TIDMAIRC
RNS Number : 7979J
Air China Ld
14 September 2016
If you are in doubt as to any aspect of this circular, you
should consult your 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 Air China
Limited, you should at once hand this circular and the form of
proxy and the notice of attendance to the purchaser or the
transferee or to the bank, stockbroker or other agent through whom
the sale or transfer was effected for transmission to the purchaser
or transferee.
Hong Kong 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.
AIR CHINA LIMITED
(a joint stock limited company incorporated in the People's
Republic of China with limited liability)
(Stock Code:00753)
CONTINUING CONNECTED TRANSACTIONS
Independent Financial Adviser
to the Independent Board Committee and the Independent
Shareholders
OCTAL CAPITAL LIMITED
A letter from the Board is set out on pages 4 to 15 of this
circular.
A letter from the Independent Board Committee, containing its
advice to the Independent Shareholders of the Company, is set out
on pages 16 to 17 of this circular.
A letter from Octal Capital, the independent financial adviser,
containing its advice to the Independent Board Committee and the
Independent Shareholders of the Company is set out on pages 18 to
36 of this circular.
A notice convening the EGM will be dispatched by the Company in
due course. The Company will announce details of the EGM, including
the date and venue as and when available in compliance with the
articles of association of the Company and the Hong Kong Listing
Rules.
14 September 2016
Page
DEFINITIONS-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 1
LETTER FROM THE BOARD ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 4
I. Introduction -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 4
Continuing Connected Transactions--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
II. . . . . . 5
EGM----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
III. . 15
IV. Recommendation -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 15
Additional Information ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
V. . . . . . 15
LETTER FROM THE INDEPENT BOARD COMMITTEE--------------------------------------------------------------------------------------------------------------------------------------------------------------
. 16
LETTER FROM OCTAL CAPITAL----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
. 18
APPIX I - GENERAL INFORMATION------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ 37
In this circular, unless the context otherwise requires, the
following expressions have the following meanings:
"ACC Framework Agreement" the framework agreement, dated 27
October 2011, entered into
between the Company and Air China Cargo in respect of the ACC
Transactions
"ACC Group" Air China Cargo and its subsidiaries
"ACC Transactions" the continuing connected transactions
contemplated under the ACC
Framework Agreement and the New ACC Framework Agreement, as
applicable, between any member of the Group on the one hand, and
any member of the ACC Group on the other hand
"Air China Cargo" Air China Cargo Co., Ltd., a company
incorporated under the laws
of the PRC with limited liability and a non-wholly owned
subsidiary of the Company
"Board" the board of directors of the Company
"Cathay Pacific" Cathay Pacific Airways Limited, a company
incorporated in Hong Kong, whose shares are listed on the Hong Kong
Stock Exchange, the principal activity of which is the operation of
scheduled airline services
"Company" Air China Limited, a company incorporated in the PRC,
whose H shares are listed on the Hong Kong Stock Exchange as its
primary listing venue and on the Official List of the UK Listing
Authority as its secondary listing venue, and whose A shares are
listed on the Shanghai Stock Exchange
"Director(s)" the director(s) of the Company
"EGM" the extraordinary general meeting of the Company to be
held to seek Independent Shareholders' approval for, among other
things, the ACC Transactions and the proposed annual caps
thereunder
"GAC" the General Administration of Customs of the PRC ( )
"GAC Regulated Property" certain property of the Group located
in the areas subject to the
oversight and administration of the GAC in various cities of the
PRC
"Group" the Company and its subsidiaries, excluding the ACC
Group (unless otherwise provided in this circular)
"Hong Kong Listing Rules" the Rules Governing the Listing of
Securities on The Stock
Exchange of Hong Kong Limited
"Hong Kong Stock Exchange" The Stock Exchange of Hong Kong Limited
"Independent Board Committee" a board committee comprising Mr.
Pan Xiaojiang, Mr. Simon To
Chi Keung, Mr. Stanley Hui Hon-chung and Mr. Li Dajin, all being
the independent non-executive directors of the Company
"Independent Shareholders" the Shareholders of the Company
excluding Cathay Pacific and its
associates
"Latest Practicable Date" 7 September 2016, being the latest
practicable date prior to the
printing of this circular for ascertaining certain information
contained herein
"Leases of GAC Regulated Property"
the property lease contracts, each with an initial term of five
or six years, between the Company (as the lessor) and Air China
Cargo (as the lessee) in connection with the lease of certain GAC
Regulated Property, as more particularly described in Section II in
the Letter from the Board of this circular
"New ACC Framework Agreement" the framework agreement, dated 30
August 2016, entered into
between the Company and Air China Cargo in respect of the ACC
Transactions
"Octal Capital" Octal Capital Limited, a corporation licensed to
conduct Type 1 (dealing in securities) and Type 6 (advising on
corporate finance) regulated activities under the SFO, being the
independent financial adviser to the Independent Board Committee
and the Independent Shareholders in connection with the ACC
Transactions, the proposed annual caps under the New ACC Framework
Agreement and the term of the Leases of GAC Regulated Property
under the New ACC Framework Agreement
"Percentage Ratios" the percentage ratios set out in Rule 14.07
of the Hong Kong
Listing Rules, i.e., "assets ratio", "profits ratio", "revenue
ratio", "consideration ratio" and "equity capital ratio"
"PRC" the People's Republic of China, excluding, for the purpose
of this circular only, the Hong Kong Special Administrative Region,
the Macau Special Administrative Region and Taiwan
"RMB" Renminbi, the lawful currency of the PRC
"SFO" the Securities and Futures Ordinance (Chapter 571 of the
Laws of Hong Kong), as amended and modified from time to time
"Shanghai Listing Rules" the Rules Governing the Trading of
Stocks on the Shanghai Stock
Exchange
"Shareholder(s)" the shareholder(s) of the Company
AIR CHINA LIMITED
(a joint stock limited company incorporated in the People's
Republic of China with limited liability)
(Stock Code:00753)
Directors:
Non-executive Directors: Cai Jianjiang (Chairman) Cao
Jianxiong
Feng Gang
John Robert Slosar
Sai Cheung Shiu, Ian
Executive Director:
Song Zhiyong (President)
Independent non-executive Directors:
Pan Xiaojiang
To Chi Keung, Simon Hui Hon-chung, Stanley Li Dajin
Registered Address: Blue Sky Mansion 28 Tianzhu Road
Airport Industrial Zone Shunyi District
Beijing The PRC
Principal place of business in Hong Kong:
5th Floor, CNAC House 12 Tung Fai Road
Hong Kong International Airport Hong Kong
14 September 2016
To the Shareholders
Dear Sir or Madam,
CONTINUING CONNECTED TRANSACTIONS
I. INTRODUCTION
Reference is made to the announcement of the Company dated 30
August 2016 in relation to, among other things, the ACC
Transactions. The current term of the ACC Framework Agreement will
expire on 31 December 2016. As the Company expects that the ACC
Transactions will continue to be conducted after 31 December 2016,
on 30 August 2016 (after trading hours), the Company and Air China
Cargo entered into the New ACC Framework Agreement to renew and
amend the ACC Framework Agreement with a term of three years
commencing on 1 January 2017 and ending on 31 December 2019.
The purpose of this circular is to provide you with further
information on the abovementioned matters so that you can make an
informed decision on voting in respect of the relevant resolutions
at the EGM. A notice convening the EGM will be dispatched by the
Company in due course. The Company will announce details of the
EGM, including the date and venue as and when available in
compliance with the articles of association of the Company and the
Hong Kong Listing Rules.
II. CONTINUING CONNECTED TRANSACTIONS
1. The ACC Transactions
Parties and Connections of the Parties
The New ACC Framework Agreement was entered into between the
Company and Air China Cargo.
The Company's principal business activity is air passenger, air
cargo and airline-related services. The principal activity of Air
China Cargo is the operation of cargo airline services.
Air China Cargo is a 51% held subsidiary of the Company. Cathay
Pacific, a substantial Shareholder of the Company, holds more than
10% of the equity interest in Air China Cargo. Therefore, Air China
Cargo is a connected person of the Company as defined under the
Hong Kong Listing Rules.
Description of the ACC Transactions
Pursuant to the New ACC Framework Agreement, the Group will
provide the following services to the ACC Group:
-- provision of bellyhold space of the passenger aircraft
operated by the Company;
-- ground support services, such as airport apron services and
aircraft cabin cleansing services; and
-- other services, including aircraft maintenance engineering
services, engine and other aircraft related materials lease
services, property lease services (including the lease of certain
GAC Regulated Property) and labour management services.
Pursuant to the New ACC Framework Agreement, the ACC Group will
provide the following services to the Group:
-- marketing and sales services of bellyhold space provided by
the Company;
-- ground support services, such as cargo and mail ground
loading and unloading and security inspection services;
--
-- other services, including engine and other aircraft related
material lease services and property lease services.
With respect to engine and other aircraft related material lease
services and property lease services, to the extent that the Group
or the ACC Group possesses suitable engines, aircraft related
materials or premises that could meet the operating needs of the
Group or the ACC Group from time to time, the Group or the ACC
Group may enter into lease agreements with the other party pursuant
to the New ACC Framework Agreement.
Pricing Policies for the ACC Transactions
The consideration of any specific ACC Transactions shall be
agreed on arm's length negotiations between the Group and the ACC
Group and on normal commercial terms, which shall be determined in
accordance with the pricing policies set forth below on a
case-by-case basis.
The pricing policies for the ACC Transactions in relation to
services provided by the Group to the ACC Group are as follows:
-- The prices for bellyhold space provided to the ACC Group will
be determined by the Company based on the following formula: total
annual sales amount = the average sales price of bellyhold space of
the Company in the past three years * (1 + adjustment rate) * the
total volume of bellyhold space provided by the Company. The
adjustment rate generally ranges from -7% to +7%, which is
determined by the Company with reference to the average annual
revenue growth rate for air cargo services of other major aircraft
operators in the PRC and the operating costs of the Company in
connection with air transportation.
-- The prices for the ground support services provided by the
Group will be negotiated and agreed by both parties primarily on a
"cost-plus" basis, which will be determined based on the costs and
expenses of the Company, including costs of human resources and
costs of equipment, plus a margin generally ranging from 5% to 10%.
In addition, the Group will also take into account various other
factors, including the guidance from the Civil Aviation
Administration of the PRC and the International Air Transport
Association on the service prices and other terms for ground
support services, and the market prices for comparable services
provided to independent third parties or available from other
service providers.
-- The prices for other services provided by the Group will be
negotiated and agreed by both parties primarily on a "cost-plus"
basis, which will be determined based on the costs and expenses of
the Company, including costs of human resources and costs of
relevant leased items or premises (as applicable), plus a margin
generally ranging from 5% to 10%. The Group will also take into
account
--
certain other factors, including the prices for the same or
similar type of services provided to and available from independent
third parties, and the specific needs of the ACC Group.
For each individual ACC Transaction in terms of services
provided by the Group to the ACC Group, to ensure that its pricing
is on normal commercial terms, designated personnel of the Group
will be responsible for monitoring and collating the industry data
and market prices in connection with air cargo services and other
services, analysing the costs and expenses of the Group and
reporting to the management of the Company regularly. The
management will review such information and make appropriate
adjustments to the pricing of the relevant ACC Transaction when
necessary. In general, for obtaining and comparing quotations and
terms for comparable ground support services and other services
available from or provided to independent third parties, enquiries
on quotation and terms will be made to at least two independent
third parties by e-mail, facsimile or telephone.
The pricing policies for the ACC Transactions in relation to
services provided by the ACC Group to the Group are as follows:
-- With respect to ACC Group's provision of marketing and sales
services of bellyhold space to end customers, the Company will pay
commission fees to Air China Cargo primarily based on the costs and
expenses in connection with the sales and marketing of bellyhold
space to end customers by the ACC Group and the sales performance
of the ACC Group on meeting the relevant sales targets, after
taking into account the overall market conditions. For the past
three years ending 31 December 2014, 2015 and 2016, the total
commission fees (including any performance-based sales incentive
bonuses but excluding value-added tax) paid or payable to the ACC
Group each year account for approximately 8.0% to 10.2% of the
total amounts payable by the ACC Group for the Company's bellyhold
space for the same year.
-- The prices for the ground support services provided by the
ACC Group will be negotiated and determined by both parties on an
arm's length basis, after taking into account various factors,
including the guidance from the Civil Aviation Administration of
the PRC and the International Air Transport Association on the
service prices and other terms for ground support services, the
market prices for comparable services available from other service
providers and the quality of services.
-- The prices for other services provided by the ACC Group will
be negotiated and determined by both parties on an arm's length
basis with reference to comparable market prices for the same or
similar type of services by independent third parties, after taking
into account other relevant factors, including the quality of
services and the specific needs of the Group.
--
For each individual ACC Transaction in terms of ground support
services and other services provided by the ACC Group to the Group,
to ensure that its pricing is on normal commercial terms,
designated personnel of the Group will be responsible for obtaining
and verifying quotations and terms for the same or similar type of
services available from independent third parties. In general,
enquiries on quotation and terms will be made to at least two
independent third parties by e-mail, facsimile or telephone.
Please also refer to the section headed "Internal Control
Procedures" below for more information on the internal control
relating to pricing of the ACC Transactions.
Generally, payments for the ACC Transactions will be settled on
a monthly basis and paid by the Group or the ACC Group to the other
party in cash.
The Term of the New ACC Framework Agreement
The term of the New ACC Framework Agreement is three years,
commencing on 1 January 2017 and ending on 31 December 2019, which
is renewable for a successive term of three years unless being
terminated by either party to the New ACC Framework Agreement by
serving the other party notice of termination of not less than
three months expiring on any 31 December.
During the term of the new ACC Framework Agreement, the Company
(as the lessor) and Air China Cargo (as the lessee) are expected to
enter into certain Leases of GAC Regulated Property, each with an
initial term of five or six years ending by 31 December 2022 the
latest. The fact that initial term of such Leases of GAC Regulated
Property is longer than three years is primarily due to GAC's
mandatory administrative requirement that the minimum term for any
lease of GAC Regulated Property shall not be less than five years.
In this connection, pursuant to Rule 14A.52 of the of the Hong Kong
Listing Rules, the Company has engaged Octal Capital as the
independent financial adviser, to explain why a period longer than
three years is required and confirming whether it is normal
business practice for an agreement of this type to be of such
duration. Please refer to the letter from Octal Capital as set out
on pages 18 to 36 of this circular.
Reasons for and Benefits of the ACC Transactions
The Directors believe that it is in the best interest of the
Group to continue the ACC Transactions with the ACC Group having
taken into account the following factors:
-- Air China Cargo, being a company having engaged in air cargo
business for a long time, has a profound understanding of, and
extensive experience in, the air cargo business and the air cargo
industry, and therefore possesses certain advantages in promoting
the Company's air cargo business with access to the Company's
bellyhold space;
--
-- As the Company and Air China Cargo both have significant
presence in Beijing, the PRC, the aircraft related services such as
ground support and aircraft maintenance engineering services could
be easily accessible and therefore generate revenue and benefit for
the Company with low additional cost; and
-- The long established successful cooperative relationship
between the Company and Air China Cargo is able to provide
streamlined and efficient cooperation and transaction between the
Group and the ACC Group.
Historical Amounts and Proposed Annual Caps
In connection with the ACC Transactions, the table below sets
out (i) the annual caps for the aggregate amount paid or payable by
the ACC Group or the Group for each of the three years ending 31
December 2014, 2015 and 2016, respectively; (ii) the actual
aggregate amounts paid by the ACC Group or the Group for each of
the two years ending 31 December 2014 and 2015, and the estimated
aggregate amount payable for the year ending 31 December 2016,
respectively; and (iii) the proposed annual caps of amounts payable
by the ACC Group or the Group for each of the three years ending 31
December 2017, 2018 and 2019, respectively.
Historical Historical Proposed
Transactions Caps Figures Annual Caps
for the year ending 31 December
2014 2015 2016 2014 2015 2016* 2017 2018 2019
(in millions of RMB)
Amount paid/payable
by
the ACC
Group to
the
Group 6,120 7,110 8,250 4,892 4,585 4,771 5,854 7,160 8,777
Amount paid/payable
by
the Group
to the ACC
Group 1,060 1,250 1,480 792 956 1,362 1,625 1,944 2,326
* Estimated annual amount payable by the ACC Group or by the
Group to the other for the year ending 31 December 2016.
Breakdown of Historical Amounts and Proposed Annual Caps
In connection with the ACC Transactions, the table below sets
out (i) the breakdown of the actual amounts paid by the ACC Group
or the Group for each of the two years ending 31 December 2014 and
2015, and the estimated aggregate amount payable for the year
ending 31 December 2016, respectively; and (ii) the breakdown of
the proposed annual caps of amounts payable by the ACC Group or the
Group for each of the three years ending 31 December 2017, 2018 and
2019, respectively.
Transactions Historical Proposed
Figures Annual Caps
for the year ending
31 December
2014 2015 2016* 2017 2018 2019
(in millions of RMB)
Amount payable by the
ACC Group to the Group 4,892 4,585 4,771 5,854 7,160 8,777
In terms of bellyhold
space 4,482 4,045 4,176 5,182 6,429 7,977
In terms of ground
support services 94 113 120 143 169 200
In terms of other services 316 427 475 529 562 600
Amount payable by the
Group to the ACC Group 792 956 1,362 1,625 1,944 2,326
In terms of marketing
and sales services
of bellyhold 362 363 424 519 643 798
In terms of ground
support services 430 465 798 932 1,088 1,269
In terms of other services 1 128 140 174 213 259
Note: Due to rounding, the historical figure for the amount
payable by the Group to the ACC Group for the year ending 31
December 2014 does not correspond with the sum of the separate
figures in connection with various types of services for the same
period.
* Estimated annual amount payable by the ACC Group or by the
Group to the other for the year ending 31 December 2016.
The Proposed Annual Caps for the Leases of GAC Regulated
Property
The table below sets out (i) the historical aggregate amounts
paid or payable by the ACC Group to the Group in connection with
the lease of certain GAC Regulated Property for each of the three
years ending 31 December 2014, 2015 and 2016, respectively; and
(ii) the proposed annual caps for the amount payable by the ACC
Group to the Group in connection with the Leases of GAC Regulated
Property for each of the six years ending 31 December 2017, 2018,
2019, 2020, 2021 and 2022, respectively.
For the avoidance of doubt, the historical figures for the
amounts paid or payable by the ACC Group to the Group in connection
with other services for each of the three years ending 31 December
2014, 2015 and 2016 and the proposed annual caps for the amount
payable by the ACC Group to the Group in connection with the other
services for each of the three years ending 31 December 2017, 2018
and 2019 stated in the section headed "Breakdown of Historical
Amounts and Proposed Annual Caps" above have taken into account and
reflected the historical amounts and the proposed annual caps in
connection with the Leases of GAC Regulated Property stated below
for the relevant period accordingly.
Historical Proposed Annual Caps
Figures
for the year ending 31 December
2014 2015 2016* 2017 2018 2019 2020 2021 2022
(in millions of RMB)
143 143 143 180 180 180 200 200 200
* Estimated annual amount payable by the ACC Group to the Group
for the year ending 31 December 2016.
Basis for the Proposed Annual Caps
Amounts Payable by the ACC Group to the Group
In arriving at the estimated aggregate amounts payable by the
ACC Group to the Group in connection with the provision of
bellyhold space for the years ending 31 December 2017, 2018 and
2019, the Company has considered, among other things, the following
factors:
-- Expansion of fleet capacity - The bellyhold space provided to
the ACC Group will increase generally along with the expansion of
the fleet capacity of passenger aircraft of the Company. The fleet
capacity of the Company is currently expected to expand at an
annual rate of approximately 12.8% from 2017 to 2019, which is
determined by the Company primarily based on historical expansion
rates as disclosed in the Company's annual reports and the
Company's understanding and forecast of the market need.
-- Increase in unit price - Fuel costs account for a substantial
portion of the Company's operating costs. As such, any significant
fluctuations in the international oil prices could have a material
impact on our operating costs, which in return could substantially
affect the sales prices for our bellyhold space. The Company have
considered the significant fluctuations in the international oil
prices in the past few years and assumed that the unit price for
bellyhold space will rise at an annual rate of approximately 10%
from 2017 to 2019 to account for any substantial increase in
international oil prices and the increase in our costs and expenses
in connection with the expansion of our fleet capacity.
In arriving at the estimated aggregate amounts payable by the
ACC Group to the Group in connection with ground support services
provided by the Group for the years ending 31 December 2017, 2018
and 2019, the Company has considered, among other things, the
following factors:
-- Increasing need for relevant services - Due to the increase
in the bellyhold space provided to the ACC Group by the Company,
the need for ground support services by the ACC Group will
generally increase accordingly. Given that the
--
fleet capacity of the Company is currently expected to expand at
an annual rate of approximately 12.8% from 2017 to 2019, the
Company has assumed that the ACC Group's need for relevant services
will increase at the same rate.
-- Increase in unit price - The Company have assumed that the
unit price for our relevant services will generally rise at an
annual rate of 5% from 2017 to 2019 to account for the increase in
our costs and expenses primarily due to inflation and the overall
improvement in our service quality.
In arriving at the estimated aggregate amounts payable by the
ACC Group to the Group in connection with other services provided
by the Group for the years ending 31 December 2017, 2018 and 2019,
the Company has considered, among other things, the historical
transaction amounts, the increase in unit price of the Group's
services and a reasonable cushion to provide flexibility to cater
for the ACC Group's operating need from time to time. The Company
has assumed that the unit price for the relevant services provided
by the Group will generally rise at an annual rate of 5% from 2017
to 2019.
Amounts Payable by the Group to the ACC Group
For the past three years ending 31 December 2014, 2015 and 2016,
the total commission fees (including any performance-based sales
incentive bonuses but excluding value-added tax) paid or payable to
the ACC Group each year account for approximately 8.0% to 10.2% of
the total amounts payable by the ACC Group for the Company's
bellyhold space. As such, in arriving at the estimated aggregate
amounts payable by the Group to the ACC Group in connection with
the marketing and sales services of bellyhold space for the years
ending 31 December 2017, 2018 and 2019, the Company has assumed
that total commission fees (including any performance-based sales
incentive bonuses but excluding value-added tax) paid or payable to
the ACC Group each year will account for approximately 10% of the
total amounts payable by the ACC Group for the Company's bellyhold
space for the relevant year, which amounts are in turn subject to
the Company's fleet capacity and the unit price for the Company's
bellyhold space as stated above.
In arriving at the estimated aggregate amounts payable by the
Group to the ACC Group in connection with the ground support
services for the years ending 31 December 2017, 2018 and 2019, the
Company has considered, among other things, the historical
transaction amounts and the increasing need for relevant ground
support services in light of the expected expansion of the
Company's fleet capacity at an annual rate of approximately 12.8%,
and has assumed that the unit price for the relevant services
provided by the ACC Group will generally rise at an estimated
annual rate of 3.5% from 2017 to 2019.
In arriving at the estimated aggregate amounts payable by the
Group to the ACC Group in connection with other services provided
by the ACC Group for the years ending 31 December 2017, 2018 and
2019, the Company has considered, among other things, the increased
need for relevant services in light of the expected expansion of
the Company's fleet capacity at an
annual rate of approximately 12.8%, the historical transaction
amounts, the increase
in the unit price for relevant services provided by the ACC
Group and a reasonable
cushion to provide flexibility to cater for the Group's
operating need from time to time. The Company has assumed that the
unit price for the relevant services provided by the ACC Group will
generally rise at an estimated annual rate of 3.5% from 2017 to
2019.
Amounts Payable in Connection with the Leases of GAC Regulated
Property
In arriving at the estimated aggregate amounts payable by the
ACC Group to the Group under the Leases of GAC Regulated Property,
the Company has primarily considered the historical figures, the
ACC Group's need for such leases and the rent for comparable leases
available from independent third parties for similar premises in
close proximity to the property after taking into account specific
needs of the ACC Group.
Internal Control Procedures
In addition to those as disclosed in the section headed "Pricing
Policies for the ACC Transactions" above, the Group has also
adopted the following internal control procedures to ensure that
the ACC Transactions will be conducted on normal commercial terms
and in accordance with the New ACC Framework Agreement and the
pricing policies of the Group:
-- The independent auditor of the Company and the independent
non-executive Directors will conduct an annual review on the
continuing connected transactions of the Group.
-- Before entering into individual ACC Transactions, the Finance
Department, the Legal Department, the Asset Management Department
(which has a dedicated sub-division responsible for management of
connected transactions) and if applicable, certain other relevant
departments of the Company will review the proposed terms for the
individual ACC Transactions and discuss with the relevant business
department of the Group to ensure that such transactions are
conducted on normal commercial terms and in compliance with the
pricing policy of the Group before these relevant departments
approve the finalized transaction agreements according to their
authority within the Group.
-- The Asset Management Department of the Company will be
responsible for monitoring and reviewing of the balance amount of
the annual cap for the ACC Transactions on an ongoing basis and if
the annual cap for the ACC Transactions is expected to be exceeded
for a particular year, it will report to the management and take
appropriate measures in advance in accordance with the relevant
requirements of the Hong Kong Listing Rules.
-- The Audit and Risk Management Committee of the Board and the
relevant management personnel of the Company will meet at least
twice a year to discuss and review the overall adequacy and
effectiveness of the internal control policies and procedures
relating to continuing connected transactions.
--
2. Listing Rules Implications
Air China Cargo is a connected person of the Company as defined
under the Hong Kong Listing Rules, and accordingly the ACC
Transactions constitute continuing connected transactions of the
Company under Chapter 14A of the Hong Kong Listing Rules. As the
highest of the applicable Percentage Ratios in respect of the
proposed annual caps applicable to the ACC Transactions is, on an
annual basis, higher than 5.0%, the ACC Transactions and the
proposed annual caps thereunder are subject to the announcement,
reporting, annual review, circular (including independent financial
advice) and Independent Shareholders' approval requirements under
Chapter 14A of the Hong Kong Listing Rules.
As the initial term of the Leases of GAC Regulated Property is
longer than three years which is primarily due to GAC's mandatory
administrative requirement that the minimum term for any lease of
GAC Regulated Property shall not be less than five years, a letter
from Octal Capital, the independent financial adviser, explaining
why a period longer than three years is required and confirming
whether it is normal business practice for an agreement of this
type to be of such duration pursuant to Rule 14A.52 of the Hong
Kong Listing Rules, is set out on pages 18 to 36 of this
circular.
The Independent Board Committee has been formed to advise the
Independent Shareholders on the ACC Transactions and the proposed
annual caps thereunder. Octal Capital has been appointed as the
independent financial adviser of the Company to advise the
Independent Board Committee and the Independent Shareholders in
this regard.
The ACC Transactions and the proposed annual caps thereunder
will be considered and, if thought fit, approved at the EGM. Voting
will be taken by poll and Cathay Pacific, being a substantial
shareholder of the Company and Air China Cargo, together with its
associates, will abstain from voting.
The Company will comply with the continuing obligations under
Rule 14A of the Hong Kong Listing Rules and will re-comply with the
relevant Hong Kong Listing Rules if the annual caps are exceeded,
when the New ACC Framework Agreement is renewed or when there is a
material change to its terms.
Mr. Cai Jingjiang, Mr. Song Zhiyong, Mr. John Robert Slosar and
Mr. Ian Sai Cheung Shiu are considered to have a material interest
in the ACC Transactions and therefore have abstained from voting on
the relevant board resolutions of the Company in respect of the ACC
Transactions. Save as disclosed above, none of the other Directors
have a material interest in the ACC Transactions and hence no other
Director is required to abstain from voting on the relevant board
resolutions.
3. PRC Law Implications
Pursuant to the Shanghai Listing Rules, Air China Cargo is a
subsidiary of the Company in its consolidated financial statements
and any transaction between the ACC Group and the Group does not
constitute a related party transaction and is therefore exempted
from disclosure and compliance with the relevant procedures.
III. EGM
The Company will convene the EGM to consider, and if thought
fit, to approve, among other things, the ACC Transactions (and the
proposed annual caps thereunder).
A notice convening the EGM will be dispatched by the Company in
due course. The Company will announce details of the EGM, including
the date and venue as and when available in compliance with the
articles of association of the Company and the Hong Kong Listing
Rules.
Pursuant to Rule 14A.36 of the Hong Kong Listing Rules, any
connected person and any Shareholder and their associates with a
material interest in the ACC Transactions are required to abstain
from voting on the relevant resolution at the EGM. As at the Latest
Practicable Date, Cathay Pacific is a substantial shareholder of
the Company and Air China Cargo. Accordingly, Cathay Pacific and
its associates are required to abstain from voting on the
resolution in respect of the ACC Transactions.
IV. RECOMMATION
The Board (including the independent non-executive Directors)
considers that the ACC Transactions have been conducted on normal
commercial terms or on terms no less favourable than those
available to independent third parties and were entered into on a
continuing and regular basis and in the ordinary and usual course
of business of the Company, are fair and reasonable and in the
interests of the Company and the Shareholders as a whole, and that
the proposed annual caps under the ACC Transactions are fair and
reasonable.
The Board recommends that the Independent Shareholders to vote
to approve the ACC Transactions and the proposed annual caps
thereunder at the EGM.
V. ADDITIONAL INFORMATION
Your attention is drawn to the letter from the Independent Board
Committee as set out on pages 16 to 17 of this circular which
contains its recommendation to the Independent Shareholders as to
the voting at the EGM regarding the ACC Transactions and the
proposed annual caps thereunder.
Your attention is also drawn to the letter from Octal Capital as
set out on pages 18 to 36 of this circular, which contains, among
other things, its advice to the Independent Board Committee and the
Independent Shareholders in relation to the ACC Transactions as
well as the principal factors and reasons considered by it in
concluding its advice.
Your attention is also drawn to the additional information set
out in Appendices I to this circular.
By Order of the Board Cai Jianjiang Chairman
Beijing, the PRC
AIR CHINA LIMITED
(a joint stock limited company incorporated in the People's
Republic of China with limited liability)
(Stock Code:00753)
Independent Board Committee:
Mr. Pan Xiaojiang
Mr. Simon To Chi Keung
Mr. Stanley Hui Hon-chung Mr. Li Dajin
14 September 2016
To the Independent Shareholders of the Company
Dear Sirs or Madams,
CONTINUING CONNECTED TRANSACTIONS
We refer to the Circular dated 14 September 2016 ("Circular")
issued by the Company to its Shareholders of which this letter
forms a part. Terms defined in the Circular shall have the same
meanings when used in this letter, unless the context otherwise
requires.
On 30 August 2016, the Board approved the entering into of the
New ACC Framework Agreement in respect of the ACC Transactions as
set out in the Circular for a term of three years commencing on 1
January 2017 and ending on 31 December 2019, and approved the
proposed annual caps thereunder. The entry into the New ACC
Framework Agreement and the proposed annual caps thereunder are
subject to the announcement, reporting, annual review, circular
(including independent financial advice) and Independent
Shareholders' approval requirements under Chapter 14A of the Hong
Kong Listing Rules.
The terms and the reasons for the ACC Transactions are
summarised in the Letter from the Board set out on pages 4 to 15 of
this circular.
The Independent Board Committee was formed to make a
recommendation to the Independent Shareholders as to whether the
entering into of the New ACC Framework Agreement, the ACC
Transactions and the proposed annual caps thereunder are fair and
reasonable and whether such transactions are in the interest of the
Company and the Shareholders as a whole. Octal Capital has been
appointed as the independent financial adviser to advise the
Independent Board Committee and the Independent Shareholders in
this regard.
As your Independent Board Committee, we have discussed with the
management of the Company the reasons for the entering into of the
New ACC Framework Agreement, the ACC Transactions and the proposed
annual caps thereunder, their terms and the basis upon which the
terms have been determined. We have also considered the key factors
taken into account by Octal Capital in arriving at its opinion
regarding the ACC Transactions as set out in the letter from Octal
Capital on pages 18 to 36 of the Circular, which we urge you to
read carefully.
The Independent Board Committee, after taking into account,
among other things, the advice of Octal Capital, considers that the
ACC Transactions have been conducted on normal commercial terms or
on terms no less favourable than those available to independent
third parties and were entered into on a continuing and regular
basis and in the ordinary and usual course of business of the
Company, are fair and reasonable and in the interests of the
Company and the Shareholders as a whole, and that the proposed
annual caps under the ACC Transactions are fair and reasonable.
Accordingly, the Independent Board Committee recommends the
Independent Shareholders to vote in favor of the relevant ordinary
resolution as set out in the notice of the EGM.
Yours faithfully,
Independent Board Committee
Mr. Pan Xiaojiang Mr. Simon To Chi Keung
Mr. Stanley Hui Hon-chung
Mr. Li Dajin
Independent non- executive Director
Independent non- executive Director
Independent non- executive Director
Independent non- executive Director
The following is the letter of advice from Octal Capital Limited
to the Independent Board Committee and the Independent Shareholders
prepared for the purpose of inclusion in this circular.
Octal Capital Limited
802-805, 8th Floor, Nan Fung Tower
88 Connaught Road Central
Hong Kong
14 September 2016
To the Independent Board Committee and the Independent
Shareholders
Dear Sirs,
CONTINUING CONNECTED TRANSACTIONS
INTRODUCTION
We refer to our appointment as the independent financial adviser
to advise the Independent Board Committee and the Independent
Shareholders in relation to (i) the ACC Transactions and the
proposed annual caps under the New ACC Framework Agreement; and
(ii) the term of the leases of GAC Regulated Property under the New
ACC Framework Agreement. Details of which are set out in the Letter
from the Board contained in the Circular of the Company to the
Shareholders dated 14 September 2016 (the "Circular"), of which
this letter forms a part. Capitalised terms used in this letter
shall have the same meanings as those defined in the Circular
unless otherwise defined.
On 30 August 2016 (after trading hours), the Company and Air
China Cargo entered into the New ACC Framework Agreement to renew
and amend the ACC Framework Agreement for a term of three years
commencing on 1 January 2017 and ending on 31 December 2019.
Air China Cargo is a connected person of the Company as defined
under the Hong Kong Listing Rules, and accordingly the ACC
Transactions constitute continuing connected transactions of the
Company under Chapter 14A of the Hong Kong Listing Rules. As the
highest of the applicable Percentage Ratios in respect of the
proposed annual caps applicable to the ACC Transactions is, on an
annual basis, higher than 5.0%, the ACC Transactions and the
proposed annual caps are subject to independent shareholders'
approval under Chapter 14A of the Hong Kong Listing Rules.
The Independent Board Committee comprising all independent
non-executive Directors of the Company, namely Mr. Pan Xiaojiang,
Mr. Simon To Chi Keung, Mr. Stanley Hui Hon-chung and Mr. Li Dajin,
has been established to consider and advise the Independent
Shareholders that the ACC Transactions have been conducted on
normal commercial terms or on terms no less favorable than those
available to independent third parties and were entered into in the
ordinary and usual course of business of the Company, are fair and
reasonable and in the interests of the Company and Shareholders as
a whole and the proposed annual caps under the ACC Transactions are
fair and reasonable. The advice of the Independent Board Committee
as regards the ACC Transactions and the proposed annual caps
thereunder is contained in the Letter from the Board included in
this Circular.
We are not connected with the directors, chief executive and
substantial shareholders of the Company and Air China Cargo or any
of their respective subsidiaries or their respective associates or
parties acting in concert with any of them and do not have any
shareholding, directly or indirectly, in any member of the Group or
any right (whether legally enforceable or not) to subscribe for or
to nominate persons to subscribe for securities in any member of
the Group as at the Latest Practicable Date and therefore is
considered suitable to give independent advice to the Independent
Board Committee and the Independent Shareholders. During the last
two years, there was no engagement between the Company and Octal
Capital. Apart from normal professional fees payable to us in
connection with this appointment, no arrangement exists whereby we
will receive any fees or benefits from the Group or the directors,
chief executive and substantial shareholders of the Company and Air
China Cargo or any of its subsidiaries or their respective
associates or parties acting in concert with any of them.
In formulating our opinion, we have relied on the accuracy of
the information and representations contained in the Circular and
have assumed that all information and representations made or
referred to in the Circular as provided by the management of the
Company were true at the time they were made and continue to be
true as at the date of the Circular. We have also assumed that all
statements of belief, opinion and intention made by the management
of the Company respectively in the Circular were reasonably made
after due enquiry. We consider that we have reviewed sufficient
information to reach an informed view, to justify our reliance on
the accuracy of the information contained in the Circular and to
provide a reasonable basis for our advice. We have no reason to
suspect that any material facts have been omitted or withheld from
the information contained or opinions expressed in the Circular nor
to doubt the truth, accuracy and completeness of the information
and representations provided to us by the management of the
Company. We have not, however, conducted an independent in-depth
investigation into the business and affairs of the Company and Air
China Cargo and their respective associates, nor have we carried
out any independent verification of the information supplied to
us.
A. THE ACC TRANSACTIONS
Principal factors and reasons considered
In arriving at our opinion regarding the terms of the ACC
Transactions, we have considered the following principal factors
and reasons:
1. Background information of the Group
The Group's principal business activity is air passenger, air
cargo and airline-related services, including aircraft engineering
services and airport ground handling services, mainly in Mainland
China, Hong Kong and Macau. The Group has its headquarters in
Beijing, PRC with two important hubs in Chengdu and Shanghai.
The Group is the only national flag carrier of China and a
member of Star Alliance, the world's largest airline alliance. It
is also the only Chinese civil aviation enterprise listed in "The
World's 500 Most Influential Brands". As a member of Star Alliance,
the Group's network covered 1,330 destinations in 193 countries as
at 31 December 2015.
According to the annual report for the year ended 31 December
2015 ("2015 Annual Report"), the Group recorded revenue of RMB110.1
billion, representing a year-on-year increase by approximately
3.9%. The operating expenses decreased by approximately 4.3% from
approximately RMB98.7 billion for the year ended 31 December 2014
to approximately RMB94.5 billion for the year ended 31 December
2015. Fuel cost was one of the major operating expenses which was
approximately RMB24.0 billion for the year ended 31 December 2015,
representing a year-on-year decrease by 30.4% due to the reduction
in the international crude oil prices. The profit attributable to
equity shareholders of the Company increased by 83.3% from
approximately RMB3.9 billion for the year ended 31 December 2014 to
approximately RMB7.1 billion for the year ended 31 December
2015.
During the year ended 31 December 2015, the Group carried
approximately 89.8 million of passengers, representing an annual
growth rate of 8.2% from the prior year. The cargo and mail volume
reached approximately 1.7 million tonnes, representing an annual
growth of 7.2% from last year. The total fleet size had 590
aircrafts with an average age of 6.2 years. As discussed in the
2015 Annual Report, the Group has planned to introduce 50, 48 and
41 new passenger aircrafts in 2016, 2017 and 2018 respectively.
According to the result announcement for the six months ended 30
June 2016, the Group recorded revenue of approximately RMB51.0
billion, representing an increase of approximately 3.5% compared to
the same period of last year. The operating expenses were increased
by approximately 1.6% to RMB50.0 billion. Fuel cost was
approximately RMB9.7 billion, representing a decrease of
approximately 19.3% compared to the same period of last year. The
profit attributable to the equity shareholders of the Company has
been decreased by approximately 17.5% to RMB3.5 billion compared to
the six months ended 30 June 2015.
Air China Cargo is a 51% held subsidiary of the Company. Cathay
Pacific holds more than 10% of the equity interest in Air China
Cargo and is a substantial Shareholder of the Company. Air China
Cargo provides air cargo services in the PRC. Its headquarters is
in Beijing with main operating base in Shanghai. As at 31 December
2015, Air China Cargo operated 15 aircrafts with an average age of
8.54 years. Through the network of the Group, Air China Cargo has
connections to approximately 370 airfreight routes.
2. Industry overview and prospects
The following graph presents the traffic and volume of cargo and
mail in PRC during 2011 to
2015.
Source: Civil Aviation Administration of China
Note: Tonnes kilometers represent the tonnes of goods
multiplying the kilometers of distance flown.
According to the annual statistic reports published by Civil
Aviation Administration of China, the cargo and mail traffic was
decreased by 5.8% from 2011 to 2012 due to the global economy
downturn. Subsequently, the cargo and mail traffic was continuously
increasing from 2012 to 2015 and recorded a compound annual growth
rate (the "CAGR") of 8.3%. The volume of cargo and mail was also
growing substantially from approximately 5.5 million tonnes in 2012
to approximately 6.3 million tonnes in 2015, representing a CAGR of
4.9%.
We also checked to the latest available statistic report
published by Civil Aviation Administration of China, the cargo and
mail traffic of the first four months of 2016 reached approximately
8,610 million tonnes kilometres, representing an increase of 5.4%
compared to the same period of last year. The volume of cargo and
mail was approximately 2.6 million tonnes, representing an increase
of 3.3% compared to the same period of 2015. The growth of air
cargo traffic was driven by the growth of PRC domestic economy and
the recovery of global economy.
According to Boeing Current Market Outlook (2016-2035) ("CMO
Report"), the world passenger traffic is predicted to grow by 4.8%
per annum and world air cargo traffic by 4.2% per annum over the
next 20 years respectively. The CMO Report also forecasts that the
airline passenger traffic in the Asia Pacific region and China is
expected to record an annual growth rate of 6.1% per annum and 6.2%
per annum respectively from 2016 to 2035 due to China's strong
economic growth.
The below table sets out the movement of crude oil prices from
2011 to July 2016. The crude oil prices from 2011 to July 2016
recorded a negative CAGR of approximately 14.9%. The international
crude oil prices have experienced significant fluctuations in the
past five years.
3. The principal terms of ACC Transactions
The current terms of the ACC Framework Agreement will expire on
31 December 2016. As the Company expects that the ACC Transactions
will continue after 31 December 2016, the Company and Air China
Cargo has entered into the New ACC Framework Agreement to renew and
amend the ACC Framework Agreement on 30 August 2016.
Pursuant to the New ACC Framework Agreement, the Group will
provide the following services to the ACC Group:
-- provision of bellyhold space of the passenger aircrafts
operated by the Company (the "Bellyhold Services");
-- ground support services, such as airport apron services and
aircraft cabin cleaning services; and
-- other services, including aircraft maintenance engineering
services, engine and other aircraft related materials lease
services; property lease services and labour management
services.
Pursuant to the New ACC Framework Agreement, the ACC Group will
provide the following services to the Group:
-- marketing and sales services of bellyhold space provided by the Company;
--
-- ground support services, including cargo and mail ground
loading and uploading and security inspection services;
-- other services, including engine and other aircraft related
material lease services and property lease services.
The table below sets out the historical amount of ACC
Transactions during the year ended 31 December 2015 and the six
months ended 30 June 2016.
Amount paid/payable by Air China Cargo to the Group
Year ended Six months
31 December ended
2015 30 June 2016
RMB RMB
(in % (in %
million) million)
In terms of
Bellyhold Services 4,045 88.2 2,046 88.9
Ground support services 113 2.5 51 2.2
Other services 427 9.3 204 8.9
--------- ------- --------- -------
Total 4,585 100.0 2,301 100.0
--------- ------- --------- -------
Amount paid/payable by the Group to Air China Cargo
Year ended Six months
31 December ended
2015 30 June 2016
RMB RMB
(in % (in %
million) million)
In terms of
Marketing and sales
services of
bellyhold space
(namely commission
fees) 363 38.0 212 34.3
Ground support services 465 48.6 332 54.0
Other services 128 13.4 72 11.7
--------- ------- --------- -------
Total 956 100.0 616 100.0
--------- ------- --------- -------
We have reviewed the ACC Group's 2016 annual budget and
understand from the management that the estimated amount of
Bellyhold Services paid/payable by Air China Cargo to the Group
for
the year ending 31 December 2016, which is roughly an annualized
amount of the actual amount for the six months ended 30 June 2016,
is based on the annual sales target agreed between the Group
and
Air China Cargo. The estimated amount of marketing and sales
services of bellyhold space paid/ payable by the Group to the Air
China Cargo for the year ending 31 December 2016 is also roughly an
annualized amount of the actual amount incurred during the first
six months of 2016.
We also understand from the management that the estimated amount
of the ground support services and other services provided by Air
China Cargo or the Group to the other for the year ending 31
December 2016 have considered the following factors: (i) the actual
performances of the first half year of 2016; (ii) the services
demand in the second half year of 2016 will be at least similar to
the first half year of 2016; and (iii) the seasonal factor in the
second half of 2016.
In addition, we have reviewed the amount paid/payable by the
Group or by Air China Cargo to the other for the first half year of
2015 and second half year of 2015. We note that the amount paid by
Air China Cargo to the Group in the second half year of 2015 was
higher than that in the first half year of 2015 by approximately 5%
and the amount paid by the Group to Air China Cargo in the second
half year of 2015 was higher than the first half year of 2015 by
approximately 61%.
In light of the above reasons, we consider that the estimated
transaction amount for the year ending 31 December 2016 is fair in
general.
Reasons for and benefits of the ACC Transactions
As set out in the Letter from the Board, the Directors believe
that it is in the best interest of the Company to continue the ACC
Transactions with the ACC Group having taken into account of the
following factors:
-- Air China Cargo, being a company having engaged in air cargo
business for almost 13 years, has a profound understanding of, and
extensive experience in, the air cargo business and the air cargo
industry, and therefore possesses advantages in promoting the
Company's air cargo business with access to the Company's bellyhold
space; and
-- As the Company and Air China Cargo both have significant
presence in Beijing, the PRC, the aircraft related services such as
ground support and aircraft maintenance engineering services could
be easily accessible and provided for the Company at lower
additional cost;
Air China Cargo was established in 2003 and its principal
activity is the operation of cargo airline services and is a
dominant player in the air cargo services market in the Yangtze
River Delta region of the PRC. Pooling the resources of the Company
and Air China Cargo together will be able to achieve improved
economies of scale. The cooperative relation between the Company
and Air China Cargo has been commenced since 2003. The long
established successful cooperation is able to provide streamlined
and efficient cooperation between the Company and Air China
Cargo.
Moreover, according to the 2015 Annual Report, the available
freight tonne kilometres (the "AFTKs") (measuring the cargo
capacity of the Company) of Air China Cargo reached 11,175 million,
representing a year-on-year increase of 18.4%. Its revenue freight
tonne kilometres (the
"RFTKs") reached 6,012 million, representing a year-on-year
increase of 16.1%. The volume of
cargo and mail was approximately 1.32 million tonnes,
representing a year-on-year increase of 7.2%. Air China Cargo is
actively expanding its international cargo network and promoting
new businesses and products in the areas of mail, express delivery
and special cargo services. Air China Cargo have accelerated its
development of the Shanghai transit hub in which the volume of
cargo transited through Shanghai increased by 76% over the previous
year.
Having considered (i) Air China Cargo has profound understanding
of, and extensive experience in, the air cargo business and the air
cargo industry; (ii) Air China Cargo has handled the air cargo
capability of the Company in the PRC for almost 13 years and have
established a successful cooperation relationship with Air China;
and (iii) Air China Cargo plays an important role in the air cargo
and mail business segment of the Group, we concur with the
Directors' view that it is in the interests of the Company to
continue the ACC transactions and enter into the New ACC Framework
Agreement.
4. Proposed Annual Caps of the ACC Transactions under the New ACC Framework Agreement
Amount payable by the ACC Group to the Group
The table below sets out the proposed annual caps of amounts
payable by ACC Group to the Group for each of the three years
ending 31 December 2017, 2018 and 2019, respectively.
Year ending 31 December
% to % to % to
RMB (million) 2017 total 2018 total 2019 total
In terms
of
Bellyhold
Services 5,182 88.5 6,429 89.8 7,977 90.9
Ground support
services 143 2.4 169 2.4 200 2.3
Other services 529 9.1 562 7.8 600 6.8
------- ----------- ------- ----------- ------- ----------
Total 5,854 100.0 7,160 100.0 8,777 100.0
------- ----------- ------- ----------- ------- ----------
In the course of assessing the reasonableness of the proposed
annual caps, we have obtained information from the Company on the
basis of determination and assumptions of the proposed annual caps
under the New ACC Framework Agreement and understand that the
proposed annual caps are mainly based on the expected amount of
Bellyhold Services and ground support services payable by the ACC
Group for the coming three years.
We have reviewed the financial information provided by the
Company and note that the amount paid/payable by Air China Cargo to
the Group in relation to Bellyhold Services and ground support
services accounted for 90.7% and 91.1% of the total amount
paid/payable by Air China Cargo to the Group during the year ended
31 December 2015 and the six months
ended 30 June 2016 respectively. Since the Bellyhold Services
and ground support services are the major transactions conducted
between the Group and the ACC Group, we agree with the management
of the Company that the determination of proposed annual caps
should be mainly based on the expected amount of Bellyhold Services
and ground support services payable by the ACC Group for the coming
three years. The expected amount of Bellyhold Services and ground
support service is primarily based on the following assumptions,
(i) the fleet capacity of the Company is expected to expand at an
annual rate of approximately 12.8% from 2017 to 2019; (ii) the unit
air transportation price of Bellyhold Services is expected to
increase at an annual rate of approximately 10% from 2017 to 2019;
(iii) the unit prices of ground support services and other services
are expected to increase at an annual rate of approximately 5% from
2017 to 2019; and (iv) the market conditions.
(i) Expansion of fleet capacity
The Company operated a fleet of 334 and 360 aircrafts as at 31
December 2014 and 2015, with an average age of 6.3 years in 2015.
During the year ended 31 December 2014, the Company introduced 40
aircrafts and phased out 22 aircrafts. During the year ended 31
December 2015, the Company introduced 35 aircrafts and phased out
nine aircrafts. As advised by the management of the Company, the
Company has an aircraft introduction and phase out plan for the
years 2017 to 2019 and the number of new aircrafts will be at least
increased in a similar scale as 2015.
According to the internal statistics provided by the Company,
the AFTKs was increased by an average annual rate of 12.3% from
2012 to 2015.
Based on the historical growth of new aircrafts and cargo
capacity and the fleet expansion plan, we concur with the
Directors' view that the available bellyhold cargo space and the
need for ground support services and other relevant services by the
Group will increase along with the expansion of fleet capacity from
2017 to 2019 at an annual rate of approximately 12.8%
(ii) Change of unit price of Bellyhold Services
As advised by the management of the Company, the unit price for
Bellyhold Services is expected to increase at an annual rate of
approximately 10% from 2017 to
2019 based on an assumption that international oil prices may
gradually increase from
2017 to 2019. As disclosed in the 2013, 2014 and 2015 annual
reports of the Company,
the fuel cost is the Group's major operating cost. The total
fuel cost of the Group was RMB33.7 million, RMB34.5 million and
RMB24.0 million, which accounted for 35.9%, 35.0% and 25.4% of the
total operating costs, during the years ended 31 December
2013, 2014 and 2015 respectively. We understand from the
management that the
decrease in the fuel cost was mainly due to the reduction in the
international crude oil
price from USD98.6 per barrel in 2013 to USD47.3 in 2015 even
the traffic capacity increased. The oil price is affected by
various factors, such as market demand and
supply, US dollar exchange rate and political environment and
these factors are out of
the Company's control. The management of the Company also
explained that the selling
price of bellyhold spaces will be adjusted upward when the oil
price increases in order to reduce the cost pressure of the
Company. We note that the international crude price bounced back
from USD31.7 per barrel in January 2016 to USD41.5 per barrel in
July 2016, representing an increment of 30.9% in the first seven
months of 2016. Taking into account of the significant fluctuation
of international crude oil price in the past few years, the
increment of international crude oil price in the first seven
months of 2016 and the pressure of fuel cost to the Group, we
concur with the Directors' view that the growth rate of unit price
for Bellyhold Services will be approximately 10% per year from 2017
to 2019.
(iii) Change of unit prices for ground support services and other services
As advised by the management of the Company, the unit prices for
ground support services and other services are expected to increase
at an annual rate of approximately 5% from 2017 to 2019, taking
into account of the price inflation leading to higher operating
cost and the overall improvement in service quality.
We understand from the management of the Company that the
service quality, which refers to those services with higher unit
air transportation prices, will be enhanced through the adjustment
of international cargo network coverage and sales and marketing
strategies to promote the delivery services with higher unit air
transportation prices, for example, bulk volume of express delivery
services, hazardous goods and delicate electronic products,
etc.
We note that the inflation rates of 2014 and 2015 in the PRC are
approximately 2.0% and 1.4% respectively.
Provided that the Company is improving its service quality and
facing higher operating costs due to price inflation, we concur
with the Directors' view the unit prices of ground support services
and other services are expected to grow at an annual rate of
approximately 5% from 2017 to 2019.
(iv) Improvement in market conditions
According to the National Bureau of Statistics of China, the
gross domestic products ("GDP") of the PRC has been growing from
approximately RMB59,042 billion in 2013 to approximately RMB67,671
billion in 2015 (preliminary statistics announced on 20 January
2016). The GDP growth rate of 2015 was approximately 6.9% compared
to last year. According to World Economic Outlook Update issued by
International Monetary Fund in January 2016, the growth in China is
predicted to be around 6.3% in 2016 and 6.0% in 2017. The estimated
growth of GDP in 2016 and 2017 implies that the aviation market in
China will benefit from the domestic growth.
Moreover, we note that the Group has been continuously opening
up new destinations in recent years. During the years ended 31
December 2014 and 2015, the Group introduced 16 and 65 new routes
(including reopening of old routes) respectively. The Group is
working towards adding more destinations in the future.
In view of the historical economic data and forecasted market
trend, it is reasonable to increase the proposed annual caps of the
ACC transactions between the ACC Group and the Group. We concur
with the Directors' view that the demand of air cargo service is
expected to increase in line with the growth in the air cargo
traffic market and therefore a reasonable buffer has been included
in the annual cap of other services to cater for the ACC Group's
operating needs.
In arriving the proposed annual caps for the year ending 31
December 2017 payable by the ACC Group to the Group, the Company
has considered various factors for each service segment based on
the estimated amount paid/payable by Air China Cargo to the Group
for the year ending 31 December 2016. The proposed annual cap of
the Bellyhold Services is based on the annual fleet capacity growth
of 12.8% and the unit price growth rate of 10.0% per annum. The
proposed annual cap of the ground support services is based on the
annual fleet capacity growth of 12.8% and the unit price growth
rate of 5.0% per annum. The proposed annual cap of other services
had made reference to the growth of transaction amount in relation
to other services from the year ended 31 December 2014 to the year
ended 31 December 2015 by approximately 11.2% which has already
included the unit price growth rate of 5.0% per annum.
In light of the above, we are of the view that the Group has
taken into the appropriate factors including, (i) the expansion of
fleet capacity; (ii) the change of unit price of Bellyhold
Services; (iii) the change of unit prices for ground support
services and other services; and (iv) the change in market
conditions, when determining the annual caps for the amounts
payable by the ACC Group to the Group and we agree that the
proposed annual caps for each of the years ending 31 December 2017,
2018 and 2019 are fair and reasonable.
Amount payable by Group to the ACC Group
Year ending 31 December
% to % to % to
RMB (million) 2017 total 2018 total 2019 total
In terms of
Marketing and
sales services
of bellyhold space
(namely commission
fees) 519 31.9 643 33.0% 798 34.3%
Ground support
services 932 57.4 1,088 56.0% 1,269 54.6%
Other services 174 10.7 213 11.0% 259 11.1%
------- ---------- ------- ---------- ------- ----------
Total 1,625 100.0 1,944 100.0 2,326 100.0
------- ---------- ------- ---------- ------- ----------
We have reviewed the financial information provided by the
Company that the amount paid/payable by the Group to Air China
Cargo in relation to the commission fees and ground support
services accounted for approximately 86.6% and 88.3% of the total
amount paid/ payable by the Group to Air China Cargo during the
year ended 31 December 2015 and the six months ended 30 June 2016.
The commission fees are calculated based on the amount of Bellyhold
Services payable by the ACC Group. We understand from the
management of the Company that the Bellyhold Services and ground
support services are closely related and therefore the needs of
ground support services will be increased in line with the growth
of the Bellyhold Services. We agree with the management of the
Company that the determination of proposed annual caps is also made
reference to the fleet capacity growth rate of the Company at
approximately 12.8% as discussed above.
The commission fees (including any performance-based sales
incentive bonuses but excluding value-added tax) paid/payable by
the Group to Air China Cargo accounted for approximately 8.1%, 9.0%
and 10.4% of the total amount of Bellyhold Services paid by the Air
China Cargo to the Group during the two years ended 31 December
2014 and 2015 and the six months ended 30 June 2016. On top of the
average commission rate of approximately 9.1%, the Company also
considers the impact of potential out-performance bonus which is
part of the commission fee and calculated based on the amount of
Bellyhold Services and the pre- determined sales target, times a
bonus rate negotiated by the Company and Air China Cargo on a
yearly basis. Based on the historical commission fee ratios and the
potential out-performance bonus, the Company assumes that the
commission fee is expected to be approximately 10% of the amount of
Bellyhold Services payable by the ACC Group.
We also note that the ground support services fees paid by the
Group to Air China Cargo had increased by approximately 8.1% from
2014 to 2015 and the inflation rates of 2014 and 2015 in the PRC
are approximately 2.0% and 1.4% respectively. Taking into account
of
the historical growth of amounts paid/payable by the Group and
the historical inflation rates,
we concur with the Directors' view that the unit prices of the
ground support services and other services to be provided by the
ACC Group from 2017 to 2019 will be increased by approximately 3.5%
per annum.
As advised by the management of the Company, the fleet expansion
plan also increases the Group's demand for the ground support
services and other services and thus the needs of the ground
support services and the other services will increase in line with
the fleet expansion capacity. The ground support services and other
services are supporting services to the passenger aircrafts of the
Company and thus we agree that the needs of ground support services
and other services provided by the ACC Group will grow at the same
rate as the fleet capacity.
Having considered (i) the historical commission ratio in
relation to the marketing and sales services of bellyhold space;
(ii) the higher demands of ground support services and other
services due to the growth of fleet capacity at 12.8% per year; and
(iii) the expected increase in the unit prices of ground support
services and other services, we concur with the Directors' view
that the proposed annual caps for each of the three years ending
2017, 2018 and 2019 are fair and reasonable.
5. Pricing Policy of the ACC Transactions
The consideration of any specific ACC Transactions shall be
agreed between the Group and the ACC Group on arm's length
negotiation in accordance with the pricing policies disclosed in
the Letter from the Board of this circular on a case-by-case
basis.
The pricing policies for the ACC Transactions in relation to
services provided by the Group to the ACC Group as below:
-- The Company will continue to provide bellyhold space of its
passenger aircrafts to the
ACC Group for its onward sales to end customers. The pricing
terms will be negotiated
and determined by the Company and the ACC Group based on the
formula: total annual sales amount = the average sales prices of
bellyhold space of the Company in the past
three years * (1+adjustment rate) * the total volume of
bellyhold space provided by the Company. The adjustment rate
generally ranges from -7% to +7%, which is determined
by the Company with reference to the average revenue growth rate
for air cargo services
of other major aircraft operators in the PRC and the operating
costs of the Company in connection with air transportation. To
assess the reasonableness of the adjustment rate,
we have reviewed the internal calculation of the adjustment
rates for the years from
2013 to 2015 and checked to the cargo and mail revenue of the
Group, China Eastern Airlines Corporation Limited and China
Southern Airlines Company Limited as
disclosed in their annual reports. We note that the Company has
made reference to the cargo and mail revenue growth rate of China
Eastern Airlines Corporation Limited and China Southern Airlines
Company Limited in calculating the adjustment rate. During
the year ended 31 December 2015, the cargo and mail revenue of
China Eastern
Airlines Corporation Limited decreased by approximately 11.4%
and that of China Southern Airlines Company Limited decreased by
approximately 4.5%. Taking the
--
average growth rate of these two comparable airlines and the
Company's own cargo and revenue growth in the year ended 31
December 2015, the adjustment rate is approximately -7.0%. To
ensure the fairness and the reasonableness of the terms of
Bellyhold Services agreement, the agreement is being classified as
Type 1 contract in the Company's internal control system and this
contract was reviewed and approved by the Finance Department, the
Asset Management Department and the Legal Department.
-- Regarding the prices for ground support services provided by
the Group to the ACC Group, the prices will be negotiated and
agreed by both parties primarily based on a "cost-plus" model and
the margin is generally within the range from 5% to 10%. We have
reviewed the cost calculation of ground support services and
discussed with the management of the Company and we note that the
margin of ground support services were within the range of 5% to
10%, depending on the types of aircrafts. The price determination
of ground support services provided by the Group to the ACC Group
considers various factors, including the guidance from the Civil
Aviation Administration of the PRC and the price and terms of
ground support services issued by International Air Transport
Association. We have reviewed the relevant regulations, a standard
ground handling agreement from an independent third party and the
existing service agreement of ground support services between the
Company and Air China Cargo and discussed the pricing determination
process with the management of the Company. We understand that the
price of ground support services had made reference to the pricing
guidance from the Civil Aviation Administration of China ("
[2007]159 ") and the pricing guidelines and standard agreement
published by the International Air Transport Association. We also
understand from the management of the Company that they consider
other factors, including but not limited to, the prevailing market
prices, the staff cost and the required quality of services. To
assess the fairness and reasonableness of the current pricing
agreement, we have reviewed two ground support service agreements
with independent third parties and discussed with the management of
the Company and we found that the terms of the existing ground
support services agreement between the Company and Air China Cargo
are comparable to those terms offered to an independent third
party. We also note that the ground support service agreement
between the Company and Air China Cargo was classified as Type 2
contract under the Company's internal control system and the
agreement was jointly reviewed and approved by at least three
different departments of the Company, including the Finance
Department.
-- To determine the prices for other services provided by the
Group to the ACC Group, the Company will be based on a "cost-plus"
model and the margin is generally within the range of 5% to 10%. We
reviewed the cost calculation of other services for the years
ended 31 December 2014 and 2015 and note that the margin of
these other services
were within the range of 5% to 10%. Regarding, the price
determination of other
services, which was provided by the Group to the ACC Group,
takes into account of a number of factors, including the labour
costs, the specific needs of the other party and prices of the
same/similar services offered to independent third parties, if
available. We understand from the management of the Company that
the rent payable by the ACC
Group for the property lease services (one of the other services
provided by the Group
--
to the ACC Group) will be determined based on, including but not
limited to, the leasing services available with independent third
parties for the same or similar type of properties in a nearby
location and consider other relevant factors, including property
quality and specific needs of the lessees. We have reviewed a
property lease agreement entered between an independent third party
and Air China Cargo and note that the rent payable/paid by Air
China Cargo to the Company during 2014 to 2016 is comparable to a
similar leasing transaction with an independent third party. Also,
as advised by the management of the Company that the said rent
determination will also take into account of its operating costs
and required investment return. To ensure the fairness and the
reasonableness of the terms of property lease agreement, the
agreement is being classified as Type 1 contract in the Company's
internal control system and this contract was reviewed and approved
by the Finance Department, the Asset Management Department and the
Legal Department.
The pricing policies for the ACC Transactions in relation to
services provided by the ACC Group to the Group as below:
-- Regarding the marketing and sales services of bellyhold space
to the end customers conducted by the ACC Group, the Company will
pay commission fees to Air China Cargo primarily based on (i) the
costs and expenses in connection with the sales of bellyhold space
to end customers; (ii) the sales performance of the ACC Group on
meeting the relevant sales targets; and (iii) the overall market
condition of the cargo and mail business. We checked to the
commission fees paid/payable by the Group to Air China Cargo for
the years ended 31 December 2014 and 2015 and the six months ended
30 June 2016 and noted that the commission fees accounted for
approximately 8.1%, 9.0% and 10.4% of the total amount of Bellyhold
Services paid/payable by the Air China Cargo to the Group
respectively. We understand from the management of the Company that
the fluctuation of the average commission rate was due to the
performance-based sales incentive bonus which was dependent on
whether the sales of bellyhold space could meet the annual sales
targets.
-- In arriving the prices of ground support services provided by
the ACC Group to the Group, similar to the pricing determination
process of the ground support services provided by the Group to the
ACC Group, the Company makes reference to (i) the pricing guidance
from the Civil Aviation Administration of China (" [2007]159 ") and
the pricing guidelines and standard agreement published by the
International Air Transport Association; (ii) market prices of
comparable services from other service providers (if available) and
(iii) quality of services required.
-- In arriving the price of other services provided by the ACC
Group to the Group, the Company also takes into consideration of
market prices of comparable services from other service providers
(if available), quality of services required and specific needs of
the Group.
--
We reviewed some contracts relating to the marketing and sales
of bellyhold space, ground support services and other services
provided by the ACC Group to the Group and note that these
contracts were also reviewed and approved by different departments
of the Company.
In light of the above, we consider the pricing policies of ACC
Transactions provided by the Group or by the ACC Group to the other
during the years ended 31 December 2014 and 2015 are on normal
commercial terms given that they had gone through a series of
internal review procedures and subject to annual review by the
independent executive directors and the auditor of the Company as
detailed in the section headed"Internal Control".
The New ACC Framework Agreement, except for the Leases of GAC
Regulated Property, will have a term of three years commencing on 1
January 2017 and ending on 31 December 2019 and the New ACC
Framework Agreement is renewable for successive terms of three
years unless being terminated by either party by serving the other
party notice of termination of not less than three months expiring
on any 31 December.
During the three-year period of New ACC Framework Agreement, the
Company (as the lessor) and Air China Cargo (as the lessee) are
expected to enter into certain Leases of GAC Regulated Properties
in which the ACC Group will primarily lease warehouses and office
space in Hangzhou International Airport and Beijing Capital
International Airport from the Company for an initial term of five
or six years ending by 31 December 2022 the latest. These
warehouses and office space are located in the areas subject to the
oversight and administration of the GAC. The reason to have the
initial term of five or six years is due to the local government
authority's mandatory administrative requirements as to the minimum
lease term of properties located in the areas that are subject to
the oversight and supervision of the GAC.
We have reviewed the Measure of the PRC for the Administration
of Places under Customs Supervision General (" ") issued by the
Administration of Customs of the PRC with effective from 1 March
2008 and note that the lease term of property, which is used for
loading, unloading, storage, delivery and shipping of import and
export goods in the areas that are subject to the oversight and
supervision of the GAC is required to be at least five years. The
current properties leased by Air China Cargo from the Company are
located inside the cargo terminals of Hangzhou International
Airport and Beijing Capital International Airport and these areas
are subject to the governance of the GAC. Their lease terms will be
renewed during the periods from 2017 to 2019. In this regard, the
lease term of five or six years can comply with statutory
requirements.
The table below sets out the proposed annual caps of amounts
payable by the ACC Group to the Group, in relation to the leases of
certain GAC Regulated Property from the years ending 31 December
2017 to 2022.
For the year ending 31 December
2017 2018 2019 2020 2021 2022
(in millions of RMB)
180 180 180 200 200 200
The proposed annual caps of the amount payable by the ACC Group
to the Group have included the above proposed annual caps in
relation to the leases of certain GAC Regulated Property,
representing approximately 3.1%, 2.5% and 2.1% of the total
proposed annual caps of for each of the three years ending 31
December 2017, 2018 and 2019 respectively.
As advised by the management of the Company, the demand of
leased areas and properties by the ACC Group is expected to
increase as the cargo and mail business of the ACC Group will be
growing in line with the Bellyhold Services as discussed above.
Having considered (i) the potential growth of Bellyhold Services
and (ii) the actual amounts in relation to the lease of GAC
Regulated Property was approximately RMB143 million for the year
ending 31 December 2016, we concur with the management that the
proposed annual caps in relation to the leases of certain GAC
Regulated Property is fair and reasonable.
6. Internal control
As advised by the management of the Company, the Group has
implemented various internal control procedures to monitor the
operation of continuing connected transactions. We have
reviewed
(i) Approval Policy of Connected Transactions of Air China
Limited, which set out the directors' authority in approving the
connected transactions and approval procedures of connected
transactions by the Board of Directors (the "Approval Policy of
CTS"); (ii) the Administrative Measures of Connected Transactions
of Air China Limited (the "Administrative Measures of CTs") which
set out the duties and responsibilities of each department which
involves in the connected transactions of the Group and set out the
procedures that each service agreement is made in accordance with
the framework agreement; (iii) sample records of past internal
approvals for the ACC Transactions; (iv) We reviewed the recent
internal reports in relation to the actual transaction amount of
the ACC Transactions prepared by the Asset Management Department
which is currently responsible for monitoring and reviewing of the
actual amount of the annual caps for the ACC Transactions; and (v)
the recent meeting documents of the Audit and Risk Management
Committee of the Board in relation to the continuing connected
transactions. The management of the Company also confirmed that the
previous ACC transactions were generally in compliance with the
Approval Policy of CTs and the Administrative Measures of CTs.
In light of the above, we are of the view that the Company has
internal control procedures in place to monitor the operation of
continuing connected transactions.
We have also reviewed the annual reports of the Company and note
that the Company have implemented the following procedures.
(i) The Company's independent non-executive directors review the
continuing connected transactions every year and confirm in the
annual report whether the transactions have been entered into:
(1) in the ordinary and usual course of business of the Group;
(2) on normal commercial terms or better terms; and
(3) according to the agreement governing the continuing
connected transactions on terms that are fair and reasonable and in
the interests of the Company's Shareholders as a whole.
(ii) The Company also engages its auditor to report on the
continuing connected transactions every year and confirms in the
annual report. The auditor provides a letter to the Board
confirming whether the continuing connected transactions:
(1) have been approved by the Board;
(2) were, in all material respects, in accordance with the
pricing policies of the Group;
(3) were entered into, in all material respects, in accordance
with the relevant agreement governing the transactions; and
(4) have not exceeded the annual cap.
The Company's auditor, KPMG, has performed certain procedures
and issue an independent auditor's assurance report on continuing
connected transactions entered into by the Group for the years
ended 31 December 2014 and 31 December 2015 in accordance with Hong
Kong Standard on Assurance Engagements 3000 (Revised) "Assurance
Engagement Other Than Audits or Reviews of Historical Financial
Information" and with reference to Practice Note 740 "Auditor's
Letter on Continuing Connected Transactions under the Hong Kong
Listing Rules" issued by the HKICPA. We have reviewed the
confirmation letters issued by KPMG and no abnormality was
noted.
Having considered (i) the internal policies and internal control
procedures to monitor the continuing connected transactions; (ii)
the annual review by the independent non-executive directors; and
(iii) the annual review by the auditor of the Company, we are of
the view that the Company has appropriate measures to govern the
future execution of such transactions and to safeguard the interest
of the Company and its shareholders as whole.
RECOMMATION
Having considered the principal factors and reasons above, we
are of the view that the proposed annual caps under the New ACC
Framework Agreement and the term of the Leases of GAC Regulated
Property under the New ACC Framework Agreement are in the ordinary
and usual course of business of the Company, are on normal
commercial terms which are fair and reasonable and in the interests
of the
Company and the Shareholders as a whole. Accordingly, we
recommend the Independent Shareholders, as well as the Independent
Board Committee to advise the Independent Shareholders, to vote in
favour of the relevant ordinary resolutions to approve the terms
and the proposed annual caps under the New ACC Framework Agreement
and the term of the Leases of GAC Regulated Property under the New
ACC Framework Agreement contemplated thereunder at the upcoming
EGM.
Yours faithfully, For and on behalf of Octal Capital Limited
Alan Fung
Managing Director
Wong Wai Leung
Executive Director
Note: Mr. Alan Fung has been a responsible officer of Type 1
(dealing in securities) and Type 6 (advising on corporate finance)
regulated activities since 2003. Mr. Fung has more than 20 years of
experience in corporate finance and investment banking and has
participated in and completed various advisory transactions in
respect of mergers and acquisitions, connected transactions and
transactions subject to the compliance to the Takeovers Code of
listed companies in Hong Kong. Mr. Wong Wai Leung has been a
responsible officer of Type 1 (dealing in securities), Type 6
(advising on corporate finance) regulated activities since 2008 and
Type 9 (asset management) regulated activities. Mr. Wong has more
than 15 years of experience in corporate finance and investment
banking and has participated in and completed various advisory
transactions of listed companies in Hong Kong in respect of the
Takeovers Code.
1. RESPONSIBILITY STATEMENT
This circular, for which the Directors collectively and
individually accept full responsibility, includes particulars given
in compliance with the Hong Kong Listing Rules for the purpose of
giving information with regard to the Group. The Directors, having
made all reasonable enquiries, confirm that to the best of their
knowledge and belief the information contained in this circular is
accurate and complete in all material respects and not misleading
or deceptive, and there are no other matters the omission of which
would make any statement herein or this circular misleading.
2. DISCLOSURE OF INTERESTS OF DIRECTORS AND SUPERVISORS
Save as disclosed below, as at the Latest Practicable Date, none
of the Directors, supervisors or chief executives of the Company
had interests or short positions in the shares, underlying shares
and/or debentures (as the case may be) of the Company or its
associated corporations (within the meaning of Part XV of the SFO)
which were notifiable to the Company and Hong Kong Stock Exchange
pursuant to the SFO, or were recorded in the register maintained by
the Company pursuant to section 352 of the SFO, or which were
notified to the Company and the Hong Kong Stock Exchange pursuant
to the Model Code for Securities Transactions by Directors of
Listed Companies.
Interest
of
children
under Shareholding
the age percentage
Name of company of 18 as at
Relevant Personal or Corporate the Practicable
shareholder interest spouse interest Total Date
Cathay Pacific
Airways 1,000 - - 1,000 0.00%
(ordinary (ordinary
Limited shares) shares)
Ian Sai
Cheung Shiu
Air China
Limited 10,000 - - 1,000 0.00%
Zhou Feng (A shares) (A shares)
Air China
Limited 33,200 - - 33,200 0.00%
Shen Zhen (A shares) (A shares)
None of the Directors or supervisors of the Company has any
direct or indirect interest in any assets which have been, since 31
December 2015 (the date to which the latest published audited
financial statements of the Group were made up), acquired or
disposed of by or leased to any member of the Group or are proposed
to be acquired or disposed of by or leased to any member of the
Group.
None of the Directors or supervisors of the Company is
materially interested in any contract or arrangement subsisting at
the Latest Practicable Date and which is significant in relation to
the business of the Group.
Cathay Pacific is a substantial Shareholder of the Company and
as at Latest Practicable Date, it held 2,633,725,455 H shares in
the Company. Mr. Ian Sai Cheung Shiu is a non-executive director of
the
Company and is concurrently a non-executive director of Cathay
Pacific. Mr. Cai Jianjiang, who is the
chairman and a non-executive director of the Company and Mr.
Song Zhiyong, who is the president and an executive director of the
Company, are concurrently non-executive directors of Cathay
Pacific. Mr. John Robert Slosar, who is a non-executive Director of
the Company, is concurrently an executive director and the chairman
of Cathay Pacific.
Cathay Pacific wholly owns Hong Kong Dragonair Airlines Limited
("Dragonair"). Cathay Pacific and Dragonair compete or are likely
to compete either directly or indirectly with some aspects of the
business of the Company as they operate airline services to certain
destinations, which are also served by the Company.
Save as above, none of the Directors or supervisors of the
Company and their respective associates (as defined in the Hong
Kong Listing Rules) has any competing interests which would be
required to be disclosed under Rule 8.10 of the Hong Kong Listing
Rules if each of them were a controlling shareholder of the
Company.
3. SERVICE CONTRACTS
None of the Directors has any existing or proposed service
contract with any member of the Group which is not expiring or
terminable by the Group within one year without payment of
compensation (other than statutory compensation).
4. NO MATERIAL ADVERSE CHANGE
The Directors confirm that there has been no material adverse
change in the Group's financial or trading position since 31
December 2015, being the date to which the latest published audited
financial statements of the Group have been made up.
5. EXPERT
The following are the qualifications of the expert who has given
its opinion or advice, which is contained in this circular:
Name Qualification
Octal Capital a corporation licensed to
conduct Type 1 (dealing in
securities) and Type 6 (advising
on corporate finance) regulated
activities under the SFO
(a) As at the Latest Practicable Date, Octal Capital did not
have any direct or indirect interest in any assets which have been
acquired or disposed of by or leased to any member of the Group, or
are proposed to be acquired or disposed of by or leased to any
member of the Group since 31 December 2015 (the date to which the
latest published audited financial statements of the Group were
made up);
(a)
(b) As at the Latest Practicable Date, Octal Capital was not
beneficially interested in the share capital of any member of the
Group and had no right, whether legally enforceable or not, to
subscribe for or to nominate persons to subscribe for securities in
any member of the Group; and
(c) Octal Capital has given and has not withdrawn its written
consent to the issue of this circular with inclusion of its opinion
and the reference to its name included herein in the form and
context in which it appears.
6. MISCELLANEOUS
(a) The joint company secretaries of the Company are Rao Xinyu
and Tam Shuit Mui. Ms. Tam is an associate member of the Hong Kong
Institute of Certified Public Accountants (HKICPA).
(b) The registered address of the Company is at Blue Sky
Mansion, 28 Tianzhu Road, Airport Industrial Zone, Shunyi District,
Beijing, the PRC. The head office of the Company is at No. 30,
Tianzhu Road, Airport Industrial Zone, Shunyi District, Beijing,
the PRC.
(c) The Hong Kong branch share registrar and transfer office of
the Company is Computershare Hong Kong Investor Services Limited,
Rooms 1712-1716, 17M Floor, Hopewell Centre, 183 Queen's Road East,
Wanchai, Hong Kong.
7. DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents are available for inspection
at the principal place of business of the Company in Hong Kong at
5th Floor, CNAC House, 12 Tung Fai Road, Hong Kong International
Airport, Hong Kong during normal business hours on any business day
from the date of this circular until 31 December 2016:
(a) the New ACC Framework Agreement;
(b) the letter from the Independent Board Committee to the
Independent Shareholders, the text of which is set out on pages 16
to 17 of this circular;
(c) the letter from Octal Capital to the Independent Board
Committee and the Independent Shareholders, the text of which is
set out on pages 18 to 36 of this circular; and
(d) the consent letter issued by the expert referred to in this
circular.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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