,918
Deferred taxation (Note 35)		38,484		(49,155	)

		73,916		23,763

Prior to 2008, the Company and certain of its subsidiaries (the ‘‘Pudong Subsidiaries’’) located in Pudong District, Shanghai, were entitled to a reduced rate of 15% pursuant to the preferential tax policy in Pudong, Shanghai. Under the Corporate Income Tax Law of the People’s Republic of China (the ‘‘New CIT Law’’) which was approved by the National People’s Congress on 16 March 2007 and became effective from 1 January 2008, the Company and the Pudong Subsidiaries are entitled to enjoy a transitional period to gradually increase the applicable corporate income tax rate to 25% in coming five years. For the year ended 31 December 2008, the corporate income tax rate applicable to the Company and the Pudong Subsidiaries is 18%. Other subsidiaries of the Company, except for those incorporated in Hong Kong and being subject to the Hong Kong corporate income tax rate of 16.5%, are generally subject to the PRC standard corporate tax rate of 25% under the New CIT Law.

– 156 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Tax on the Group’s consolidated income statement differs from the theoretical amount that would arise using the taxation rate of the home country of the Company as follows:

	Group
	2008 RMB’000			2007 RMB’000

(Loss)/ profit before income tax		(15,256,009	)		377,938
Adjusted by:
Share of result of associates and jointly controlled entities		(93,718	)		(88,398	)

		(15,349,727	)		289,540

Tax calculated at enacted tax rate of 18% (2007 : 15%)		(2,762,951	)		43,431
Effect attributable to subsidiaries charged at tax rates of 16.5% or 25% (2007: 17.5% or 33%)		(67,505	)		(49,578	)
Expenses not deductible for tax purposes		6,462			12,031
Effect of tax rate change on deferred tax		—			24,289
Utilisation of previously unrecognised tax losses		—			(157,531	)
Written off of deferred tax asset recognised by a subsidiary in prior year		34,773			—
Unrecognised tax losses for the year		1,093,350			54,647
Unrecognised temporary differences for the year		1,769,787			96,474

Tax charge		73,916			23,763

The Group operates international flights to overseas destinations. There was no material overseas taxation for the years ended 31 December 2008, as there are double tax treaties between the PRC and the corresponding jurisdictions (including Hong Kong) relating to aviation businesses.

15.

DIVIDEND

No dividend was paid during both 2008 and 2007.

The Board of Directors of the Company has not recommended any dividend in respect of the year ended 31 December 2008.

16.

(LOSS)/PROFIT ATTRIBUTABLE TO SHAREHOLDERS

The loss attributable to equity holders of the Company is dealt with in the financial statements of the Company to the extent of RMB13,877 million (2007 : profit of RMB505 million).

17.

(LOSS)/EARNINGS PER SHARE

The calculation of basic loss per share is based on the loss attributable to equity holders of the Company of RMB15,269 million (2007 : a profit of RMB379 million) and the weighted average number of shares of 4,866,950,000 (2007 : 4,866,950,000) in issue during the year.

The Company has no potentially dilutive option or other instruments relating to ordinary shares.

– 157 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

18.

INTANGIBLE ASSETS

	Group
	Goodwill		Sponsorship		Computer
	(Note (a))		fee (Note (b))		software			Total
	RMB’000		RMB’000		RMB’000			RMB’000

Cost
At 1 January 2007		993,143		320,000		118,573			1,431,716
Other additions		—		—		15,283			15,283
Disposals		—		—		(1,715	)		(1,715	)

At 31 December 2007		993,143		320,000		132,141			1,445,284

At 1 January 2008		993,143		320,000		132,141			1,445,284
Other additions		—		—		23,439			23,439

At 31 December 2008		993,143		320,000		155,580			1,468,723

Accumulated amortisation
At 1 January 2007		—		52,870		41,292			94,162
Charge for the year		—		82,194		24,509			106,703
Disposals		—		—		(287	)		(287	)

At 31 December 2007		—		135,064		65,514			200,578

At 1 January 2008		—		135,064		65,514			200,578
Charge for the year		—		82,194		27,957			110,151

At 31 December 2008		—		217,258		93,471			310,729

Impairment
At 1 January 2008		—		—		—			—
Charge for the year		993,143		—		—			993,143

At 31 December 2008		993,143		—		—			993,143

Net book amount
At 31 December 2007		993,143		184,936		66,627			1,244,706

At 31 December 2008		—		102,742		62,109			164,851

– 158 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

	Company
	Goodwill		Sponsorship		Computer
	(Note (a))		fee (Note (b))		software			Total
	RMB’000		RMB’000		RMB’000			RMB’000

Cost
At 1 January 2007		688,311		320,000		117,389			1,125,700
Other additions		—		—		15,071			15,071
Disposals		—		—		(1,715	)		(1,715	)

At 31 December 2007		688,311		320,000		130,745			1,139,056

At 1 January 2008		688,311		320,000		130,745			1,139,056
Other additions		—		—		23,321			23,321

At 31 December 2008		688,311		320,000		154,066			1,162,377

Accumulated amortisation
At 1 January 2007		—		52,870		40,151			93,021
Charge for the year		—		82,194		24,454			106,648
Disposals		—		—		(287	)		(287	)

At 31 December 2007		—		135,064		64,318			199,382

At 1 January 2008		—		135,064		64,318			199,382
Charge for the year		—		82,194		27,911			110,105

At 31 December 2008		—		217,258		92,229			309,487

Impairment
At 1 January 2008		—		—		—			—
Charge for the year		688,311		—		—			688,311

At 31 December 2008		688,311		—		—			688,311

Net book amount
At 31 December 2007		688,311		184,936		66,427			939,674

At 31 December 2008		—		102,742		61,837			164,579

Notes:

(a)

Impairment tests for goodwill

The Group operates in two cash-generating units (‘‘CGU’’) which are passenger (including cargo carried by passenger flights) and cargo and logistics.

For the year ended 31 December 2008, the Group and the Company recognised impairment charge of RMB993 million and RMB688 million respectively, against goodwill which had previously been recognised in connection with the acquisition of Yunnan Airline, Xibei Airline and Wuhan Airline within the passenger CGU. The impairment charge recognised represents the amount by which the CGU’s carrying amount exceeds its recoverable amount.

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FINANCIAL INFORMATION ON THE GROUP

The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management.

Key assumptions used for cash flow projections are as following:

— Passenger yield growth rate	0% to 4.5%
— Passenger load factor	63% to 80%
— Aircraft daily utilization (hours per day)	5.4 to 11.4
— Discount rate		10%

Management determined budgeted passenger yield increase rate, load factor and aircraft daily utilization based on past performance and its expectations for market development. The discount rate used is pre-tax and reflects specific risks relating to the Group’s business.

(b)

Sponsorship fees

In March 2006, the Company entered into an agreement (the ‘‘Sponsorship Agreement’’) with the Bureau of 2010 Expo Shanghai (the ‘‘Bureau’’) which designated the Group as the exclusive airline passenger carrier in the PRC to sponsor the 2010 Shanghai Expo. The Company will be entitled to a number of rights, including but not limited to the use of the Expo logo in the Group’s products, priority to purchase advertising space at the Expo site etc. In return, the Company is required to pay a total sponsorship fee of RMB320 million, RMB160 million of which would be paid in cash by instalments, the remaining RMB160 million would be settled by value-in-kind services (‘‘VIK’’) (in the form of goods or services) to support the 2010 Shanghai Expo. Accordingly, an intangible asset has been recognised and amortised on straight-line basis over the period from the effective date of the Sponsorship Agreement to the completion of the Expo. The outstanding sponsorship fee of RMB178 million (2007 : 233 million) has been recognised as other long-term liabilities (Note 34) in the Group’s balance sheet.

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FINANCIAL INFORMATION ON THE GROUP

19.

PROPERTY, PLANT AND EQUIPMENT

	Group
	Aircraft, engines and
	flight equipment
										Other
				Held under						property,
				finance						plant and			Construction
	Owned			leases			Buildings			equipment			in progress			Total
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Cost
At 1 January 2008, as restated		32,928,494			27,815,704			2,825,748			3,883,784			480,791			67,934,521
Reclassification upon a purchase		3,094,561			(3,094,561	)		—			—			—			—
Sales and finance lease back		(3,085,419	)		3,085,419			—			—			—			—
Transfers from construction in progress		—			—			233,746			19,313			(253,059	)		—
Transfers from advanced payments on acquisition of aircraft (Note 21)		411,153			3,816,843			—			—			—			4,227,996
Other additions		1,781,272			4,683,699			360,498			335,220			345,730			7,506,419
Other disposals		(719,787	)		(408,134	)		(8,047	)		(143,060	)		—			(1,279,028	)

At 31 December 2008		34,410,274			35,898,970			3,411,945			4,095,257			573,462			78,389,908

Accumulated depreciation
At 1 January 2008, as restated		13,165,501			4,820,675			673,892			1,986,752			—			20,646,820
Reclassification upon purchase		1,580,097			(1,580,097	)		—			—			—			—
Sales and finance lease back		(1,779,979	)		1,779,979			—			—			—			—
Charge for the year		2,138,172			1,913,877			108,826			379,654			—			4,540,529
Other disposals		(520,373	)		(408,134	)		(932	)		(6,326	)		—			(935,765	)

At 31 December 2008		14,583,418			6,526,300			781,786			2,360,080			—			24,251,584

Impairment
At 1 January 2008		—			—			13,094			550			4,303			17,947
Charge for the year (Note (a))		966,191			473,393			—			—			2,320			1,441,904

At 31 December 2008		966,191			473,393			13,094			550			6,623			1,459,851

Net book amount
At 31 December 2008		18,860,665			28,899,277			2,617,065			1,734,627			566,839			52,678,473

At 1 January 2008		19,762,993			22,995,029			2,138,762			1,896,482			476,488			47,269,754

– 161 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

	Group
	Aircraft, engines and
	flight equipment
										Other
				Held under						property,
				finance						plant and			Construction
	Owned			leases			Buildings			equipment			in progress			Total
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Cost
At 1 January 2007, as restated		31,922,671			21,310,056			2,752,340			3,514,463			250,112			59,749,642
Reclassification upon a purchase		4,203,030			(4,203,030	)		—			—			—			—
Transfers from construction in progress		—			—			84,402			91,269			(175,671	)		—
Transfers from advanced payments on acquisition of aircraft (Note 21)		189,402			4,920,311			—			—			—			5,109,713
Other additions		1,792,502			6,026,340			51,276			380,211			406,350			8,656,679
Disposal to a jointly controlled entity (Note 24)		—			—			(28,489	)		(2,773	)		—			(31,262	)
Other disposals		(788,727	)		(237,973	)		(33,781	)		(99,386	)		—			(1,159,867	)
Transfers to assets held for sale		(4,390,384	)		—			—			—			—			(4,390,384	)

At 31 December 2007		32,928,494			27,815,704			2,825,748			3,883,784			480,791			67,934,521

Accumulated depreciation
At 1 January 2007, as restated		12,472,726			5,393,870			582,072			1,659,800			—			20,108,468
Reclassification upon a purchase		2,203,703			(2,203,703	)		—			—			—			—
Charge for the year		2,221,399			1,868,481			103,622			394,683			—			4,588,185
Disposal to a jointly controlled entity		—			—			(5,562	)		(1,426	)		—			(6,988	)
Other disposals		(786,032	)		(237,973	)		(6,240	)		(66,305	)		—			(1,096,550	)
Transfers to assets held for sale		(2,946,295	)		—			—			—			—			(2,946,295	)

At 31 December 2007		13,165,501			4,820,675			673,892			1,986,752			—			20,646,820

Impairment
At 1 January 2007, as restated		—			—			13,094			550			4,303			17,947
Charge for the year		—			—			—			—			—			—

At 31 December 2007		—			—			13,094			550			4,303			17,947

Net book amount
At 31 December 2007		19,762,993			22,995,029			2,138,762			1,896,482			476,488			47,269,754

At 1 January 2007		19,449,945			15,916,186			2,157,174			1,854,113			245,809			39,623,227

– 162 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

	Company
	Aircraft, engines and
	flight equipment
										Other
				Held under						property,
				finance						plant and			Construction
	Owned			leases			Buildings			equipment			in progress			Total
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Cost
At 1 January 2008, as restated		27,203,710			23,659,953			1,539,304			2,433,576			205,951			55,042,494
Reclassification upon a purchase		3,094,561			(3,094,561	)		—			—			—			—
Sales and finance lease back		(3,085,419	)		3,085,419			—			—			—			—
Transfers from construction in progress		—			—			56,226			19,314			(75,540	)		—
Transfers from advanced payments on acquisition of aircraft (Note 21)		411,153			3,816,843			—			—			—			4,227,996
Other additions		1,662,101			4,616,658			346,804			150,603			284,791			7,060,957
Other disposals		(494,530	)		(360,988	)		(2,070	)		(95,289	)		—			(952,877	)

At 31 December 2008		28,791,576			31,723,324			1,940,264			2,508,204			415,202			65,378,570

Accumulated depreciation
At 1 January 2008, as restated		10,254,289			4,333,277			409,816			1,460,062			—			16,457,444
Reclassification upon purchase		1,580,097			(1,580,097	)		—			—			—			—
Sales and finance lease back		(1,779,979	)		1,779,979			—			—			—			—
Charge for the year		1,929,703			1,636,342			53,734			271,797			—			3,891,576
Other disposals		(478,713	)		(360,988	)		(346	)		(88,027	)		—			(928,074	)

At 31 December 2008		11,505,397			5,808,513			463,204			1,643,832			—			19,420,946

Impairment
At 1 January 2008		—			—			—			—			4,303			4,303
Charge for the year (Note (a))		966,191			473,393			—			—			897			1,440,481

At 31 December 2008		966,191			473,393			—			—			5,200			1,444,784

Net book amount
At 31 December 2008		16,319,988			25,441,418			1,477,060			864,372			410,002			44,512,840

At 1 January 2008		16,949,421			19,326,676			1,129,488			973,514			201,648			38,580,747

– 163 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

	Company
	Aircraft, engines and
	flight equipment
										Other
				Held under						property,
				finance						plant and			Construction
	Owned			leases			Buildings			equipment			in progress			Total
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Cost
At 1 January 2007, as restated		22,709,498			18,475,510			1,503,144			2,212,408			155,533			45,056,093
Reclassification upon a purchase		3,909,982			(3,909,982	)		—			—			—			—
Transfers from construction in progress		—			—			82,588			13,388			(95,976	)		—
Transfers from advanced payments on acquisition of aircraft (Note 21)		114,941			4,177,685			—			—			—			4,292,626
Other additions		1,070,095			5,149,747			1,437			289,425			146,394			6,657,098
Disposal to a jointly controlled entity (Note 24)		—			—			(28,489	)		(2,773	)		—			(31,262	)
Other disposals		(597,936	)		(233,007	)		(19,376	)		(78,872	)		—			(929,191	)
Transfers to assets held for sale		(2,870	)		—			—			—			—			(2,870	)

At 31 December 2007		27,203,710			23,659,953			1,539,304			2,433,576			205,951			55,042,494

Accumulated depreciation
At 1 January 2007, as restated		7,145,363			5,001,753			369,913			1,226,280			—			13,743,309
Reclassification upon a purchase		2,061,531			(2,061,531	)		—			—			—
Charge for the year		1,642,746			1,626,062			49,979			293,667			—			3,612,454
Disposal to a jointly controlled entity (Note 24)		—			—			(5,562	)		(1,426	)		—			(6,988	)
Other disposals		(595,240	)		(233,007	)		(4,514	)		(58,459	)		—			(891,220	)
Transfers to assets held for sale		(111	)		—			—			—			—			(111	)

At 31 December 2007		10,254,289			4,333,277			409,816			1,460,062			—			16,457,444

Impairment
At 1 January 2007, as restated		—			—			—			—			4,303			4,303
Charge for the year		—			—			—			—			—			—

At 31 December 2007		—			—			—			—			4,303			4,303

Net book amount
At 31 December 2007		16,949,421			19,326,676			1,129,488			973,514			201,648			38,580,747

At 1 January 2007		15,564,135			13,473,757			1,133,231			986,128			151,230			31,308,481

Notes:

(a)

In view of the decline in demand on the air transportation market under the current economic environment, the Group performed an impairment test on property, plant and equipment (‘‘PP&E’’) as at 31 December 2008, based on which an impairment provision of RMB1,442 million was made against certain aircraft model and the related equipment which reflects their relatively lower operation efficiency and which management intend to retire in the near future (Note 10). In determining the recoverable amounts of the related assets, management has compared the value in use and the fair value less costs to sell of the related assets, primarily determined by reference to estimated market values.

– 164 –

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FINANCIAL INFORMATION ON THE GROUP

(b)

As at 31 December 2008, certain aircraft and buildings owned by the Group and the Company with an aggregate net book amount of approximately RMB8,723 million and RMB7,209 million respectively (2007 : RMB9,865 million and RMB8,990 million respectively) were pledged as collateral under certain loan arrangements (note 32).

20.

LEASE PREPAYMENTS

	Group					Company
	2008		2007			2008		2007
	RMB’000		RMB’000			RMB’000		RMB’000

Cost
At 1 January		1,175,104		1,247,104			546,404		616,553
Other additions		54,964		—			5,381		—
Disposal to a jointly controlled entity (Note 24)		—		(70,149	)		—		(70,149	)
Other disposals		—		(1,851	)		—		—

At 31 December		1,230,068		1,175,104			551,785		546,404

Accumulated amortisation
At 1 January		207,607		192,742			121,268		118,885
Charge for the year		25,940		24,847			10,245		11,502
Disposal to a jointly controlled entity (Note 24)		—		(9,119	)		—		(9,119	)
Other disposals		—		(863	)		—		—

At 31 December		233,547		207,607			131,513		121,268

Net book amount
At 31 December		996,521		967,497			420,272		425,136

Lease prepayments represent unamortised prepayments for land use rights.

The Group’s land use rights are located in the PRC and the majority of these land use rights have terms of 50 years from the date of grant. As at 31 December 2008, the majority of these land use rights had remaining terms ranging from 38 to 53 years (2007 : from 39 to 54 years).

21.

ADVANCED PAYMENTS ON ACQUISITION OF AIRCRAFT

	Group						Company
	2008			2007			2008			2007
	RMB’000			RMB’000			RMB’000			RMB’000

At 1 January		6,695,573			7,668,708			6,695,573			7,006,853
Additions		3,603,824			3,737,079			3,603,824			3,604,445
Interest capitalised (Note 13)		342,153			399,499			342,153			376,901
Transfers to property, plant and equipment (Note 19)		(4,227,996	)		(5,109,713	)		(4,227,996	)		(4,292,626	)

At 31 December		6,413,554			6,695,573			6,413,554			6,695,573

Included in the Group’s and the Company’s balance as at 31 December 2008 is accumulated interest capitalised of RMB518 million (2007 : RMB553 million), at an average interest rate of 5.43% (2007 : 5.90%).

– 165 –

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FINANCIAL INFORMATION ON THE GROUP

22.

INVESTMENTS IN SUBSIDIARIES

Particulars of the principal subsidiaries, all of which are limited liability companies established and operating in the PRC or Hong Kong, are as follows:

						Attributable
	Place and date	Paid-up capital				equity interest
Company	of establishment	2008		2007		2008			2007			Principal activities
		RMB’000		RMB’000

China Eastern Airlines Jiangsu Co., Ltd. (‘‘CEA Jiangsu’’)	PRC 3 May 1993		880,000		880,000		63	%		63	%	Provision of airline services

China Cargo Airlines Co., Ltd. (‘‘China Cargo’’)	PRC 22 July 1998		950,000		950,000		70	%		70	%	Provision of cargo carriage services

China Eastern Airlines Wuhan Co., Ltd. (‘‘CEA Wuhan’’)	PRC 16 August 2002		600,000		600,000		96	%		96	%	Provision of airline services

Shanghai Eastern Flight Training Co., Ltd.	PRC 18 December 1995		473,000		473,000		95	%		95	%	Provision of flight training services

Shanghai Eastern Airlines Logistics Co., Ltd. (‘‘Eastern Logistics’’)	PRC 23 August 2004		200,000		200,000		70	%		70	%	Provision of cargo logistics services

Eastern Airlines Hotel Co., Ltd.	PRC 18 March 1998		70,000		70,000		86	%		86	%	Provision of hotel services primarily to crew members

Shanghai Eastern Maintenance Co., Ltd.	PRC 27 November 2002		25,658		25,658		60	%		60	%	Provision of aircraft repair and maintenance services

China Eastern Airlines Development (HK) Co., Ltd.	PRC 20 May 1995		10,047		10,047		80	%		80	%	Provision of ticket sales and logistics

China Eastern Airlines (Shantou) Economics Development Co., Ltd.	PRC 18 March 1998		10,000		10,000		55	%		55	%	Provision of airline equipment sales

China Eastern Airline Gifting Co., Ltd.	PRC 17 August 2007		50,000		50,000		100	%		100	%	Provision of marketing services

Eastern Business Airline Service Co., Ltd.	PRC 27 September 2008		50,000		—		100	%		—		Provision of airlines consultation services

– 166 –

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FINANCIAL INFORMATION ON THE GROUP

23.

INVESTMENTS IN ASSOCIATES

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

Unlisted investments, at cost		808,417		425,817		762,058		377,872
Share of post acquisition results/reserves		171,902		175,302		—		—

		980,319		601,119		762,058		377,872

The movement on investments in associates is as follows:

	Group						Company
	2008			2007			2008		2007
	RMB’000			RMB’000			RMB’000		RMB’000

At 1 January		601,119			623,390			377,872		377,872
Costs of additional investments		384,186			—			384,186		—
Disposal of an indirectly held associate		(3,820	)		(102,750	)		—		—
Share of results of associates		69,668			58,312			—		—
Share of revaluation surplus/ (deficits) on available for sale investments held by associates		(19,080	)		22,167			—		—
Dividend received during the year		(51,754	)		—			—		—

At 31 December		980,319			601,119			762,058		377,872

– 167 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Particulars of the principal associates, all of which are limited liability companies established and operating in the PRC, are as follows:

						Attributable
	Place and date	Paid-up capital				equity interest
Company	of establishment	2008		2007		2008			2007			Principal activities
		RMB’000		RMB’000

Eastern Air Group Finance Co., Ltd. (‘‘EAGF’’)	PRC 6 December 1995		400,000		400,000		25	%		25	%	Provision of financial services to group companies of CEA Holding

China Eastern Air Catering Investment Co., Ltd.	PRC 17 November 2003		350,000		350,000		45	%		45	%	Provision of air catering services

Jiangsu Huayu General Aviation Co., Ltd.	PRC 1 December 2004		110,000		110,000		27	%		27	%	Provision of aviation support services

Eastern Aviation Import & Export Co., Ltd (‘‘EAIEC’’)	PRC 9 June 1993		80,000		80,000		45	%		45	%	Provision of aviation equipment, spare

Collins Aviation Maintenance Service Shanghai Ltd.	PRC 27 September 2002		57,980		57,980		35	%		35	%	Provision of airline electronic product maintenance services

Shanghai Dongmei Aviation Travel Co., Ltd. (‘‘SDATC’’)	PRC 17 October 2004		31,000		31,000		27	%		27	%	Provision of traveling and accommodation agency services

Shanghai Hongpu Civil Airport Communication Co., Ltd.	PRC 18 October 2002		25,000		25,000		30	%		30	%	Provision of cable and wireless communication services

Eastern Aviation Advertising Service Co., Ltd. (‘‘CAASC’’)	PRC 04 March 1986		10,320		10,320		45	%		45	%	Provision of aviation advertising agency services

Joy Air Co., Ltd (Note (a))	PRC 28 March 2008		600,000		—		40	%		—		Provision of regional airline transportation

Shanghai Pratt & Whitney Maintenance Company Limited (Note (b))	PRC 28 March 2008	USD 39,500			—		51	%		—		Provision of maintenance Aircraft Engine of aircraft, engine and other related components maintenance services

– 168 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Note:

(a)

On 24 January 2008, the Company entered into an agreement with China Aviation Industry Corporation to establish Joy Air Company Limited (‘‘Joy Air’’). The Company holds a 40% interests of Joy air. As at 31 December 2008, the Company contributed RMB240 million in cash. Joy Air is still in preparation period as at the balance sheet date.

(b)

In 2008, the Company entered into an agreement with a third party to establish Shanghai Pratt & Whitney Aircraft Engine Maintenance Company Limited (‘‘Shanghai P&W’’). Shanghai P&W’s registered capital is USD40 million, in which the Company holds 51% interests. As at 31 December 2008, the Company contributed USD20,145,000 in cash to Shanghai P&W. According to the agreement, the third party has the power to govern the financial and operating policies of Shanghai P&W and hence the Company accounts for Shanghai P&W as an associate. At the balance sheet date, Shanghai P&W is still in preparation period.

(c)

The Group’s aggregated share of the revenues, results, assets and liabilities of its associates are as follows:

	Assets		Liabilities		Revenues		Profit/(loss)
	RMB’000		RMB’000		RMB’000		RMB’000

2008		4,326,145		3,345,826		913,845		69,668
2007		2,194,818		1,593,699		919,495		58,312

24.

INVESTMENTS IN JOINTLY CONTROLLED ENTITIES

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

Unlisted investments, at cost		270,208		268,892		301,802		301,802
Share of post-acquisition results/reserves		92,124		68,074		—		—

		362,332		336,966		301,802		301,802

The movement on investments in jointly controlled entities is as follows:

	Group					Company
	2008		2007			2008		2007
	RMB’000		RMB’000			RMB’000		RMB’000

At 1 January		336,966		115,540			301,802		59,552
Other addition		—		209,340			—		242,250
Dividend received during the year		—		(18,000	)		—		—
Share of results		24,050		30,086			—		—
Amortisation of previously unrecognised gain		1,316		—			—		—

At 31 December		362,332		336,966			301,802		301,802

– 169 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

Particulars of the principal jointly controlled entities, all of which are limited liability companies established and operating in the PRC are as follows:

						Attributable
	Place and date	Paid-up capital				equity interest
Company	of establishment	2008		2007		2008			2007			Principal activities
		RMB’000		RMB’000

Shanghai Technologies Aerospace Co., Ltd. (‘‘STA’’) (Note (a))	PRC 28 September 2004		576,795		576,795		51	%		51	%	Provision of repair and maintenance services

Shanghai Eastern Union Aviation Wheels & Brakes Maintenance Services Overhaul Engineering Co., Ltd. (‘‘Wheels & Brakes’’)	PRC 28 December 1995		17,484		17,484		40	%		40	%	Provision of spare parts repair and maintenance services

Eastern China Kaiya System Integration Co., Ltd.	PRC 21 May 1999		10,000		10,000		41	%		41	%	Provision of computer systems development

Notes:

(a)

Under a Joint Venture Agreement with the other joint venture partner of STA dated 10 March 2003, the Company has agreed to share control over the economic activities of STA. Any strategic financial and operating decisions relating to the activities of STA require the unanimous consent of the Company and the other joint venture partner.

(b)

The Group’s aggregated share of the revenues, results, assets and liabilities of its jointly controlled entities is as follows:

	Assets		Liabilities		Revenues		Profit/(loss)
	RMB’000		RMB’000		RMB’000		RMB’000

2008		404,888		42,556		187,997		24,050
2007		382,501		45,535		205,188		30,086

25.

OTHER LONG-TERM ASSETS

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

Deposits relating to aircraft under operating leases (Note (a))		509,887		508,903		360,061		361,453
Prepaid flight training fees (Note (b))		337,597		43,920		326,254		43,920
Prepaid staff benefits (Note (c))		26,888		40,567		21,401		32,398
Rental and renovation deposits		26,460		33,032		26,460		33,032
Other long-term receivables		40,724		34,329		31,175		28,046

		941,556		660,751		765,351		498,849

Notes:

(a)

The fair value of deposits relating to aircraft held under operating leases of the Group and the Company are RMB473 million and RMB349 million (2007 : RMB441 million and RMB318 million), which are determined using the expected future payments discounted at market interest rates prevailing at the year end of 0.75%–2.79% (2007 : 2.4%–3.06%).

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FINANCIAL INFORMATION ON THE GROUP

(b)

Prepaid flight training expenses represent the training expenses prepaid for pilot undergraduates and pilots in service of the Group and are amortised over the relevant training periods for which the prepayments cover on a straight-line basis.

(c)

Prepaid staff benefits represent subsidies to certain employees as an encouragement to purchase motor vehicles. The employees are required to continue serving the Group for six years from the date of receipt of the subsidies. If the employee leaves before the end of the six-year period, a refund by the employee is required to be calculated on a pro-rata basis. These subsidies are amortised over six years on the straight-line basis.

26.

TRADE RECEIVABLES AND NOTES RECEIVABLE

The credit terms given to trade customers are determined on an individual basis, with the credit periods generally ranging from half a month to two months.

The aging analysis of trade receivables is as follows:

	Group						Company
	2008			2007			2008			2007
	RMB’000			RMB’000			RMB’000			RMB’000

Within 90 days		1,088,951			1,761,799			733,498			1,098,281
91 to 180 days		24,282			104,991			12,546			97,212
181 to 365 days		30,451			187,355			27,800			150,506
Over 365 days		103,919			101,769			63,286			84,914

		1,247,603			2,155,914			837,130			1,430,913

Less: provision for impairment of receivables		(101,081	)		(59,907	)		(86,635	)		(55,757	)

Trade receivables		1,146,522			2,096,007			750,495			1,375,156

The carrying amounts of the trade receivables approximate their fair value.

Trade receivables that were neither past due nor impaired relate to a large number of independent sales agents for whom there is no recent history of default.

As at 31 December 2008, trade receivables of RMB153 million (2007 : RMB360 million) were past due but not impaired. These relate to a number of independent sales agents for whom there is no recent history of default. The Group holds cash deposits of RMB175 million (2007 : RMB202 million) from these agents. The ageing analysis of these trade receivables is as follows:

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

Up to 6 months		122,407		202,238		34,950		156,897
6 to 12 months		30,451		157,850		27,800		126,517

		152,858		360,088		62,750		283,414

As at 31 December 2008, trade receivables of RMB84 million (2007 : RMB44 million) were impaired and fully provided for. The remaining impaired trade receivables relate to customers that were in financial difficulties and only a portion of the receivables is expected to be recovered. The factors considered by management in determining the impairment are described in Note 2(r).

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FINANCIAL INFORMATION ON THE GROUP

The ageing of impaired receivables is as follows:

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

12 to 24 months overdue		15,660		26,734		551		18,527
Over 24 months overdue		88,259		75,035		62,734		66,387

		103,919		101,769		63,285		84,914

Movements on the Group’s provision for impairment of trade receivables are as follows:

	Group						Company
	2008			2007			2008			2007
	RMB’000			RMB’000			RMB’000			RMB’000

At 1 January		59,907			90,405			55,757			87,195
Receivables written off during the year as uncollectible		(1,027	)		(4,009	)		(552	)		(4,009	)
Provision for impairment of receivables		42,201			—			31,430			—
Unused amounts reversed		—			(26,489	)		—			(27,429	)

At 31 December		101,081			59,907			86,635			55,757

The carrying amounts of the Group’s trade receivables are denominated in the following currencies:

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

Currency
Renminbi		899,905		1,800,355		552,572		1,159,012
US Dollars		51,075		89,944		17,580		15,255
HK Dollars		48,901		80,246		46,916		80,094
Korea Won		9,021		41,538		24,620		41,538
Euro		42,706		54,185		9,021		49,517
Japanese Yen		56,003		1,323		55,929		1,323
Other currencies		38,911		28,416		43,857		28,417

		1,146,522		2,096,007		750,495		1,375,156

The net impact of creation and release of provisions for impaired receivables have been included in ‘Provision for impairment of trade and other receivables’ in the income statement (Note 11). Amounts charged to the allowance account are generally written off, when there is no expectation of recovering additional cash.

The maximum exposure to credit risk at the reporting date is the carrying amount of receivable shown above.

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FINANCIAL INFORMATION OF THE GROUP

27.

PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

Restricted bank deposits (Note (a))		2,159,848		—		2,082,075		—
Rebates receivable on aircraft acquisitions		930,665		929,652		881,395		875,786
Deposits relating to aircraft under finance leases — current portion		—		419,604		—		419,604
Ground Service Fees		310,452		337,166		178,300		215,296
Prepaid aircraft operating lease rentals		249,308		256,069		210,078		233,808
Rental deposits		88,001		130,348		74,477		79,393
Custom duties and value added tax recoverable		64,501		88,747		29,127		25,612
Prepayments for acquisition of flight equipment and other assets		36,480		60,325		34,707		36,340
Deposits with banks and a financial institution with original maturity over three months but less than
a year (Note (b))		33,116		52,843		31,860		52,843
Others		253,848		280,895		184,757		211,927

		4,126,219		2,555,649		3,706,776		2,150,609

Notes:

(a)

The restricted bank deposits represent: i) a deposit of RMB1,347 million pledged against 188 million US dollar loan (2007 : Nil); ii) a security deposit of US dollar 117 million (RMB796 million equivalent) for fuel option contracts (2007 : Nil); iii) a deposit of RMB17 million for notes payable (2007 : Nil.)

(b)

As at 31 December 2008, the effective interest rate on deposits with banks with original maturity over three months but less than a year was 0.36% (2007 : 0.7%).

28.

CASH AND CASH EQUIVALENTS

The carrying amounts of the Group’s and Company’s cash and cash equivalents are denominated in the following currencies:

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

Renminbi		2,623,585		585,797		1,636,815		322,447
US Dollars		494,249		736,951		441,671		460,383
Euro		126,695		92,205		95,622		60,122
Japanese Yen		37,657		70,996		22,705		57,480
Pounds Sterling		11,016		16,141		11,016		16,141
Australian Dollars		18,922		14,991		18,915		14,991
Canadian Dollars		12,394		25,332		12,245		25,332
Singapore Dollars		42,617		1,116		42,617		1,116
Others		83,875		111,715		80,335		82,885

		3,451,010		1,655,244		2,361,941		1,040,897

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FINANCIAL INFORMATION OF THE GROUP

29.

TRADE PAYABLES AND NOTES PAYABLE

The aging analysis of trade payables and notes payable is as follows:

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

Within 90 days		3,310,710		1,465,079		3,109,316		1,228,690
91 to 180 days		1,249,400		1,126,091		1,241,243		1,125,495
181 to 365 days		267,785		449,391		123,544		221,750
Over 365 days		316,963		97,319		273,127		86,781

		5,144,858		3,137,880		4,747,230		2,662,716

As at 31 December 2008, notes payable totaling RMB3,840 million (2007 : RMB1,616 million) were unsecured. Discount rates ranged from 2.9% to 5.9% (2007 : 3.5% to 5.5%) and all notes are repayable within six months.

30.

OTHER PAYABLES AND ACCRUED EXPENSES

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

Accrued fuel cost		3,841,660		2,348,932		3,534,281		2,180,773
Accrued take-off and landing charges		1,879,751		1,036,423		1,563,049		838,218
Accrued aircraft overhaul expenses		1,256,115		1,184,529		986,055		978,089
Other accrued operating expenses		1,417,988		928,267		1,251,514		841,311
Accrued salaries, wages and benefits		976,551		1,067,245		786,964		861,035
Duties and levies payable		545,482		858,966		423,527		646,588
Staff housing allowance (Note 37(b))		386,065		363,110		317,918		332,156
Deposits received from ticket sales agents		320,254		339,064		229,399		268,064
Current portion of other long-term liabilities (Note 34)		130,460		135,859		121,178		135,859
Current portion of post-retirement benefit obligations (Note 36(b))		46,461		34,425		43,801		31,707
Others		1,346,388		1,294,425		1,229,272		1,190,894

		12,147,175		9,591,245		10,486,958		8,304,694

31.

OBLIGATIONS UNDER FINANCE LEASES

As at 31 December 2008, the Group and the Company had 68 and 61 aircraft (2007 : 55 and 48 aircraft) respectively under finance leases. Under the terms of the leases, the Group/the Company has the option to purchase, at or near the end of the lease terms, certain aircraft at fair market value and others at either fair market value or a percentage of the respective lessors’ defined cost of the aircraft. The obligations under finance leases are principally denominated in US Dollars.

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APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

The future minimum lease payments (including interest), and the present value of the minimum lease payments under finance leases are as follows:

	Group
	2008									2007
							Present									Present
							value of									value of
	Minimum						minimum			Minimum						minimum
	lease						lease			lease						lease
	payments			Interest			payments			payments			Interest			payments
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Within one year		2,765,969			848,980			1,916,989			3,356,665			811,442			2,545,223
In the second year		2,704,499			688,327			2,016,172			2,206,135			638,882			1,567,253
In the third to fifth year inclusive		7,805,669			1,602,339			6,203,330			5,714,466			1,509,114			4,205,352
After the fifth year		11,868,053			1,195,645			10,672,408			9,331,048			1,196,666			8,134,382

Total		25,144,190			4,335,291			20,808,899			20,608,314			4,156,104			16,452,210
Less: amount repayable within one year		(2,765,969	)		(848,980	)		(1,916,989	)		(3,356,665	)		(811,442	)		(2,545,223	)

Long-term portion		22,378,221			3,486,311			18,891,910			17,251,649			3,344,662			13,906,987

	Company
	2008									2007
							Present									Present
							value of									value of
	Minimum						minimum			Minimum						minimum
	lease						lease			lease						lease
	payments			Interest			payments			payments			Interest			payments
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

Within one year		2,458,559			743,497			1,715,062			2,993,378			676,597			2,316,781
In the second year		2,400,584			594,223			1,806,361			1,866,827			524,660			1,342,167
In the third to fifth year inclusive		6,892,822			1,380,412			5,512,410			4,725,108			1,230,149			3,494,959
After the fifth year		10,534,868			1,039,530			9,495,338			7,574,768			956,172			6,618,596
Total		22,286,833			3,757,662			18,529,171			17,160,081			3,387,578			13,772,503
Less: amount repayable within one year		(2,458,559	)		(743,497	)		(1,715,062	)		(2,993,378	)		(676,597	)		(2,316,781	)

Long-term portion		19,828,274			3,014,165			16,814,109			14,166,703			2,710,981			11,455,722

The fair value of obligations under finance leases of the Group and the Company are RMB21,037 million and RMB18,640 million (2007: RMB16,577 million and RMB13,863 million respectively), which are determined using the expected future payments discounted at market interest rates prevailing at the year end.

At 31 December 2008, the Group and the Company had bank deposits totaling nil (2007: RMB420 million) pledged as collateral under certain finance lease arrangements.

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FINANCIAL INFORMATION OF THE GROUP

32.

BORROWINGS

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

Non-current
Long-term bank borrowings
— secured		3,350,114		3,994,947		2,189,950		3,376,847
— unsecured		5,237,938		7,374,360		4,855,130		6,273,736

		8,588,052		11,369,307		7,045,080		9,650,583
Current
Long-term bank borrowings
— secured		1,133,836		772,286		742,176		615,626
— unsecured		5,905,655		2,533,233		5,772,969		2,288,940
Short-term bank borrowings
— secured		1,284,236		—		1,222,953		—
— unsecured		18,189,593		15,189,002		16,325,335		13,039,208

		26,513,320		18,494,521		24,063,433		15,943,774

Total borrowings		35,101,372		29,863,828		31,108,513		25,594,357

The borrowings are repayable as follows:
Within one year		26,513,320		18,494,521		24,063,433		15,943,774
In the second year		4,147,845		5,927,098		3,569,348		5,515,186
In the third to fifth year inclusive		3,665,352		4,216,517		2,977,920		3,266,554
After the fifth year		774,855		1,225,692		497,812		868,843

Total borrowings		35,101,372		29,863,828		31,108,513		25,594,357

Notes:

As at 31 December 2008, the secured bank borrowings of the Group and the Company for the purchases of aircraft were secured by the related aircraft with an aggregate net book amount of RMB8,723 million and RMB7,209 million respectively (2007 : RMB9,865 million and RMB8,990 million) (Note 19).

Certain unsecured bank borrowings of the Group and the Company totaling of RMB357 million and Nil (2007 : RMB1,008 million and Nil respectively) were guaranteed by CEA Holding (Note 44).

Certain unsecured bank borrowings of the Group and the Company totaling of RMB600 million (2007 : Nil) were guaranteed by a third party bank.

– 176 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

The terms of the long-term bank loans are summarised as follows:

Currency	Interest rate and	Group				Company
	final maturities	2008		2007		2008		2007
		RMB’000		RMB’000		RMB’000		RMB’000

RMB denominated	Interest rates ranging from 4.52% to 8.36% per annum with final maturities through to 2017.		6,898,178		6,132,551		5,042,498		4,270,211

U.S. dollar denominated	Interest rates ranging from 3 month LIBOR +0.25% to 6 month LIBOR +3% per annum with final maturities through to 2019		8,617,707		8,418,967		8,406,069		8,161,630

EURO denominated	Interest rate is 6 months LIBOR +0.6% with final maturity through 2010.		111,658		123,308		111,658		123,308

Total long-term bank loans			15,627,543		14,674,826		13,560,225		12,555,149

Note:

(a)

The fair value of long-term borrowings of the Group and the Company are RMB15,826 million and RMB13,684 million (2007: RMB14,111 million and RMB12,124 million), which are determined using the expected future payments discounted at prevailing market interest rates available to the Group and the Company for financial instruments with substantially the same terms and characteristics at the balance sheet date.

(b)

Short-term borrowings of the Group and the Company are repayable within one year with interest charged at the prevailing market rates based on the rates quoted by the People’s Bank of China. As at 31 December 2008, the interest rates relating to such borrowings ranged from 2.7% to 7.47% per annum (2007: 4.39% to 6.72% per annum). During the year ended 31 December 2008, the weighted average interest rate on short-term bank loans was 6.36 % per annum (2007: 5.75% per annum).

(c)

The carrying amounts of the borrowings are denominated in the following currencies:

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

Renminbi		21,955,769		12,528,550		18,262,088		8,590,026
US Dollars		13,007,688		17,196,836		12,734,767		16,874,186
Euro		111,658		130,145		111,658		130,145
HK Dollar		26,257		8,297		—		—

		35,101,372		29,863,828		31,108,513		25,594,357

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FINANCIAL INFORMATION OF THE GROUP

33.

PROVISION FOR OPERATING LEASE AIRCRAFT RETURN CONDITION CHECK

	Group					Company
	2008			2007		2008			2007
	RMB’000			RMB’000		RMB’000			RMB’000

At 1 January		956,910			510,621		737,371			429,590
Additional provisions		618,555			446,289		431,319			307,781
Utilisation		(41,447	)		—		—			—

At 31 December		1,534,018			956,910		1,168,690			737,371
Less: current portion		(213,830	)		—		(139,710	)		—

Long-term portion		1,320,188			956,910		1,028,980			737,371

Provision of operating lease aircraft return condition check represents the present value of estimated costs of major return check for aircraft under operating leases as the Group has the responsibility to fulfill certain return conditions under relevant leases.

34.

OTHER LONG-TERM LIABILITIES

	Group						Company
	2008			2007			2008			2007
	RMB’000			RMB’000			RMB’000			RMB’000

Long-term duties and levies payable		805,794			584,791			713,522			501,867
Fair value of unredeemed points awarded under the Group’s frequent flyer program		364,858			378,361			364,858			378,361
Long-term payable to the Bureau of 2010 Expo Shanghai (Note 18(b))		177,883			232,811			177,883			232,811
Long-term payable to Aviation China Civil Flight Institute (Note (a))		30,000			60,000			30,000			60,000
Deferred gains on sale and leaseback transactions of aircraft		14,549			21,011			14,549			21,011
Other long-term payable		58,135			101,582			56,319			101,582

		1,451,219			1,378,556			1,357,131			1,295,632
Less: Current portion		(130,460	)		(135,859	)		(121,178	)		(135,859	)

Long-term portion		1,320,759			1,242,697			1,235,953			1,159,773

Notes:

(a)

The balance is unsecured, interest bearing at an effective rate of 6.21% per annum and is repayable by annual instalments of RMB30 million up to year 2009.

– 178 –

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FINANCIAL INFORMATION OF THE GROUP

35.

DEFERRED TAXATION

	Group						Company
	2008			2007			2008		2007
	RMB’000			RMB’000			RMB’000		RMB’000

Deferred tax assets
— Deferred tax asset to be utilised after 12 months		79,802			111,874			—		—
— Deferred tax asset to be utilised within 12 months		2,145			1,337			—		—

		81,947			113,211			—		—

Deferred tax liabilities
— Deferred tax liability to be realised after 12 months		(55,444	)		(50,369	)		—		—
— Deferred tax liability to be realised within 12 months		(2,145	)		—			—		—

		(57,589	)		(50,369	)		—		—

Movements in the net deferred taxation asset/(liability) are as follows:

	Group					Company
	2008			2007		2008		2007
	RMB’000			RMB’000		RMB’000		RMB’000

At 1 January		62,842			13,687		—		—
(Charged)/credited to income statement (Note 14)		(38,484	)		49,155		—		—

At 31 December		24,358			62,842		—		—

– 179 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

The deferred tax assets and liabilities (prior to the offsetting of balances within the same tax jurisdiction) were made up of the taxation effects of the following:

	Group						Company
	2008			2007			2008			2007
	RMB’000			RMB’000			RMB’000			RMB’000

Deferred tax assets:
Tax losses carried forward		1,846			317,392			—			313,755
Impairment provision for obsolete flight equipment spare parts		78,634			138,783			74,872			136,614
Impairment provision for receivables		68,553			79,195			52,872			44,348
Impairment provision for property, plant and equipment		170,808			—			170,451			—
Provision for aircraft overhaul expense		152,231			96,834			135,196			56,985
Provision for frequent flyer program		13,619			—			13,619			—
Financial derivative liabilities		313,488			10,449			313,488			10,449
Provision for post-retirement benefits		271,672			351,283			247,424			306,694

		1,070,851			993,936			1,007,922			868,845

Deferred tax liabilities:
Depreciation and amortisation		(1,024,173	)		(931,094	)		(985,602	)		(868,845	)
Financial derivative assets		(22,320	)		—			(22,320	)		—

		(1,046,493	)		(931,094	)		(1,007,922	)		(868,845	)

– 180 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Movements of the net deferred tax assets/(liabilities) of the Group for the year:

				(Charged)/
	At the			credited			(Charged)/
	beginning of			to income			credited		At the end of
	the year			statement			to equity		the year
	RMB’000			RMB’000			RMB’000		RMB’000

For the year ended 31 December 2008
Tax losses carried forward		317,392			(315,546	)		—		1,846
Impairment provision for obsolete flight equipment spare parts		138,783			(60,149	)		—		78,634
Impairment provision for receivables		79,195			(10,642	)		—		68,553
Impairment provision for property, plant and equipment		—			170,808			—		170,808
Provision for aircraft overhaul expense		96,834			55,397			—		152,231
Provision for frequent flyer program		—			13,619					13,619
Financial derivative liabilities		10,449			303,039					313,488
Provision for post-retirement benefits		351,283			(79,611	)		—		271,672

		993,936			76,915			—		1,070,851

Depreciation and amortisation		(931,094	)		(93,079	)		—		(1,024,173	)
Financial derivative assets		—			(22,320	)		—		(22,320	)

Net deferred tax assets/(liabilities)		62,842			(38,484	)		—		24,358

For the year ended 31 December 2007
Tax losses carried forward		90,335			227,057			—		317,392
Impairment provision for obsolete flight equipment spare parts		68,574			70,209			—		138,783
Impairment provision for receivables		57,467			21,728			—		79,195
Provision for aircraft overhaul expense		77,000			19,834			—		96,834
Financial derivative liabilities		20,823			(10,374	)		—		10,449
Provision for post-retirement benefits		216,570			134,713			—		351,283

		530,769			463,167			—		993,936

Depreciation and amortisation		(517,082	)		(414,012	)		—		(931,094	)

Net deferred tax assets		13,687			49,155			—		62,842

In accordance with the PRC tax law, tax losses can be carried forward to offset against future taxable income for a period of five years. As at 31 December 2008, the Group and the Company had tax losses carried forward of approximately RMB11,465 million and RMB8,778 million respectively (2007 : RMB5,380 million and RMB4,119 million respectively) which will expire between 2009 and 2013, and which are available to set off against the Group and the Company’s future taxable income. As at 31 December 2008, the Group and the Company did not recognise RMB2,864 million and RMB2,195 million respectively (2007 : RMB1,035 million and RMB718 million respectively) of deferred tax assets arising from tax losses available as management did not consider it probable that such tax losses would be realised before they expire.

– 181 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

36.

RETIREMENT BENEFIT PLANS AND POST-RETIREMENT BENEFITS

(a)

Defined contribution retirement schemes

(i)

Pension

The Group companies participate in defined contribution retirement schemes organised by municipal governments of the various provinces in which the Group companies operate, and substantially all of the Group’s PRC employees are eligible to participate in the Group companies’ retirement schemes. The Group companies are required to make annual contributions to the schemes at rates ranging from 20% to 22% on the employees’ prior year salary and allowances. Employees are required to contribute to the schemes at rates ranging from 7% to 8% of their basic salaries. The Group has no other material obligation for the payment of retirement benefits beyond the annual contributions under these schemes. For the year ended 31 December 2008, the Group’s pension cost charged to the consolidated income statement amounted to RMB360 million (2007 : RMB296 million).

(ii)

Medical insurance

The majority of the Group’s PRC employees participate in the medical insurance schemes organised by the municipal governments, under which the Group and its employees are required to contribute to the scheme approximately 12% and 2%, respectively, of the employee’s basic salaries. For those employees who participate in these schemes, the Group has no other obligation for the payment of medical expense beyond the annual contributions. For the year ended 31 December 2008, the Group’s medical insurance contributions charged to the income statement amounted to RMB93 million (2007 : RMB77 million).

(b)

Post-retirement benefits

In addition to the above retirement schemes, the Group provides retirees with other post-retirement benefits including transportation subsidies, social function activities subsidies and others. The expected cost of providing these post-retirement benefits is actuarially determined and recognised by using the projected unit credit method, which involves a number of assumptions and estimates, including inflation rate, discount rate and employees’ turnover ratio.

The post-retirement benefit obligations recognised in the balance sheets are as follows:

	Group						Company
	2008			2007			2008			2007
	RMB’000			RMB’000			RMB’000			RMB’000

Present value of unfunded post-retirement benefit obligations		4,481,420			2,155,393			3,941,724			1,861,036
Unrecognised actuarial losses		(2,965,835	)		(750,266	)		(2,611,045	)		(634,259	)


Post-retirement benefit obligations		1,515,585			1,405,127			1,330,679			1,226,777
Less: current portion (Note 30)		(46,461	)		(34,425	)		(43,801	)		(31,707	)

Long-term portion		1,469,124			1,370,702			1,286,878			1,195,070

– 182 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Changes in post-retirement benefit obligations are as follows:

	Group						Company
	2008			2007			2008			2007
	RMB’000			RMB’000			RMB’000			RMB’000

At 1 January		1,405,127			1,323,684			1,226,777			1,173,380
Total expenses charged in the income statement		200,603			170,670			181,309			128,057
Payments		(90,145	)		(89,227	)		(77,407	)		(74,660	)

At 31 December		1,515,585			1,405,127			1,330,679			1,226,777

The costs of post-retirement benefits are recognised under wages, salaries and benefits in the income statements as follows:

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

Current service cost		74,478		73,416		71,552		55,624
Interest cost		102,009		83,858		89,145		63,678
Actuarial losses recognised		24,116		13,396		20,612		8,755

Total (Note 9)		200,603		170,670		181,309		128,057

The principal actuarial assumptions at the balance sheet date are as follows:

	Group and Company
	2008			2007

Discount rate		3.75	%		4.75	%
Annual rate of increase of per capita benefit payment		3	%		2.5	%
Employee turnover rate		3.00	%		3.0	%
Mortality rate		8.80	%		8.43	%
Medical inflation rate		5	%		2.5%–5	%

37.

STAFF HOUSING BENEFITS

(a)

Staff housing fund

In accordance with the PRC housing reform regulations, the Group is required to contribute to the State- sponsored housing fund at rates ranging from 7% to 15% (2007 : 7% to 15%) of the specified salary amount of its PRC employees. At the same time, the employees are required to contribute an amount equal to the Group’s contribution. The employees are entitled to claim the entire sum of the fund contributed under certain specified withdrawal circumstances. For the year ended 31 December 2008, the Group’s contributions to the housing funds amounted to RMB282 million (2007 : RMB285 million) which has been charged to the consolidated income statement. The staff housing fund payable as at 31 December 2008 is RMB25 million (2007 : RMB17 million). The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.

(b)

Staff housing allowances

The Group also provides cash staff housing allowances to eligible employees who have not been allocated with any housing quarters or who have not been allocated with a quarter above the minimum as set out in the Group’s staff housing allowance policy introduced in October 2003 (the ‘‘Policy’’) based on the area of quarter to which they are entitled and the unit price as set out in the Policy.

– 183 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

The total entitlement of an eligible employee is principally vested over a period of 20 years. Upon an eligible employee’s resignation, his or her entitlement will cease and any unpaid entitlement related to past service up to the date of resignation will be paid. As at 31 December 2008, the present obligation of the provision for employee’s staff housing entitlement is RMB386 million (2007 : RMB363 million).

For the year ended 31 December 2008, the staff housing benefit provided under the Staff Housing Allowance Policy amounted to RMB123 million (2007 : RMB53 million) which has been charged to the consolidated income statement.

38.

DERIVATIVE FINANCIAL INSTRUMENTS

	Group and Company
	Assets						Liabilities
	2008			2007			2008			2007
	RMB’000			RMB’000			RMB’000			RMB’000

At 31 December
Interest rate swaps (Note (a))		988			33,232			182,971			39,542
Forward foreign exchange contracts (Note (b))		—			2,847			138,760			1,719
Fuel option contracts (Note (c))		123,010			59,468			6,319,868			535

Total		123,998			95,547			6,641,599			41,796

Less: current portion
— Interest rate swaps		—			(27,155	)		(41,668	)		(17,984	)
— Forward foreign exchange contracts		—			(2,847	)		(94,539	)		(1,719	)
— Fuel option contracts		(123,010	)		(59,468	)		(6,319,868	)		(535	)

		(123,010	)		(89,470	)		(6,456,075	)		(20,238	)

Non-current portion		988			6,077			185,524			21,558

The maximum exposure to credit risk at the reporting date is the fair value of the derivative assets in the balance sheet.

Notes:

(a)

Interest rate swaps

The Group uses interest rate swaps to reduce the risk of changes in market interest rates (Note 3(a)(ii)). The Group’s interest rate swaps qualify for hedge accounting. The interest rate swaps entered into by the Group are generally for swapping variable rates, usually referenced to LIBOR, into fixed rates and are accounted for as cashflow hedges. Other interest rate swaps are for swapping fixed rates into variable rates and are accounted for as fair value hedges. As at 31 December 2008, the notional amount of the outstanding interest rate swap agreements was approximately US$471 million (2007 : US$624 million). These agreements will expire between 2009 and 2016.

– 184 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Realised and unrealised gains and losses arising from the valuation of these interest rate swaps have been dealt with in the income statements as follows:

	Group
	2008			2007
	RMB’000			RMB’000

Realised (losses)/gain (recorded in finance costs)		10,083			59,862
Unrealised mark to market (losses)/gains
— cash flow hedges (recognised in equity)		(126,138	)		(79,783	)
— fair value hedges (recognised in the income statement)		(49,535	)		(8,824	)

		(165,590	)		(28,745	)

(b)

Forward foreign exchange contracts

The Group uses forward foreign exchange contracts to reduce the risk of changes in currency exchange rates in respect of ticket sales and expenses denominated in foreign currencies (Note 3(a)(i)). The Group’s forward foreign exchange contracts qualify for hedge accounting. These contracts are generally for selling Japanese Yen and purchasing U.S. dollars at fixed exchange rates and are accounted for as cash flow hedges. Other forward foreign exchange contracts are for selling Japanese Yen and purchasing U.S. dollars at variable exchange rates and are accounted for as fair value hedges. As at 31 December 2008, the notional amount of the outstanding currency forward contracts was approximately US$121 million (2007 : US$33 million), which will expire between 2009 and 2017.

Realised and unrealised gains and losses arising from the valuation of these contracts have been dealt with in the income statements as follows:

	Group
	2008			2007
	RMB’000			RMB’000

Realised (losses)/gain (recorded in finance income)		14,759			17,932
Unrealised mark to market (losses)/gains
— cash flow hedges (recognised in equity)		(44,222	)		1,586
— fair value hedges (recognised in the income statement)		(95,666	)		(3,787	)

		(125,129	)		15,731

(c)

Fuel option contracts

The Group enters into fuel hedging contracts to reduce the risk of changes in market oil/petroleum prices as a hedge against aircraft fuel costs. The fuel hedging contracts used by the Group are normally structured to include a combination of both put and call options which allow the Group to lock in fuel prices for specified volumes within a price range. In each hedging contract, the call options price at which the Group is effectively entitled to buy fuel will be higher than that at which the counterparty is effectively entitled to sell.

None of the fuel hedging contracts entered into by the Group in 2008 or which remained open at 31 December 2008 qualified for hedge accounting. The Group is required to account for the fair value of the difference between the spot price of fuel and the price at which the counterparties are effectively entitled to sell in future periods as unrealised mark to market losses and recognised these losses in the income statements immediately.

– 185 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Realised and unrealised gains and losses arising from the valuation of these contracts have been dealt with in the income statements.

	Group
	2008			2007
	RMB’000			RMB’000

Realised (losses)/gains (recorded in aircraft fuel)		(8,577	)		120,171
Unrealised mark to market (losses)/gains (recorded in loss on fair value movements of financial derivatives)		(6,255,791	)		96,576

		(6,264,368	)		216,747

The fair value of fuel option contracts is determined by reference to mark-to-market values provided by counterparties and independent third parties applying appropriate option valuation models (i.e. mean regression model using the Monte Carlo Simulation Process). Key parameters used in the valuation models include volatility, credit spread, long run mean and mean reverting ratio at date of valuation.

39.

SHARE CAPITAL

	2008		2007
	RMB’000		RMB’000

Registered, issued and fully paid of RMB1.00 each
Circulating shares with restricted transfer held by CEA Holding and employees		2,904,000		2,904,000
A shares listed on The Shanghai Stock Exchange		396,000		396,000
H shares listed on The Stock Exchange of Hong Kong Limited		1,566,950		1,566,950

		4,866,950		4,866,950

Pursuant to articles 49 and 50 of the Company’s Articles of Association, each of the unlisted shares, the listed A shares and the listed H shares are all registered ordinary shares and carry equal rights.

On 4 January 2007, the Company’s share reform plan was approved by the Ministry of Commerce and implemented on 9 January 2007. In this connection, CEA Holding granted 96 million shares in total to the holders of the circulating shares and the original non-circulating shares held by CEA Holding were granted the status of listing subject to certain circulating conditions.

– 186 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

40.

RESERVES

	Group
				Statutory
				and
				discretionary					Capital			Hedging
	Share			reserve			Revaluation		reserve			reserve			Accumulated
	premium			(Note (a))			reserve		(Note (b))			(Note 38)			losses			Total
	RMB’000			RMB’000			RMB’000		RMB’000			RMB’000			RMB’000			RMB’000

At 1 January 2007, as restated		1,006,455			428,808			23,816		(720,057	)		53,167			(3,621,106	)		(2,828,917	)
Unrealised loss on cashflow hedges (Note 38)		—			—			—		—			(79,783	)		—			(79,783	)
Realised gains on cashflow hedges (Note 38)		—			—			—		—			1,586			—			1,586
Fair value movements of available for sale investments held by associates		22,167			—			—		—			—			—			22,167
Profit attributable to equity holders of the Company		—			—			—		—			—			378,568			378,568
Adjustments to statutory and discretionary reserves		—			(428,808	)		—		—			—			428,808			—

At 31 December 2007		1,028,622			—			23,816		(720,057	)		(25,030	)		(2,813,730	)		(2,506,379	)

At 1 January 2008, as restated		1,028,622			—			23,816		(720,057	)		(25,030	)		(2,813,730	)		(2,506,379	)
Unrealised loss on cashflow hedges (Note 38)		—			—			—		—			(170,525	)		—			(170,525	)
Realised gains on cashflow hedges (Note 38)		—			—			—		—			165			—			165
Fair value movements of available for sale investments held by associates		(19,080	)		—			—		—			—			—			(19,080	)
Loss attributable to equity holders of the Company		—			—			—		—			—			(15,268,532	)		(15,268,532	)

At 31 December 2008		1,009,542			—			23,816		(720,057	)		(195,390	)		(18,082,262	)		(17,964,351	)

– 187 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

	Company
			Statutory
			and
			discretionary			Capital			Hedging
	Share		reserve			reserve			reserve			Accumulated
	premium		(Note (a))			(Note (b))			(Note 38)			losses			Total
	RMB’000		RMB’000			RMB’000			RMB’000			RMB’000			RMB’000

At 1 January 2007, as restated		1,006,455		182,336			(720,057	)		53,167			(3,160,413	)		(2,638,512	)
Unrealised loss on cashflow hedges (Note 38)		—		—			—			(79,783	)		—			(79,783	)
Realised gains on cashflow hedges (Note 38)		—		—			—			1,586			—			1,586
Adjustments to statutory and discretionary reserves		—		(182,336	)		—			—			182,336			—
Profit for the year		—		—			—			—			505,330			505,330

At 31 December 2007		1,006,455		—			(720,057	)		(25,030	)		(2,472,747	)		(2,211,379	)

At 1 January 2008, as restated		1,006,455		—			(720,057	)		(25,030	)		(2,472,747	)		(2,211,379	)
Unrealised loss on cashflow hedges (Note 38)		—		—			—			(170,525	)		—			(170,525	)
Realised gains on cashflow hedges (Note 38)		—		—			—			165			—			165
Loss for the year		—		—			—			—			(13,877,388	)		(13,877,388	)

At 31 December 2008		1,006,455		—			(720,057	)		(195,390	)		(16,350,135	)		(16,259,127	)

Notes:

(a)

Statutory and Discretionary Reserves

Pursuant to the PRC regulations and the Companies’ Articles of Association, each of the Group companies is required to transfer 10% of its profit for the year, as determined under the PRC Accounting Regulations, to a statutory common reserve fund until the fund balance exceeds 50% of the Group company’s registered capital. The statutory common reserve fund can be used to make good previous years’ losses, if any, and to issue new shares to shareholders in proportion to their existing shareholdings or to increase the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital.

Each of the Group companies is permitted to transfer 5% of its profit for the year as determined under the PRC Accounting Regulations, to a discretionary common reserve fund. The transfer to this reserve is subject to approval at shareholders’ meetings.

No profit appropriation by the Company to the discretionary common reserve fund was made for the year ended 31 December 2008 (2007 : nil).

(b)

Capital reserve

Capital reserve represents the difference between the fair value of the net assets injected and the nominal amount of the Company’s share capital issued in respect of a group restructuring carried out in June 1996 for the purpose of the Company’s listing.

– 188 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

41.

NON-CURRENT ASSETS HELD FOR SALE

In December 2006, the Board of Directors passed a resolution to dispose of certain older aircrafts and related flight equipments in the forthcoming 12-months. Accordingly, these aircrafts together with related flight equipments and spare parts were classified as non-current assets held for sale as at 31 December 2006. Despite of the Company’s continuing effort to locate and negotiate with potential buyers, no agreement to dispose these assets has been reached. It is management’s intention to dispose these assets in the forthcoming 12-months and management is continuing to take active step to locate potential buyers of these assets. They have therefore been still classified as non-current assets held for sale as of 31 December 2008. An impairment loss of RMB235 million has been recognised in the income statement in relation to these assets with reference to the estimated market values as at the balance sheet date (Note 10(c)).

42.

NOTE TO CONSOLIDATED CASH FLOW STATEMENT

(a)

Cash generated from operations

	2008			2007
	RMB’000			RMB’000

(Loss)/gain before income tax		(15,256,009	)		377,938
Adjustments for:
Depreciation of property, plant and equipment		4,755,622			4,694,888
Gains on disposals of property, plant and equipment		(267,084	)		(674	)
Share of results of associates		(69,668	)		(58,312	)
Share of results of jointly controlled entities		(24,050	)		(30,086	)
Amortisation of lease prepayments		25,940			24,847
Net foreign exchange gains		(1,970,990	)		(2,023,032	)
Amortisation of deferred revenue		(19,965	)		(12,594	)
Loss/(gain) arising from fair value movements of derivative financial instruments		6,400,992			(96,575	)
Consumption of flight equipment spare parts		476,282			468,888
Impairment provision trade and other receivables		39,338			10,481
Provision for post-retirement benefits		200,603			170,670
Provision for operating lease aircraft return condition check		618,556			446,289
Impairment loss		2,976,678			227,456
Interest income		(89,275	)		(96,849	)
Interest expenses		2,328,147			1,978,550
Gain on disposal of an associate and available-for-sale financial assets		(13,557	)		—
Gain of contribution to a joint controlled entity		—			(31,620	)
Gain on disposal of a subsidiary		—			(54,441	)

Operating profit before working capital changes		111,560			5,995,824

– 189 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

	2008			2007
	RMB’000			RMB’000

Changes in working capital
Flight equipment spare parts		(529,068	)		(409,392	)
Trade receivables		909,701			(478,550	)
Amount due from related companies		(223,112	)		349,897
Prepayments, deposits and other receivables		(216,706	)		(336,890	)
Sales in advance of carriage		(197,331	)		319,550
Trade payables and notes payables		2,006,978			(1,888,884	)
Amounts due to related companies		(187,819	)		29,571
Other payables and accrued expenses		1,901,892			(194,694	)
Other long-term liabilities		(431,956	)		(74,081	)
Provision for operating lease aircraft return condition check		(41,448	)		—
Staff housing allowances		(100,428	)		(76,381	)
Post-retirement benefit obligations		(90,145	)		(89,227	)
Operating lease deposits		30,348			(3,909	)

		2,830,906			(2,852,990	)

Cash generated from operations		2,942,466			3,142,834

(b)

Non-cash transactions

	2008		2007
	RMB’000		RMB’000

Financing activities not affecting cash:
Finance lease obligations incurred for acquisition of aircraft		7,964,792		8,395,965

43.

COMMITMENTS

(a)

Capital commitments

The Group and the Company had the following capital commitments:

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

Authorised and contracted for:
— Aircraft, engines and flight equipment		52,533,736		50,852,865		52,533,736		50,852,865
— Other property, plant and equipment		130,180		353,771		111,810		289,971

		52,663,916		51,206,636		52,645,546		51,142,836

Authorised but not contracted for:
— Other property, plant and equipment		5,235,712		11,326,338		4,874,680		10,709,963

		5,235,712		11,326,338		4,874,680		10,709,963

		57,899,628		62,532,974		57,520,226		61,852,799

– 190 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Contracted expenditures for the above aircraft and flight equipment, including deposits prior to delivery, subject to future inflation increases built into the contracts and any discounts available upon delivery of the aircraft, if any, were expected to be paid as follows:

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

Within one year		8,852,380		17,127,081		8,852,380		17,127,081
In the second year		13,174,190		15,056,943		13,174,190		15,056,943
In the third year		9,051,539		13,960,033		9,051,539		13,960,033
In the fourth year		9,224,482		2,531,964		9,224,482		2,531,964
Over four years		12,231,145		2,176,844		12,231,145		2,176,844

		52,533,736		50,852,865		52,533,736		50,852,865

(b)

Operating lease commitments

As at the balance sheet date, the Group and the Company had commitments under operating leases to pay future minimum lease rentals as follows:

	Group				Company
	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

Aircraft, engines and flight equipment
Within one year		2,671,355		2,527,072		2,145,554		2,235,504
In the second year		2,330,080		2,331,741		2,008,984		2,124,109
In the third to fifth year inclusive		4,598,624		4,991,164		4,432,529		4,925,469
After the fifth year		4,100,560		5,341,362		4,028,862		5,341,361

		13,700,619		15,191,339		12,615,929		14,626,443

Land and buildings
Within one year		202,540		87,410		46,701		84,482
In the second year		124,643		50,683		21,066		49,363
In the third to fifth year inclusive		325,423		40,888		16,323		40,026
After the fifth year		2,398,361		29,846		29,276		29,846

		3,050,967		208,827		113,366		203,717

		16,751,586		15,400,166		12,729,295		14,830,160

– 191 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

44.

RELATED PARTY TRANSACTIONS

The Group is controlled by CEA Holding, which owns approximately 59.67% of the Company’s shares as at 31 December 2008. The aviation industry in the PRC is administrated by the CAAC. CEA Holding and the Group is ultimately controlled by the PRC government, which also controls a significant portion of the productive assets and entities in the PRC (collectively referred as the ‘‘SOEs’’).

(a)

Related party transactions

The other related party transactions are:

		Income/
		(expense or payments)
Nature of transaction	Related party	2008			2007
		RMB’000			RMB’000

With CEA Holding or companies
directly or indirectly held by CEA
Holding:

Interest income on deposits at an	EAGF*		30,766			9,717
average rate of 0.36% per annum
(2007: 0.72% per annum)

Interest expense on loans at rate of	EAGF*		(22,267	)		(33,590	)
4.87% per annum
(2007: 5.42% per annum)

Ticket reservation service charges for	Travel Sky Technology Limited		(241,206	)		(241,161	)
utilisation of computer reservation
system

Commission expense on air tickets sold	SDATC*		(610	)		(9,220	)
on behalf of the Group, at rates	Shanghai Tourism		(1,696	)		(6	)
ranging from 3% to 9% of the value	(HK) Co., Ltd
of tickets sold

Handling charges of 0.1% to 2% for	EAIEC*		(47,257	)		(34,643	)
purchase of aircraft, flight equipment,
flight equipment spare parts, other
property, plant and equipment

Repairs and maintenance expense for	Wheels & Brakes		(64,653	)		(56,764	)
aircraft and engines	STA		(131,081	)		(100,270	)

Supply of food and beverages	Shanghai Eastern Air Catering		(267,117	)		(243,895	)
	Co., Ltd
	Yunnan Eastern Air Catering		(40,836	)		(37,782	)
	Investment Co., Ltd.
	Xian Eastern Air Catering		(36,526	)		(28,780	)
	Investment Co., Ltd.
	Qingdao Eastern Air Catering		(27,480	)		(20,101	)
	Investment Co., Ltd

– 192 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

		Income/
		(expense or payments)
Nature of transaction	Related party	2008			2007
		RMB’000			RMB’000

Disposal of a subsidiary	CEA Holding		—			461,916

Disposal of a associate	CEA Holding		32,972			—

Advertising expense	CAASC		(3,595	)		(14,370	)

Automobile maintenance fee	CEA Development Co. Ltd		(23,595	)		(18,574	)

Land and building rental	CEA Holding		(55,399	)		(55,399	)

Purchase of other fixed assets	CEA Northwest Co. Ltd		—			(67,305	)

With CAAC and its affiliates:

Civil aviation infrastructure levies paid	CAAC		(769,849	)		(781,613	)

Aircraft insurance premiums paid	CAAC		(134,176	)		(136,875	)
through CAAC which entered into
the insurance policies on behalf of
the Group

With other SOE:

Take-off and landing fee charges	State-controlled airports		(4,323,382	)		(4,152,888	)

Purchase of aircraft fuel	State-controlled fuel suppliers		(14,020,301	)		(11,120,186	)

Ticket reservation service charges for	Travel Sky Technology Limited		(241,206	)		(241,161	)
utilisation of computer reservation
system

Interest income on deposits at an	State-controlled banks		14,778			15,411
average rates of 0.36% per annum
(2006: 0.72% per annum)

Interest expense on loans at an average	State-controlled banks		(1,872,553	)		(1,406,812	)
rate of 5.96% per annum (2007:
5.47% per annum)

Commission expense on air tickets sold	Other PRC airlines		(65,832	)		(70,285	)
on behalf of the Group at rates
ranging from 3% to 9% of the value
of tickets sold

Supply of food and beverages	Other state-control enterprises		(567,071	)		(511,766	)

* EAGF is also 25% owned associate of the Group; SDATC and EAIEC are both 45% owned associates of the Group.

– 193 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

(b)

Balances with related companies

(i)

Amounts due from related companies

	Group				Company
Company	2008		2007		2008		2007
	RMB’000		RMB’000		RMB’000		RMB’000

SDATC		9,714		16,378		9,714		16,378
Shanghai Tourism (HK) Co., Ltd		4,020		2,914		4,020		2,914
EAIEC		181,788		26,166		181,788		26,166
China Cargo		—		—		1,091,055		1,535,804
CEA Wuhan		—		—		208,928		—
Other related companies		12,767		19,997		22,836		37,070

Total		208,289		65,455		1,518,341		1,618,332

All the amounts due from related companies are trade in nature, interest free and payable within normal credit terms given to trade customers.

(ii)

Amounts due to related companies

	Group						Company
Company	2008			2007			2008			2007
	RMB’000			RMB’000			RMB’000			RMB’000

EAIEC		(241,560	)		(470,349	)		(182,277	)		(401,178	)
CEA Holding		(69,497	)		(40,214	)		(69,497	)		(40,214	)
Shanghai Eastern Airlines Catering Co. Ltd.		(46,580	)		(60,718	)		(46,580	)		(60,718	)
Yunnan Eastern Air Catering Investment Co., Ltd.		(665	)		(488	)		(665	)		(488	)
CAASC		(164	)		(2,550	)		(164	)		(2,550	)
CEA Northwest		—			(64,895	)		—			—
Eastern Logistics		—			—			(134,213	)		(31,503	)
CEA Jiangsu		—			—			(157,885	)		(193,193	)
Other related companies		(54,660	)		(32,379	)		(104,522	)		(47,578	)

Total		(413,126	)		(671,593	)		(695,803	)		(777,422	)

Except for amounts due to EAGF and CEA Holding, which are reimbursement in nature, all other amounts due to related companies are trade in nature, interest free and payable within normal credit terms given by trade creditors.

– 194 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

(iii)

Short-term deposits and short-term loans with an associate

	Average interest rate						Group				Company
	2008			2007			2008		2007		2008		2007
	RMB’000			RMB’000			RMB’000		RMB’000		RMB’000		RMB’000

Short-term deposits
(included in Prepayments,
Deposits and Other
Receivables) ‘‘EAGF’’		0.4	%		0.7	%		1,202,892		408,151		427,363		90,793

Short-term loans (included in
Borrowings) ‘‘EAGF’’		4.3	%		5.3	%		295,181		260,351		295,181		180,351

(iv)

State-controlled banks and other financial institutions

	Average interest rate						Group				Company
	2008			2007			2008		2007		2008		2007
	RMB’000			RMB’000			RMB’000		RMB’000		RMB’000		RMB’000

Bank deposits (included in
cash and cash equivalents)		0.4	%		0.7	%		1,762,245		845,719		1,601,059		630,783

Long-term bank borrowings		5.3	%		5.7	%		14,577,150		13,062,353		12,671,832		11,104,676

(c)

Guarantees by holding company

As at 31 December 2008, bank loans of the Group and the Company with an aggregate amount of RMB357 million and Nil respectively (2007: RMB1,008 million and Nil) were guaranteed by CEA Holding (Note 32).

(d)

Key management compensation

	2008	2007
	RMB’000	RMB’000

Salaries, bonus, allowances and benefits	1,614	1,805

45.

ULTIMATE HOLDING COMPANY

The Directors regard CEA Holding, a state-owned enterprise established in the PRC, as being the ultimate holding company.

46.

CONTINGENT LIABILITIES

In 2005, the family members of certain victims in the aircraft accident (the aircraft was then owned and operated by China Eastern Air Yunnan Company), which occurred in Baotou on 21 November 2004, sued the Company in a U.S. court for compensation. On 5 July 2007, pursuant to several conditions with which the Company has complied, the Superior Court of the State of California ordered the action stayed on the grounds of forum non convenients for the purpose of permitting proceedings in the PRC. On 20 February 2008, the plaintiffs filed a motion with the Superior Court of the State of California to lift the stay, but the motion was rejected by the court on 6 May 2008. The plaintiffs filed a second motion to lift the stay on 10 July 2008. On 27 August 2008, the Superior Court of the State of California rejected the motion of the plaintiffs again. After the case entered the procedures on appeal in the California Court of Appeal, the Court of Appeal of California issued an opinion on 26 February 2009, dismissing the appeal of the plaintiffs and affirming the original order. On 16 March 2009, the Chinese counsel of the plaintiff sued the Company on behalf of the family members of victims in the Beijing No. 2 Intermediate People’s Court. The case is under the filing procedure and no official summons from the court has been received by the Company. The management of the Group believe that a negative outcome of the case will not have an adverse effect on the financial condition and results of operations of the Company. The Group intends to provide updates to the shareholders regarding the progress of the litigation. As at 31 December 2008, the Group was not involved in any other litigation, arbitration or claim of material importance.

– 195 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

47.

POST BALANCE SHEET EVENTS

On 15 January 2009, CEA Holding (as the principal), Eastern Air Group Finance Company Limited (the ‘‘Finance Company’’) (as the trustee) and the Company (as the borrower) entered into an entrusted loan agreement, pursuant to which, the Company will obtain a short-term loan of RMB5.55 billion from CEA Holding through the Finance Company. Details are set out in the Company’s announcement dated 15 January 2009.

On 19 January 2009, the Company obtained a two-year credit facility of RMB10 billion from Shanghai Pudong Development Bank.

On 13 February 2009, the Company obtained a three-year credit facility of RMB15 billion from Agricultural Bank of China.

On 26 February 2009, the Company convened an extraordinary general meeting of A and H Share Shareholders in which the special resolution in relation to the approval of the non-public issuance of 1,437,375,000 new A Shares at subscription price of approximately RMB5,563 million to China Eastern Air Holding Company and the issuance of 1,437,375,000 new H Share at subscription price of approximately RMB1,437 million to CES Global Holdings (Hong Kong) Limited was passed. Details are set out in the Company’s announcement dated 10 December 2008 and its Notice of Extraordinary General Meeting and Notice of H Shareholders Class Meeting dated 8 January 2009.

On 16 March 2009, the Company obtained a three-year credit facility of RMB11 billion from Construction Bank of China.

– 196 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL

INFORMATION OF THE ENLARGED GROUP

Set out below are the unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group as at 30 June 2009, the statement of adjusted consolidated net tangible assets of the Group and the unaudited pro forma statement of adjusted consolidated net tangible assets of the Enlarged Group (collectively, the ‘‘Unaudited Pro Forma Financial Information’’) which have been prepared on the basis of the notes set out below for the purpose of illustrating the effect of the Proposed Acquisition as if it had taken place on 30 June 2009.

The Unaudited Pro Forma Financial Information has been prepared for illustrative purpose only and because of their hypothetical nature, they may not give a true picture of the financial position of the Enlarged Group had the Proposed Acquisition been completed as at 30 June 2009 or at any future date.

(I)	UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

The unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group is compiled based on the unaudited condensed consolidated balance sheet of the Group as at 30 June 2009 as extracted from the interim result announcement of the Company for the six months ended 30 June 2009, and the audited consolidated balance sheet of the Target Group as at 30 June 2009 as extracted from the accountant’s report of the Target Group as set out in Appendix I to this circular.

	Pro forma adjustments
	Unaudited
	condensed		Audited
	consolidated		consolidated
	statement of		statement of						Pro forma
	assets and		assets and						consolidated
	liabilities of		liabilities of						balances of
	the Group as		the Target		Other				the Enlarged
	at 30 June		Group as at		pro forma				Group as at
	2009		30 June 2009		adjustments				30 June 2009
	RMB’000		RMB’000		RMB’000				RMB’000
	(Note 1)		(Note 2)

ASSETS
Non-current assets
Intangible assets		116,402		21,874		379,355		(Note 3(a))		10,068,429
						9,550,798		(Note 3(b))
Property, plant and equipment		53,351,228		8,696,469		(1,700,625	)	(Note 3(a))		60,347,072
Lease prepayments		983,767		117,244		368,351		(Note 3(a))		1,469,362
Advanced payments on acquisition of aircraft		5,667,142		2,966,923						8,634,065
Investments in jointly controlled entities		370,502		19,587						390,089
Investments in associates		703,710		55,085						758,795
Available-for-sale financial assets		61,268		181,945						243,213
Other long-term assets		874,585		542,208						1,416,793
Deferred tax assets		110,475		7,470						117,945

		62,239,079		12,608,805						83,445,763

– 197 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL

INFORMATION OF THE ENLARGED GROUP

	Pro forma adjustments
	Unaudited
	condensed			Audited
	consolidated			consolidated
	statement of			statement of				Pro forma
	assets and			assets and				consolidated
	liabilities of			liabilities of				balances of
	the Group as			the Target			Other	the Enlarged
	at 30 June			Group as at			pro forma	Group as at
	2009			30 June 2009			adjustments	30 June 2009
	RMB’000			RMB’000			RMB’000	RMB’000
	(Note 1)			(Note 2)

Current assets
Flight equipment spare parts		918,384			392,576				1,310,960
Trade receivables		1,263,507			489,262				1,752,769
Amounts due from related companies		204,757			2,935				207,692
Prepayments, deposits and other receivables		3,954,369			749,070				4,703,439
Cash and cash equivalents		3,796,963			1,951,542				5,748,505
Derivative assets		208			—				208
Non-current assets held for sale		462,700			—				462,700

		10,600,888			3,585,385				14,186,273

TOTAL ASSETS		72,839,967			16,194,190				97,632,036

LIABILITIES
Current liabilities
Sales in advance of carriage		(1,119,648	)		(194,547	)			(1,314,195	)
Trade payables and notes payable		(4,420,470	)		(1,340,061	)			(5,760,531	)
Amounts due to related companies		(476,539	)		(12,339	)			(488,878	)
Other payables and accrued expenses		(11,407,689	)		(1,744,648	)			(13,152,337	)
Current portion of obligations under finance leases		(2,018,328	)		(71,861	)			(2,090,189	)
Current portion of borrowings		(22,723,843	)		(7,203,120	)			(29,926,963	)
Income tax payable		(22,285	)		(20,250	)			(42,535	)
Current portion of provision for aircraft overhaul expenses		(333,547	)		—				(333,547	)
Derivative liabilities		(2,229,316	)		(58,037	)			(2,287,353	)

		(44,751,665	)		(10,644,863	)			(55,396,528	)

Non-current liabilities
Obligations under finance leases		(18,379,006	)		(1,048,516	)			(19,427,522	)
Borrowings		(9,851,317	)		(2,854,788	)			(12,706,105	)
Provision for aircraft overhaul expenses		(1,344,391	)		(599,063	)			(1,943,454	)
Other long-term liabilities		(1,264,318	)		(233,601	)			(1,497,919	)
Deferred tax liabilities		(41,139	)		(295	)			(41,434	)
Post-retirement benefit obligations		(1,648,420	)		(413,281	)			(2,061,701	)
Derivative liabilities		(129,578	)		—				(129,578	)

		(32,658,169	)		(5,149,544	)			(37,807,713	)

TOTAL LIABILITIES		(77,409,834	)		(15,794,407	)			(93,204,241	)

NET (LIABILITIES)/ASSETS		(4,569,867	)		399,783				4,427,795

– 198 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL

INFORMATION OF THE ENLARGED GROUP

Notes:

The balances are extracted from the unaudited condensed consolidated balance sheet of the Group as at 30 June 2009 as set out in the interim result announcement dated 10 August 2009, which is set out in Appendix II to this circular.

The adjustment represents the inclusion of the statement of assets and liabilities of the Target Group as at 30 June2009 as extracted from the accountant’s report of the Target Group as set out in Appendix I to this circular.

The adjustments reflect the allocation of the cost of the acquisition to the identifiable assets and liabilities of the Target Group, which represents:

(a)

fair value adjustment of the identifiable assets and liabilities of the Target Group

Upon completion of the Proposed Acquisition, the identifiable assets and liabilities of the Target Group will be accounted for in the consolidated financial statements of the Enlarged Group at fair value under the purchase method of accounting in accordance with International Financial Reporting Standard No. 3 ‘‘Business Combinations’’ (‘‘IFRS 3’’). The identifiable assets and liabilities of the Target Group are recorded in the unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group at their fair values estimated by the Directors with reference to a valuation report issued by an independent valuer. The pro forma adjustments represent the fair value adjustments on property, plant and equipment, intangible assets and lease prepayments of the Target Group amounting to RMB1,700,625,000 in negative, RMB379,355,000 and RMB368,351,000 respectively.

(b)

recognition of goodwill

Goodwill represents the excess of the cost of the acquisition over the estimated fair value of the identifiable net assets of the Target Group. The cost of acquisition is calculated based on the Company’s 1,694,838,860 A Shares to be issued in connection with the Proposed Acquisition and the average trading price of A Share at RMB5.28 for a period of 20 trading days up to and including 5 June 2009, being the last trading day immediately before the suspension of trading of A Shares on the Shanghai Stock Exchange prior to 30 June 2009. The estimated fair value of the identified net assets of the Target Group as at 30 June 2009 is determined based on the Target Group’s net asset value attributable to the equity holders of the Target Company amounting to RMB350,870,000 and the fair value adjustments on property, plant and equipment, intangible assets and lease prepayments as set out in Note 3(a) above.

Since the closing share price of A share on the date of Completion and the fair value of the identifiable assets and liabilities of the Target Group at the date of Completion may be substantially different from their respective values used in the Unaudited Pro Forma Financial Information, the final amount of goodwill may be different from the amount presented above.

No other adjustment has been made to reflect any trading result or other transaction of the Group and the Target Group entered into subsequent to 30 June 2009.

– 199 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL

INFORMATION OF THE ENLARGED GROUP

(II)	STATEMENT OF ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS OF THE GROUP AND UNAUDITED PRO FORMA STATEMENT OF ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS OF THE ENLARGED GROUP

The statement of adjusted consolidated net tangible assets of the Group before completion of the Proposed Acquisition is compiled based on the unaudited condensed consolidated balance sheet of the Group as at 30 June 2009 as extracted from the interim result announcement of the Company for the six months ended 30 June 2009. The unaudited pro forma statement of adjusted consolidated net tangible assets of the Enlarged Group after completion of the Proposed Acquisition is compiled based on the unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group as at 30 June 2009 as set out in this Appendix:

		Unaudited
Adjusted		pro forma
consolidated net		adjusted consolidated	Unaudited
tangible assets of		net tangible assets of	pro forma
the Group	Adjusted	the Enlarged Group	adjusted consolidated
attributable to	consolidated net	attributable to	net tangible assets of
the equity holders	tangible assets of	the equity holders of	the Enlarged Group
of the Company	the Group per Share	the Company	per Share
as at 30 June 2009	as at 30 June 2009	as at 30 June 2009	as at 30 June 2009
RMB’000	RMB’000	RMB’000	RMB’000
(Note 1)	(Note 2)	(Note 3)	(Note 4)

(5,187,366)	(0.67)	(6,190,644)	(0.66)

Notes:

The adjusted consolidated net tangible assets of the Group attributable to the equity holders of the Company as at 30 June 2009 of RMB5,187,366,000 in negative is derived from the unaudited condensed consolidated balance sheet of the Group as set out in Appendix II to this circular, which is based on the unaudited consolidated net liabilities of the Group attributable to the equity holders of the Company as at 30 June 2009 of RMB5,070,964,000 with an adjustment for intangible assets as at 30 June 2009 of RMB116,402,000.

The adjusted consolidated net tangible assets of the Group per Share as at 30 June 2009 is determined based on 7,741,700,000 Shares issued and outstanding as at 30 June 2009.

The unaudited pro forma adjusted consolidated net tangible assets of the Enlarged Group attributable to the equity holders of the Company as at 30 June 2009 of RMB6,190,644,000 in negative is derived from the unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group as set out in section I of this appendix, which is based on the unaudited pro forma consolidated net assets of the Enlarged Group attributable to the equity holders of the Company as at 30 June 2009 of RMB3,877,785,000 with an adjustment for intangible assets as at 30 June 2009 of RMB10,068,429,000.

The unaudited pro forma adjusted consolidated net tangible assets of the Enlarged Group per Share as at 30 June 2009 is determined based on 9,436,538,860 Shares assumed to be issued and outstanding as at 30 June 2009, representing 7,741,700,000 existing Shares and 1,694,838,860 new A Shares to be issued pursuant to the Proposed Acquisition.

No other adjustment has been made to reflect any trading result or other transaction of the Group and the Target Group entered into subsequent to 30 June 2009.

– 200 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL

INFORMATION OF THE ENLARGED GROUP

(III)

REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following is the text of a report received from PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular.

ACCOUNTANT’S REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF CHINA EASTERN AIRLINES CORPORATION LIMITED

We report on the unaudited pro forma financial information set out on pages 197 to 200 under the heading of ‘‘Unaudited Pro Forma Financial Information of the Enlarged Group’’ (the ‘‘Unaudited Pro Forma Financial Information’’) in Appendix III of the circular dated 25 August 2009 (the ‘‘Circular’’) of China Eastern Airlines Corporation (the ‘‘Company’’), in connection with the proposed acquisition of Shanghai Airlines Co., Ltd. (the ‘‘Proposed Acquisition’’) by the Company. The Unaudited Pro Forma Financial Information has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the Proposed Acquisition might have affected the relevant financial information of the Company and its subsidiaries (hereinafter collectively referred to as the ‘‘Group’’). The basis of preparation of the Unaudited Pro Forma Financial Information is set out on pages 197 to 200 of the Circular.

Respective Responsibilities of Directors of the Company and the Reporting Accountant

It is the responsibility solely of the directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with rule 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the ‘‘Listing Rules’’) and Accounting Guideline 7 ‘‘Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars’’ issued by the Hong Kong Institute of Certified Public Accountants (the ‘‘HKICPA’’).

It is our responsibility to form an opinion, as required by rule 4.29(7) of the Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

– 201 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL

INFORMATION OF THE ENLARGED GROUP

Basis of Opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 ‘‘Accountants’ Reports on Pro Forma Financial Information in Investment Circulars’’ issued by the HKICPA. Our work, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unaudited consolidated statement of assets and liabilities of the Group as at 30 June 2009 with the unaudited condensed consolidated financial statements of the Group as at 30 June 2009, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the directors of the Company.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to rule 4.29(1) of the Listing Rules.

Our work has not been carried out in accordance with auditing standards or other standards and practices generally accepted in the United States of America or auditing standards of the Public Company Accounting Oversight Board (United States) and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices.

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Group as at 30 June 2009 or any future date.

Opinion

In our opinion:

the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated;

such basis is consistent with the accounting policies of the Group; and

the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to rule 4.29(1) of the Listing Rules.

PricewaterhouseCoopers

Certified Public Accountants

Hong Kong, 25 August 2009

– 202 –

APPENDIX IV

MANAGEMENT DISCUSSION AND ANALYSIS

OF THE RESULTS OF THE TARGET GROUP

Shanghai Airlines is a company with its A shares listed on Shanghai Stock Exchange on 11 October 2002. Shanghai Airlines primarily engages in the business of domestic air transportation of passengers and cargo, agency business for airline companies, approved international and regional business for air transportation of passengers and cargo, domestic business flight, business flight in neighbouring countries and regions, approved management of business aircraft, and maintenance of aviation equipment and machinery.

In the last several years, the Target Group (as defined in Appendix I) has been actively developing its principal business by gradually expanding the scale of its fleet and the coverage of its airline routes, actively pursuing cooperation with other international and domestic airlines, and promoting its strategy of globalization. Until now, the scheduled flights of the Target Group connects more than 60 cities spanning the PRC and overseas, and it has ran more than 170 passenger routes, and operated a total of 68 aircraft.

RESULTS OF OPERATIONS

Revenues

For 2006, 2007, 2008 and the period from January to June 2009, the revenues generated by the Target Group amounted to RMB9,842 million, RMB12,045 million, RMB13,154 million and RMB5,328 million respectively, the breakdown of which is as follows:

	The Target Group
	Year ended 31 December									Six months ended 30 June
	2006			2007			2008			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000
										(Unaudited)

Revenues
Traffic revenues
— Passenger		6,301,485			7,467,893			8,400,729			4,057,528			3,714,386
— Cargo and mail		1,284,774			1,850,631			1,977,810			1,024,984			489,349
Revenue from tour operations		1,124,660			1,329,857			1,359,314			748,849			581,744
Revenue from export and import trading		864,655			976,116			726,413			359,026			265,779
Revenue from freight forwarding services		459,304			565,710			713,467			331,693			265,868
Others		54,796			170,911			285,139			214,798			157,070

		10,089,674			12,361,118			13,462,872			6,736,878			5,474,196
Less: Business tax		(247,625	)		(316,261	)		(308,780	)		(176,299	)		(146,176	)

		9,842,049			12,044,857			13,154,092			6,560,579			5,328,020

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APPENDIX IV

MANAGEMENT DISCUSSION AND ANALYSIS

OF THE RESULTS OF THE TARGET GROUP

In 2007, the rapid growth of demand in the aviation market contributed to a substantial growth of the revenue of the Target Group. in the year of 2008 there was a slowdown of the growth rate of the Target Group’s revenue, followed by a decrease of revenue for the period from January to June 2009, with the following primary reasons: (1) the quick decrease of demand in the aviation market under the overall economic adjustments on a global basis against the backdrop of the financial crisis; (2) the significant impact in terms of international passenger and cargo transportation in Shanghai, which has its economy more outward-oriented as a leading city in Yangtze River Delta; (3) the occurrence of natural disasters and the unexpected circumstances in 2008 as well as the spread of H1N1 flu in 2009 also had, to a certain extent, adverse impact on the demand for aviation.

Other Income

For 2006, 2007, 2008 and the period from January to June 2009, other operating income generated by the Target Group amounted to RMB4 million, RMB45 million, RMB82 million and RMB315 million respectively. The larger amount of other operating income for the period from January to June 2009 was mainly a result of the return of civil aviation infrastructure levies paid.

Operating Expenses

Operating expenses incurred by the Target Group in 2006, 2007, 2008 and the period from January to June 2009 amounted to RMB9,724 million, RMB12,444 million, RMB14,451 million and RMB5,725 million respectively, mainly comprising aircraft fuel expenses, take-off and landing charges, depreciation and amortization, wages, salaries and benefits expenses, aircraft maintenance expenses, aircraft operating lease rentals, transportation and accommodation expenses and loss/gain on fair value movements of derivative financial instrument.

(1)	Aircraft fuel

For 2006, 2007, 2008 and the period from January to June 2009, the aircraft fuel expenses of the Target Group amounted to RMB2,770 million, RMB3,704 million, RMB4,958 million and RMB1,400 million, accounting for 28.49%, 29.76%, 34.31% and 24.46% respectively of its operating expenses. The continual upsurge of aircraft fuel cost in 2007 and 2008 was mainly due to the fact that international oil prices sustained at a high level. The decrease in international oil prices in the first half of 2009 pulled down the cost of the Target Group’s aircraft fuel.

(2)	Take-off and landing charges

For 2006, 2007, 2008 and the period from January to June 2009, the take-off and landing charges of the Target Group amounted to RMB855 million, RMB1,046 million, RMB1,128 million and RMB588 million respectively, accounting for 8.79%, 8.40%, 7.80% and 10.26% respectively of the Target Group’s operating expenses. The growth of the take-off and landing charges was mainly due to the increase in the number of take-offs and landings of aircraft as a result of the expansion of its scale of operations. Since 1 March 2008, there was a certain degree of increase in the unit price of aircraft take-off and landing, under the adjustment of the fee-charging policy applicable to civil airports in the PRC. This was also an important reason for the growth of take-off and landing charges incurred by the Target Group in 2008 and the first half of 2009.

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APPENDIX IV

MANAGEMENT DISCUSSION AND ANALYSIS

OF THE RESULTS OF THE TARGET GROUP

(3)	Depreciation and amortization

For 2006, 2007, 2008 and the period from January to June 2009, the depreciation and amortization of the Target Group amounted to RMB654 million, RMB747 million, RMB726 million and RMB415 million respectively. The persistent increase was mainly due to the increase in the number of aircraft.

(4)	Wages, salaries and benefits

For 2006, 2007, 2008 and the period from January to June 2009, the wages, salaries and benefits of the Target Group amounted to RMB902 million, RMB1,192 million, RMB1,412 million and RMB778 million respectively. For the period from the end of 2006 to the first half of 2009, the Target Group had its headcount increasing from 4,542 to 5,754. The expansion in the size of its staff and the increase in wages and salaries contributed to the growth of the Target Group’s wages, salaries and benefits expenses.

(5)	Aircraft maintenance

For 2006, 2007, 2008 and the period from January to June 2009, the aircraft maintenance expenses incurred by the Target Group amounted to RMB493 million, RMB726 million, RMB963 million and RMB386 million. The growth was primarily attributable to the expansion of the scale of its fleet.

(6)	Aircraft operating lease rentals

For 2006, 2007, 2008 and the period from January to June 2009, the Target Group’s aircraft operating lease rentals amounted to RMB798 million, RMB1,103 million, RMB1,195 million and RMB590 million respectively. The growth was primarily due to the increase in the number of aircraft under operating lease which in turn was a result of the expansion of the scale of its fleet.

(7)	Transportation and accommodation

For 2006, 2007, 2008 and the period from January to June 2009, the Target Group’s transportation and accommodation expenses amounted to RMB1,034 million, RMB1,223 million, RMB1,244 million and RMB458 million respectively. The growth was primarily attributable to the expansion of the scale of its tour operations.

(8)	Loss/gain on fair value movements of derivative financial instrument

The use of hedging contract against the risk of oil price upsurge adopted by the Target Group was implemented since 2008 and there was no loss/gain on fair value movements of derivative financial instrument in 2006 and 2007. In 2008, it was a loss on fair movement of derivative financial instrument amounting to RMB182 million, whereas for the period from January to June 2009 it was a gain amounting to RMB52 million. The primary reason was the substantial drop in international oil prices in the second half of 2008, contributing to a loss on the fair value of the Target Group’s 2-year WTI hedging contracts. In the first half of 2009 when international oil prices picked up, there was a reversal of the loss in relation to that part of the fair value.

– 205 –

APPENDIX IV

MANAGEMENT DISCUSSION AND ANALYSIS

OF THE RESULTS OF THE TARGET GROUP

Finance income

For 2006, 2007, 2008 and the period from January to June 2009, the finance income of the Target Group amounted to RMB143 million, RMB283 million, RMB297 million and RMB12 million respectively. Finance income comprises primarily net foreign exchange gain. From 2006 to 2008, the persistent increase in the exchange rate of RMB contributed to the continual increase in net foreign exchange gain, and resulting in an increase in finance income. In the first half of 2009 when the appreciation of RMB slowed down, net foreign exchange gain substantially dropped and so was finance income.

Finance costs

For 2006, 2007, 2008 and the period from January to June 2009, the finance costs of the Target Group amounted to RMB274 million, RMB375 million, RMB397 million and RMB182 million respectively, among which interest on loans from banks amounted to RMB303 million, RMB399 million, RMB424 million and RMB209 million respectively. The increase in finance costs was primarily due to the persistent expansion of the scale of borrowing.

Profit/(Loss)

As a result of the foregoing, the profit/(loss) attributable to equity holders of the Target Group amounted to RMB8 million, –RMB532 million, –RMB1,199 million and –RMB271 million respectively for 2006, 2007, 2008 and the period from January to June 2009.

LIQUIDITY AND CAPITAL STRUCTURE

Cash and cash equivalents

As at 31 December 2006, 31 December 2007, 31 December 2008 and 30 June 2009, the Target Group had cash and cash equivalents of RMB622 million, RMB944 million, RMB1,056 million and RMB1,952 million. In June 2009, the Target Group has raised RMB1,000 million through non public offering and its cash and cash equivalents increased correspondingly.

For 2006, 2007, 2008 and the period from January to June 2009, net cash inflow from the Target Group’s operating activities was RMB1,491 million, RMB826 million, RMB385 million and RMB49 million respectively. The decrease in net cash inflow from operating activities in 2007 and 2008 was primarily due to the persistent upsurge of international oil prices which contributed to continual increase in cash expenditure on aircraft fuel costs. The relatively lower net cash inflow from operating activities in 2009 was mainly due to the decrease in revenue from its principal business.

For 2006, 2007, 2008 and the period from January to June 2009, the Target Group’s net cash outflow from its investing activities amounted to RMB1,993 million, RMB1,172 million, RMB1,292 million and RMB907 million respectively. The net cash outflow generated from investing activities was mainly attributable to the purchase of aircraft and equipment and the payment schedules.

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APPENDIX IV

MANAGEMENT DISCUSSION AND ANALYSIS

OF THE RESULTS OF THE TARGET GROUP

For 2006, 2007, 2008 and the period from January to June 2009, the Target Group’s net cash inflow from financing activities amounted to RMB566 million, RMB678 million, RMB1,023 million and RMB1,754 million. The persistent increase was primarily attributable to the continual expansion of the scale of bank borrowing. In June 2009, the Target Group has raised RMB1,000 million through non public offering and its cash inflow from financing activities for the period from January to June 2009 increased correspondingly.

Net current liabilities

As at 31 December 2006, 31 December 2007, 31 December 2008 and 30 June 2009, the net current liabilities of the Target Group amounted to RMB3,861 million, RMB5,258 million, RMB7,340 million and RMB7,059 million respectively.

Financial liabilities

As at 31 December 2006, 31 December 2007, 31 December 2008 and 30 June 2009, the Target Group had a debt structure which mainly comprised short-term debts with a maturity within one year. The breakdown of the Target Group’s debt profile is set out below:

	The Target Group
			Between		Between
	Less than		1 and		2 and		Over
	1 year		2 years		5 years		5 years
	RMB’000		RMB’000		RMB’000		RMB’000

At 31 December 2006
Short term debentures		800,000		—		—		—
Borrowings		2,891,292		730,380		1,769,798		1,694,534
Trade, notes and other payables		2,117,684		—		—		—

Total		5,808,976		730,380		1,769,798		1,694,534

At 31 December 2007
Short term debentures		800,000		—		—		—
Borrowings		4,123,129		783,820		1,562,454		1,221,386
Obligations under finance leases		54,784		54,590		164,089		381,686
Trade, notes and other payables		2,995,494		—		—		—

Total		7,973,407		838,410		1,726,543		1,603,072

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APPENDIX IV

MANAGEMENT DISCUSSION AND ANALYSIS

OF THE RESULTS OF THE TARGET GROUP

	The Target Group
			Between		Between
	Less than		1 and		2 and		Over
	1 year		2 years		5 years		5 years
	RMB’000		RMB’000		RMB’000		RMB’000

At 31 December 2008
Borrowings		6,332,098		863,049		1,422,724		871,174
Derivative financial instrument		172,458		—		—		—
Obligations under finance leases		103,891		106,146		329,018		862,364
Trade, notes and other payables		3,238,504		—		—		—

Total		9,846,951		969,195		1,751,742		1,733,538

At 30 June 2009
Borrowings		7,395,213		838,409		1,374,833		867,350
Derivative financial instrument		58,037		—		—		—
Obligations under finance leases		108,626		110,083		339,860		815,351
Trade, notes and other payables		3,084,709		—		—		—

Total		10,646,585		948,492		1,714,693		1,682,701

Gearing Ratio

As at 31 December 2006, 31 December 2007, 31 December 2008 and 30 June 2009, the gearing ratio of the Target Group was 0.79, 0.87, 1.04 and 0.95 respectively.

CAPITAL EXPENDITURES

Up to 2015, it is estimated that the Target Group’s capital expenditure on aircraft and aviation equipment, including deposit payment, will be approximately RMB8,130 million in aggregate, among which it is expected that RMB934 million will be expended in 2009 and RMB1,573 million in 2010. The aforesaid amounts are subject to upward adjustment to take into account stipulations under contracts, or changes in price indices. The Target Group intends to satisfy the aforesaid other capital requirements with its revenue from operations, existing credit facilities granted by banks, bank borrowings, leasing arrangements and other means of external financing.

RISK PROFILE

Liquidity risk

The Target Group’s primary cash requirements have been for additions of and upgrades to aircraft, engines and flight equipment and payments on related borrowings. It finances its working capital requirements through a combination of funds generated from operations and bank borrowings. It generally finances the acquisition of aircraft through long-term finance leases and bank loans.

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APPENDIX IV

MANAGEMENT DISCUSSION AND ANALYSIS

OF THE RESULTS OF THE TARGET GROUP

Due to the dynamic nature of the underlying businesses, the Target Group’s treasury policy aims at maintaining flexibility in funding by keeping credit lines available. At 30 June 2009, the Target Group had total un-used credit facilities of approximately RMB14.9 billion from certain banks.

Interest rate at risk

The Target Group’s interest-rate risk primarily arises from borrowings and obligations under finance leases borrowings issued at variable rates expose it to cash flow interest-rate risk.

The following table indicates the approximate change in the Target Group’s profit and loss if interest rate had been 25 bases points higher with all other variables held constant.

	The Target Group
							As at
	As at 31 December						30 June
	2006		2007		2008		2009
	RMB’000		RMB’000		RMB’000		RMB’000

Decrease in profit after tax	(13,358	)	(17,272	)	(20,642	)	(11,949	)

Foreign currency risk

The Target Group operates its business in several countries and territories. It generates its revenue in different currencies, and its foreign currency liabilities at the end of the period are much higher than its foreign currency assets. Its major liability item (purchases and leases of aircraft) is mainly priced and settled in US dollars. In addition, fluctuations in exchange rates will affect the Target Group’s costs incurred from foreign purchases such as aircraft, flight equipment and aviation fuel, and take-off and landing charges at foreign airports.

The following table details the Target Group’s exposure at the balance sheet date to major currency risk which is primarily attributable to US dollars.

	The Target Group
										As at
	As at 31 December									30 June
	2006			2007			2008			2009
	RMB’000			RMB’000			RMB’000			RMB’000

Trade and other receivables		25,192			36,510			47,144			78,824
Cash and cash equivalents		34,411			151,483			45,665			54,539
Trade and other payables		(83,328	)		(156,042	)		(149,111	)		(115,532	)
Obligations under finance leases		—			(498,956	)		(1,154,784	)		(1,120,377	)
Borrowings		(4,198,596	)		(4,303,086	)		(3,670,354	)		(4,079,153	)

Net balance sheet exposure		(4,222,321	)		(4,770,091	)		(4,881,440	)		(5,181,699	)

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APPENDIX IV

MANAGEMENT DISCUSSION AND ANALYSIS

OF THE RESULTS OF THE TARGET GROUP

Fuel price risk

The Target Group’s results of operations may be significantly affected by fluctuations in fuel prices.

For the years ended 31 December 2006, 2007 and 2008 and the six months ended 30 June 2009, if the fuel price had been 5% higher or lower with all other variables held constant (excluding the impact of fuel option contracts), the Target Group’s fuel cost would have been RMB139 million, RMB185 million, RMB248 million and RMB70 million higher or lower respectively.

EMPLOYEES AND REMUNERATION POLICY

As at 31 December 2006, 31 December 2007, 31 December 2008 and 30 June 2009, the Target Group had a headcount of 4,542, 5,256, 5,769 and 5,754 respectively. For 2006, 2007, 2008 and the period from January to June 2009, the Target Group’s expenses on wages, salaries and other benefits totaled RMB902 million, RMB1,192 million, RMB1,412 million and RMB778 million respectively. Remuneration for employees of the Target Group basically comprises basic salaries and performance- based bonuses.

CHARGES ON THE ASSETS OF THE TARGET GROUP

As at 31 December 2006, 2007 and 2008 and 30 June 2009, certain aircraft and buildings owned by the Target Group with an aggregate net book amount of approximately RMB4,547 million, RMB4,306 million, RMB4,035 million and RMB4,241 million respectively were pledged as collateral under certain loan arrangements.

PRINCIPAL ACCOUNTING POLICIES

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. The Target Group’s principal accounting policies are set forth in Note 2 to Appendix I ‘‘Financial Information of Shanghai Airlines’’ (‘‘Financial Information’’) of this circular. The Target Group adopts the accounting policies and makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

(a)	Estimated impairment of property, plant and equipment

The Target Group tests whether property, plant and equipment have been impaired in accordance with the accounting policy stated in Note 2(l) to the Financial Information as set out in Appendix I of this circular. An impairment loss is recognized for the amount by which the recoverable amount of property, plant and equipment being lower than its carrying value. The recoverable amount is the higher of an asset’s fair value less cost to sell and value in use. The calculation of value in use is based on cash flow projections approved by management in which various assumptions and estimations (including but not limited to ticket price, fuel price, load factor, aircraft daily utilisation, fuel cost and discount rate etc.) are involved. Different judgments and estimations could significantly affect the results of the calculation.

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APPENDIX IV

MANAGEMENT DISCUSSION AND ANALYSIS

OF THE RESULTS OF THE TARGET GROUP

(b)	Revenue recognition

The Target Group recognises passenger, cargo and mail revenues in accordance with the accounting policy stated in Note 2(e) to the Financial Information as set out in Appendix I of this circular. Unused tickets are recognised in traffic revenues based on management’s estimates. Management annually evaluates the balance in the SIAC and records any adjustments, which can be material, in the period the evaluation is completed.

(c)	Frequent flyer programme

(d)	Depreciation of components related to overhaul costs

(e)	Provision for costs of return condition checks for aircraft and engines under operating leases

– 211 –

APPENDIX IV

MANAGEMENT DISCUSSION AND ANALYSIS

OF THE RESULTS OF THE TARGET GROUP

(f)	Post retirement benefits

The Target Group operates and maintains defined retirement benefit plans which provide certain retirees with various retirement subsidies. The cost of providing the benefits in the defined retirement benefit plans is actuarially determined and recognised over the eligible employees’ service period by utilising various actuarial assumptions and using the projected unit credit method in accordance with the accounting policy stated in Note 2(v) to the Financial Information as set out in Appendix I of this circular. These assumptions include, without limitation, the selection of discount rate, annual rate of increase of per capita benefit payment and employees’ turnover rate etc. The discount rate is based on management’s review of local high quality corporate bonds. The annual rate of increase of benefit payments is based on the general local economic conditions. The employees’ turnover rate is based on historical trends of the Target Group. Additional information regarding the retirement benefit plans is disclosed in Note 36 to the Financial Information.

(g)

Taxation

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. In assessing the amount of deferred tax assets that need to be recognised in accordance with the accounting policy stated in Note 2(j) to the Financial Information as set out in Appendix I of this circular, the Target Group considers future taxable income and ongoing prudent and feasible tax planning strategies. In the event that the Target Group’s estimates of projected future taxable income and benefits from available tax strategies are changed, or changes in current tax regulations are enacted that would impact the timing or extent of the Target Group’s ability to utilise the tax benefits of net operating loss carry forwards in the future, adjustments to the recorded amount of net deferred tax assets and taxation expense are made.

– 212 –

APPENDIX V

GENERAL INFORMATION

1.	RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts not contained in this circular, the omission of which would make any statement herein misleading.

2.	DISCLOSURE OF INTERESTS

Directors, supervisors, chief executives and senior management

The interests of the Directors, supervisors, chief executives and senior management in the issued share capital of the Company as at the Latest Practicable Date were set out as follows:

		Number and type of shares held and nature of interest
										Capacity in which the
Name	Position	Personal		Family		Corporate		Total		A Shares were held

Liu Shaoyong	Chairman, Director		—		—		—		0	—
Li Jun	Vice-Chairman,		—		—		—		0	—
	Director
Ma Xulun	Director		—		—		—		0	—
Luo Chaogeng	Director	6,600 A Shares			—		—	6,600 A Shares		Beneficial owner
		(Note 1)						(Note 1)
Luo Zhuping	Director, Company	11,616 A Shares			—		—	11,616 A Shares		Beneficial owner
	secretary	(Note 2)						(Note 2)
Hu Honggao	Independent non-executive		—		—		—		0	—
	Director
Wu Baiwang	Independent non-executive		—		—		—		0	—
	Director
Zhou Ruijin	Independent non-executive		—		—		—		0	—
	Director
Xie Rong	Independent non-executive		—		—		—		0	—
	Director
Sandy Ke-Yaw	Independent non-executive		—		—		—		0	—
Liu	Director
Liu Jiangbo	Chairman of the		—		—		—		0	—
	Supervisory Committee
Xu Zhao	Supervisor		—		—		—		0	—
Yan Taisheng	Supervisor		—		—		—		0	—
Feng Jinxiong	Supervisor		—		—		—		0	—
Liu Jiashun	Supervisor	3,960 A Shares			—		—	3,960 A Shares		Beneficial owner
		(Note 3)						(Note 3)
Zhang Jianzhong	Vice President		—		—		—		0	—
Li Yangmin	Vice President	3,960 A Shares			—		—	3,960 A Shares		Beneficial owner
		(Note 3)						(Note 3)
Fan Ru	Vice President	3,696 A Shares			—		—	3,696 A Shares		Beneficial owner
		(Note 4)						(Note 4)
Wu Yongliang	Chief Financial Officer	3,696 A Shares			—		—	3,696 A Shares		Beneficial owner
		(Note 4)						(Note 4)

Notes:

representing approximately 0.00014% of the Company’s total issued and listed A Shares, totalling 4,737,375,000 A Shares, as at the Latest Practicable Date.

representing approximately 0.00025% of the Company’s total issued and listed A Shares, totalling 4,737,375,000 A Shares, as at the Latest Practicable Date.

– 213 –

APPENDIX V

GENERAL INFORMATION

representing approximately 0.000084% of the Company’s total issued and listed A Shares, totalling 4,737,375,000 A Shares, as at the Latest Practicable Date.

representing approximately 0.000078% of the Company’s total issued and listed A Shares, totalling 4,737,375,000 A Shares, as at the Latest Practicable Date.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors, the Company’s supervisors, chief executives or members of senior management of the Company had any interest or short position in the shares, underlying shares and/or debentures (as the case may be) of the Company and/or any of its associated corporations (within the meaning of Part XV of the SFO) which was required to be (i) notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including any interest and short position which he/she was taken or deemed to have under such provisions of the SFO); or (ii) entered in the register of interests required to be kept by the Company pursuant to section 352 of the SFO; or (iii) notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers as set out in appendix 10 to the Listing Rules.

Each of Liu Shaoyong, Li Jun and Luo Chaogeng was as at the Latest Practicable Date a director or employee of CEA Holding, which, as disclosed below, was a company having, as at the Latest Practicable Date, an interest in the Company’s shares required to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO.

Substantial shareholders

Interests in the Company

So far as is known to the Directors, as at the Latest Practicable Date, each of the following persons, other than a Director, supervisor, chief executive or member of the Company’s senior management, had an interest and/or short position in the Company’s shares or underlying shares (as the case may be) which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or was otherwise interested in 5% or more of any class of the then issued share capital of the Company:

				Interest
				As at the Latest Practicable Date
				Approximate			Approximate			Approximate
				percentage of			percentage of			percentage of
				shareholding in			shareholding in			shareholding in
	Nature of	Number of		the Company’s			the Company’s			the Company’s
	shares	shares		total issued			total issued			total issued			Short
Name of shareholder	interested	interested		share capital			A Shares			H Shares			position

CEA Holding	A Shares		4,831,375,000		62.41	%		101.98	%		—			—
CEA Holding (Note 1)	H Shares		1,927,375,000		24.90	%		—			64.15	%		—
CES Global (Note 1)	H Shares		1,927,375,000		24.90	%		—			64.15	%		—
HKSCC Nominees Limited (Notes 2 to 3)	H Shares		1,541,701,139		19.91	%		—			51.32	%		—

– 214 –

APPENDIX V

GENERAL INFORMATION

Notes:

Based on the information available to the Directors (including such information as was available on the website of the Stock Exchange) and so far as they are aware and understand, as at the Latest Practicable Date:

Such H Shares were held by CES Global, in the capacity of beneficial owner, which in turn is 100% held by CEA Holding.

Among the 1,541,701,139 H Shares held by HKSCC Nominees Limited, 189,078,000 H Shares (representing approximately 12.07% of the Company’s then total issued H Shares) were held by China National Aviation Corporation (Group) Limited in the capacity of beneficial owner, which in turn was ultimately 100% controlled by China National Aviation Holding Company.

Among the 1,541,701,139 H Shares held by HKSCC Nominees Limited, Barclays PLC had, through controlled corporations, an interest in an aggregate of 90,371,770 H Shares (representing approximately 5.77% of the Company’s then total issued H Shares). Barclays PLC was interested in the aforesaid 90,371,770 H Shares in the manner as follows:

336,970 H Shares (representing approximately 0.02% of the Company’s then total issued H Shares) were held by Barclays Global Investors Ltd in the capacity of beneficial owner, which in turn was 100% controlled by Barclays Global Investors UK Holdings Limited, which in turn was 92.3% controlled by Barclays Bank PLC, which in turn was ultimately 100% controlled by Barclays PLC;

4,790,000 H Shares (representing approximately 0.31% of the Company’s then total issued H Shares) were held by Barclays Global Investors, N.A. in the capacity of beneficial owner, which in turn was 100% controlled by Barclays California Corporation, which in turn was 100% controlled by Barclays Global Investors Finance Limited, which in turn was 100% controlled by Barclays Global Investors UK Holdings Limited, which in turn was 92.3% controlled by Barclays Bank PLC, which in turn was ultimately 100% controlled by Barclays PLC; and

85,244,800 H Shares (representing approximately 5.44% of the Company’s then total issued H Shares) were held by Barclays Global Fund Advisors in the capacity of beneficial owner, which in turn was 100% controlled by Barclays Global Investors, N.A., which in turn was 100% controlled by Barclays California Corporation, which in turn was 100% controlled by Barclays Global Investors Finance Limited, which in turn was 100% controlled by Barclays Global Investors UK Holdings Limited, which in turn was 92.3% controlled by Barclays Bank PLC, which in turn was ultimately 100% controlled by Barclays PLC.

Save as disclosed above and so far as the Directors are aware, as at the Latest Practicable Date, no other person had an interest or short position in the Company’s shares or underlying shares (as the case may be) which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO.

– 215 –

APPENDIX V

GENERAL INFORMATION

Interests in other members of the Group

So far as is known to the Directors, as at the Latest Practicable Date, each of the following persons, other than the Company or any of its Directors, supervisors, chief executives and members of the senior management, was directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the relevant member of the Group:

		Approximate
		percentage of
Subsidiary	Name of relevant substantial shareholder	shareholding

上海科技宇航有限公司	新加坡科技宇航有限公司		49	%
(Shanghai Technology Aerospace Company Limited)	(Singapore Technology Aerospace Limited)
東方航空（汕頭）經濟發展有限公司	汕頭航空用品總公司		45	%
(Eastern Airlines (Shantou) Economic Development Co., Ltd.)	(Shantou Aviation Equipment Group Company)
上海東方飛機維修有限公司	Aircraft Engineering Investment Ltd.		40	%
(Shanghai Eastern Aircraft Maintenance Co., Ltd.)
中國貨運航空有限公司	中國遠洋運輸（集團）總公司		30	%
(China Cargo Airlines Co., Ltd.)	(China Ocean Shipping (Group) Company)
上海東方遠航物流有限公司	中國遠洋運輸（集團）總公司		30	%
(Shanghai Eastern Logistics Co. Ltd.)	(China Ocean Shipping (Group) Company)
中國東方航空江蘇有限公司	江蘇省國信資產管理集團有限公司		23.89	%
(China Eastern Airlines Jiangsu Co., Ltd.)	(Jiangsu Provincial Guoxin Asset Management Group Co., Ltd.)
東航發展（香港）有限公司	大中華運通有限公司		20	%
(Eastern Airlines Development (HK) Co., Ltd.)	(Dazhonghua Yuntong Co., Ltd.)
東航大酒店有限公司	CEA Holding		14	%
(Eastern Airlines Hotel Co., Ltd.)

Save as disclosed above and so far as is known to the Directors, as at the Latest Practicable Date, no other person (other than the Directors, the Company’s supervisors, chief executives or members of senior management of the Company) had an interest or short position in the Company’s shares or underlying shares (as the case may be) which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or was directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group.

3.	NO MATERIAL ADVERSE CHANGE

The Directors confirm that there has been no material adverse change in the financial or trading position of the Group since 31 December 2008, being the date to which the latest published audited accounts of the Company have been made up.

Please also refer to section 2.9 of the circular of the Company dated 24 July 2009 relating to the financial status of the Group.

– 216 –

APPENDIX V

GENERAL INFORMATION

4.	COMPANY’S OFFICERS

Mr. Luo Zhuping, who is a holder of a Master’s degree in global economics, is a Director and the secretary of the Company.

5.	EXPERT STATEMENT

The following is the qualification of the expert who has given its opinion or advice which are contained in this circular:

Name	Qualification

PwC	Certified Public Accountants

As at the Latest Practicable Date, PwC had no beneficial shareholding interest in any member of the Group or has no right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

PwC has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its reports and references to its name in the form and context in which they are included.

As at the Latest Practicable Date, PwC was not interested, directly or indirectly, in any assets which had been since 31 December 2008 (being the date to which the latest published audited accounts of the Company were made up) acquired or disposed of by or leased to any member of the Enlarged Group, or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group.

6.	SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed service contract with any member of the Group which is not expiring or terminable by the Group within a year without payment of any compensation (other than statutory compensation).

7.	COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors or, so far as is known to them, any of their respective associates was interested in any business (apart from the Group’s business) which competes or is likely to compete either directly or indirectly with the Group’s business (as would be required to be disclosed under Rule 8.10 of the Listing Rules if each of them were a controlling shareholder).

– 217 –

APPENDIX V

GENERAL INFORMATION

8.	LITIGATION

In 2005, the family members of certain victims in the aircraft accident (the aircraft was then owned and operated by China Eastern Air Yunnan Company), which occurred in Baotou on 21 November 2004, sued the Company in a U.S. court for compensation. On 5 July 2007, pursuant to several conditions with which the Company has complied, the Superior Court of the State of California ordered the action stayed on the grounds of forum non-convenients for the purpose of permitting proceedings in the PRC. On 20 February 2008, the plaintiffs filed a motion with the Superior Court of the State of California to lift the stay, but the motion was rejected by the court on 6 May 2008. The plaintiffs filed a second motion to lift the stay on 10 July 2008. On 27 August 2008, the Superior Court of the State of California rejected the motion of the plaintiffs again. After the case entered the procedures on appeal in the California Court of Appeal, the Court of Appeal of California issued an opinion on 26 February 2009, dismissing the appeal of the plaintiffs and affirming the original order. On 18 August 2009, the Company received the complaint of the family members of certain victims from the Beijing No. 2 Intermediate People’s Court.

Save as disclosed above, as at the Latest Practicable Date, the Directors were not aware of any litigation or claim of material importance pending or threatened against any member of the Enlarged Group.

9.	TRADING AND FINANCIAL PROSPECTS OF THE ENLARGED GROUP

Trading prospects

As an aviation enterprise which performs public service functions, the operation of the Enlarged Group is linked closely to political and economic situations, both internationally and locally. As such, the operation of the Enlarged Group and of the whole sector is, to a substantial extent, subject to the risks associated with geopolitics and the outbreaks of unexpected events.

The Company is of the view that the global economy can be expected to grow in 2009, but the rate may falter. The economic growth in East Asia continues. Factors such as international oil price, imbalance in global trading and investment and the swine flu become uncertainties in the global economic environment. China’s economy is at a stage of growth, and with further system reform and opening up, the inherent impetus of economic growth and agility, spending increases gradually. In industrialized cities and town, the progress is faster, which continues to lead a faster economic growth, hence the effects of the macro-economic regulation. As such, growth in air transport demand is maintained.

The Company will seize upon the opportunity and make timely adjustments to its capacity, thereby pushing up the turnover volume in every aspect, and hence its revenue in air transport.

Financial outlook

The Directors believe that the growth of China’s air passenger and cargo traffic will recover in 2009 and beyond, reflecting a positive outlook for China’s economic and trade growth, rising domestic consumption and growth of business and leisure travel. At the same time, industry consolidation as evidenced by the restructuring undertaken by the three major airline groups in China, i.e. Air China, China Southern Airlines and the Group, will be beneficial to the establishment of a healthy and orderly market competition situation. As a result of immense market demand, the Company expects that, Chinese carriers, including the Enlarged Group, may experience positive revenue growth in 2009 subject to the impact of high aviation fuel price.

– 218 –

APPENDIX V

GENERAL INFORMATION

10.	INDEBTEDNESS OF THE ENLARGED GROUP

Borrowings

At the close of business on 30 June 2009, being the latest practicable date for the purpose of this indebtedness statement, the Enlarged Group had the following borrowings:

			Unsecured
					Non-
	Secured		Guaranteed		guaranteed		Total
	RMB’000		RMB’000		RMB’000		RMB’000

Short-term bank loans		912,491		290,000		20,753,571		21,956,062
Notes payable		166,660		—		4,092,267		4,258,927
Long-term bank loans		7,471,006		166,903		13,039,097		20,677,006
Finance lease obligations		21,517,711		—		—		21,517,711
Loan from an associate, Eastern Air Group Finance Co., Ltd.		—		—		1,617,151		1,617,151

		30,067,868		456,903		39,502,086		70,026,857

Secured short-term bank loans were secured by bank deposits of RMB954,965,000.

Notes payable were secured by bank deposits of RMB65,332,000.

Secured long-term bank loans and other loan were secured by certain aircrafts and other fixed assets with an aggregate carrying amount of RMB13,447,174,000 and RMB170,929,000 respectively.

Finance lease obligations were secured by the related aircrafts under finance leases with an aggregate carrying amount of RMB29,492,431,000 and the relevant insurance policies and bank guarantees.

The unsecured guaranteed short-term and long-term loans were guaranteed by CEA Holding.

– 219 –

APPENDIX V

GENERAL INFORMATION

Material Capital Commitments

Details of the material capital commitments of the Enlarged Group as at 30 June 2009 are set out as follows:

	RMB’000

Authorised and contracted for:
— Aircraft, engines and flight equipment		70,257,958
— Other property, plant and equipment		90,681

		70,348,639

Authorised but not contracted for:
— Other property, plant and equipment		4,309,011

Total capital commitments		74,657,650

Contracted expenditure for the above aircraft, engines and flight equipment, including deposits prior to delivery and subject to future inflation increases built into the contracts and discounts available upon delivery of the aircraft (if any), were expected to be paid as follows:

	RMB’000

Within 1 year		15,213,553
In the second year		11,849,681
In the third year		18,085,249
In the fourth year		10,886,047
Over four years		14,223,428

		70,257,958

Contingent Liabilities

In 2005, the family members of certain victims in the aircraft accident (the aircraft was then owned and operated by China Eastern Air Yunnan Company), which occurred in Baotou on 21 November 2004, sued the Company in a U.S. court for compensation. On 5 July 2007, pursuant to several conditions with which the Company has complied, the Superior Court of the State of California ordered the action stayed on the grounds of forum non convenients for the purpose of permitting proceedings in the PRC. On 20 February 2008, the plaintiffs filed a motion with the Superior Court of the State of California to lift the stay, but the motion was rejected by the court on 6 May 2008. The plaintiffs filed a second motion to lift the stay on 10 July 2008. On 27 August 2008, the Superior Court of the State of California rejected the motion of the plaintiffs again. After the case entered the procedures on appeal in the California Court of Appeal, the Court of Appeal of California issued an opinion on 26 February 2009, dismissing the appeal of the plaintiffs and affirming the original order. On 18 August 2009, the Company received the complaint of the family members of certain victims from the Beijing No. 2 Intermediate People’s Court. The management of the Group believe that a negative outcome of the case will not have an adverse effect on the financial condition and results of operations of the Company.

– 220 –

APPENDIX V

GENERAL INFORMATION

General

Save as aforesaid and apart from intra-group liabilities, the Enlarged Group did not have (a) any other debt securities issued and outstanding, and authorised or otherwise created but unissued; (b) any other term loans; (c) any other borrowings or indebtedness in the nature of borrowing including bank overdrafts and liabilities under acceptances (other than normal trade bills) or acceptance credits or hire purchase commitments; (d) any other mortgages or charges; or (e) any other material guarantees or contingent liabilities at the close of business on 30 June 2009.

11.	SUFFICIENCY OF WORKING CAPITAL

Taking into account the financial resources available to the Enlarged Group, including internally generated funds and the available banking facilities, the Directors are of the opinion that the Enlarged Group will have sufficient working capital for its present requirements, that is at least for the next 12 months from the date of this circular, in the absence of any unforeseeable circumstances.

12.	INTERESTS IN THE GROUP’S ASSETS OR CONTRACTS OR ARRANGEMENTS SIGNIFICANT TO THE GROUP

As at the Latest Practicable Date, none of the Directors or supervisors of the Company had any interest in any assets which have been, since 31 December 2008 (being the date to which the latest published audited accounts of the Company were made up), acquired or disposed of by or leased to any member of the Enlarged Group, or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group.

As at the Latest Practicable Date, none of the Directors or supervisors of the Company was materially interested in any contract or arrangement, subsisting at the date of this circular, which is significant in relation to the business of the Enlarged Group.

13.	MATERIAL CONTRACTS

On 9 November 2007, the Company entered into a subscription agreement with Singapore Airlines Limited (‘‘SIA’’) and Lentor Investment Pte. Ltd.. Simultaneously with the entering into the Investor Subscription Agreement, CEA Holding entered into a subscription agreement with the Company. On the same date, SIA and the Company entered into a cooperation agreement and a personnel secondment agreement. Details of the above agreements are disclosed in the circular of the Company dated 23 November 2007.

On 16 November 2007, CEA Holding (as the acquirer), the Company (as the seller) and 上海民航華東凱亞系統集成有限公司 (East China Cares System Co., Ltd.) (‘‘East China Cares’’) (as the seller) entered into an equity transfer agreement pursuant to which the Company and East China Cares agreed to dispose of their entire equity interests in 上海東航投資有限公司 (China Eastern Air Investment Company Limited) (‘‘CEA Investment’’) to CEA Holding. The consideration to be received by the Company and the East China Cares are approximately RMB461.9 million and RMB5.66 million respectively. Details of the above agreements are disclosed in the announcement of the Company dated 10 November 2007.

– 221 –

APPENDIX V

GENERAL INFORMATION

On 29 December 2008, CEA Holding entered into a subscription agreement with the Company, pursuant to which, CEA Holding will subscribe in cash for 1,437,375,000 new A Shares at the subscription price of RMB3.87 per A Share. On the same day, CES Global entered into another subscription agreement with the Company, pursuant to which, CES Global will subscribe in cash for 1,437,375,000 new H Shares at the subscription price of RMB1.00 per H Share. Details of the above agreements are disclosed in the circular of the Company dated 8 January 2009.

On 25 February 2009, Jin Jiang International Holdings Co., Ltd (錦江國際（集團）有限公司) (“Jin Jiang International”) entered into a subscription agreement with Shanghai Airlines, pursuant to which, Jin Jiang International will subscribe in cash for 222,222,200 new A shares of Shanghai Airlines at the subscription price of RMB4.50 per A share of Shanghai Airlines. Details of the agreement is disclosed in the announcement of Shanghai Airlines published on the Shanghai Stock Exchange on 26 February 2009.

On 10 July 2009, CEA Holding entered into a subscription agreement with the Company, pursuant to which, CEA Holding will subscribe in cash for not more than 490,000,000 new A Shares at the subscription price of not less than RMB4.75 per A Share. On the same day, CES Global entered into another subscription agreement with the Company, pursuant to which, CES Global will subscribe in cash for not more than 490,000,000 new H Shares at the subscription price of not less than HK$1.40 per H Share. Details of the above agreements are disclosed in the circular of the Company dated 24 July 2009.

On 10 July 2009, the Company and Shanghai Airlines entered into an Absorption Agreement in relation to the absorption proposal, which, if fully implemented, will involve the issue of a maximum of 1,694,838,860 A Shares by the Company to the SA Shareholders on a record date to be determined and announced by the Company and Shanghai Airlines, in exchange for all the existing issued shares of Shanghai Airlines. Details of the above agreement is disclosed in the announcement of the Company dated 10 July 2009.

Save as disclosed above, no material contract (not being contract entered into in the ordinary course of business) has been entered into by any member of the Enlarged Group within the two years immediately preceding the issue of this circular.

14.	INVESTORS WHOSE H SHARES HELD BY NOMINEE OR TRUSTEE AND HOLDERS OF ADRs DISSENTING THE ABSORPTION PROPOSAL

As stated in the Announcement, the Shareholders who dissent the Absorption Proposal may be entitled to require a third party procured by the Company to buy-back the Shares of such Shareholders pursuant to the Absorption Proposal. According to Article 172 of the Articles of Association, the dissenting right referred to above is available to the registered holders of such Shares. Accordingly, any investor who has its H Shares held by nominee (including, for example, but without limitation, any H Shares held through CCASS operated by Hong Kong Securities Clearing Company Limited by any CCASS broker/custodian participant) or trustee and wishes to exercise such dissenting right should:

– 222 –

APPENDIX V

GENERAL INFORMATION

(1)

take steps to register such H Shares under the name of such investor and take delivery of its H Shares so as to become the registered holder of such Shares prior to the EGM and the respective class meetings. Any investor who has Shares held by nominee or trustee (including, for example, without limitation, any shares held through CCASS by any CCASS broker/custodian participant) and who wishes personally to exercise the above dissenting right should take the steps to have the Shares registered in his/her/its name; or

(2)

give instructions to and/or enter into private arrangements with its nominee or trustee such that such nominee or trustee will make the request of such Shareholders who dissent the Absorption Proposal in strict compliance with the conditions and procedures set out above.

Holders of ADRs of the Company who wish to exercise the dissenting rights discussed above should take steps to present their ADRs of the Company to the Bank of New York, the Company’s Depositary, for cancellation and delivery of the H Shares so as to become registered shareholders of the Company prior to the EGM and the respective class meetings.

15.	DOCUMENTS FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the offices of Baker & McKenzie, 23rd Floor, One Pacific Place, 88 Queensway, Hong Kong for a period of 14 days (excluding Saturdays and Sundays) from the date of this circular:

(1)

the Articles of Association;

(2)

the Company’s 2007 and 2008 annual reports and the interim results announcement of the Company dated 10 August 2009;

(3)

each contract set out in the paragraph headed ‘‘Material Contracts’’ in this Appendix;

(4)

each circular issued pursuant to the requirements set out in Chapters 14 and/or 14A of the Listing Rules which has been issued since the date of the latest published audited accounts of the Company;

(5)

the accountant’s report on Shanghai Airlines from PwC as set out in Appendix I to this circular;

(6)

the report from PwC regarding the unaudited pro forma financial information of the Enlarged Group as set out in Appendix III to this circular; and

(7)

the written consent from PwC referred to in the paragraph headed ‘‘Expert Statements’’ in this Appendix.

– 223 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock code: 00670)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN THAT an extraordinary general meeting (the ‘‘EGM’’) of 中國東方航空股份有限公司 (China Eastern Airlines Corporation Limited) (the ‘‘Company’’) will be held at Shanghai International Airport Hotel (上海國際機場賓館), 2550 Hongqiao Road, Shanghai, the People’s Republic of China at 2 : 00 p.m. on 9 October 2009, or any adjournment thereof, for the purpose of considering, and if thought fit, passing, with or without modifications, the following resolutions (unless otherwise indicated, capitalized terms used in this notice shall have the same meanings as those defined in the circular of the Company dated 25 August 2009 (the ‘‘Circular’’) relating to, among other things, the absorption of Shanghai Airlines):

AS SPECIAL RESOLUTIONS

1.	‘‘THAT, the proposal for the absorption of Shanghai Airlines by the Company through share exchange be and is hereby approved, ratified and confirmed. Details of the aforesaid absorption proposal were set out in the Circular.’’

2.	‘‘THAT, the terms and conditions and the implementation of the transactions contemplated under the Absorption Agreement be and is hereby approved, ratified and confirmed.’’

‘‘THAT, the Draft Report for the Absorption of Shanghai Airlines Co., Ltd by China Eastern Airlines Corporation Limited 《中國東方航空股份有限公司換股吸收合併上海航空股份有限公司報告書（草案）》be and is hereby approved, ratified and confirmed. Details of the aforesaid draft report were contained in an overseas regulatory announcement of the Company published on the website of the Stock Exchange on 10 August 2009.’’

4.	‘‘THAT, conditional upon the passing of Resolution No. 1 above, the Board is authorized to make such appropriate and necessary amendments to the Articles of Association as they think fit to reflect the increases in the registered capital and change of shareholding of the Company.’’

AS ORDINARY RESOLUTIONS

5.	‘‘THAT, that the Company satisfies the conditions for material assets reorganization be and is hereby confirmed.’’

‘‘THAT, conditional upon the passing of Resolution No. 1 above, the Directors be and are hereby authorized to sign all such documents and/or do all such things and acts as the Directors may consider necessary or expedient and in the interest of the Company for the purpose of effecting or otherwise in connection with any transaction contemplated under Resolution No. 1 above or any matter incidental thereto.’’

– 224 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

‘‘THAT, in connection with the proposed absorption of Shanghai Airlines, the Company may provide guarantee to its wholly owned subsidiary set up for the purpose of absorbing all the assets and assuming all the liabilities of Shanghai Airlines. Details of the aforesaid guarantee to be provided by the Company were set out in section 2 of the Circular.’’

By order of the Board

中國東方航空股份有限公司

CHINA EASTERN AIRLINES CORPORATION LIMITED

Luo Zhuping

Director and Company Secretary

The Directors as at the date hereof, are:

Liu Shaoyong	(Chairman)
Li Jun	(Vice Chairman)
Ma Xulun	(Director, President)
Luo Chaogeng	(Director)
Luo Zhuping	(Director, Company Secretary)
Hu Honggao	(Independent Non-executive Director)
Wu Baiwang	(Independent Non-executive Director)
Zhou Ruijin	(Independent Non-executive Director)
Xie Rong	(Independent Non-executive Director)
Sandy Ke-Yaw Liu	(Independent Non-executive Director)

Shanghai, the PRC

25 August 2009

Notes:

1.	Persons entitled to attend the EGM

Persons who hold H Shares and are registered as holders of H Shares on the register of members maintained by Hong Kong Registrars Limited, at the close of business on Tuesday, 8 September 2009 are entitled to attend the EGM upon completion of the necessary registration procedures.

2.	Registration procedures for attending the EGM

(i)

Holders of H Shares shall deliver their attendance slips for attending the EGM, copies of transfers or copies of their share certificates or copies of receipts of share transfers, together with copies of their identity cards or other documents of identity, to the Company at its place of business at 2550 Hongqiao Road, Shanghai, the PRC (for the attention of the Office of the Secretary of the Board of Directors) (fax no: +86 21 62686116) by 4 : 00 p.m. on Friday, 18 September 2009 (if by facsimile) or between Thursday, 10 September 2009 to Friday, 18 September 2009 (if by post). If proxies are appointed by shareholders to attend the EGM, they shall, in addition to the aforementioned documents, deliver the proxy forms and copies of their identity cards or other documents of identity to the above place of business of the Company.

(ii)

Shareholders can deliver the necessary documents for registration to the Company in the following manner: in person, by post or by facsimile. Upon receipt of such documents, the Company will complete the registration procedures for attending the EGM and will despatch to shareholders voting forms by post or by facsimile. Shareholders may present the voting forms when attending the EGM as evidence of eligibility to attend the meeting.

– 225 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

3.	Appointing proxies

(i)

Shareholders who have the right to attend and vote at the EGM are entitled to appoint in writing one or more proxies (whether a member of the Company or not) to attend and vote at the meeting on their behalf.

(ii)

The instrument appointing a proxy must be duly authorized in writing by the appointor or his attorney. If that instrument is signed by an attorney of the appointor, the power of attorney authorizing that attorney to sign (or other documents of authorization) must be notarially certified. For the holders of A Shares, the notarially certified power of attorney or other documents of authorization and proxy forms must be delivered to the registrar of the Company not less than 24 hours before the time scheduled for the holding of the EGM in order for such documents to be considered valid. For the holders of H Shares, the aforementioned documents must be delivered to Hong Kong Registrars Limited, the Company’s H Share registrar, within the same time limit in order for such documents to be considered valid.

(iii)

If more than one proxy has been appointed by any shareholder of the Company, such proxies shall not vote at the same time.

4.	Duration of the EGM

The EGM is expected to last for half a day. Shareholders or their proxies attending the EGM shall be responsible for their own accommodation and travel expenses.

5.	Closure of books

The H Share register of members of the Company will be closed from Wednesday, 9 September 2009 to Friday, 9 October 2009, both days inclusive, during which period no transfer of the H Shares will be effected. As such, holders of H Shares intending to attend the EGM are therefore required to lodge their respective instrument(s) of transfer and the relevant share certificate(s) to the Company’s H share registrar, Hong Kong Registrars Limited, by 4 : 00 p.m. on Tuesday, 8 September 2009.

The address and contact details of Hong Kong Registrars Limited are as follows:

Hong Kong Registrars Limited

Rooms 1712–1716, 17th Floor, Hopewell Centre

183 Queen’s Road East

Wanchai

Hong Kong

Telephone: +852 2862 8628

Fax: +852 2865 0990

6.	Abstention from voting

No shareholder is required to be abstain from voting in respect of any resolutions.

– 226 –

NOTICE OF H SHAREHOLDERS CLASS MEETING

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock code: 00670)

NOTICE OF H SHAREHOLDERS CLASS MEETING

NOTICE IS HEREBY GIVEN THAT a class meeting of holders of H Shares (the ‘‘H Shareholders Class Meeting’’) of 中國東方航空股份有限公司 (China Eastern Airlines Corporation Limited) (the ‘‘Company’’) will be held at Shanghai International Airport Hotel (上海國際機場賓館), 2550 Hongqiao Road, Shanghai, the People’s Republic of China at 2 : 30 p.m. on Friday, 9 October 2009, or any adjournment thereof, for the purpose of considering, and if thought fit, passing, with or without modifications, the following resolutions (unless otherwise indicated, capitalized terms used in this notice shall have the same meanings as those defined in the circular of the Company dated 25 August 2009 (the ‘‘Circular’’) relating to, among other things, the absorption of Shanghai Airlines):

AS SPECIAL RESOLUTION

1.	‘‘THAT, the proposal for the absorption of Shanghai Airlines by the Company through share exchange be and is hereby approved, ratified and confirmed. Details of the aforesaid absorption proposal were set out in the Circular.’’

By order of the Board

中國東方航空股份有限公司

CHINA EASTERN AIRLINES CORPORATION LIMITED

Luo Zhuping

Director and Company Secretary

The Directors, as at the date hereof, are:

Liu Shaoyong	(Chairman)
Li Jun	(Vice Chairman)
Ma Xulun	(Director, President)
Luo Chaogeng	(Director)
Luo Zhuping	(Director, Company Secretary)
Hu Honggao	(Independent Non-executive Director)
Wu Baiwang	(Independent Non-executive Director)
Zhou Ruijin	(Independent Non-executive Director)
Xie Rong	(Independent Non-executive Director)
Sandy Ke-Yaw Liu	(Independent Non-executive Director)

Shanghai, the PRC

25 August 2009

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NOTICE OF H SHAREHOLDERS CLASS MEETING

Notes:

1.	Persons entitled to attend the H Shareholders Class Meeting

Persons who hold H Shares and are registered as holders of H Shares on the register of members maintained by Hong Kong Registrars Limited at the close of business on Tuesday, 8 September 2009 are entitled to attend the H Shareholders Class Meeting upon completion of the necessary registration procedures.

2.	Registration procedures for attending the H Shareholders Class Meeting

(i)

Holders of H Shares shall deliver their attendance slips for attending the H Shareholders Class Meeting, copies of transfers or copies of their share certificates or copies of receipts of share transfers, together with copies of their identity cards or other documents of identity, to the Company at its place of business at 2550 Hongqiao Road, Shanghai, the PRC (for the attention of the Office of the Secretary of the Board of Directors) (fax no: +86 21 62686116) by 4 : 00 p.m. on Friday, 18 September 2009 (if by facsimile) or between Thursday, 10 September 2009 to Friday, 18 September 2009 (if by post). If proxies are appointed by shareholders to attend the H Shareholders Class Meeting, they shall, in addition to the aforementioned documents, deliver the proxy forms and copies of their identity cards or other documents of identity to the above place of business of the Company.

(ii)

Shareholders can deliver the necessary documents for registration to the Company in the following manner: in person, by post or by facsimile. Upon receipt of such documents, the Company will complete the registration procedures for attending the H Shareholders Class Meeting and will despatch to shareholders voting forms by post or by facsimile. Shareholders may present the voting forms when attending the H Shareholders Class Meeting as evidence of eligibility to attend the meeting.

3.	Appointing proxies

(i)

Shareholders who have the right to attend and vote at the H Shareholders Class Meeting are entitled to appoint in writing one or more proxies (whether a member of the Company or not) to attend and vote at the meeting on their behalf.

(ii)

The instrument appointing a proxy must be duly authorized in writing by the appointor or his attorney. If that instrument is signed by an attorney of the appointor, the power of attorney authorizing that attorney to sign (or other documents of authorization) must be notarially certified. The holders of H Shares must deliver the aforementioned documents to Hong Kong Registrars Limited, the Company’s H share registrar, not less than 24 hours before the time scheduled for the holding of the H Shareholders Class Meeting in order for such documents to be considered valid.

(iii)

If more than one proxy has been appointed by any shareholder of the Company, such proxies shall not vote at the same time.

4.	Duration of the H Shareholders Class Meeting

The H Shareholders Class Meeting is expected to last for half a day. Shareholders or their proxies attending the H Shareholders Class Meeting shall be responsible for their own accommodation and travel expenses.

5.	Closure of books

The H Share register of members of the Company will be closed from Wednesday, 9 September 2009 to Friday, 9 October 2009, both days inclusive, during which period no transfer of the H Shares will be effected. As such, holders of H Shares intending to attend the H Shareholders Class Meeting are therefore required to lodge their respective instrument(s) of transfer and the relevant share certificate(s) to the Company’s H share registrar, Hong Kong Registrars Limited, by 4 : 00 p.m. on Tuesday, 8 September 2009.

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NOTICE OF H SHAREHOLDERS CLASS MEETING

The address and contact details of Hong Kong Registrars Limited are as follows:

Hong Kong Registrars Limited

Rooms 1712–1716, 17th Floor, Hopewell Centre

183 Queen’s Road East

Wanchai

Hong Kong

Telephone: +852 2862 8628

Fax: +852 2865 0990

6.	Abstention from voting

No shareholder is required to be abstain from voting in respect of the above resolution.

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