TIDMAIRC
RNS Number : 8664Y
Air China Ld
14 September 2020
If you are in any doubt as to any aspect of this circular, you
should consult a stockbroker or other registered dealer in
securities, bank manager, solicitor, professional accountant or
other professional adviser.
If you have sold or transferred all your shares of Air China
Limited, you should at once hand this circular and the form of
proxy and notice of attendance to the purchaser or transferee or to
the bank, stockbroker or other agent through whom the sale was
effected for transmission to the purchaser or the 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)
(1) CONTINUING CONNECTED TRANSACTION:
NEW TRADEMARK LICENSE FRAMEWORK AGREEMENT;
(2) DISCLOSEABLE TRANSACTIONS AND CONTINUING CONNECTED TRANSACTIONS:
FINANCIAL SERVICES AGREEMENTS
Independent Financial Adviser
to the Independent Board Committee and the Independent
Shareholders
Gram Capital Limited
A letter from the Board is set out on pages 5 to 24 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 25 to 26 of this circular.
A letter from the Independent Financial Adviser, containing its
advice to the Independent Board Committee and the Independent
Shareholders of the Company is set out on pages 27 to 41 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 2020
Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 1
LETTER FROM THE BOARD . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . .. . . . . . . . . . . . 5
I. Introduction . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .. . . . . . . . . . . 5
II. The New Trademark License Framework Agreement . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . 6
III. Financial Services Agreements . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 8
IV. EGM . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 23
V. Recommendation . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 23
VI. Additional Information . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 24
LETTER FROM THE INDEPENT BOARD COMMITTEE . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .. 25
LETTER FROM GRAM CAPITAL . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 27
APPIX I - GENERAL INFORMATION . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 42
In this circular, the following expressions have the following
meanings, unless the context requires otherwise:
"2004 Trademark License the trademark license agreement entered
Agreement" into between the Company and CNAHC on
1 November 2004
"Air China Financial Services the financial services framework agreement
Agreement" entered into between the Company and
CNAF on 30 August 2017
"Air China New Annual Caps" RMB15 billion, RMB15 billion and RMB15
billion, being the proposed maximum
daily balance of deposits (including
accrued interests) to be placed by the
Group with CNAF under the Air China
Financial Services Agreement for the
three years ending 31 December 2021,
2022 and 2023, respectively
"Articles of Association" the articles of association of the Company
"Board" the board of Directors of the Company
"Cathay Dragon" Hong Kong Dragon Airlines Limited
"Cathay Pacific" Cathay Pacific Airways Limited
"CBIRC" China Banking and Insurance Regulatory
Commission
"CNACG" China National Aviation Corporation
(Group) Limited ( ), a company incorporated
under the laws of
Hong Kong, which is a wholly- owned
subsidiary of CNAHC and a substantial
shareholder of the Company as at the
Latest Practicable Date
"CNAF" China National Aviation Finance Co.,
Ltd. ( ), a limited liability company
incorporated under
the laws of the PRC
"CNAHC" China National Aviation Holding Corporation
Limited ( )
"CNAHC Financial Services the financial services framework agreement
Agreement" entered into between CNAHC and CNAF
on 30 August 2017
"CNAHC Group" CNAHC, its subsidiaries and their associates,
companies falling within the definition
of commonly held entity under the Hong
Kong Listing Rules, as well as any other
CNAHC Member Company which, in accordance
with the listing rules of the places
where the shares of the Company are
listed as in force and as amended from
time to time, is a connected person
or related party of the Company, but
excluding the Group
"CNAHC Member Companies" the member companies of the enterprise
group of which CNAHC is the parent company,
specific scope of the CNAHC Member Companies
shall be determined in accordance with
the Administrative Measures for Finance
Companies of Enterprise Groups and other
relevant regulations
"CNAHC New Annual Caps" RMB6.5 billion, RMB6.5 billion and RMB6.5
billion, being the proposed maximum
daily balance of Credit Services to
be provided by CNAF to the CNAHC Group
under the CNAHC Financial Services Agreement
for the three years ending 31 December
2021, 2022 and 2023, respectively
"Company" Air China Limited, a company incorporated
in the PRC, whose H shares are listed
on the 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
"Credit Services" loan, finance lease, and other credit
services
"CSRC" China Securities Regulatory Commission
"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, (i) the New Trademark License
Framework Agreement and the transactions
contemplated thereunder, and (ii) the
renewal of the Financial Services Agreements,
the Non- exempt Continuing Connected
Transactions and the Proposed Annual
Caps
"Financial Services Agreements" the Air China Financial Services Agreement
and the CNAHC Financial Services Agreement
"Group" the Company and its subsidiaries
"HK$" Hong Kong dollars, the lawful currency
of Hong Kong
"Hong Kong" Hong Kong Special Administrative Region
of the PRC
"Hong Kong Listing Rules" The Rules Governing the Listing of Securities
on the Stock Exchange
"Independent Board Committee" a board committee comprising Mr. Wang
Xiaokang, Mr. Duan Hongyi, Mr. Stanley
Hui Hon-chung and Mr. Li Dajin, all
being the independent non-executive
Directors
"Independent Financial Gram Capital Limited, a corporation
Adviser" or "Gram Capital" licensed to carry out 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
Non-exempt Continuing Connected Transactions
and the Proposed Annual Caps
"Independent Shareholders" the independent shareholders of the
Company
"Latest Practicable Date" 8 September 2020, being the latest practicable
date prior to the printing of this circular
for ascertaining certain information
contained herein
"NAFMII" National Association of Financial Market
Institutional Investors
"New Trademark License the trademark license framework agreement
Framework Agreement" dated 28 August 2020 entered into between
the Company and CNAHC in respect of
the Trademark License Transaction
"Non-exempt Continuing the deposit services to be provided
Connected Transactions" by CNAF to the Group under the Air China
Financial Services Agreement and the
Credit Services to be provided by CNAF
to the CNAHC Group under the CNAHC Financial
Services Agreement
"PBOC" the People's Bank of China
"Percentage Ratio" shall have the meaning ascribed to it
by the Hong Kong Listing Rules
"PRC" the People's Republic of China, excluding,
for the purpose of this circular only,
Hong Kong, Macau and Taiwan
"Proposed Annual Caps" the Air China New Annual Caps and the
CNAHC New Annual Caps
"RMB" Renminbi, the lawful currency of the
PRC
"SAFE" the State Administration of Foreign
Exchange of the PRC
"SASAC" The State-owned Assets Supervision and
Administration Commission of the State
Council
"Shanghai Listing Rules" the Rules Governing the Trading of Stocks
on the Shanghai Stock Exchange
"Shareholder(s)" holder(s) of the shares of the Company
"SFO" the Securities and Futures Ordinance
(Chapter 571 of the laws of Hong Kong)
"Stock Exchange" The Stock Exchange of Hong Kong Limited
"Supervisor(s)" the supervisor(s) of the Company
"Trademark License Framework the trademark license framework agreement
Agreement" dated 28 October 2014 entered into between
the Company and CNAHC in respect of
the Trademark License Transaction
"Trademark License Transaction" the continuing connected transaction
contemplated under the Trademark License
Framework Agreement/New Trademark License
Framework Agreement in relation to the
granting by the Company to CNAHC and
its controlled companies (excluding
the Group) of a non-exclusive license
for the use of 83 registered trademarks
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: Registered Address:
Non-Executive Directors : Blue Sky Mansion 28 Tianzhu
Mr. Cai Jianjiang (Chairman) Road
Mr. Feng Gang Mr. Patrick Healy Mr. Xue Airport Industrial Zone
Yasong Shunyi District Beijing,
the PRC
Executive Director: Principal Place of Business
Mr. Song Zhiyong (President) in Hong Kong:
5th Floor, CNAC House
Independent Non-Executive Directors: 12 Tung Fai Road
Mr. Wang Xiaokang Mr. Duan Hongyi Hong Kong International
Mr. Stanley Hui Hon-chung Airport Hong Kong
Mr. Li Dajin
14 September 2020
To the Shareholders
Dear Sirs or Madams,
(1) CONTINUING CONNECTED TRANSACTION:
NEW TRADEMARK LICENSE FRAMEWORK AGREEMENT;
(2) DISCLOSEABLE TRANSACTIONS AND CONTINUING CONNECTED
TRANSACTIONS:
FINANCIAL SERVICES AGREEMENTS
I. INTRODUCTION
Reference is made to (i) the announcement of the Company dated
30 August 2017 and the circular of the Company dated 7 September
2017 in relation to the Trademark License Framework Agreement, the
Air China Financial Services Agreement and the CNAHC Financial
Services Agreement; and (ii) the announcement of the Company dated
28 August 2020 in relation to the New Trademark License Framework
Agreement, the proposed renewal of the Air China Financial Services
Agreement and the CNAHC Financial Services Agreement.
The purpose of this circular is to provide you with details
regarding, among others, (i) the New Trademark License Framework
Agreement; and (ii) the Financial Services Agreements, the
Non-exempt Continuing Connected Transactions and the Proposed
Annual Caps to enable you to 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 and the Hong Kong Listing Rules.
II. THE NEW TRADEMARK LICENSE FRAMEWORK AGREEMENT
1. The New Trademark License Framework Agreement
Description of the New Trademark License Framework Agreement,
pricing of and reasons for the transaction
Reference is made to the announcement of the Company dated 28
August 2020.
At the time of the incorporation of the Company, CNAHC
contributed certain registered trademarks to the Company at nil
consideration as the Company's intangible assets. As the trademarks
are related to the daily business of CNAHC and its controlled
companies, the Company licensed certain trademarks to CNAHC and its
controlled companies at nil consideration for their use in its
ordinary course of business as a reciprocal arrangement pursuant to
the 2004 Trademark License Agreement. On 1 November 2004, the
Company and CNAHC entered into the 2004 Trademark License
Agreement, which expired on 31 December 2014. On 28 October 2014,
the Company and CNAHC entered into the Trademark License Framework
Agreement, which was renewed on 30 August 2017 for a term of three
years starting from 1 January 2018.
According to the Trademark License Framework Agreement, the
Company granted CNAHC and its controlled companies (excluding the
Group) a non-exclusive license for the use of a total of 83
registered trademarks of the Company. The granting of the
non-exclusive license under the Trademark License Framework
Agreement is made on a
royalty-free basis at nil consideration.
As the current term of the Trademark License Framework Agreement
will expire on 31 December 2020, to maintain the consistency of the
business operation, the Company and CNAHC entered into the New
Trademark License Framework Agreement on 28 August 2020. The New
Trademark License Framework Agreement contains no material or
substantial changes and only contains certain non-material changes
to the terms of Trademark License Framework Agreement such as
updating the name of CNAHC and the parties' correspondence
addresses. Given the circumstances described in the paragraph
above, the New Trademark License Framework Agreement still adopts
the same method of non-exclusive licensing of these 83 registered
trademarks to CNAHC and its controlled companies at nil
consideration. CNAHC and its controlled companies undertook to use
such licensed trademarks subject to the terms of the
non-competition agreement between CNAHC and the Company dated 20
November 2004, and to ensure the quality of the services using the
licensed trademarks in order to maintain their reputation.
The term of the New Trademark License Framework Agreement shall
be three years commencing from 1 January 2021 and ending on 31
December 2023, which is renewable for successive terms of three
years after the expiry of the current term.
2. Parties and connected Relationship between the Parties
The Company
The Company's principal business activity is air passenger, air
cargo and airline-related services. The Company's parent and
ultimate holding company is CNAHC, a PRC state-owned enterprise
under the supervision of the State Council. CNAHC is mainly engaged
in the management of its state-owned assets and its equity holdings
in various investment enterprises, aircraft leasing and aviation
equipment maintenance.
CNAHC
CNAHC is a state-owned company incorporated in the PRC with a
registered capital of RMB15,500 million. Its registered address is
Rooms 101-C709, B1-9/F, Building 1, No. 30 Tianzhu Road, Shunyi
District, Beijing, the PRC and its legal representative is Mr. Cai
Jianjiang. CNAHC is primarily engaged in the management of its
state-owned assets and its equity holdings in various investment
enterprises, aircraft leasing and aviation equipment maintenance.
CNAHC is the controlling shareholder of the Company and is
therefore a connected person of the Company as defined under the
Hong Kong Listing Rules.
3. Hong Kong Listing Rules Implications
The Trademark License Transaction under the New Trademark
License Framework Agreement constitutes a continuing connected
transaction of the Company under the Hong Kong Listing Rules. As
the transaction is on normal commercial terms or better and on a
royalty-free basis, it falls below the de minimis threshold as
stipulated under Rule 14A.76(1) of the Hong Kong Listing Rules and
therefore is fully exempt from independent shareholders' approval,
annual review and all disclosure requirements under Chapter 14A of
the Hong Kong Listing Rules.
4. Shanghai Listing Rules Implications
Pursuant to the Shanghai Listing Rules, the Trademark License
Transaction is subject to the Independent Shareholders' approval at
the EGM. The Company therefore will seek approval from Independent
Shareholders for the New Trademark License Framework Agreement
entered into between the Company and CNAHC and the transactions
contemplated thereunder.
5. Approval by the Board
At the 22nd meeting of the fifth session of the Board of the
Company held on 28 August 2020, the Board approved the execution of
the New Trademark License Framework Agreement for a term of three
years from 1 January 2021 to 31 December 2023. Mr. Cai Jianjiang,
Mr. Song Zhiyong, Mr. Feng Gang and Mr. Xue Yasong, holding
positions in CNAHC, are considered to have a material interest in
the Trademark License Transaction and therefore have abstained from
voting on the relevant Board resolution. Save as disclosed above,
none of the Directors has a material interest in the Trademark
License Transaction and hence no other Director is required to
abstain from voting on the relevant Board resolution.
The Board (including the independent non-executive Directors)
considers that the Trademark License Transaction under the New
Trademark License Framework Agreement is on normal commercial terms
or better and in the ordinary and usual course of business of the
Group. The terms and conditions contained therein are fair and
reasonable and in the interests of the Company and the Shareholders
as a whole.
III. FINANCIAL SERVICES AGREEMENTS
1. Air China Financial Services Agreement
Reference is made to the announcement of the Company dated 28
August 2020. The current term of the Air China Financial Services
Agreement will expire on 31 December 2020. As the Company expects
that the transactions thereunder will continue to be conducted
after 31 December 2020, on 28 August 2020, the Company and CNAF
proposed to renew the Air China Financial Services Agreement.
Parties
The Company and CNAF
Financial services to be provided by CNAF to the Group
Pursuant to the Air China Financial Services Agreement, CNAF has
agreed to provide the Group with a range of financial services
including the following:
a. deposit services;
b. Credit Services;
c. other financial services, including but not limited to:
(i) negotiable instrument and letter of credit services;
(ii) trust loan and trust investment services;
(iii) underwriting services for debt issuances;
(iv) intermediary and consulting services (including financial information services);
(v) guarantee services;
(vi) settlement services;
(vii) internet banking services;
(viii) insurance agency services;
(ix) spot exchange settlement and sale services;
(x) cross-border bilateral RMB capital pooling services; and
(xi) other businesses of CNAF upon obtaining approval from
CBIRC, PBOC or SAFE, such as forward settlement and sales of
foreign exchange services.
Pricing basis
Deposit services
The interest rates applicable to the Group for deposits with
CNAF shall (i) be in compliance with the requirements on interests
prescribed by PBOC for such type of deposits;
(ii) be not lower than the interest rates offered by state-owned
commercial banks to the Group for the same type of services under
the same conditions; and (iii) be not lower than the interest rates
charged by CNAF to other CNAHC Member Companies for the same type
of services under the same conditions.
Credit Services
The interest rates applicable to the Credit Services provided by
CNAF to the Group shall (i) be in compliance with the requirements
on interests prescribed by PBOC for such type of loans; (ii) be not
higher than the interest rates charged by state-owned commercial
banks to the Group for the same type of services under the same
conditions; and (iii) be not higher than the interest rates charged
by CNAF to other CNAHC Member Companies for the same type of
services under the same conditions.
Other financial services
The fees charged by CNAF to the Group for providing paid
services in the other financial services shall (i) be in line with
the relevant standards (if any) prescribed by PBOC, CBIRC, CSRC,
NAFMII or other regulatory authorities; (ii) be not higher than the
fees charged by state-owned commercial banks to the Group for the
same type of services under the same conditions; and (iii) be not
higher than the fees charged by CNAF to other CNAHC Member
Companies for the same type of services under the same
conditions.
Currently, other financial services which are free of charge and
provided by CNAF to the Group include the settlement services and
financial information services (namely, providing statistics and
information in relation to different types of financing products in
the market). If CNAF charges fees for the settlement services and
financial information services during the term of the Air China
Financial Services Agreement, the pricing basis set out in the
above paragraph shall apply, and the relevant transaction amounts
will be monitored closely to ensure that the aggregate annual fees
to be paid by the Group to CNAF for other financial services will
not exceed the de minimis threshold as stipulated under Rule
14A.76(1) of the Hong Kong Listing Rules.
Other terms
Pursuant to the Air China Financial Services Agreement, CNAF
shall not carry out any business that has not been approved by
CBIRC or any illegal activities. CNAF is not allowed, during the
term of the Air China Financial Services Agreement, to make use of
the deposits of the Group for investments involving high risks
including, but not limited to, investments in equity securities and
corporate bonds. CNAF is obliged to provide convenience for the
auditors of the Company. If the auditors of the Company intend to
inspect the accounts of CNAF, CNAF shall make arrangements for such
inspection after receiving notice from the Company.
The renewal of the Air China Financial Services Agreement is
subject to the approval by the Independent Shareholders at the EGM.
If approved by the Independent Shareholders, the term of the Air
China Financial Services Agreement shall be renewed for three years
commencing from 1 January 2021 and ending on 31 December 2023,
which is automatically renewable for successive terms of three
years after the expiry of the term subject to the fulfillment of
the requirements under Hong Kong Listing Rules and the required
approval procedures thereunder. Upon expiry of the Air China
Financial Services Agreement, the Board will re-assess the terms
and conditions of the Air China Financial Services Agreement, and
the Company will re-comply with the relevant rules governing
connected transactions under the Hong Kong Listing Rules. During
the term of the Air China Financial Services Agreement, the
agreement can be terminated on any 31 December by either party
thereto by serving the other party a written notice of termination
of not less than three months.
Reasons and benefits for the transaction
The Directors believe that it is in the best interest of the
Group to enter into the above transactions with CNAF having taken
into account the following factors:
a. in respect of transactions between the Group and CNAF, CNAF
is able to provide more efficient settlement services compared with
independent third party banks;
b. CNAF is able to provide safe, convenient, fast, comprehensive
and tailor-made financial services to the Group. From 2004 and up
to the Latest Practicable Date, the connected transactions between
CNAF and the Group have been carried out in compliance with the
relevant laws and regulations and the relevant listing rules, and
CNAF has a good track record on compliance. With its continuous
improvement of professional level and financial services, CNAF is
fully qualified for providing the relevant services to the
Group;
c. as a professional financial institution in the Group, CNAF
could act more proactively in protecting the interest of the Group
than external institutions; and
d. a good cooperative relationship has been established between
CNAF and the relevant departments of the Group over the years which
makes their cooperation more efficient.
The Directors (including the independent non-executive
Directors) consider that the Air China Financial Services Agreement
is on normal commercial terms or better and in the ordinary and
usual course of business of the Group, and the terms and conditions
contained therein are fair and reasonable and in the interests of
the Company and the Shareholders as a whole.
Historical Figures and the Air China New Annual Caps
Set forth below is a summary of the historical annual caps, the
actual maximum amount and the Air China New Annual Caps for the
daily balance of deposits (including accrued interests) placed or
to be placed by the Group with CNAF:
Historical Annual Actual maximum Air China New
Caps amount Annual Caps
for
for for for for for the for for for
the the the the the period the the the
year year year year year from year year year
ended ended ending ended ended 1 January ending ending ending
31 31 31 December 31 31 to 30 31 31 31
Transaction December December 2020 December December June December December December
2018 2019 2018 2019 2020 2021 2022 2023
Financial RMB12 RMB14 RMB15 RMB10.485 RMB9.610 RMB9.665 RMB15 RMB15 RMB15
Services billion billion billion billion billion billion billion billion billion
(daily balance
of deposits)
As the Group strengthened its management of funds and improved
the efficiency of utilization of its own funds in 2018 and 2019,
the growth rate of monetary funds of the Group was lower than
expected. Therefore, the daily maximum amount of monetary funds of
the Group in the years 2018 and 2019 and the maximum daily balance
of deposits of the Group placed with CNAF in these two years were
lower than expected.
Basis for the Air China New Annual Caps
The Air China New Annual Caps are determined based on the
following factors:
a. The historical maximum amount of daily balance of deposits
placed by the Group with CNAF. Taking into consideration the
historical maximum amount of the Group's daily balance of deposits
placed with CNAF for the two years ended 31 December 2019 and the
six months ended 30 June 2020 as shown in the table above,
especially the maximum amount of the Group's daily balance of
deposits placed with CNAF for the year 2018, being RMB10.485
billion (the "Historical Maximum Amount"), it is estimated that the
amount of the Group's daily balance of deposits placed with CNAF in
each of the next three years ending 31 December 2023 will be no
more than RMB10.5 billion (without taking into account the factors
stated in paragraph b below).
b. Possible further increase in the balance of deposits placed
by the Group with CNAF. Direct financing is one of the main
financing methods of the Company. The Company determines whether or
not to conduct direct financing and the scale of financing based on
the Company's capital needs and financing environment. In 2017, the
Company used part of the proceeds raised from the non-public
issuance of A shares to replace self-raised funds previously
invested in the proceeds-funded projects. This led to an increase
of approximately RMB4.7 billion in the balance of deposits placed
by the Group with CNAF within a short period of time (the
"Historical Replaced Amount"). Due to unsatisfactory financing
environment in 2018 and 2019, the Company did not arrange direct
financing in both years. Taking into account the Company's capital
needs and current market condition, the Company may raise funds by
way of direct financing in the next three years, which may lead to
a temporary increase in the balance of deposits placed by the Group
with CNAF. With reference to the Historical Replaced Amount, it is
expected that raising funds by way of direct financing by the
Company may result in an increase in the daily balance of deposits
to be placed by the Group with CNAF by RMB4 billion for each of the
three years ending 2023.
c. A buffer of approximately 3% is applied for each of the three
years ending 31 December 2023 to cater the Group's needs from time
to time.
Taking into account the aforesaid factors, it is proposed that
the maximum daily balance of deposits (including accrued interests)
placed by the Group with CNAF for the three years ending 31
December 2021, 2022
and 2023 shall be RMB15 billion, RMB15 billion and RMB15 billion, respectively.
2. CNAHC Financial Services Agreement
Reference is made to the announcement of the Company dated 28
August 2020. The current term of the CNAHC Financial Services
Agreement will expire on 31 December 2020. As CNAF expects that the
transactions thereunder will continue to be conducted after 31
December 2020, on 28 August 2020, CNAF and CNAHC proposed to renew
the CNAHC Financial Services Agreement.
Parties
CNAF and CNAHC
Financial services to be provided by CNAF to CNAHC Group
Pursuant to the CNAHC Financial Services Agreement, CNAF has
agreed to provide the CNAHC Group with a range of financial
services including the following:
a. deposit services;
b. Credit Services;
c. other financial services, including but not limited to:
(i) negotiable instrument and letter of credit services;
(ii) trust loan and trust investment services;
(iii) underwriting services for debt issuances;
(iv) intermediary and consulting services (including financial information services);
(v) guarantee services;
(vi) settlement services;
(vii) internet banking services;
(viii) insurance agency services;
(ix) spot exchange settlement and sale services;
(x) cross-border bilateral RMB capital pooling services; and
(xi) other businesses of CNAF upon obtaining approval from
CBIRC, PBOC or SAFE, such as forward settlement and sales of
foreign exchange services.
Pricing basis
Deposit services
The interest rates applicable to CNAHC Group's deposits with
CNAF shall (i) be in compliance with the requirements on interests
prescribed by PBOC for such type of deposits;
(ii) be not higher than the interest rates offered by
state-owned commercial banks to the CNAHC Group for the same type
of services under the same conditions; and (iii) be not higher than
the interest rates charged by CNAF to other CNAHC Member Companies
for the same type of services under the same conditions.
Credit Services
The interest rates applicable to the Credit Services provided by
CNAF to the CNAHC Group shall (i) be in compliance with the
requirements on interests prescribed by PBOC for such type of
loans; (ii) be not lower than the interest rates charged by
state-owned commercial banks to the CNAHC Group for the same type
of services under the same conditions; and (iii) be not lower than
the interest rates charged by CNAF to other CNAHC
Member Companies for the same type of services under the same conditions.
Other financial services
The fees charged by CNAF to the CNAHC Group for providing paid
services in the other financial services shall (i) be in line with
the relevant rate standards (if any) prescribed by the PBOC, CBIRC,
CSRC, NAFMII or other regulatory authorities; (ii) be not lower
than the fees charged by state-owned commercial banks to the CNAHC
Group for the same type of services under the same conditions; and
(iii) be not lower than the fees charged by CNAF to other CNAHC
Member Companies for the same type of services under the same
conditions.
Currently, other financial services which are free of charge and
provided by CNAF to the CNAHC Group include the settlement services
and financial information services (namely, providing statistics
and information in relation to different types of financing
products in the market). If CNAF charges fees for the settlement
services and financial information services during the term of the
CNAHC Financial Services Agreement, the pricing basis set out in
the above paragraph shall apply, and the relevant transaction
amount will be monitored closely to ensure that the aggregate
annual fees to be paid by the CNAHC Group to CNAF for other
financial services will not exceed the de minimis threshold as
stipulated under Rule 14A.76(1) of the Hong Kong Listing Rules.
Other terms
Pursuant to the CNAHC Financial Services Agreement, CNAF shall
not carry out any business that has not been approved by CBIRC or
any illegal activities.
The renewal of the CNAHC Financial Services Agreement is subject
to the approval by the Independent Shareholders at the EGM. If
approved by the Independent Shareholders, the term of the CNAHC
Financial Services Agreement shall be renewed for three years
commencing from 1 January 2021 and ending on 31 December 2023,
which is automatically renewable for successive terms of three
years after the expiry of its initial term subject to the
fulfillment of the requirements under Hong Kong Listing
Rules/Shanghai Listing Rules and the required approval procedures
thereunder. Upon expiry of the CNAHC Financial Services Agreement,
the Board will re-assess the terms and conditions of the CNAHC
Financial Services Agreement, and the Company will re-comply with
the relevant rules governing connected transactions under the Hong
Kong Listing Rules/Shanghai Listing Rules. During the term of the
CNAHC Financial Services Agreement, the agreement can be terminated
on any 31 December by either party thereto by serving the other
party a written notice of termination of not less than three
months.
Reasons and benefits for the transaction
CNAF has been providing financial services to the CNAHC Group
for years. The business with the CNAHC Group contributed a steady
and significant portion to CNAF's revenues in the past. Such
transaction is beneficial for CNAF to make full use of its function
as a financial Platform to further improve the utilization
efficiency and effectiveness of funds, as well as enhance its gains
on capital, which is in line with the needs of the Company's
operation and development. The Directors believe that it would be
in the best interest of CNAF and the Group to continue the
provision of financial services by CNAF to the CNAHC Group.
The Directors (including the independent non-executive
Directors) consider that the CNAHC Financial Services Agreement is
on normal commercial terms or better and in the ordinary and usual
course of business of the Group, and the terms and conditions
contained therein are fair and reasonable and in the interests of
the Company and the Shareholders as a whole.
Historical Figures and the CNAHC New Annual Caps
Set forth below is a summary of the historical annual caps, the
actual maximum amount and the CNAHC New Annual Caps of the daily
balance of Credit Services (including accrued interests) granted or
to be granted by CNAF to the CNAHC Group:
Historical Annual Actual maximum CNAHC New Annual
Caps amount Caps
for
for for for for for the for for for
the the the the the period the the the
year year year year year from year year year
ended ended ending ended ended 1 January ending ending ending
31 31 31 December 31 31 to 30 31 31 31
Transaction December December 2020 December December June December December December
2018 2019 2018 2019 2020 2021 2022 2023
Financial
Services RMB8 RMB9 RMB10 RMB1.445 RMB1.025 RMB0.540 RMB6.5 RMB6.5 RMB6.5
(daily balance billion billion billion billion billion billion billion billion billion
of Credit
Services)
The low utilization rate of the historical annual caps is due to
the facts that (i) CNAHC and its subsidiaries had ample liquidity
in the years of 2018 and 2019, therefore their demands for loans
were much lower than expected; and (ii) for those members of the
CNAHC Group who had loan demands, they borrowed some of their loans
from independent third-party banks rather than CNAF.
Basis for the CNAHC New Annual Caps:
The CNAHC New Annual Caps are determined based on the following
factors:
a. The historical maximum amount of daily balance of Credit
Services provided by CNAF to the CNAHC Group. The maximum amount of
daily balance of Credit Services provided by CNAF to the CNAHC
Group for the three years ended 31 December 2017, 2018 and 2019 was
RMB3.125 billion, RMB1.445 billon and RMB1.025 billion,
respectively, with an average of approximately RMB1.865 billion
(the "Average Historical Maximum Amount"). Taking into
consideration such Average Historical Maximum Amount, it is
estimated that CNAF will continue to provide Credit Services to the
CNAHC Group with an amount of approximately RMB1.865 billion for
each of the three years ending 31 December 2023, without taking
into account the factors set out in paragraph b below.
b. CNAF may further make full use of its functions as a finance
company to replace CNAHC's existing needs for loans from external
banks with a view to effectively improve the overall efficiency of
use of funds. Taking into account the amount of one-year liquidity
loans previously obtained by CNAHC from external banks, being RMB4
billion in 2019, and assuming CNAHC will maintain the same level of
demand for liquidity loans in the next three years ending 31
December 2023, it is expected that CNAF may provide further Credit
Services to CNAHC with an amount of RMB4 billion for each of the
three years ending 31 December 2023.
c. In addition, according to the loan requirement plan of
certain subsidiaries of CNAHC regarding their liquidity, it is
expected that the subsidiaries of CNAHC will have addition demands
for loans from CNAF with an amount of approximately RMB350 million
for each of the three years ended 31 December 2023.
d. A buffer of approximately 5% is applied for each of the three
years ending 31 December 2023 to cater the CNAHC Group's needs from
time to time.
Taking into account the aforesaid factors, it is proposed that
the maximum daily balance of Credit Services (including accrued
interests) to be provided by CNAF to the CNAHC Group for the three
years ending 31 December 2021, 2022 and 2023 shall be RMB6.5
billion, RMB6.5 billion and RMB6.5 billion, respectively.
3. Risk Profile and Management of CNAF
CNAF, as a non-banking financial institution providing financial
services to the Group and the CNAHC Group, is subject to
regulations promulgated by CBIRC from time to time. These
regulations may not be the same as those regulating commercial
banks. As CNAF and commercial banks have different target customers
for their respective financial services, they may be subject to
different risk profiles. Set out below are the major risk exposures
of CNAF:
Compliance risks
According to the Measures for the Administration of Finance
Companies of Enterprise Groups) ( )) issued by the CBIRC on 27 July
2004 (as amended on 28 December 2006), CNAF shall comply with
various ratios in respect of its assets and
liabilities, including the capital adequacy ratio, inter-bank
borrowing balances to total capital ratio, outstanding guarantees
to total capital ratio, short-term securities investment to total
capital ratio, long-term investment to total capital ratio and
self-owned fixed assets to total capital ratio. Since its
establishment until the Latest Practicable Date, CNAF has complied
with all the relevant requirements from the CBIRC in respect of the
above-mentioned ratios and the applicable rules and regulations
stipulated by the CBIRC.
Liquidity risks
CNAF utilises deposits received by it by lending the funds out
to members of the Group and the CNAHC Group. Since the terms of the
deposits and loans are often different, CNAF faces liquidity risks
if any deposit becomes due and it has no immediately available fund
for making payment. The nature of such risk does not differ
materially from the liquidity risks faced by PRC commercial banks.
To manage its liquidity risks, CNAF strictly adheres to a 25%
current ratio requirement (i.e. its current liabilities shall not
exceed 25% of its current assets). The liquidity risks of CNAF are
also mitigated as it could obtain financing through inter-bank
loans or pledged repurchase from the inter-bank market if and when
necessary. In addition, since the customers of CNAF are limited to
the members of the Group and the CNAHC Group, CNAF is shielded from
the risk of bank runs by individual depositors faced by commercial
banks. Since its establishment until the Latest Practicable Date,
CNAF had always been able to meet the repayment schedules in
respect of deposits placed by its customers.
Credit risks
Like state-owned commercial banks, CNAF faces credit risks in
providing its loans and other credit services to its customers.
CNAF, being a member of the CNAHC Group, is in a better position to
gain information on the member companies who are its customers in a
more timely and comprehensive manner as opposed to other PRC
commercial banks who conduct business with clients of various
credit ratings and backgrounds. To control the credit risks, CNAF
carefully evaluates the operation situation and financial position
of the member companies within the Group and the CNAHC Group when
receiving loan applications from them and only provides loans to
member companies who have sound financial position and cash flow.
CNAF normally requires guarantees from the shareholders of the
applicant if the applicant's credit standing exposes CNAF to
relatively high risks. If a loan is approved, CNAF conducts regular
post-loan examination on the borrower to monitor and safeguard
against the credit risks. If a borrower defaults on the loan or
falls into financial difficulty in repayments, CNAF may enforce the
guarantee provided by the shareholders of the borrower. Moreover,
according to the relevant laws and regulations promulgated by the
CBIRC and as set out in the articles of association of CNAF, in the
event that CNAF falls into financial difficulty in payments, CNAHC
has the obligation to take all necessary steps including injecting
capital into CNAF based on its funding needs, to restore its
financial position. Due to the careful management of the credit
risks, CNAF has not had any non-performing loan since its
establishment until the Latest Practicable Date.
Directors' view
Based on the foregoing, the Directors are of the view that the
risk profile of CNAF, as a provider of financial services to the
Group and the CNAHC Group, is remained not greater than that of PRC
commercial banks.
4. Internal Control Measures for the Non-exempt Continuing Connected Transactions
To safeguard the interest of the Group, the Group will adopt the
following internal control measures in respect of the deposit
services to be provided by CNAF to the Group and the Credit
Services to be provided by CNAF to the CNAHC Group,
respectively.
Deposit services under the Air China Financial Services
Agreement
The Company would take the following review procedure against
the following assessment criteria when obtaining the deposit
services from CNAF under the Air China Financial Services
Agreement:
a. the designated staff of the Company and CNAF would closely
monitor the deposit balance of the Group with CNAF on a daily basis
to ensure that it does not exceed the Air China New Annual
Caps;
b. the designated staff of the Company would update the list of
the Company's subsidiaries on a regular basis to ensure the
aggregate deposit balance of the Group (including the subsidiaries
in the updated list) with CNAF does not exceed the Air China New
Annual Caps; and
c. the designated staff of the Company would compare the rates
and terms offered by CNAF and several state-owned commercial banks
when the need for deposit arises to ensure those rates and terms of
the
Group's deposits with CNAF are in line with the relevant pricing basis.
Credit Services under the CNAHC Financial Services Agreement
CNAF would take the following review procedure process against
the following assessment criteria when providing the Credit
Services to the CNAHC Group under the CNAHC Financial Services
Agreement:
a. after receiving the Credit Services application from members
of the CNAHC Group, the credit department of CNAF would carry out
the following works: verifying the materials submitted by the
applicant, considering the credit risk and financing ability of the
applicant, checking the records such as if CNAF has provided the
same type of services to CNAHC Member Companies under the same
condition, learning about the current level of market interest
charged by state-owned commercial banks and offering quotation;
b. after securing the loan business, CNAF would issue a report
to the loan review committee of CNAF, which in turn would make the
final decision on the approval of the Credit Services and the
determination of relevant terms of the Credit Services, including
the loan interest rate;
c. if it is discovered in the various quotations for a
transaction under the same conditions that the loan interest rates
intended to be offered by CNAF to the CNAHC and its subsidiaries
are more favorable than those provided to the Group, or more
favorable than those provided by independent third parties to the
CNAHC and its subsidiaries, such findings shall be reported to the
loan review committee of CNAF. The loan review committee of CNAF
would assess whether t o adjust the price for services provided by
CNAF or to amend relevant terms with reference to various factors,
such as loan demand and the applicant's qualifications and
credibility;
d. CNAF would complete the approval procedures of the risk
management department, and grant the loan to the applicant after
obtaining approval from the leader of credit department and leaders
of CNAF;
e. after the grant of the loan, the credit department of CNAF
will conduct regular post-loan examination on the applicant and
issue examination reports; and
f. the accounting department of CNAF will deduct the principal
and accumulated interests of the loan from the applicants' deposit
accounts in CNAF on the loan repayment date. If the applicant falls
short of cash to repay the loan, the applicant should request for
extension in writing to CNAF prior to the maturity of the loan, and
may carry out relevant formalities upon obtaining approval.
Since the Group has established adequate and appropriate
internal control procedures to review the Non-exempt Continuing
Connected Transactions, the Directors (including the independent
non-executive Directors) consider that such methods and procedures
can ensure and safeguard the Non-exempt Continuing Connected
Transactions will be conducted on normal commercial terms, fair and
reasonable, and in the interest of the Company and the Shareholders
as a whole.
5. Parties and Connected Relationship of the Parties
The Company
The Company's principal business activity is air passenger, air
cargo and airline-related services. The Company's parent and
ultimate holding company is CNAHC, a PRC state-owned enterprise
under the supervision of the State Council. CNAHC is mainly engaged
in the management of its state-owned assets and its equity holdings
in various investment enterprises, aircraft leasing and aviation
equipment maintenance.
CNAF
CNAF is a company with limited liability incorporated in the
PRC, and is a non-wholly owned subsidiary of the Group. CNAF is
primarily engaged in providing financial services to CNAHC Member
Companies. Since CNAHC can exercise more than 10% of the voting
power at CNAF's general meeting, CNAF is a connected subsidiary of
the Company as defined under Rule 14A.16 of the Hong Kong Listing
Rules.
CNAHC
CNAHC is a state-owned company incorporated in the PRC with a
registered capital of RMB15,500 million. Its registered address is
Rooms 101-C709, B1-9/F, Building 1, No. 30 Tianzhu Road, Shunyi
District, Beijing, the PRC and its legal representative is Mr. Cai
Jianjiang. CNAHC is primarily engaged in the management of its
state-owned assets and its equity holdings in various investment
enterprises, aircraft leasing and aviation equipment maintenance.
CNAHC is the controlling shareholder of the Company and is
therefore a connected person of the Company as defined under the
Hong Kong Listing Rules.
6. Hong Kong Listing Rules Implications Air China Financial
Services Agreement Deposit services
As one or more of the applicable Percentage Ratios in respect of
the Air China New Annual Caps exceed 5% but below 25%, the deposit
services to be provided to the Group by CNAF under the Air China
Financial Services Agreement are subject to (i) the requirements
applicable to discloseable transaction under Chapter 14 of the Hong
Kong Listing Rules; and
(ii) the reporting, announcement and independent shareholders'
approval requirements under Chapter 14A of the Hong Kong Listing
Rules.
Credit Services
Credit services to be provided to the Group by CNAF are expected
to be conducted on normal commercial terms or better, and not to be
secured by the assets of the Group. Therefore, such transactions
will be fully exempt from the reporting, annual review,
announcement and independent shareholders' approval requirements
for continuing connected transactions in accordance with Rule
14A.90 of the Hong Kong Listing Rules.
Other financial services
The other financial services to be provided by CNAF to the Group
will be carried out on normal commercial terms or better and the
aggregate annual fees to be paid by the Group to CNAF for such
services for each of the three years ending 31 December 2021, 2022
and 2023 are expected to fall below the de minimis threshold as
stipulated under Rule 14A.76(1) of the Hong Kong Listing Rules.
Therefore, such transactions will be fully exempt from the
reporting, annual review, announcement and independent
shareholders' approval requirements under the Hong Kong Listing
Rules.
CNAHC Financial Services Agreement
Deposit services
The deposits placed by the CNAHC Group with CNAF are expected to
be conducted on normal commercial terms or better, and not to be
secured by the assets of the Group. Therefore, such transactions
will be fully exempt from the reporting, annual review,
announcement and independent shareholders' approval requirements
for continuing connected transactions as provided under Rule 14A.90
of the Hong Kong Listing Rules.
Credit Services
As one or more of the applicable Percentage Ratios in respect of
the CNAHC New Annual Caps exceed 5% but below 25%, the Credit
Services to be provided to the CNAHC Group by CNAF under the CNAHC
Financial Services Agreement are subject to (i) the requirements
applicable to discloseable transaction under Chapter 14 of the Hong
Kong Listing Rules; and (ii) the reporting, announcement and
independent shareholders' approval requirements under Chapter 14A
of the Hong Kong Listing Rules.
Other financial services
The other financial services to be provided by CNAF to the CNAHC
Group will be carried out on normal commercial terms or better and
the aggregate annual fees to be paid by the CNAHC Group to CNAF for
such services for each of the three years ending 31 December 2021,
2022 and 2023 are expected to fall below the de minimis threshold
as stipulated under Rule 14A.76(1) of the Hong Kong Listing Rules.
Therefore, such transactions will be fully exempt from the
reporting, annual review, announcement and independent
shareholders' approval requirements for continuing connected
transactions.
Approval by the Board
At the 22nd meeting of the fifth session of the Board of the
Company held on 28 August 2020, the Board approved the proposed
renewal of the Financial Services Agreements and the transactions
contemplated thereunder and the Proposed Annual Caps. Mr. Cai
Jianjiang, Mr. Song Zhiyong, Mr. Feng Gang and Mr. Xue Yasong,
holding positions in CNAHC, are considered to have a material
interest in the renewal of the Financial Services Agreements and
therefore have abstained from voting in the relevant Board
resolutions in respect of the renewal of the Financial Services
Agreements and the transactions contemplated thereunder and the
Proposed Annual Caps. Save as disclosed above, none of the
Directors has a material interest in the renewal of the Financial
Services Agreements and hence no other Director is required to
abstain from voting on the relevant Board resolutions.
7. Shanghai Listing Rules Implications
Pursuant to the Shanghai Listing Rules, the renewal of the
Financial Services Agreement shall be approved by Independent
Shareholders at the EGM.
IV. EGM
The Company will convene the EGM to consider, and if thought
fit, to approve, among other things, (i) the New Trademark License
Framework Agreement and the transactions contemplated thereunder,
and (ii) the renewal of the Financial Services Agreements, the
Non-exempt Continuing Connected Transactions and the Proposed
Annual Caps.
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 and the Hong Kong Listing Rules.
Pursuant to the Shanghai Listing Rules, CNAHC and CNACG have a
material interest in the Trademark License Transaction, and are
therefore required to abstain from voting on the resolution in
respect of the New Trademark License Framework Agreement and the
transactions contemplated thereunder.
Pursuant to Rule 14A.36 of the Hong Kong Listing Rules, any
Shareholder with a material interest in the renewal of the
Financial Services Agreements is required to abstain from voting on
the relevant resolution at the EGM. As at the Latest Practicable
Date, CNAHC is a substantial shareholder of the Company and CNAF.
Accordingly, CNAHC and CNACG, which is a wholly-owned subsidiary of
CHAHC, are required to abstain from voting on the resolutions in
respect of the renewal of the Financial Services Agreements, the
Non-exempt Continuing Connected Transactions and the Proposed
Annual Caps at the EGM. As at the Latest Practicable Date, CNAHC
and CNACG held an aggregate of 7,508,571,617 shares of the Company
(representing approximately 51.70% of the issued share capital of
the Company), control or are entitled to control over the voting
right in respect of their shares in the Company. To the best
knowledge, information and belief of the Directors, having made all
reasonable enquiries, save as CNAHC and CNACG, no Shareholder has a
material interest in the resolutions in respect of the renewal of
the Financial Services Agreements, the Non-exempt Continuing
Connected Transactions and the Proposed Annual Caps or should be
required to abstain from voting on the relevant resolutions at the
EGM.
V. RECOMMATION
The Board (including the independent non-executive Directors)
considers that the Trademark License Transaction under the New
Trademark License Framework Agreement is on normal commercial terms
or better. The terms and conditions contained therein are fair and
reasonable and in the interests of the Company and the Shareholders
as a whole. The Board recommends that the Independent Shareholders
vote to approve the New Trademark License Framework Agreement and
the transactions contemplated thereunder.
The Board (including the independent non-executive Directors)
considers that the Air China Financial Services Agreement and the
CNAHC Financial Services Agreement is on normal commercial terms or
better and in the ordinary and usual course of business of the
Group, and the terms and conditions contained therein and the
Proposed Annual Caps are fair and reasonable and in the interests
of the Company and the Shareholders as a whole. The Board
recommends that the Independent Shareholders vote to approve the
renewal of the Financial Services Agreements, the Non-exempt
Continuing Connected Transactions and the Proposed Annual Caps.
VI. ADDITIONAL INFORMATION
Your attention is drawn to the letter from the Independent Board
Committee as set out on pages 25 to 26 of this circular which
contains its recommendation to the Independent Shareholders as to
the voting at the EGM regarding the renewal of the Financial
Services Agreements, the Non-exempt Continuing Connected
Transactions and the Proposed Annual Caps.
Your attention is also drawn to the letter from the Independent
Financial Adviser as set out on pages 27 to 41 of this circular,
which contains, among others, its advice to the Independent Board
Committee and the Independent Shareholders in relation to the
Financial Services Agreements, the Non-exempt Continuing Connected
Transactions, the Proposed Annual Caps 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 Appendix 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. Wang Xiaokang
Mr. Duan Hongyi
Mr. Stanley Hui Hon-chung
Mr. Li Dajin
14 September 2020
To the Independent Shareholders of the Company
Dear Sirs or Madams,
DISCLOSEABLE TRANSACTIONS AND CONTINUING CONNECTED
TRANSACTIONS:
FINANCIAL SERVICES AGREEMENTS
We refer to the circular dated 14 September 2020 (the
"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 28 August 2020, the Board proposed to renew the Financial
Services Agreements as set out in the Circular, and approved the
Proposed Annual Caps for the three years ending 31 December 2021,
2022 and 2023. The Non-exempt Continuing Connected Transactions and
the Proposed Annual Caps are subject to the reporting, annual
review, announcement and independent shareholders' approval
requirements under Chapter 14A of the Hong Kong Listing Rules.
The terms and the reasons for entering into the Financial
Services Agreements are summarised in the Letter from the Board set
out on pages 5 to 24 of the Circular.
The Independent Board Committee was formed to make a
recommendation to the Independent Shareholders as to whether the
renewal of the Financial Services Agreements, the Non-exempt
Continuing Connected Transactions and the Proposed Annual Caps are
fair and reasonable and whether such transactions are in the
interest of the Company and the Shareholders as a whole. Gram
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 renewal of the
Financial Services Agreements, the Non-exempt Continuing Connected
Transactions and the Proposed Annual Caps, their terms and the
basis upon which the terms have been determined. We have also
considered the key factors taken into account by Gram Capital in
arriving at its opinion regarding the renewal of the Financial
Services Agreements and the Proposed Annual Caps as set out in the
letter from Gram Capital on pages 27 to 41 of the Circular, which
we urge you to read carefully.
The Independent Board Committee, after taking into account,
amongst other things, the advice of Gram Capital, considers the
renewal of the Financial Services Agreements to be in the best
interest of the Company and the Shareholders as a whole and to be
fair and reasonable. The Independent Board Committee also considers
the Non-exempt Continuing Connected Transactions to be carried out
in the usual and ordinary course of business, on normal commercial
terms and the Proposed Annual Caps to be fair and reasonable.
Accordingly, the Independent Board Committee recommends the
Independent Shareholders to vote in favour of the relevant ordinary
resolutions as set out in the notice of the EGM.
Yours faithfully,
Independent Board Committee
Mr. Wang Xiaokang Mr. Duan Hongyi Mr. Stanley Hui Hon-chung Mr. Li Dajin
Independent Independent Independent Independent
non-executive non-executive non-executive Director non-executive
Director Director Director
Set out below is the text of a letter received from Gram
Capital, the Independent Financial Adviser to the Independent Board
Committee and the Independent Shareholders in respect of the
Non-exempt Continuing Connected Transactions for the purpose of
inclusion in this circular.
Room 1209, 12/F.
Nan Fung Tower
Gram Capital Limited 88 Connaught Road Central/
173 Des Voeux Road Central
Hong Kong
14 September 2020
To: The independent board committee and the independent
shareholders of
Air China Limited
Dear Sir/Madam,
DISCLOSEABLE TRANSACTIONS AND
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 respect of the Non-exempt Continuing Connected
Transactions, details of which are set out in the letter from the
Board (the "Board Letter") contained in the circular dated 14
September 2020 issued by the Company to the Shareholders (the
"Circular"), of which this letter forms part. Terms used in this
letter shall have the same meanings as defined in the Circular
unless the context requires otherwise.
The current term of the Air China Financial Services Agreement
and the CNAHC Financial Services Agreement will expire on 31
December 2020. As the Company/CNAF expects that the transactions
thereunder will continue to be conducted after 31 December 2020, on
28 August 2020, (i) the Company and CNAF proposed to renew the Air
China Financial Services Agreement; and (ii) CNAF and CNAHC
proposed to renew the CNAHC Financial Services Agreement.
With reference to the Board Letter, the deposit services (the
"Deposit Services") to be provided by CNAF to the Group under the
Air China Financial Services Agreement and the credit services (the
"Credit Services") to be provided by CNAF to the CNAHC Group under
the CNAHC Financial Services Agreement constitute discloseable
transactions and continuing connected transactions of the Company,
and are subject to the reporting, announcement and independent
shareholders' approval requirements under Chapters 14 and 14A of
the Hong Kong Listing Rules.
The Independent Board Committee comprising Mr. Wang Xiaokang,
Mr. Duan Hongyi, Mr. Stanley Hui Hon-chung and Mr. Li Dajin has
been established to advise the Independent Shareholders on (i)
whether the terms of the Non-exempt Continuing Connected
Transactions are on normal commercial terms and are fair and
reasonable; (ii) whether the Non-exempt Continuing Connected
Transactions are in the interests of the Company and the
Shareholders as a whole and are conducted in the ordinary and usual
course of business of the Group; and (iii) how the Independent
Shareholders should vote in respect of the resolutions to approve
the Non-exempt Continuing Connected Transactions at the EGM. We,
Gram Capital Limited, have been appointed as the Independent
Financial Adviser to advise the Independent Board Committee and the
Independent Shareholders in this respect.
BASIS OF OUR OPINION
In formulating our opinion to the Independent Board Committee
and the Independent Shareholders, we have relied on the statements,
information, opinions and representations contained or referred to
in the Circular and the information and representations as provided
to us by the Directors and/or the Company's management (the
"Management"). We have assumed that all information and
representations that have been provided by the Directors and/or the
Management, for which they are solely and wholly responsible, are
true and accurate at the time when they were made and continue to
be so as at the Latest Practicable Date. We have also assumed that
all statements of belief, opinion, expectation and intention made
by the Directors and/or the Management in the Circular were
reasonably made after due enquiry and careful consideration. We
have no reason to suspect that any material facts or information
have been withheld or to doubt the truth, accuracy and completeness
of the information and facts contained in the Circular, or the
reasonableness of the opinions expressed by the Company, its
advisers and/or the Directors/the Management, which have been
provided to us. Our opinion is based on the Directors'
representation and confirmation that there are no undisclosed
private agreements/arrangements or implied understanding with
anyone concerning the Non-exempt Continuing Connected Transactions.
We consider that we have taken sufficient and necessary steps on
which to form a reasonable basis and an informed view for our
opinion in compliance with Rule 13.80 of the Hong Kong Listing
Rules.
The 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 the 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 as contained in the Circular or the
Circular misleading. We, as the Independent Financial Adviser, take
no responsibility for the contents of any part of the Circular,
save and except for this letter of advice.
We consider that we have been provided with sufficient
information to reach an informed view and to provide a reasonable
basis for our opinion. We have not, however, conducted any
independent in-depth investigation into the business and affairs of
the Company, CNAF, CNAHC and each of their respective subsidiaries
or associates, nor have we considered the taxation implication on
the Group or the Shareholders as a result of the Non-exempt
Continuing Connected Transactions. Our opinion is necessarily based
on the financial, economic, market and other conditions in effect
and the information made available to us as at the Latest
Practicable Date. Shareholders should note that subsequent
developments (including any material change in market and economic
conditions) may affect and/or change our opinion and we have no
obligation to update this opinion to take into account events
occurring after the Latest Practicable Date or to update, revise or
reaffirm our opinion. In addition, nothing contained in this letter
should be construed as a recommendation to hold, sell or buy any
Shares or any other securities of the Company.
Lastly, where information in this letter has been extracted from
published or otherwise publicly available sources, it is the
responsibility of Gram Capital to ensure that such information has
been correctly extracted from the relevant sources.
PRINCIPAL FACTORS AND REASONS CONSIDERED
In arriving at our opinion in respect of the Non-exempt
Continuing Connected Transactions, we have taken into consideration
of the following principal factors and reasons:
Information on the Company
With reference to the Board Letter, the Company's principal
business activity is air passenger, air cargo and airline-related
services.
Information on CNAHC
With reference to the Board Letter, CNAHC is a state-owned
company incorporated in the PRC. CNAHC is primarily engaged in the
management of its state-owned assets and its equity holdings in
various investment enterprises, aircraft leasing and aviation
equipment maintenance. CNAHC is the controlling shareholder of the
Company and is therefore a connected person of the Company as
defined under the Hong Kong Listing Rules.
Information on CNAF
With reference to the Board Letter, CNAF is a company with
limited liability incorporated in the PRC, and is a non-wholly
owned subsidiary of the Group. CNAF is primarily engaged in
providing financial services to CNAHC Member Companies. Since CNAHC
can exercise more than 10% of the voting power at CNAF's general
meeting, CNAF is a connected subsidiary of the Company as defined
under Rule 14A.16 of the Hong Kong Listing Rules.
CNAF, as a non-banking financial institution providing financial
services to the Group and the CNAHC Group, is subject to
regulations promulgated by CBIRC from time to time. These
regulations may not be the same as those regulating commercial
banks. As CNAF and commercial banks have different target customers
for their respective financial services, they may be subject to
different risk profiles (mainly compliance risks, liquidity risks
and credit risks). Details of the key risk factors are set out
under the sub- section headed "3. Risk Profile and Management of
CNAF" under the section head "III. FINANCIAL SERVICES AGREEMENTS"
of the Board Letter. To assess the key risk factors, we conducted
following analyses:
Compliance risks
As confirmed by the Management, CNAF shall comply with
(Administrative Measures on Finance Companies of Enterprise
Groups*) (the "Administrative Measures ") and other requirements
from the PBOC and CBIRC.
We noted that the Administrative Measures set out certain
compliance and risk control requirements/ measures in relation to
the operation of group financing companies, including but not
limited to, maintaining certain financial ratios at all times.
The table below sets out the key financial ratio requirements of
the Administrative Measures and the respective financial ratios of
CNAF for the three years ended 31 December 2019 as provided by the
Company.
Financial ratios of CNAF
For the year For the year For the year
ended 31 December ended 31 December ended 31 December
Financial ratio Requirements 2019 (approximate 2018 (approximate 2017 (approximate
%) %) %)
Lowest during the respective period
Capital adequacy Not less than
ratio 10% 23.70 20.98 21.49
Highest during the respective period
Inter-financial Not more than Nil Nil Nil
institution 100%
borrowing balances
to total capital
ratio
Total amount Not more than Nil Nil Nil
of outstanding 100%
guarantees
to total
capital ratio
Long-term and
short- term
investment
to total capital Not more than
ratio 70% 67.12 63.29 66.83
Self-owned
fixed assets
to total capital Not more than
ratio 20% 0.37 0.26 0.28
Non-performing Not more than Nil Nil Nil
loan ratio 5%
As shown in the table above, CNAF complied with the relevant
financial ratio requirements as set out in the Administrative
Measures during 2017, 2018 and 2019. As also confirmed by the
Management, they are not aware of any record of non-compliance with
relevant laws and regulations of the PRC on CNAF during the recent
three years.
Liquidity risks
CNAF recorded liquidity ratio of approximately 61.68% and 89.45%
as at 31 December 2018 and 31 December 2019 respectively. According
to the statistics as published by CBIRC, the PRC commercial banks
recorded average liquidity ratio of approximately 58.46% for the
fourth quarter in 2019. As such, CNAF had a higher liquidity ratio
as compared to the average liquidity ratio of the PRC commercial
banks for the fourth quarter in 2019.
Credit risks
The key indicators of credit risk are the non-performing loans
ratio and the allowance of non- performing loans to total loans
ratio. As advised by the Management, as at 31 December 2019, CNAF
did not record any non-performing loans and the allowance of
non-performing loans to total loans ratios is not applicable.
In addition, pursuant to the Administrative Measures, in the
event that a group finance company faces any difficulty in making
payment, its controlling shareholder(s) will increase such group
finance company's capital accordingly based on the actual need. We
noted from CNAF's articles of association that CNAHC undertook that
CNAHC will provide funding (according to the practical situations)
to CNAF to satisfy its capital needs in the event that CNAF
experiences any urgent payment difficulties.
A. DEPOSIT SERVICES
Reasons for and benefits of the Deposit Services
With reference to the Board Letter, the Directors believe that
it is in the best interest of the Group to enter into transactions
under the Air China Financial Services Agreement with CNAF having
taken into account the following factors:
a. in respect of transactions between the Group and CNAF, CNAF
is able to provide more efficient settlement services as compared
with independent third party banks;
b. CNAF is able to provide safe, convenient, fast, comprehensive
and tailor-made financial services to the Group. From 2004 and up
to the Latest Practicable Date, the connected transactions between
CNAF and the Group have been carried out in compliance with the
relevant laws and regulations and the relevant listing rules, and
CNAF has a good track record on compliance. With its continuous
improvement of professional level and financial services, CNAF is
fully qualified for providing the relevant services to the
Group;
c. as a professional financial institution in the Group, CNAF
could act more proactively in protecting the interest of the Group
than external institutions; and
d. a good cooperative relationship has been established between
CNAF and the relevant departments of the Group over the years which
makes their cooperation more efficient.
As confirmed by the Management, based on the previous
cooperation with other banks, the Management considers that CNAF is
more efficient in provision of deposit services as compared to
others banks as CNAF has been in-corporation with the Group for
over 15 years, thereby having in- depth understanding in each
other's business model and working practice. The deposit services
offered by CNAF, in term of deposit amounts and period, can be
tailor-made to fulfil the financial needs of the Group.
Pursuant to the Air China Financial Services Agreement, the
interest rates applicable to the Group for deposits with CNAF shall
(i) be in compliance with the requirements prescribed by PBOC on
such type of deposits; (ii) be not lower than the interest rates
offered by state-owned commercial banks to the Group for the same
type of services under the same conditions; and (iii) be not lower
than the interest rates offered by CNAF to other CNAHC Member
Companies for the same type of services under the same conditions.
In addition, it will not restrict the Group to place their monetary
funds in any banks.
In light of the above reasons, in particular:
(i) the information and background of the CNAF; and
(ii) the pricing policy of the Deposit Services,
we consider the Deposit Services are in the interests of the
Company and the Shareholders as a whole and are conducted in the
ordinary and usual course of business of the Group.
Principal terms of the Deposit Services
Summarised below are the major terms of the Deposit Services,
details of which are set out under the sub-section headed "1. The
Air China Financial Services Agreement" under the section headed
"III. FINANCIAL SERVICES AGREEMENTS" of the Board Letter:
Date
28 August 2020
Parties
The Company and CNAF
Principal terms
Pursuant to the Air China Financial Services Agreement, CNAF has
agreed to provide the Group with a range of financial services
including the Deposit Services.
Pricing basis
With respect to the Deposit Services, the interest rates
applicable to the Group for deposits with CNAF shall (i) be in
compliance with the requirements on interests prescribed by PBOC
for such type of deposit; (ii) be not lower than the interest rates
offered by state-owned commercial banks to the Group for the same
type of services under the same conditions; and (iii) be not lower
than the interest rates offered by CNAF to other CNAHC Member
Companies for the same type of services under the same
conditions.
As confirmed by the Management, the Group's cash placed in CNAF
were mainly saving deposits ( ) during 2018 to 2020. We selected
three sets of deposit records between (i) the Group and CNAF; (ii)
other CNAHC Member Companies and CNAF; and (iii) the Group and a
state-owned commercial bank in the same period during 2019 and
2020, respectively. According to the aforesaid deposit records, we
noted that the interest rates for the saving deposits ( ) offered
by CNAF to the Group were not lower than those (i) offered by the
commercial bank to the Group; and (ii) offered by CNAF to other
CNAHC Member Companies.
With reference to the Board Letter, the Group adopted certain
internal control measures in respect of the Deposit Services to be
provided by CNAF to the Group. Details of the measures are set out
under the sub-sections headed "4. Internal Control Measures for the
Non-exempt Continuing Connected Transactions" under the sectoin
headed "III. FINANCIAL SERVICES AGREEMENTS" of the Board Letter.
According to the internal control measures and our findings on
deposit rates, we consider that the effective implementation of the
measures will ensure the fair pricing of the Deposit Services and
we do not doubt the effectiveness of the implementation of the
internal procedures for the Deposit Services.
Based on the above factors, we are of the view that the terms of
the Deposit Services are on normal commercial terms and are fair
and reasonable.
Proposed annual caps
Set out below are (i) the actual maximum amount of the Deposit
Services for the three years ending 31 December 2020 with existing
annual caps; and (ii) the Air China New Annual Caps for the three
years ending 31 December 2023:
For the year For the year For the year
ended 31 December ended 31 December ending 31 December
2018 2019 2020
RMB' billion RMB' billion RMB' billion
Maximum daily
balance of deposits 9.665
10.485 9.610 (Note)
Existing annual
caps 12 14 15
Utilisation rate
(%) 87.38 68.64 64.43
For the year For the year For the year
ending 31 December ending 31 December ending 31 December
2021 2022 2023
RMB' billion RMB' billion RMB' billion
Air China New
Annual Caps 15 15 15
Note: the figure was for the six months ended 30 June 2020.
The basis for determining the Air China New Annual Caps for the
three years ending 31 December 2023 are set out under sub-section
headed "Basis for the Air China New Annual Caps" under the section
headed "III. FINANCIAL SERVICES AGREEMENTS" of the Board
Letter.
According to the above table, the utilisation rates of existing
annual cap for two years ended 2019 and for six months ended 30
June 2020 were approximately 87.38%, 68.64% and 64.43%
respectively. With reference to the Board Letter, as the Group
strengthened its management of funds and improved the efficiency of
utilization of its own funds in 2018 and 2019, the growth rate of
monetary funds of the Group was lower than expected. Therefore, the
daily maximum amount of monetary funds of the Group for the two
years ended 31 December 2019 and the maximum daily balance of
deposits of the Group placed with CNAF in those two years were
lower than expected.
Despite that the utilisation rates of existing annual cap for
FY2019 and for the six months ended 30 June 2020 were not at high
level, the Management set the Air China New Annual Caps for each of
the three years ending 31 December 2023 at the same amount of the
existing annual cap for the year ending 31 December 2020.
To assess the fairness and reasonableness of the Air China New
Annual Caps for the three years ending 31 December 2023, we
conducted the following analyses:
-- According to the 2020 interim results announcement, as at 30
June 2020, total amount of Group's (i) monetary fund (excluding
CNAF's restricted bank deposits) amounted to approximately RMB13.4
billion; and (ii) accounts receivable amounted to approximately
RMB3.8 billion. The sum of the aforesaid two items amounted to
approximately RMB17.2 billion as at 30 June 2020. The sum of the
aforesaid two items (which is more than the Air China New Annual
Cap for each of the three years ending 31 December 2023) indicates
the Group's possible demand of deposit services to be provided by
commercial banks and CNAF.
-- The Company provided us the calculation of Air China New
Annual Caps for the three years ending 31 December 2023. According
to the calculation, the Air China New Annual Caps were calculated
by the sum of (i) estimated amount of the Group's daily balance of
deposits placed with CNAF (based on historical maximum amount of
daily balance of deposits placed by the Group with CNAF for the
three years ended 31 December 2019) of RMB10.5 billion; (ii)
estimated increase of daily balance of deposits to be placed by the
Group with CNAF (based on possible further increase in the balance
of deposits to be placed by the Group with CNAF) of RMB4 billion;
and (iii) a buffer of RMB0.5 billion.
-- During the three years ended 31 December 2019, the maximum
daily balance of deposits with CNAF were approximately RMB8.943
billion, RMB10.485 billion and RMB9.610 billion respectively,
representing an average change rate of approximately 4.45%.
Based on (i) the maximum daily balance of deposits with CNAF
during 2019 (i.e. approximately RMB9.610 billion); and (ii) the
average change rate of approximately 4.45%, the estimated maximum
daily balance of deposits with CNAF would reach approximately
RMB10.484 billion for the year ending 31 December 2021.
In addition, based on the historical information, the maximum
daily balance of deposits with CNAF during the three years ended 31
December 2019 was approximately RMB10.485 billion recorded in
2018.
The estimated amount of the Group's daily balance of deposited
placed with CNAF (based on historical maximum amount of daily
balance of deposits placed by the Group with CNAF) of RMB10.5
billion for the three years ending 31 December 2023 were close to
the above figures (i.e. RMB10.484 billion and RMB10.485 billion
respectively).
-- As stated in the 2019 annual report, the Group has set the
total budgeted capital expenditure for aircraft and related
equipment at RMB88,898 million, of which RMB30,116 million,
RMB29,473 million and RMB29,309 million have been allocated to the
each of the three years ending 2020, 2021 and 2022, respectively.
The Group intends to satisfy the capital expenditure requirement by
means such as internal funds or financing.
As stated in the Board Letter, direct financing is one of the
main financing methods of the Company. The Company determines
whether or not to conduct direct financing and the scale of
financing based on the Company's capital needs and financing
environment. The Company may raise funds by way of direct financing
in the next three years. It is estimated that this may lead to an
increase of the Group's funds. It is expected blat raising funds by
way of direct financing by the Company may result in an increase of
daily balance of deposits to be placed by the Group with CNAF by
RMB4 billion for each of the three years ending 31 December
2023.
Due to unsatisfactory financing environment in 2018 and 2019,
the Company did not arrange direct financing in both years.
Accordingly, the Company determined the estimated increase of daily
balance of deposits (i.e. RMB4 billion) for each of the three years
ending 31 December 2023 mainly based on the Company's use of part
of the proceeds raised from its non-public issuance of A shares in
2017 to replace self-raised funds previously invested in the
proceeds-funded projects (which led to an increase of approximately
RMB4.7 billion in the balance of deposits placed by the Group with
CNAF).
-- The Group applied a buffer of less than 5% as an assumption
for the determination of the Air China New Annual Caps for each of
the three years ending 31 December 2023. Having considered that the
buffer was applied for unforeseeable circumstances, for instance,
the unpredictable increase in the Group's actual demand on the
Deposit Services, we consider the buffer to be acceptable.
-- As further advised by the Management, it is difficult to
accurately predict the cash level during 2021 to 2023 due to the
COVID-19 in 2020, which may cause large uncertainties in market.
Nevertheless, should there be any substantial increase in total
cash of the Group, the Group may opt to deposit larger portion of
cash in commercial banks or re-comply with the applicable
provisions of the Hong Kong Listing Rules governing continuing
connected transaction to revise the Air China New Annual Caps.
Having considered the above factors, we are of the view that the
Air China New Annual Caps for the three years ending 31 December
2023, which are the same as the Air China New Annual Cap for the
year ending 31 December 2021, are fair and reasonable.
B. THE CREDIT SERVICES
Reasons for and benefit of the Credit Services
With reference to the Board Letter, CNAF has been providing
financial services to the CNAHC Group for years. The business with
the CNAHC Group contributed a steady and significant portion to
CNAF's revenues in the past. Such transaction is beneficial for
CNAF to make full use of its function as a financial Platform to
further improve the utilization efficiency and effectiveness of
funds, as well as enhance its gains on capital, which is in line
with the needs of the Company's operation and development. The
Directors believe that it would be in the best interest of CNAF and
the Group to continue the provision of financial services by CNAF
to the CNAHC Group.
As mentioned above, CNAF is primarily engaged in providing
financial services to CNAHC Member Companies. As confirmed by the
Management, as the Credit Services are conducted in the ordinary
and usual course of business of the CNAF and may be conducted on a
frequent and regular basis, it would be (i) costly and impractical
to make regular disclosure of each of the relevant transactions and
obtain the prior approval from the Independent Shareholders as
required by the Hong Kong Listing Rules, if necessary; and (ii)
impracticable to seek Independent Shareholders' approval (if
necessary) after receiving the Credit Services application from
members of the CNAHC Group. Accordingly, the Management are of the
view that the Credit Services to be continuously provided by CNAF
to the CNAHC Group under the CNAHC Financial Services Agreement
will be beneficial
to the Group and the Shareholders as a whole.
In view of the above, we concur with the Directors that the
Credit Services are in the interests of the Company and the
Shareholders as a whole and are conducted in the ordinary and usual
course of business of the Group.
Principal terms of the Credit Services
Summarised below are the major terms of the Credit Services,
details of which are set out under the sub-section headed "2. CNAHC
Financial Services Agreement" under the section headed "III.
FINANCIAL SERVICES AGREEMENTS" of the Board Letter:
Date
28 August 2020
Parties
CNAF and CNAHC
Principal terms
Pursuant to the CNAHC Financial Services Agreement, CNAF has
agreed to provide the CNAHC Group with a range of financial
services including the Credit Services.
Pricing basis
The interest rates applicable to the Credit Services provided by
CNAF to the CNAHC Group shall (i) be in compliance with the
requirements on interests prescribed by PBOC for such type of
loans; (ii) be not lower than the interest rates charged by
state-owned commercial banks to the CNAHC Group for the same type
of services under the same conditions; and (iii) be not lower than
the interest rates charged by CNAF to other CNAHC Member Companies
for the same type of services under the same conditions.
Upon our request, we obtained six loan agreements in total
entered into between (i) the Group and CNAF; and (ii) the CNAHC
Group and CNAF, with relevant approval documents during 2018 to
2020. Based on the aforesaid documents, we noted that (i) CNAF's
staff conducted pre-loan investigation on loan applications to,
among other things, assess the borrowers' creditworthiness; (ii)
loan review committee approved the key terms of the loans; and
(iii) after the approval from the loan review committee was
obtained, the borrower and CNAF enter into a legally-binding loan
agreement and then the loan principal was transferred to the
borrower. In addition, we noted that the interest rates charged by
CNAF to the members of the CNAHC Group were not lower than those
charged by CNAF to the Group for loans with similar duration and
granted in similar period.
With reference to the Board Letter, the Group adopted certain
internal control measures in respect of the Credit Services to be
provided by CNAF to the CNAHC Group. Details of the measures are
set out under the sub-sections headed "4. Internal Control Measures
for the Non-exempt Continuing Connected Transactions" under the
section headed "III. FINANCIAL SERVICES AGREEMENTS" of the Board
Letter. According to the internal control measures and our findings
on interest rates, we consider that the effective implementation of
the measures will ensure the fair pricing of the Credit Services
and we do not doubt the effectiveness of the implementation of the
internal procedures for the Credit Services.
Based on the above factors, we are of the view that the terms of
the Credit Services are on normal commercial terms and are fair and
reasonable.
Proposed annual caps
Set out below are (i) the actual maximum amount of the Credit
Services for the three years ending 31 December 2020 with existing
annual caps; and (ii) the CNAHC New Annual Caps for the three years
ending 31 December 2023:
For the year For the year For the year
ended 31 December ended 31 December ending 31 December
2018 2019 2020
RMB' billion RMB' billion RMB' billion
Maximum daily
balance of Credit
Services
0.540
1.445 1.025 (Note)
Existing annual
caps 8 9 10
Utilisation rate
(%) 18.06 11.39 5.40
For the year For the year For the year
ending 31 December ending 31 December ending 31 December
2021 2022 2023
RMB' billion RMB' billion RMB' billion
CNAHC New Annual
Caps 6.5 6.5 6.5
Note: the figure was for the six months ended 30 June 2020.
The basis for determining the CNAHC New Annual Caps for the
three years ending 31 December 2023 are set out under sub-section
headed "Basis for the CNAHC New Annual Caps" of section headed
"III. FINANCIAL SERVICES AGREEMENTS" of the Board Letter.
According to the above table, the utilisation rates of existing
annual cap for two years ended 2019 and for six months ended 30
June 2020 were approximately 18.06%, 11.39% and 5.40% respectively.
With reference to the Board Letter, the low utilization rate of the
historical annual caps is due to the facts that (i) CNAHC and its
subsidiaries had ample liquidity in the years of 2018 and 2019,
therefore their demands for loans were much lower than expected;
and (ii) for those members of the CNAHC Group who had loan demands,
they borrowed some of their loans from independent third-party
banks rather than CNAF.
We understood that the existing annual caps for the three years
ending 31 December 2020 were determined with reference to, among
other things, (i) estimated maximum amount of daily balance of
Credit Services provided by CNAF to CNAHC Group for each of the
three years ending
31 December 2020 of RMB3.7 billion, RMB4.5 billion and RMB5.4
billion respectively; (ii) estimated additional borrowings of
RMB4.0 billion, RMB4.2 billion and RMB4.5 billion to be obtained by
the CNAHC Group from CNAF in place of banks for each of the three
years ending 31 December 2020 respectively; and (iii) CNAHC Group's
additional loans requirement of RMB0.3 billion, RMB0.3 billion and
RMB0.1 billion for each of the three years ending 31 December 2020
respectively for the construction of auxiliary facilities of a
project from CNAF. Upon our request, the Management provided
breakdown of the historical maximum daily balance of Credit
Services for the two years ended 31 December 2019. According to the
breakdown, (i) the differences between actual maximum amount of
daily balance of Credit Services provided by CNAF to CNAHC Group
and its estimated maximum amount amounted to approximately RMB2.255
billion and RMB3.475 billion for each of the two years ended 31
December 2019; and (ii) the differences between actual amounts of
additional borrowings obtained by the CNAHC Group from CNAF in
place of banks for the two years ended 31 December 2019 and its
estimated maximum amount amounted to RMB4 billion and RMB4.2
billion for each of the two years ended 31 December 2019. The sum
of aforesaid differences represented over 95% of the difference
between the historical maximum amount of and the existing annual
caps of Credit Services for the two years ended 31 December 2019
(i.e. RMB6.555 billion for 2018 and RMB7.975 billion for 2019).
Based on the aforesaid figures, we also consider that (i) demands
for loans of CNAHC and its subsidiaries from CNAF were much lower
than expected for the two years ended 31 December 2019; (ii) for
those members of the CNAHC Group who had loan demands, they
borrowed some of their loans from independent third-party banks
rather than CNAF for the two years ended 31 December 2019; and
(iii) the low utilisation rate of the existing annual caps for the
two years ended 31 December 2019 were mainly caused by
the aforesaid factors (i) and (ii).
As the utilisation rates of existing annual caps for two years
ended 31 December 2019 and for six months ended 30 June 2020 were
at low levels, the Management lower the CNAHC New Annual Caps for
the three years ending 31 December 2023. Despite the fact that the
CNAHC New Annual Caps for the three years ending 31 December 2023
are lower than the existing annual cap for the year ending 31
December 2020, the CNAHC New Annual Caps were much more than the
actual maximum daily balance of the Credit Services for the two
years ended 31 December 2019.
To assess the fairness and reasonableness of the CNAHC New
Annual Caps for the three years ending 31 December 2023, the
Management provided us the calculation for the CNAHC New Annual
Caps for the three years ending 31 December 2023 upon our
request.
According to the calculation, the CNAHC New Annual Caps for the
three years ending 31 December 2023 were calculated by (i) the
CNAHC Group's historical demand of Credit Services; (ii) the
CNAHC's possible financing needs from CNAF based on their existing
demand of credit services from independent third parties; (iii) the
possible demand of the CNAHC Group (excluding CNAHC) for their
annual liquidity needs; and (iv) a buffer of less than 5%.
In respect of the CNAHC Group's historical demand of Credit
Services, the Management estimated such demand would be
approximately RMB1.865 billion for each of the three years ending
31 December 2023. During the three years ended 31 December 2019,
the Group recorded historical amounts under the Credit Services of
approximately RMB3.125 billion, RMB1.445 billion and RMB1.025
billion, with an average of approximately RMB1.865 billion. The
estimated demand of RMB1.865 billion represented the average
historical amounts under the Credit Services for the three years
ended 31 December 2019.
In respect of the CNAHC's possible financing needs from CNAF
based on their existing demand of credit services from independent
third parties, the Management estimated a maximum demand of RMB4
billion based on CNAHC's existing borrowings with independent third
party(ies) (i.e. an one-year liquidity loans previously obtained by
CNAHC from external banks, being RMB4 billion in 2019) and the
assumption that CNAHC will maintain the same level of demand for
liquidity loans during 2021 to 2023. We understood that the purpose
of a group finance company is to provide financial services
(including granting of loan) to members of such group. Based on the
Management's understanding, the CNAHC Group may borrow from CNAF
instead of external banks, provided that the pricing policy of the
Credit Services was fulfilled. For our due diligence purpose, we
obtained CNAHC's audited accounts for the year ended 31 December
2019 and noted that CNAHC had outstanding borrowings of more than
RMB5 billion as at 31 December 2019.
In respect of the possible demand of the CNAHC Group (excluding
CNAHC) for their annual liquidity needs, we noted that such amount
represented approximately 5% of CNAHC New Annual Caps. As advised
by the Management, the possible demand of the CNAHC Group
(excluding CNAHC) was determined with reference to the liquidity
financing plan of RMB350 million of CNAHC's certain subsidiaries,
provided that the pricing policy of the Credit Services was
fulfilled.
Furthermore, the Group has applied a buffer of less than 5% as
an assumption for the determination of the CNAHC New Annual Caps
for each of the three years ending 31 December 2023. Having
considered that the additional buffer was applied for unforeseeable
circumstances, for instance, the unpredictable increase in the
CNAHC Group's actual demand on the Credit Services, we consider the
buffer to be acceptable.
Having considered the above factors and that the CNAHC New
Annual Caps were the same for the three years ending 31 December
2023, we are of the view that the CNAHC New Annual Caps for the
three years ending 31 December 2023 to be fair and reasonable.
Hong Kong Listing Rules implications
The Directors confirmed that the Company shall comply with the
requirements of Rules 14A.53 to 14A.59 of the Hong Kong Listing
Rules pursuant to which (i) the maximum amounts of the Non-exempt
Continuing Connected Transactions must be restricted by their
respective proposed annual caps for the period concerned under the
relevant agreements; (ii) the terms of the Non-exempt Continuing
Connected Transactions (including their respective proposed annual
caps) must be reviewed by the independent non-executive Directors
annually; (iii) details of independent non- executive Directors'
annual review on the terms of the Non-exempt Continuing Connected
Transactions must be included in the Company's subsequent published
annual reports and financial accounts.
Furthermore, it is also required by the Hong Kong Listing Rules
that the auditors of the Company must provide a letter to the Board
confirming, among other things, whether anything has come to their
attention that causes them to believe that the Non-exempt
Continuing Connected Transactions (i) have not been approved by the
Board; (ii) were not, in all material respects, in accordance with
the pricing policies of the Group if the transactions involve the
provision of goods or services by the listed issuer's group; (iii)
were not entered into, in all material respects, in accordance with
the relevant agreement governing the transactions; and (iv) have
exceeded their respective proposed annual caps.
In the event that the maximum amounts of the Non-exempt
Continuing Connected Transactions are anticipated to exceed their
respective proposed annual caps, or that there is any proposed
material amendment to the terms of the Non-exempt Continuing
Connected Transactions, as confirmed by the Directors, the Company
shall comply with the applicable provisions of the Hong Kong
Listing Rules governing continuing connected transaction.
Given the above stipulated requirements for continuing connected
transactions pursuant to the Hong Kong Listing Rules, we are of the
view that there are adequate measures in place to monitor the
Non-exempt Continuing Connected Transactions and thus the interest
of the Independent Shareholders would be safeguarded.
RECOMMATION
Having taken into consideration the factors and reasons as
stated above, we are of the opinion that (i) the terms of the
Non-exempt Continuing Connected Transactions are on normal
commercial terms and are fair and reasonable; and (ii) the
Non-exempt Continuing Connected Transactions are conducted in the
ordinary and usual course of business of the Group and in the
interests of the Company and the Shareholders as a whole.
Accordingly, we recommend the Independent Board Committee to advise
the Independent Shareholders to vote in favour of the resolutions
to be proposed at the EGM to approve the Non-exempt Continuing
Connected Transactions and we recommend the Independent
Shareholders to vote in favour of the resolutions in this
regard.
Yours faithfully,
For and on behalf of
Gram Capital Limited
Graham Lam
Managing Director
Note: Mr. Graham Lam is a licensed person registered with the
Securities and Futures Commission and a responsible officer of Gram
Capital Limited to carry out Type 6 (advising on corporate finance)
regulated activity under the SFO. He has over 25 years of
experience in investment banking industry.
* For identification purpose only
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, 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
As at the Latest Practicable Date, none of the Directors,
Supervisors or chief executive 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 the 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 Stock Exchange pursuant to the Model Code for Securities
Transactions by Directors of Listed Companies.
As at the Latest Practicable Date, none of the Directors or
Supervisors of the Company has any direct or indirect interest in
any assets which have been, since 31 December 2019 (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.
Mr. Patrick Healy is a non-executive Director of the Company and
is concurrently the chairman and an executive director of Cathay
Pacific. Cathay Pacific is a substantial shareholder of the
Company, holding 2,633,725,455 H shares in the Company as at the
Latest Practicable Date, and it wholly owns Cathay Dragon. Mr. Cai
Jianjiang, who is the chairman and a non-executive Director of the
Company, and Mr. Song Zhiyong, who is an executive Director of the
Company, are concurrently non-executive directors of Cathay
Pacific. Cathay Pacific and Cathay Dragon compete or are likely to
compete either directly or indirectly with the Company in some
aspects of the business of the Company as they operate airline
services to certain destinations, which are also served by the
Company.
Mr. Song Zhiyong is an executive Director of the Company and
also a director of Air China Cargo. Air China Cargo competes or is
likely to compete either directly or indirectly with some aspects
of the business of the Company as it operates cargo airline
services by cargo aircraft to certain destinations, which are also
served by the bellyhold cargo of the Company.
Save as mentioned above, as at the Latest Practicable Date, none
of the Directors or Supervisors of the Company and their respective
close 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 as if each of them
was a controlling shareholder of the Company.
3. SERVICE CONTRACTS
As at the Latest Practicable Date, none of the Directors or
Supervisors of the Company has any existing or proposed service
contract with any member company of the Group which is not expiring
or terminable by the Group within one year without payment of
compensation (other than statutory compensation).
4. DIRECTORS' AND SUPERVISORS' EMPLOYMENT WITH SUBSTANTIAL SHAREHOLDERS
The followings are the particulars of Directors' and
Supervisors' employment with substantial Shareholders as at the
Latest Practicable Date:
Directors
Mr. Cai Jianjiang, a non-executive Director and the chairman of
the Board of the Company, serves as the chairman of the board of
directors and a member and the secretary of the communist party
group of CNAHC. He is also a non-executive director and the deputy
chairman of the board of directors of Cathay Pacific.
Mr. Song Zhiyong, the executive Director, the vice chairman of
the Board and the president of the Company, serves as the director,
the general manager, and a member and a deputy secretary of the
communist party group of CNAHC. He is also a non-executive director
of Cathay Pacific.
Mr. Feng Gang, a non-executive Director of the Company, serves
as a director, a member and a deputy secretary of the communist
party group of CNAHC.
Mr. Xue Yasong, the employee representative Director of the
Company, serves as the employee representative director and the
president of the Labour Union of CNAHC.
Mr. Patrick Healy, a non-executive Director of the Company,
serves as an executive director and the chairman of the board of
directors of Cathay Pacific.
Supervisor
Mr. Zhao Xiaohang, a supervisor of the Company, serves as a
deputy general manager and a member of the communist party group of
CNAHC. He is also the chairman of the board of directors of CNACG
and a non-executive director of Cathay Pacific.
Mr. He Chaofan, a supervisor of the Company, serves as a
director, the president and a member of the party committee of
CNACG.
5. NO MATERIAL ADVERSE CHANGE
Other than disclosed in the 2019 annual results announcement and
the 2019 annual report of the Company, the first quarter report of
2020 of the Company, the 2020 interim results announcement of the
Company and the announcements of the Company in relation to the
Group's monthly key operating data, the Directors confirm that as
at the Latest Practicable Date, there has been no material adverse
change in the Group's financial or trading position since 31
December 2019, being the date to which the latest published audited
financial statements of the Group have been made up.
6. EXPERT
The following are the qualifications of the expert who has given
its opinion or advice, which is contained in this circular:
Name Qualification
Gram Capital a corporation licensed to carry out Type
6 (advising on corporate finance) regulated
activities under the SFO
a. As at the Latest Practicable Date, Gram 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 2019 (the date to which the
latest published audited financial statements of the Group were
made up);
b. As at the Latest Practicable Date, Gram 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. Gram 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.
7. MISCELLANEOUS
a. The company secretary of the Company is Mr. Zhou Feng.
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 H share registrar and transfer office of the Company is
Computershare Hong Kong Investor Services Limited, Rooms 1712-1716,
17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong
Kong.
8. 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 Monday, 28 September 2020:
a. Air China Financial Services Agreement;
b. CNAHC Financial Services Agreement;
c. the letter from the Independent Board Committee to the
Independent Shareholders, the text of which is set out on pages 25
to 26 of this circular;
d. the letter from Gram Capital to the Independent Board
Committee and the Independent Shareholders, the text of which is
set out on pages 27 to 41 of this circular;
e. the consent letter issued by the expert referred to in this circular; and
f. this circular.
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END
CIRFIFFVADISLII
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