TIDMAIRC
RNS Number : 9785A
Air China Ld
28 September 2022
If you are in any doubt as to any aspect of this circular or as
to the action you should take, you should consult your stockbroker
or other registered dealer in securities, bank manager, solicitor,
professional accountant or other professional adviser.
If you have sold or transferred all your shares in Air China
Limited, you should at once hand this circular along with the
accompanying form of proxy to the purchaser or the transferee or to
the bank, stockbroker or other agent through whom the sale was
effected for transmission to the purchaser or transferee.
Hong Kong Exchanges and Clearing Limited and The Stock Exchange
of Hong Kong Limited take no responsibility for the contents of
this circular, make no representation as to its accuracy or
completeness and expressly disclaim any liability whatsoever for
any loss howsoever arising from or in reliance upon the whole or
any part of the contents of this circular.
AIR CHINA LIMITED
(a joint stock limited company incorporated in the People's
Republic of China with limited liability)
(Stock Code: 00753)
(1) CONTINUING CONNECTED TRANSACTIONS AND DISCLOSEABLE
TRANSACTION; AND
(2) PROPOSED ENTERING INTO OF THE SUPPLEMENTAL AGREEMENT AND
NOTICE OF EXTRAORDINARY GENERAL MEETING
Independent Financial Adviser to the Independent Board Committee
and the Independent Shareholders
SOMERLEY CAPITAL LIMITED
A letter from the Board is set out on pages 5 to 36 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 37 to 38 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 39 to 65 of this
circular.
A notice convening the EGM to be held at 11:00 a.m. on Friday,
14 October 2022 at The Conference Room C713, No. 30, Tianzhu Road,
Airport Industrial Zone, Shunyi District, Beijing, the PRC, is set
out on pages 70 to 72 of this circular. Whether or not you are able
to attend the EGM, you are requested to complete and return the
accompanying form of proxy in accordance with the instructions
printed thereon as soon as possible but in any event not less than
24 hours before the time appointed for convening the EGM or any
adjournment thereof. Completion and return of the form of proxy
will not preclude you from attending and voting in person at the
EGM or any adjournment thereof should you so wish.
28 September 2022
Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . 1
LETTER FROM THE BOARD . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
I. Introduction . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
II. ACC Transactions . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
III. CNACG Transactions . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 22
IV. Proposed Entering into of the Supplemental Agreement
. . . . . . . . . . . . . . . . . . 32
V. EGM . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
VI. Recommendation . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 35
VII. Additional Information . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 36
LETTER FROM THE INDEPENT BOARD COMMITTEE . . . . . .
. . . . . . . . . . . . . . . 37
LETTER FROM THE INDEPENT FINANCIAL ADVISER . . . . .
. . . . . . . . . . . . . . . . 39
APPIX I - GENERAL INFORMATION . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . 66
NOTICE OF EXTRAORDINARY GENERAL MEETING . . . . . . . .
. . . . . . . . . . . . . . . . . . 70
In this circular, unless the context otherwise requires, the
following expressions have the following meanings:
"2019 ACC Framework Agreement" the framework agreement dated 30 October
2019 entered into between the Company
and Air China Cargo in respect of the
ACC Transactions
"2022 ACC Framework Agreement" the framework agreement dated 20 September
2022 entered into between the Company
and Air China Cargo in respect of the
ACC Transactions
"ACC Group" Air China Cargo and the corporations
or other entities in which Air China
Cargo holds 30% or more equity interests
or voting rights at the general meeting
or the majority directors of which are
controlled, directly or indirectly,
by Air China Cargo
"ACC Transactions" the continuing connected transactions
contemplated under the 2019 ACC Framework
Agreement and the 2022 ACC Framework
Agreement, as applicable, between any
member of the Group on the one hand,
and any member of the ACC Group on the
other hand
"Air China Cargo" Air China Cargo Co., Ltd., a company
incorporated under the laws of the PRC
with limited liability
"Board" the board of directors of the Company
"Cathay Pacific" Cathay Pacific Airways Limited, a company
incorporated in Hong Kong and listed
on the Hong Kong Stock Exchange, the
principal activity of which is the operation
of scheduled airline services
"Company" Air China Limited, a company incorporated
in the PRC, whose H shares are listed
on the Hong Kong Stock Exchange as its
primary listing venue and on the Official
List of the UK Listing Authority as
its secondary listing venue, and whose
A shares are listed on the Shanghai
Stock Exchange
"CNACG" China National Aviation Corporation
(Group) Limited, a company incorporated
under the laws of Hong Kong and a wholly-owned
subsidiary of CNAHC
"CNACG Group" CNACG, its subsidiaries and 30%-controlled
companies (as defined under Hong Kong
Listing Rules)
"CNACG Framework Agreement" the framework agreement dated 30 October
2019 entered into between the Company
and CNACG in respect of the CNACG Transactions
"CNACG Transactions" the continuing connected transactions
contemplated under the CNACG Framework
Agreement between the member of the
Group on the one hand, and the member
of the CNACG Group on the other hand,
but excluding the various services,
such as airline catering service, housing
rental, etc., that have been included
or will be included in the continuing
connected transaction framework agreements
entered into between the Company and
CNAHC
"CNAF" China National Aviation Finance Co.,
Ltd, a company incorporated under the
laws of the PRC with limited liability
and is held as to 51% and 49% by the
Company and CNAHC. CNAF is primarily
engaged in providing financial services
to CNAHC's 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" China National Aviation Holding Corporation
Limited, a PRC state-owned enterprise
and the controlling shareholder of the
Company, directly and indirectly holding
approximately 51.70% of the issued share
capital of the Company in aggregate
as at the Latest Practicable Date
"CNAHC Financial Services the CNAHC financial services agreement
Agreement" renewed by CNAF and CNAHC on 28 August
2020
"CNAHC Group" CNAHC and the corporations or other
entities in which CNAHC holds 30% or
more equity interests or voting rights
at the general meeting or the majority
directors of which are controlled, directly
or indirectly, by CNAHC (excluding the
Group)
"Comprehensive Services the framework agreement for the continuing
Framework Agreement" related (connected) transactions of
comprehensive services entered into
between the Company and CNAHC on 29
October 2021
"connected person(s)" has the meaning ascribed to it under
the Hong Kong Listing Rules
"CSRC" the China Securities Regulatory Commission
"Director(s)" the director(s) of the Company
"EGM" the extraordinary general meeting of
the Company to be held at 11:00 a.m.
on Friday, 14 October 2022 at The Conference
Room C713, No. 30, Tianzhu Road, Airport
Industrial Zone, Shunyi District, Beijing,
the PRC
"Group" the Company and its subsidiaries
"Hong Kong Listing Rules" the Rules Governing the Listing of Securities
on The Stock Exchange of Hong Kong Limited
"Hong Kong Stock Exchange" The Stock Exchange of Hong Kong Limited
"Independent Board Committee" a board committee comprising Mr. Li
Fushen, Mr. He Yun, Mr. Xu Junxin and
Ms. Winnie Tam Wan-chi, all being the
independent non-executive Directors
of the Company
"Independent Shareholders" In terms of ACC Transactions and the
Supplemental Agreement, the Shareholders
of the Company excluding CNAHC, CNACG,
Cathay Pacific and its associates; in
terms of CNACG Transactions, the Shareholders
of the Company excluding CNAHC and CNACG
"Latest Practicable Date" 22 September 2022, being the latest
practicable date prior to the printing
of this circular for ascertaining certain
information contained herein
"Non-exempt Transactions" the relevant transactions of the Passenger
Aircraft Cargo Business under the 2022
ACC Framework Agreement and the finance
and operating leases entered into between
the Group, as lessee, and CNACG Group
"Passenger Aircraft Cargo all passenger aircraft cargo businesses
Business" and a series of relevant business operation
activities (including but not limited
to sales, pricing and settlement of
aircraft cargo space) operated by the
Group (including all airlines controlled
by the Group)
"PBOC" People's Bank of China
"Properties Leasing Framework the framework agreement for the continuing
Agreement" related (connected) transactions of
properties leasing entered into between
the Company and CNAHC on 29 October
2021
"RMB" the lawful currency of the PRC
"SFO" the Securities and Futures Ordinance
(Chapter 571 of the Laws of Hong Kong),
as amended and modified from time to
time
"Shanghai Listing Rules" the Listing Rules of Shanghai Stock
Exchange
"Shareholder(s)" the shareholder(s) of the Company
"Somerley" or "Independent Somerley Capital Limited, a licensed
Financial Adviser" corporation licensed to carry out Type
1 (dealing in securities) and Type 6
(advising on corporate finance) regulated
activities under the SFO, as the Independent
Financial Adviser to the Independent
Board Committee and the Independent
Shareholders to advise on the Non-exempt
Transactions
"Supplemental Agreement" the agreement for the matters related
to the related (connected) transactions
involving Air China Cargo entered into
among the Company, CNAHC, Air China
Cargo and CNAF on 20 September 2022
"Trademark License Framework the trademark license framework agreement
Agreement" entered into between the Company and
CNAHC on 28 August 2020
Directors: Registered Address:
Executive Directors: 1st Floor-9th Floor 101,
Song Zhiyong (Chairman) Building 1
Ma Chongxian (President) 30 Tianzhu Road Shunyi
District Beijing, the
PRC
Non-Executive Directors:
Feng Gang Patrick Healy Principal Place of Business
in Hong Kong:
Independent Non-Executive Directors: 5th Floor, CNAC House
Li Fushen He Yun Xu Junxin 12 Tung Fai Road
Winnie Tam Wan-chi Hong Kong International
Airport Hong Kong
28 September 2022
To the Shareholders
Dear Sir or Madam,
(1) CONTINUING CONNECTED TRANSACTIONS AND DISCLOSEABLE
TRANSACTION; AND
(2) PROPOSED ENTERING INTO OF THE SUPPLEMENTAL AGREEMENT AND
NOTICE OF EXTRAORDINARY GENERAL MEETING
I. INTRODUCTION
Reference is made to the announcements of the Company dated 30
October 2019 and 20 September 2022 in relation to, among other
things, the ACC Transactions. In order to further address the issue
of business competition and optimize transaction structure, the
Group intended to carry out a long-term
collaboration with the ACC Group for the Passenger Aircraft
Cargo Business under an exclusive operating model. Therefore, the
Company and Air China Cargo entered into the 2022 ACC Framework
Agreement to make amendments on the operation model of the
Passenger Aircraft Cargo Business.
Reference is made to the announcements of the Company dated 30
October 2019 and 20 September 2022 in relation to, among other
things, the CNACG Transactions. The current term of the CNACG
Framework Agreement will expire on 31 December 2022. As the Company
expects that the CNACG Transactions will continue to be conducted
after 31 December 2022, on 20 September 2022, the Company proposed
to renew the CNACG Framework Agreement with CNACG.
Reference is made to the announcements of the Company dated 28
August 2020 and 29 October 2021 in relation to, among other things,
the CNAHC Financial Services Agreement, Trademark License Framework
Agreement, Comprehensive Services Framework Agreement and
Properties Leasing Framework Agreement, as well as the announcement
of the Company dated 20 September 2022 in relation to the
Supplemental Agreement. Pursuant to the relevant listing
requirements of Air China Cargo, Air China Cargo shall maintain
independence from CNAHC and enter into framework agreement with the
Group separately. Therefore, the Company and CNAHC, Air China Cargo
and CNAF entered into the Supplemental Agreement to stipulate that
the CNAHC Financial Services Agreement, Trademark License Framework
Agreement, Comprehensive Services Framework Agreement and
Properties Leasing Framework Agreement shall not regulate the
relevant transactions entered into between the Group and ACC Group.
Air China Cargo will, as an independent entity, enter into relevant
connected transaction agreement(s) with the Company and CNAF
separately.
The purpose of this circular is to provide you with further
information on the abovementioned matters so that you can make an
informed decision on voting in respect of the relevant resolutions
at the EGM.
II. ACC TRANSACTIONS
The Company and Air China Cargo entered into the 2022 ACC
Framework Agreement on 20 September 2022.
1. Parties and the relationship between the parties
The Company is principally engaged in providing air passenger,
air cargo and airline-related services.
Air China Cargo is owned as to 45.0018% by CNAHC, the
controlling shareholder of the Company, and is therefore a
connected person of the Company under the Hong Kong Listing Rules.
Air China Cargo is a limited liability company established under
the laws of the PRC and is principally engaged in air cargo and
mail transportation business.
CNAHC directly holds 40.98% of the Company's shares and holds
10.72% of the Company's shares through its wholly-owned subsidiary
CNACG, and is the controlling shareholder of the Company as at the
Latest Practicable Date. As at the Latest Practicable Date, the
State-owned Assets Supervision and Administration Commission of the
State Council is a controlling shareholder and de
facto controller of CNAHC. CNAHC primarily operates all the
state-owned assets and state-owned equity interests invested by the
State in CNAHC and its invested entities, aircraft leasing and
aviation equipment and facilities maintenance businesses.
2. Description of the ACC Transactions
The ACC Transactions contemplated under the 2022 ACC Framework
Agreement are as follows:
-- Exclusive operation of the Passenger Aircraft Cargo Business:
In order to further address the issue of business competition and
optimize transaction structure, after friendly negotiation between
both parties, the Group and the ACC Group have determined to carry
out a long-term collaboration for the Passenger Aircraft Cargo
Business under an exclusive operating model. The entire Passenger
Aircraft Cargo Business of the Group will be operated exclusively
by the ACC Group, and the ACC Group shall undertake the overall
responsibilities for transporting the cargos to the consignors with
respect to the cargos which are transported through the passenger
aircraft.
The term of the exclusive operation of the Passenger Aircraft
Cargo Business between the Company and the ACC Group commences from
the effective date of the 2022 ACC Framework Agreement and ends on
31 December 2034. The commencement date of the term of the
exclusive operation of the Passenger Aircraft Cargo Business
between the airlines controlled by the Group and the ACC Group
shall be subject to the written agreement entered into between such
airlines and ACC Group, if otherwise specified. Upon expiry of the
exclusive operation term, the parties may determine new exclusive
operation term through friendly negotiation.
-- Ground support services and other services: The ground
support services and other services provided by the Group to the
ACC Group include but are not limited to operation support
services, IT sharing services, comprehensive support services,
engine and aircraft-related materials sharing services, retiree
management services, training services, human resources services
(including general, servicing and information services in respect
of personnel employment, archival information, salaries and
benefits, social insurance and employee services), and procurement
and maintenance services. The ground support services and other
services provided by the ACC Group to the Group include but are not
limited to ground support services (cargo terminal services and
airport apron services), container and pallet management services,
engine and aircraft-related materials sharing services.
In respect of the engine and aircraft-related materials sharing
services between the Group and the ACC Group, they mainly involve
the provision of common engine and aircraft-related materials by
the other party when one party's own engine and aircraft- related
materials could not be able to meet its respective needs (mainly
involving high- priced reusable components on the aircraft), for
the purpose of reducing the
procurement costs and timeliness in the event of temporary needs
of the parties, while, on the other hand, improve each of their
inventory utilization efficiency, hence bringing certain source of
revenue.
-- Property leasing: The Group may rent out its own properties
or land with legal use rights to ACC Group for its production and
operation, office and storage use, and the Group may lease
self-owned properties and land from the ACC Group in the event that
its own properties could not be able to meet its business needs
such as production and operation, office and storage.
The properties leased to each other between the Group and the
ACC Group differ in terms of aspects such as geographical location,
area and purpose. Currently, the properties rent out by the Group
to the ACC Group are mainly properties invested and built by the
Group in the vicinity of the Beijing Capital International Airport
for warehouse purpose, which are subject to the supervision and
administration of the General Administration of Customs of the PRC,
and the properties leased by the Group from the ACC Group at
present are mainly properties adjacent to the Group that were
leased to the Group for its use by the ACC Group under the
circumstances that the Group's own properties could not be able to
meet its office and operation needs.
Generally, the leasing term of properties or land shall not
exceed three years. If there are specific government and/or
industry requirements, the leasing term of properties or land shall
comply with such requirements. When the terms expired, the leasing
terms could be extended with unanimous consent after negotiation
between both parties.
3. Pricing Policies for the ACC Transactions
The consideration of any specific ACC Transactions shall be
determined after arm's length negotiations between the Group and
the ACC Group and on normal commercial terms, and shall be
determined in accordance with the pricing policies set forth below
on a case-by-case basis.
-- Exclusive operation of the Passenger Aircraft Cargo Business:
During the exclusive operation term, the Group shall charge the
ACC Group the transportation service fee regularly in each year.
Such transportation service fee shall be determined based on the
ACC Group's actual cargo revenue generated from the exclusive
operation of the Group's Passenger Aircraft Cargo Business after
deducting certain operating fee rate. The specific formulas are as
follows:
Transportation service fee = actual revenue from the Passenger
Aircraft Cargo Business
× (1 - operating fee rate)
Operating fee rate = operation expense rate + reward/punishment
rate
Reward/punishment rate = (growth rate of yield level of the
Passenger Aircraft Cargo Business of the current year - growth rate
of yield level of the cargo business in the industry of the current
year) ×50%
Of which:
(1) The actual revenue of the Passenger Aircraft Cargo Business
represents the actual cargo revenue generated by ACC Group's
exclusive operation of the Group's Passenger Aircraft Cargo
Business.
(2) The operation expense rate represents the ratio of operating
expenses to actual revenue from the Passenger Aircraft Cargo
Business. Operation expenses are determined by the parties through
arm's length negotiation primarily based on the operation expenses
in the historical years, with reference to factors such as the
price level in the similar market and industry and its variation
trend.
(3) In order to enhance the operating results of the exclusive
operation of the Passenger Aircraft Cargo Business, the both
parties decide to apply the reward/ punishment rate after
negotiation. The basic index of reward/punishment rate represents
50% of the difference between the yield level growth rate of the
Passenger Aircraft Cargo Business and the yield level growth rate
of the cargo business in the industry of the current year. The
parties may make reasonable adjustments according to the changes in
the market environment and the operation direction of the Passenger
Aircraft Cargo Business with unanimous consent after negotiation.
The rate of 50% is determined by the Company and Air China Cargo
through arm's length negotiation with reference to industry
practice. The rate of 50% is the same as the relevant ratios of
similar transactions of comparable companies in the industry, which
will encourage the ACC Group to enhance its capacity of the
Passenger Aircraft Cargo Business, thereby boosting the operating
efficiency of the Group's Passenger Aircraft Cargo Business, and
hence the rate is fair and reasonable.
(4) The growth rate of yield level of the Passenger Aircraft
Cargo Business of the current year represents the growth rate of
the yield level of the Passenger Aircraft Cargo Business of the
current year generated by ACC Group's exclusive operation of the
Group's Passenger Aircraft Cargo Business as compared with that of
the previous year.
(5) The growth rate of yield level of the cargo business in the
industry of the current year represents the growth rate of the
revenue of the cargo business in the industry of the current year
as compared with that of the previous year.
(6) The yield level of the cargo business represents the cargo
revenue divided by the investment amount for the cargo business.
The investment amount for the cargo business represents the total
available cargo and mail traffic measured by the
(1)
capacity available for the carriage of the cargo and mail for
every route, and the calculation formula of which is (capacity
available for the carriage of the cargo and mail of the route
multiplied by the distance of the route).
Upon the 2022 ACC Framework Agreement becoming effective, the
2019 ACC Framework Agreement shall be terminated immediately. With
respect to the Passenger Aircraft Cargo Business performed between
the parties in accordance with the 2019 ACC Framework Agreement and
the relevant specific agreement in 2022, both parties agreed that
it shall be deemed to have been correspondingly adjusted in
accordance with the above-mentioned principles since 1 January
2022.
-- Ground support services and other services:
Both parties shall, according to the service items and specific
needs, determine the relevant service fees of the ground support
services and other services provided to or by the Group through
arm's length negotiations in accordance with the following
principles:
(1) Follow the government and industry pricing or guide price if
it is available, including but not limited to the guidance from the
Civil Aviation Administration of China (CAAC) and the International
Air Transport Association on the prices of ground support services
and other terms, and the requirements on the pricing of navigation
information stipulated by CAAC and Air Traffic Management Bureau
(ATMB), and the transaction price shall be determined by the
parties through arm's length negotiation with reference to factors
such as comparable prices (if any) in the market, relevant laws and
tax policies. Generally, CAAC and the International Air Transport
Association will publish the guidance on their official websites
from time to time (for the International Air Transport Association,
the guidance may also be provided by selling to customers).
(2) If no government and industry pricing or guide price is
available, the final transaction price shall be determined through
arm's length negotiations between the parties with firstly making
reference to the market prices offered by at least two independent
third parties on the market for the same type of service, and then
taking certain factors into account such as the service standard,
service scope, business volume and specific needs of the parties.
If any service needs of the service recipient change, appropriate
adjustment will be made to the transaction price after negotiation
between both parties based on the extent of variation in relevant
costs, service quality or other factors.
(3) If none of the above prices are applicable, the service
price shall be determined by both parties on the basis of cost plus
reasonable profit. The costs are mainly based on the costs and
expenses of the service provider, including costs of human
resources and costs of facility, equipment and materials.
Reasonable profit margin will be determined with mainly making
reference to the historical average prices on similar products or
services (where possible) published regarding the
(1)
relevant industry, and/or the profit margin of the comparable
products and services disclosed by other listed companies. The
reasonable profit margin of ACC Group shall not exceed 10%. The
final transaction prices shall be determined on terms that to the
Group are no less favourable than those provided by independent
third parties to the Group or those provided by ACC Group to
independent third parties. The Group generally may gain
understanding on the historical average prices of the reasonable
profit margin of similar products or services of the relevant
industry by engaging third-party professional institutions or
making its own enquiries through channels such as available data
resources (e.g. Bureau van Dijk (BVD) and other large-scale
databases) and the official websites of other listed companies.
Besides, prior to entering into transactions of various ground
support services and other services, the Group will request the ACC
Group to provide and hence obtain the terms of similar and
comparable transactions between the ACC Group and independent third
parties whenever possible as its reference for determining the
transaction price. While making reference to the profit margin of
comparable products and services disclosed by other listed
companies, the Group will try to acquire comparable data as more as
possible, and generally by referring to at least two listed
companies' relevant data where practicable.
-- Property leasing services:
The parties shall, according to the service items and specific
needs, determine the relevant service fees of the property leasing
services through arm's length negotiations in accordance with the
following principles:
(1) The Group as lessor: First, the Group shall provide
quotation of the leased properties or land to ACC Group after
taking into account the factors including the relevant costs, tax
and reasonable profit margin relating to the properties or land.
The relevant costs include construction costs, depreciation costs,
funding costs and maintenance costs. Reasonable profit margin will
be determined with mainly making reference to the historical
average prices on similar services (where possible) published
regarding the property leasing industry, and/or the profit margin
of the comparable services disclosed by other listed companies.
Then, the rental prices for the leased properties or land shall be
determined through arm's length negotiations between the Group and
ACC Group after ACC Group takes into account the factors such as
the location of the leased properties or land and the service
quality. Such rental prices shall not be lower than the rent
offered by the Group to an independent third party (if any) in
comparable circumstances.
(2) The Group as lessee: First, the Group shall conduct market
research and collect, consolidate and analyze information in
respect of provision of leasing services by independent third
parties for the same type of properties or land (if any) in close
proximity to the properties or land to be leased. Generally, the
Group shall assign a department or an officer to verify the price
and terms available from at least
(1)
two independent third parties (if any) by email, fax or
telephone. Then, (a) if there is comparable market of the same type
identified through market research, the parties shall determine the
rental prices for the leased properties or land through arm's
length negotiations with reference to the market price for the same
type of services available from at least two independent third
parties after taking into account the relevant factors. The
relevant factors include the geographical location, function and
layout, furnishing, ancillary facilities and property services of
the property or land as well as the specific needs of the lessee;
and (b) if there is no comparable market of the same type found in
the neighboring areas through market research, the price shall be
determined by adopting the cost-plus approach: the rental price of
the leased properties or land shall be determined through arm's
length negotiations between the parties based on the relevant
costs, tax and reasonable profit margin of the properties or land
offered by ACC Group. The relevant costs include construction
costs, depreciation costs, funding costs and maintenance costs.
Reasonable profit margin will be determined with mainly making
reference to the historical average prices on similar services
(where possible) published regarding the property leasing industry,
and/or the profit margin of the comparable services disclosed by
other listed companies, and the reasonable profit margin of ACC
Group shall not exceed 10%. The abovementioned rental prices shall
not be higher than those offered by ACC Group to the independent
third parties (if any) in comparable circumstances.
The Group generally may gain understanding on the historical
average prices of the reasonable profit margin of similar products
or services of the relevant industry by engaging third-party
professional institutions or making its own enquiries through
channels such as available data resources (e.g. Bureau van Dijk
(BVD) and other large-scale databases) and the official websites of
other listed companies. Besides, prior to entering into
transactions of various ground support services and other services,
the Group will request the ACC Group to provide and hence obtain
the terms of similar and comparable transactions between the ACC
Group and independent third parties whenever possible as its
reference for determining the transaction price. While making
reference to the profit margin of comparable products and services
disclosed by other listed companies, the Group will try to acquire
comparable data as more as possible, and generally by referring to
at least two listed companies' relevant data where practicable.
(3) The Group as lessee and lessor: When leasing each other's
properties or land, as a separate matter, the parties may determine
the quotation for the rental prices of their respective properties
or land based on the above pricing principles, and then exchange
the properties and land use right in accordance with the principle
of equivalent exchange.
(4) The payment method of rental fee shall be subject to specific agreement.
(1)
4. Term of the 2022 ACC Framework Agreement
The 2022 ACC Framework Agreement shall take effect upon the
approval by the Shareholders at the general meeting of the Company
and Air China Cargo, and shall be valid until 31 December 2024 (the
"Initial Term"). The 2022 ACC Framework Agreement may be
automatically renewed for successive terms of three years after 31
December 2024 (together with the Initial Term, collectively
referred to as the "Terms of the Agreement"), subject to the
compliance with requirements under the Hong Kong Listing
Rules/Shanghai Listing Rules and the approval procedures required
under the Hong Kong Listing Rules/Shanghai Listing Rules. During
the Terms of the Agreement, the agreement can be terminated upon
the expiry on any 31 December by either party thereto by serving
the other party a written notice of not less than three months.
However, the exclusive operation term of the Passenger Aircraft
Cargo Business between the Group and ACC Group under the 2022 ACC
Framework Agreement shall not be terminated upon the termination of
the 2022 ACC Framework Agreement, provided that the compliance
requirements (including but not limited to obtaining approval and
fulfilling disclosure procedures for the annual caps) under the
Hong Kong Listing Rules/ Shanghai Listing Rules shall then be
complied with.
Upon the 2022 ACC Framework Agreement becoming effective, the
2019 ACC Framework Agreement shall be terminated immediately.
5. Independent Financial Adviser's opinion on the exclusive
operation term of the Passenger Aircraft Cargo Business
As mentioned above, the exclusive operation term of the
Passenger Aircraft Cargo Business is approximately 12 years.
According to Rule 14A.52 of the Hong Kong Listing Rules, the term
of the agreement for a continuing connected transaction shall not
exceed three years except in special circumstances where the nature
of the transaction requires a longer contractual term. In this
case, the listed issuer shall appoint an independent financial
adviser to explain why the agreement requires a longer term and to
confirm that it is normal business practice for agreements of this
type to be of such duration. Accordingly, the Company has engaged
Somerley as the Independent Financial Adviser, and Somerley has
formulated its opinion as follows:
Having considered the following factors, Somerley is of the view
that a term of longer than three years is required for the
effective operation of the transactions relating to the Passenger
Aircraft Cargo Business (the "Cargo Transactions") and is a normal
business practice in the industry:
(i) Air China Cargo intends to apply for the listing of A shares
and to comply with the applicable guidelines on initial public
offering and listing of shares issued by CSRC, the Cargo
Transactions having a term more than three years is necessary for
facilitating the potential listing of Air China Cargo;
(ii) entering into of the Cargo Transactions could provide a
clear delineation of business and thereby eliminating concerns
associated with competition between the Company and Air China
Cargo;
(i)
(iii) Air China Cargo is the sole service provider for the
Passenger Aircraft Cargo Business and in view of the shareholding
structure of both the Group and Air China Cargo, it is not
practical or commercially sensible for the Company to entrust such
services with another party in the PRC as such counterparty would
have to have a reasonable business scale to handle the Group's
Passenger Aircraft Cargo Business and possible candidates with such
business scale would normally be under control of an industry
competitor; and
(iv) Somerley considers the practice of having a term of longer
than three years is not uncommon in the industry because Somerley
noted that the similar exclusive passenger aircraft bellyhold space
contractual operation arrangement of China Eastern Airlines
Corporation Limited is also for a long term of 12 years.
6. Independent Financial Adviser's opinion on the leasing term of properties
As mentioned above, for the purpose of the property leasing
services between the Group and the ACC Group, the leasing term of
properties or land for both parties shall not exceed three years.
However, if there are specific government and/or industry
requirements, the leasing term of properties or land shall comply
with such requirements (the "Regulated Property(ies)").
Air China Cargo (as the lessee) leased properties which are
subject to the supervision and administration of the General
Administration of Customs of the PRC (the "GAC Regulated
Properties") from the Company (as the lessor). The initial leasing
term of the GAC Regulated Properties shall exceed three years which
is mainly due to the compulsory administrative regulations of the
General Administration of Customs of the PRC. Therefore, the GAC
Regulated Properties under lease are the Regulated Properties.
According to Rule 14A.52 of the Hong Kong Listing Rules, the term
for the agreement for a continuing connected transaction shall not
exceed three years except in special circumstances where the nature
of the transaction requires a longer term. In this case, the listed
issuer shall appoint an independent financial adviser to explain
why the agreement requires a longer term and to confirm that it is
normal business practice for the agreements of this type to be of
such duration.
As disclosed in the announcement of the Company dated 29 October
2021, the Company had engaged BaoQiao Partners Capital Limited, a
corporation licensed to carry on Type 1 (dealing in securities) and
Type 6 (advising on corporate finance) regulated activities under
the Securities and Futures Ordinance (Chapter 571 of the laws of
Hong Kong) ("BaoQiao Partners"), to advise opinion in respect of
the leasing term of the Regulated Properties. In particular, (i)
based on BaoQiao
Partners' review of the Measure of the PRC for the General
Administration of Places under Customs Supervision General ( )
issued by the General Administration of Customs of the PRC
effective from 1 March 2008, BaoQiao Partners noted that the lease
term of
property for the use of loading, unloading, storage, delivery
and shipping of import and export goods in the areas that are
subject to the oversight and supervision of the General
Administration of Customs is required to be at least five years. In
this regard, it is normal business practice with regards to the
compliance with applicable government/industrial regulations or
requirements for the lease term of the lease agreements to be over
three years; (ii) the lease terms for the Regulated Properties are
subject to the requirements under specific government or industrial
regulations, and the entering
into leases of the Regulated Properties will provide the
flexibility for the Company to lease out its vacant Regulated
Properties for rental income; and (iii) BaoQiao Partners has
reviewed the continuing connected transaction announcements
published by companies listed on the Hong Kong Stock Exchange since
2018, and noted that there were similar framework agreements, of
which the lease term exceeded three years, and the properties under
these framework agreements include production facilities,
commercial properties and offices which are relevant to their
respective operations and the framework agreements to lease these
premises have a duration term of up to 15 years. To sum up, BaoQiao
Partners is of the view that it is normal business practice to
enter into leases for the Regulated Properties with terms of more
than three years and to be of such duration for agreements of this
type. Please refer to the announcement of the Company dated 29
October 2021 for details.
7. Reasons for and Benefits of the ACC Transactions
The Directors believe that it is in the best interest of the
Group to continue the ACC Transactions with the ACC Group having
taken into account the following factors:
-- In respect of the exclusive contracting operation of the
Passenger Aircraft Cargo Business,
in comparison with the business arrangement of the 2019 ACC
Framework Agreement, under the 2022 ACC Framework Agreement:
(i) The two-way settlement model of income and expenditure is
adjusted to a one- way net settlement. This allows for
simplification of transactions and procedures and facilitates
public understanding.
(ii) Instead of conducting estimation at the beginning of year
and year-end reviews, revenue recognition of the Group has been
adjusted to actual revenue recognition, further ensuring the
fairness and independence of transactions.
(iii) The reward/punishment rate is applied in the operating fee
rate, and the industry yield level is used as incentives and
restrictive mechanisms, which indicated the fairness of pricing for
connected transactions. By enhancing the capacity of the Passenger
Aircraft Cargo Business of Air China Cargo, the Company's income
from passenger aircraft cargo operation will be increased.
-- In respect of ground support services and other services, the
long established successful cooperative relationship between the
Company and Air China Cargo is able to provide streamlined and
efficient cooperation and transaction between the Group and the ACC
Group.
-- In respect of properties leasing services, the Group has
entered into similar property leasing transactions with various
parties including both connected persons and independent third
parties in the ordinary course of business. The leasing of the
Group's properties to the ACC Group is beneficial to the Group in
improving the
--
efficiency of asset utilization and obtaining rental income. The
properties leased by the ACC Group to the Group are generally
located in the vicinity of the Group's office, and therefore can
meet the Group's relevant needs in a more efficient and convenient
way.
8. Actual Amounts and Existing Annual Caps
The table below sets out (i) the annual caps of amounts payable
by the ACC Group or the Group for each of the three years
ended/ending 31 December 2020, 2021 and 2022, respectively; and
(ii) the actual amounts paid by the ACC Group or the Group for
each of the two years ended 31 December 2020 and 2021 and for the
six months ended 30 June 2022, and the estimated amounts payable
for the year ending 31 December 2022 (if applicable).
Unit: RMB Million
Estimated
Future
Actual Historical Amounts(1) Existing Annual Caps
Amounts
For the For the For the For the For the For the For the
year year six months year ending year year year ending
ended ended ended 31 ended ended 31
31 31 30 June December 31 31 December
December December 2022 2022 December December 2022
2020 2021 2020 2021
Amounts
payable/paid
by the ACC
Group
to the Group
In terms of
contracting
operation
income
of passenger
aircraft
bellyhold
space cargo
business 7,685 10,491 6,656 N/A 8,000 11,000 14,000
In terms of
ground
support
services
and other
services 603 789 426 1,500 800 1,000 1,100
Amounts
payable/paid
by the Group
to the ACC
Group(2)
In terms of
operation
expenses of
bellyhold
space 351 609 351 N/A 800 960 1,160
In terms of
ground
support
services
and other
services 569 630 288 1,400 1,000 1,200 1,400
Notes:
(1) Upon the 2022 ACC Framework Agreement becoming effective,
with respect to the Passenger Aircraft Cargo Business between the
Company and the ACC Group in 2022 that has been performed in
accordance with the 2019 ACC Framework Agreement and the relevant
specific agreement, both parties agree that such business shall be
deemed to have been adjusted in accordance with the pricing
principles as disclosed above since 1 January 2022 (i.e. adjusting
the two-way settlement model of income and expenditure to a one-way
net settlement, and calculating the amount of service fee based on
the formulas under the 2022 ACC Framework Agreement (as disclosed
above)). Therefore, the estimated amounts of the contracting
operation income of passenger aircraft bellyhold space cargo
business and operation expenses of bellyhold space in 2022 are not
listed.
(2) Under the impact of the COVID-19 pandemic, the fleet
capacity of the Company's passenger aircraft has declined.
Therefore, the utilization rate of the annual cap for operation
expenses of bellyhold space related to flight volume in 2020, 2021
and the six months ended 30 June 2022 was relatively low, which has
accordingly reduced the business volume of cargo warehouse
operations and airport apron operations related to flight volume
and resulted in a lower utilization rate of the annual cap of
amounts payable by the Group to the ACC Group in respect of ground
support services and other services.
As of the Latest Practicable Date, the actual amount paid by the
ACC Group or the Group under the 2019 ACC Framework Agreement since
1 January 2022 has not exceeded the annual caps of such
transactions for the year ending 31 December 2022.
9. Proposed Annual Caps and Basis of Determination
After the 2022 ACC Framework Agreement becoming effective, the
2019 ACC Framework Agreement shall be terminated. As the Passenger
Aircraft Cargo Business under the 2022 ACC Framework Agreement is
adjusted to follow the one-way settlement model, the Company
proposes to revise the annual caps for 2022 under the 2022 ACC
Framework Agreement.
The table below sets out the revised annual caps of amounts
payable by the ACC Group or the Group after the 2022 ACC Framework
Agreement has become effective for the year ending 31 December 2022
and the proposed annual caps for each of the two years ending 31
December 2023 and 2024, respectively:
Unit: RMB Million
Proposed Annual Caps
For the year For the year For the
ending 31 ending 31 year
December December ending 31
2022 2023 December
Transactions 2024
Amounts Payable by the
ACC Group to the Group
In terms of the transportation
service fees of the Passenger
Aircraft Cargo Business 15,500 17,000 18,000
In terms of ground support
services and other services 1,500 2,500 2,700
In terms of properties
leasing services 250 250 250
Amounts Payable by the
Group to the ACC Group
In terms of ground support
services and other services 1,400 1,500 1,600
Note: In terms of the Passenger Aircraft Cargo Business and the
property leasing services provided by the Group to the ACC Group,
as the terms of which will exceed three years, the Company will
re-comply with the relevant requirements of the Hong Kong Listing
Rules (including setting annual caps, issuing announcements and/or
obtaining shareholders' approval) prior to the expiration of the
2022 ACC Framework Agreement.
Amounts Payable by the ACC Group to the Group
In arriving at the annual caps for the transportation fees of
the Passenger Aircraft Cargo Business payable by the ACC Group to
the Group for each of the three years ending 31 December 2024, the
Company has considered, among other things, the historical
transaction amounts and the following factors:
(i) In terms of income, based on the historical contracting
operation income of passenger aircraft bellyhold space cargo
business of the Company, it is estimated that the Company's income
from the Passenger Aircraft Cargo Business for the year 2022 will
not exceed RMB14.0 billion (i.e. not exceeding the revised annual
cap of the contracting operation income of passenger aircraft
bellyhold space cargo business for the year 2022 which was approved
by the Independent Shareholders at the general meeting held on 30
December 2021). Moreover, having considered that the Passenger
Aircraft Cargo Business will be expanded to include the
subsidiaries of the Company, the estimated income of the Passenger
Aircraft Cargo Business of the Group for the year 2022 is expected
to not exceed RMB15.4 billion accordingly. In terms of the
operating fee rate, the lower of the historical operating fee rates
was used in calculating the annual cap of 2022. A reasonable buffer
has also been included in the estimated amount of
(i)
transportation fees of the Passenger Aircraft Cargo Business to
cater for the operating needs from time to time. After taking into
account the above factors, it is estimated that the amount of
transportation service fee payable by the ACC Group to the Group in
respect of the Passenger Aircraft Cargo Business for the year 2022
shall not exceed RMB15.5 billion;
(ii) Based on the estimated amount of transportation service fee
in respect of the Passenger Aircraft Cargo Business in 2022, it is
assumed that the average annual growth rate in 2023 and 2024 will
be 7%. The average annual growth rate of 7% is determined with
reference to certain expected indicators of civil aviation
development during the "14th Five-Year" period (i.e. the average
annual growth rate of civil aviation passenger traffic volume of
5.9% and the average annual growth rate of guaranteed take-offs and
landings of 6.5% during the "14th Five- Year" period (2021 to
2025)), while taking into account the expected gradual slowdown of
the COVID-19 pandemic in the future and the situations such as the
Group's future fleet size and capacity growth.
-- In arriving at the annual caps for the amounts payable by the
ACC Group to the Group in connection with the ground support
services and other services provided by the Group for each of the
three years ending 31 December 2024, the Company has considered,
among other things, the historical transaction amounts and the
estimated scale of the new business between the Group and the ACC
Group from the effective date of the 2022 ACC Framework Agreement
to 2024, primarily taking into account the increased demand for
flight crew and aircraft and engine maintenance services from Air
China Cargo due to its increase in aircraft capacity and for which
the Company can provide the corresponding personnel and services.
Accordingly, it is expected that the transaction amount for the
year 2022 to 2024 may continue to increase. A reasonable buffer is
also included to cater for the operating needs from time to
time.
-- In arriving at the annual caps for the amounts payable by the
ACC Group to the Group in connection with the properties leasing
services provided by the Group for each of the three years ending
31 December 2024, the Company has considered, among other things,
the annual rentals of the properties currently leased by the Group
to the ACC Group of approximately RMB170 million and the potential
additional rentals from the possible new properties leases projects
from 2022 to 2024.
Amounts Payable by the Group to the ACC Group
-- In arriving at the annual caps for the amounts payable by the
Group to the ACC Group in connection with the ground support
services and other services provided by the ACC Group for each of
the three years ending 31 December 2024, based on the review of the
historical transaction amounts and the estimation of the
transaction amounts in 2022, including as the situation of the
COVID-19 pandemic improves, and after taking into account the
seasonal factors that affect air transport, it is estimated that
the demand for the relevant business of the Group will further
increase during the second half of year, as a result, the estimated
transaction amounts in relation to ground services (cargo
--
terminal services and airport apron services) will be
approximately RMB700 million and the estimated transaction amounts
in relation to other services (container and pallet management
services and engine leasing services) will be approximately RMB300
million in 2022, hence, the Company intends to continue to set the
annual cap for 2022 at RMB1.4 billion (i.e. the annual cap for 2022
which was approved at the general meeting of the Company held on 19
December 2019), and set the annual caps for 2023 and 2024 by
assuming an average annual growth rate of 7% in the future. The
average annual growth rate of 7% is determined with reference to
certain expected indicators of civil aviation development during
the "14th Five-Year" period (i.e. average annual growth rate of
civil aviation passenger traffic volume of 5.9% and average annual
growth rate of guaranteed take-offs and landings of 6.5% during the
"14th Five-Year" period (2021 to 2025)), while taking into account
the conditions such as expected gradual slowdown of the COVID-19
pandemic and the situations such as the Group's future fleet size
and capacity growth.
10. Internal Control Procedures
The Group has adopted the following internal control procedures
to ensure that the ACC Transactions will be conducted on normal
commercial terms, and in accordance with the 2022 ACC Framework
Agreement and the pricing policies of the Group:
-- Before entering into individual ACC Transactions, the Finance
Department, the Legal Department, the Asset Management Department
(which has a dedicated sub-division responsible for the management
of connected transactions) and if applicable, certain other
relevant departments of the Company will review the proposed terms
for the individual ACC Transactions and discuss with the relevant
departments of the Group to ensure that such transactions are
conducted on normal commercial terms and in compliance with the
pricing policies of the Group before these relevant departments
approve the finalized transaction agreements according to their
authority within the Group.
-- The Asset Management Department of the Company is responsible
for overseeing the connected transactions of the Company. The Asset
Management Department will monitor and collect detailed information
on the ACC Transactions on a regular basis, including but not
limited to the implementation of pricing policies, the Terms of the
Agreement and actual transaction amount to ensure that the
transactions are conducted in accordance with the framework
agreement. In addition, the Asset Management Department is
responsible for monitoring and reviewing the balance amount of the
annual cap for the ACC Transactions on a monthly basis and if the
annual cap for the ACC Transactions is expected to be exceeded for
a particular year, it will report to the management and take
appropriate measures in accordance with the relevant requirements
of the Hong Kong Listing Rules and/or Shanghai Listing Rules.
-- The Company's Internal Audit Department is responsible for
performing annual assessment on the internal control procedures of
the Group, including but not limited to the relevant information on
the management of continuing connected transactions. In
--
addition, the Internal Audit Department is responsible for
compiling the annual internal control assessment report and
submitting the report to the Board for examination and
approval.
-- The independent auditor of the Company and the independent
non-executive Directors will conduct an annual review on the
continuing connected transactions of the Group.
The Company considers that the above internal control procedures
could function as effective measures to regulate continuing
connected transactions. The Company also provides accurate
materials in relation to continuing connected transactions as
always to facilitate the annual review conducted by the independent
non-executive Directors and the independent auditor. Therefore, the
Directors consider that the above internal control procedures could
ensure the continuing connected transactions will be conducted on
normal commercial terms and not prejudicial to the interests of the
Company and its minority shareholders.
11. Hong Kong Listing Rules Implications
As a non-wholly owned subsidiary of CNAHC, the Company's
controlling shareholder, Air China Cargo is a connected person of
the Company as defined under the Hong Kong Listing Rules, and
accordingly the ACC Transactions constitute continuing connected
transactions of the Company under Chapter 14A of the Hong Kong
Listing Rules. As the highest applicable percentage ratio in
respect of the proposed annual caps of the transportation service
fees of the Passenger Aircraft Cargo Business payable by the ACC
Group under the ACC Transactions is, on an annual basis, higher
than 5%, such transactions are therefore subject to the
announcement, annual review, circular (including advice of
independent financial adviser) and Independent Shareholders'
approval requirements under Chapter 14A of the Hong Kong Listing
Rules.
In respect of ground support services and other services
provided by the Group, as the highest applicable percentage ratio
in respect of the proposed annual caps of amounts payable by the
ACC Group is, on an annual basis, higher than 0.1% but less than
5%, these transactions are therefore subject to the announcement
and annual review requirements under Chapter 14A of the Hong Kong
Listing Rules but are exempt from the Independent Shareholders'
approval requirement.
In respect of ground support services and other services
provided by the ACC Group, as the highest applicable percentage
ratio in respect of the proposed annual caps of amounts payable by
the Group is, on an annual basis, higher than 0.1% but less than
5%, these transactions are therefore subject to the announcement
and annual review requirements under Chapter 14A of the Hong Kong
Listing Rules but are exempt from the Independent Shareholders'
approval requirement.
In respect of properties leasing services provided by the Group,
as the highest applicable percentage ratio in respect of the
proposed annual caps of amounts payable by the ACC Group is, on an
annual basis, higher than 0.1% but less than 5%, these transactions
are therefore subject to the announcement and annual review
requirements under Chapter 14A of the Hong Kong Listing Rules but
are exempt from the Independent Shareholders' approval
requirement.
In respect of properties leasing services provided by the ACC
Group, during the three years ending 31 December 2022, 2023 and
2024, it is expected that the total amounts payable to the Group
for each year are below the de minimis threshold as stipulated
under Rule 14A.76(1)(a) of the Hong Kong Listing Rules, and
therefore the transaction will be exempted from announcement,
annual review and the Independent Shareholders' approval
requirement under Chapter 14A of the Hong Kong Listing Rules.
12. Shanghai Listing Rules Implications
As Air China Cargo is controlled by CNAHC, the controlling
shareholder of the Company, Air China Cargo is considered as a
related party of the Company according to Shanghai Listing Rules.
As a result, the transactions between the Group and the ACC Group
constitute related transactions under Shanghai Listing Rules.
According to Shanghai Listing Rules, the transaction amounts of the
proposed annual caps exceed 5% of the latest audited net assets of
the Company, and therefore shall be disclosed in a timely manner
and be submitted to the general meeting of the Company for
consideration and approval by unrelated shareholders of the Company
(i.e. the Independent Shareholders).
Therefore, although the ground support services and other
services and properties leasing services provided by the Group and
the ground support services and other services and properties
leasing services provided by the ACC Group are exempted from
Independent Shareholders' approval under Hong Kong Listing Rules,
they are required to be approved by the Independent Shareholders
under the Shanghai Listing Rules.
III. CNACG TRANSACTIONS
Reference is made to the announcement of the Company dated 30
October 2019 in relation to, amongst others, the CNACG
Transactions. The current term of the CNACG Framework Agreement
will expire on 31 December 2022. As the Company expects that the
CNACG Transactions will continue to be conducted after 31 December
2022, on 20 September 2022, the Company proposed to renew the CNACG
Framework Agreement with CNACG for a term of three years commencing
from 1 January 2023 to 31 December 2025.
1. Parties and Connections of the Parties
The Company's principal business activity is air passenger, air
cargo and airline-related services.
CNACG is both a substantial shareholder of the Company and a
wholly-owned subsidiary of CNAHC, the Company's controlling
shareholder, and is therefore a connected person of the Company as
defined under the Hong Kong Listing Rules. CNACG is an investment
holding company established in Hong Kong whose principal businesses
include passenger terminal operation, cargo terminal operation,
airport ground handling services, airline catering services,
finance/operating lease, aircraft maintenance, property investment,
logistics and other businesses conducted through its subsidiaries.
As at the Latest Practicable Date, the State-owned Assets
Supervision and Administration Commission of the State Council is a
controlling shareholder and de facto
controller of CNAHC. CNAHC primarily operates all the
state-owned assets and state-owned equity interests invested by the
State in CNAHC and its invested entities, aircraft leasing and
aviation equipment and facilities maintenance businesses.
2. Description of the CNACG Transactions
The CNACG Transactions contemplated under the CNACG Framework
Agreement are as follows:
-- Finance and operating lease services : CNACG Group will
provide finance and operating lease services in respect of,
including but not limited to, aircraft, engines, simulators,
aircraft-related materials, equipment and vehicles to the Group;
the Group will provide finance and operating lease services in
respect of, including but not limited to, equipment and vehicles to
CNACG Group.
Set out below are the differences among (i) engines and
aircraft-related materials sharing services provided by the ACC
Group and the Group to each other, (ii) engines, equipment and
vehicle leasing services provided by the CNACG Group to the Group,
and (iii) equipment and vehicle leasing services provided by the
Group to the CNACG Group:
o The engines and aircraft-related materials sharing services
provided by the ACC Group and the Group to each other represent the
short-term sharing of engines or aircraft-related materials (mainly
high-price rotables) by one party to the other according to its
temporary needs during the daily operation, generally for a
relatively short period (mainly around three months);
o The engines, equipment and vehicle leasing services provided
by the CNACG Group to the Group represent the leasing of engines,
equipment (mainly airborne media equipment and baggage handling
equipment) or vehicles by a subsidiary of CNACG specialising in
leasing business to the Group under finance lease or operating
lease for a leasing term of one year or above in general; and
o The Group provides relatively few equipment and vehicle
leasing services to the CNACG Group, which include the leasing of
catering trolleys by the Group to the CNACG Group according to the
needs of CNACG Group from time to time for a leasing term of one
year or above in general.
-- Ground support services and other services : including but
not limited to the following transactions conducted between any
member of the Group on the one hand and any member of CNACG Group
on the other hand: ground support services, aircraft maintenance
services, aircraft repair services, property investment and
management services, ticket and tourism services, logistics
services, administrative management services, cleaning and washing
services, resident security services, lounge supplies procurement
services and aircraft material procurement services.
--
In particular, the services provided by the CNACG Group to the
Group from time to time mainly include the ground support services,
aircraft maintenance services, property investment and management
services, ticket and tourism services, logistics services,
administrative management services, cleaning and washing services
and resident security services, while the services provided by the
Group to the CNACG Group from time to time mainly include the
aircraft repair services, lounge supplies procurement services and
aircraft material procurement services.
3. Pricing Policies for the CNACG Transactions
The consideration of any specific CNACG Transactions shall be
agreed on arm's length negotiations between the Group and the CNACG
Group and on normal commercial terms, which shall be determined in
accordance with the pricing policies set forth below on a
case-by-case basis.
-- Finance and operating lease services : The final transaction
price will be determined on arm's length negotiations between both
parties with reference to the prices for the same type of lease
services offered by independent third parties and after taking into
account certain factors. Such factors include purchasing price of
the leasing subject, interest rate and arrangement fees (if any)
(for finance lease), rental fee (for operating lease), the lease
terms, the feature of the leasing subject and the comparable market
rental prices. The final transaction price should not be higher
than the transaction prices offered by at least two independent
third parties on the same conditions.
-- Ground support services and other services :
The pricing policies for ground support services and other
services provided to or by the Group are set forth below:
(i) Follow the government pricing or guide price if it is
available, including but not limited to the guidance from the Civil
Aviation Administration of China (CAAC) and the International Air
Transport Association on the prices of ground support services and
other terms, and the requirements on the pricing of navigation
information stipulated by CAAC and Air Traffic Management Bureau
(ATMB). Generally, CAAC and the International Air Transport
Association will publish the guidance on their official websites
from time to time (for the International Air Transport Association,
the guidance may also be provided by selling to customers).
(ii) If no government pricing or guide price is available, the
final transaction price shall be determined on arm's length
negotiations between the parties, with firstly making reference to
the market prices offered by at least two independent third parties
on the market for the same type of service, and after taking
certain factors into account such as service standard, service
scope, business volume and specific need of parties. If any service
need of the service recipient changes,
(i)
appropriate adjustment will be made to the transaction price
after negotiation between both parties based on the extent of
variation in relevant costs, service quality or other factors.
(iii) If neither the above cases is applicable, the price will
be determined on the basis of cost plus reasonable profit. The
costs are mainly based on the costs and expenses of the service
provider, including costs of human resources and costs of facility,
equipment and materials. Reasonable profit margin will be
determined mainly making reference to the historical average prices
on similar products or services (where possible) published
regarding the relevant industry, and/or the profit margin of the
comparable products and services disclosed by other listed
companies. The profit margin of CNACG Group shall not exceed 10%.
The final transaction prices shall be determined on terms that to
the Group are no less favourable than those provided by independent
third parties to the Group or those provided by CNACG Group to
independent third parties (with regards to the receiving of
services by the Group), or no more favourable than those provided
by the Group to the independent third parties (with regards to the
rendering of services by the Group). The Group generally may gain
understanding on the historical average prices of the reasonable
profit margin of similar products or services of the relevant
industry by engaging third-party professional institutions or
making its own enquiries through channels such as available data
resources (e.g. Bureau van Dijk (BVD) and other large-scale
databases) and the official websites of other listed companies.
Besides, prior to entering into individual CNACG Transactions, the
Group will request the CNACG Group to provide and hence obtain the
terms of similar and comparable transactions between the CNACG
Group and independent third parties whenever possible as its
reference for determining the transaction price. While making
reference to the profit margin of comparable products and services
disclosed by other listed companies, the Group will try to acquire
comparable data as more as possible, and generally by referring to
at least two listed companies' relevant data where practicable.
4. The Term of the CNACG Framework Agreement
The renewal of the CNACG Framework Agreement is subject to the
approval of Independent Shareholders at the EGM. If the approval of
Independent Shareholders is obtained, the CNACG Framework Agreement
will be renewed for a term of three years commencing from 1 January
2023 to
31 December 2025. Upon the expiry of such terms, the CNACG
Framework Agreement is automatically renewable for successive terms
of three years, subject to the fulfilment of requirements under the
Hong Kong Listing Rules/Shanghai Listing Rules and obtaining the
required approval. Before expiry of the term of the CNACG Framework
Agreement, the Board will re-assess the terms and conditions of the
CNACG Framework 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 CNACG
Framework Agreement, the agreement can be terminated on any 31
December by either party thereto by serving the other party a
written notice of not less than three months.
Consistent with the common practice in the aviation industry, it
is expected that the finance lease terms and the operating lease
terms under the CNACG Framework Agreement will exceed three years
in most cases, but will be capped within the useful life of the
leasing subject of finance or operating lease by respective finance
and operating lease agreement. The useful life of the aircraft and
engines is usually over 10 years and the useful life of simulators,
ground support equipment and special vehicles is usually 3 to 12
years. The Independent Financial Adviser has analysed the above
lease terms. For details, please refer to the letter from the
Independent Financial Adviser of this circular.
5. Reasons for and Benefits of the CNACG Transactions
In respect of the leasing business as a whole, entering into
lease transactions with CNACG Group helps to streamline the process
for the Group to secure relevant equipment that meets the specific
needs of the Group with a lower cost of financing, higher
flexibility and less impact on the Group's cash flow as compared to
direct purchasing. In respect of the aircraft finance lease
business, certain subsidiaries of CNACG Group, to be acting as the
lessors, are registered in the free trade zones in the PRC and are
entitled to certain favourable tax treatments which will further
lower the transaction costs of the Group. In addition, the business
team of CNACG Group has extensive experience in aircraft leasing
and has a better understanding of the Group's business needs.
Therefore, the communications of business between the Company and
CNACG Group tend to be smoother and it will be easier for to reach
an agreement in the best interests of both parties in the stage of
negotiation. In terms of the aircraft finance lease, the Company
expects that through adopting aircraft finance lease under the
CNACG Framework Agreement with CNACG Group, the estimated total
savable financing costs for the Group as compared to adopting
secured loans arrangements with equivalent interest rates provided
by the market over the same period will be approximately US$27.64
million, US$31.32 million and US$33.12 million, respectively for
each of the years from 2023 to 2025.
In respect of ground support services and other services, the
Group has entered into a series of continuing connected
transactions with CNACG Group in its ordinary and usual course of
business. CNACG Group possesses ample management experience and
financial resources on airport ground support services and
logistics business, and it is able to provide high-quality services
to the Group.
6. Actual Amounts and Existing Annual Caps
The table below sets out (i) the annual caps of the Group for
the three years ended/ending 31 December 2020, 2021 and 2022; and
(ii) the actual aggregate amounts paid by the Group for each of the
two years ended 31 December 2020 and 2021 and for the six months
ended 30 June 2022, and the estimated aggregate amounts payable for
the year ending 31 December 2022.
Unit: RMB million
Estimated
Actual Historical Future Existing Annual Caps
Amounts Amounts
For the For the For the For the For the For the For the
year year six months year year year year ending
ended ended ended ending ended ended 31
31 31 30 June 31 31 31 December
December December 2022 December December December 2022
2020 2021 2022 2020 2021
Total value
of
right-of-use
assets in
relation
to the
finance
and
operating
leases
entered
into by the
Group as
lessee 1,959 3,526 1,032 9,140 14,500 16,000 16,500
Amounts
payable/paid
to CNACG
Group by
the Group
for ground
support
services
and other
services 111 91 51 553 600 696 807
The reasons for the lower utilization rate of the historical
annual caps were: under the influence of the COVID-19 pandemic, the
Company's existing aircraft orders were delayed in delivery, and
the demand for the operating lease business of production and
operation supporting equipment shrank or the arrangement was
suspended, thus leading to lower utilization rate of the
transaction annual caps for the finance and operating lease
services. Also affected by the COVID-19 pandemic, the procurement
of products and services related to the flights and passenger
traffic declined due to the decrease of capacity of the Group
(especially the relevant flights of the Group involving Hong Kong),
which also resulted in lower utilization rate of the transaction
annual caps for the ground support services and other services.
7. Proposed Annual Caps and Basis of Determination
The table below sets out the proposed annual caps for the
relevant transactions of the Group below for each of the three
years ending 31 December 2023, 2024 and 2025, respectively:
Unit: RMB million
Proposed Annual Caps
For the year For the year For the
ending 31 ending 31 year
December December ending 31
Transactions 2023 2024 December
2025
Total value of right-of-use
assets in relation to the
finance and operating leases
entered into by the Group
as
lessee 14,000 16,500 17,500
Annual rental fee for operating
leases
not accounted for as right-of-use
assets provided by CNACG
Group 100 140 220
Amounts payable to CNACG
Group by the Group for
ground support services
and other services 750 800 850
In arriving at the annual caps of the total value of
right-of-use assets in relation to the finance and operating leases
entered into by the Group as lessee above, the Company has
considered the following factors:
-- Of the estimated total value of right-of-use assets in
relation to the finance and operating leases entered into by the
Group as lessee, about 95% is the value of right-of- use assets in
relation to the finance lease of aircraft and other assets. When
estimating the total value of right-of-use assets in relation to
the aircraft finance lease in the following three years, the
Company has considered the followings: (i) historical transaction
amounts; (ii) it is assumed that 50% of the total amount of
aircraft to be introduced during the period from 2023 to 2025 by
the Company with no funding arrangements will be introduced by way
of finance lease with CNACG Group, and it is expected that the
number of aircraft delayed due to the COVID-19 pandemic will be
delivered under the finance lease entered into by the Group in 2020
and 2021 within the next three financial years ending 31 December
2025, and the principal amount of the relevant finance lease is
estimated accordingly; (iii) considering that the lease term of
each leased aircraft is expected to be ten to twelve years, the
market quoted interest rate (LPR) for loans of more than five years
was used as the interest rate for calculating the interest of the
aircraft finance lease transactions; (iv) according to the
information currently available to the Group, CNACG Group is
expected not to charge the Group the finance lease arrangement fees
in the next three years, thus no arrangement fees considered when
estimating the annual cap amount; (v) the Company's incremental
borrowing rate is adopted as the discount rate; and (vi) it is
assumed that the exchange rate of RMB against USD dollars ranges
from 6.5 to 7.2:1.
-- About 5% of estimated total value of right-of-use assets in
relation to the finance and operating leases entered into by the
Group as lessee is the value of right-of-use assets in relation to
operating lease. When estimating the total value of right-of-use
assets in
--
relation to above-said lease in the following three years, the
Company has considered the followings: (i) historical transaction
amounts; (ii) the operation condition of the Group's engines,
simulators, and equipment and the Group's commercial demand for
operating leases in the following three years (based on information
currently available to the Company, the Group may lease 2 to 4 used
engines, 3 back-up engines and 8 equipment from CNACG Group in each
of the three years from 2023 to 2025, respectively); and (iii) the
operating lease price and terms of the same or similar assets in
domestic market (for example, for a heavy aircraft tractor, its
annual rental fee for operating lease in domestic market usually
ranges from RMB600,000 to RMB900,000 and its lease term ranges from
3 years to 12 years).
-- A reasonable buffer is included to cater for the Group's
business needs from time to time.
-- Based on the above, the Company expected that for the three
years ending 31 December 2025, the total annual rental fee paid to
CNACG Group throughout the lease term for the finance lease
business entered into (as set under the Shanghai Listing Rules)
will not exceed RMB15 billion, RMB17 billion and RMB18 billion each
year, respectively; and the total annual rental fee paid to CNACG
Group throughout the lease term for the operating lease business
entered into (as set under the Shanghai Listing Rules) will not
exceed RMB500 million, RMB700 million and RMB800 million each year,
respectively. By adopting the incremental borrowing rate of the
Company as the discount rate (4.9% for leases with terms over 5
years and 4.75% for leases with terms ranging from 1 to 5 years) to
discount such estimated future total rental fee, the total value of
the right-of-use assets under the finance and operating leases
entered into by the Group as the lessee for the three years ending
31 December 2025 will be approximately RMB14 billion, RMB16.5
billion and RMB17.5 billion, respectively.
In arriving at the above annual caps of annual rental fee
payable by the Group to the CNACG Group in relation to the
operating leases not accounted for as right-of-use assets, the
Company has considered, among other things, the historical
transaction amounts and the following factors:
-- the operation condition of the Group's engines, simulators,
and equipment and the Group's commercial demand for operating
leases in the following three years. The Group's annual rental fees
paid for the lease with the CNACG Group that were not accounted for
as right-of-use assets in the past were mainly related to some
sporadic and temporary leases of engines and equipment, with an
annual rental fee of approximately RMB25 million. As mentioned
above, the Group may lease 2 to 4 used engines, 3 back- up engines
and 8 equipment from the CNACG Group in each of the three years
from 2023 to 2025, respectively. As the Group has not yet
determined whether to adopt long- term leases of over 1 year (in
this case, the leased assets will be accounted for as right- of-use
assets) or short-term leases for the lease of such engines and
equipment, the Company has also set the annual caps for the rental
fees of operating leases not accounted for as right-of-use assets
to ensure that the transaction amounts of such leases will be
governed by corresponding annual caps regardless of the lease
method. The Group will determine the lease method based on the
actual business needs, taking into
--
account the respective rental quotations for long-term and
short-term leases and the financial impact on the Group. Based on
the above, the Company expected that for the three years ending 31
December 2025, the annual rental fee of operating leases for
engines, simulators and equipment not accounted for as right-of-use
assets will be RMB59 million, RMB137 million and RMB217 million,
respectively; and
-- On the basis of the above estimated transaction amount, a
reasonable buffer has been included by rounding to the nearest
integer to cater for the Group's operating needs from time to
time.
In arriving at the above annual caps of amount payable by the
Group to the CNACG Group in relation to the ground support services
and other services provided by the CNACG Group, the Company has
considered, among other things, the historical transaction amounts
and the following factors:
-- Based on the research on the Group's business needs, it is
expected that the trend of the COVID-19 pandemic will slow down in
the future, and the Group will increase its capacity, including the
resumption of flights related to Hong Kong. As such, the ground
support services and other services provided by the CNACG Group to
the Group is expected to increase accordingly for the year of 2023,
and it is estimated that the transaction amount payable to the
CNACG Group by the Group for such services will not exceed RMB683
million. On this basis, a reasonable buffer is added to cater for
the Group's business needs from time to time, therefore the annual
cap for the transaction amount for 2023 is set at RMB750 million;
and
-- Based on the above annual cap for 2023, assuming that the
transaction amount will grow at a rate of approximately 7% in 2024
and 2025, with a reasonable buffer rounded to the nearest integer
to meet the Group's business needs from time to time, the annual
caps on transaction amount for 2024 and 2025 are set at RMB800
million and RMB850 million respectively. The average annual growth
rate of 7% is based on certain estimated indicators of civil
aviation development during the "14th Five-Year" period (i.e, the
average annual growth rate of civil aviation passenger traffic of
5.9% and the average annual growth rate of guaranteed take-offs and
landings of 6.5% during the "14th Five-Year" period (2021 to
2025)), taking into account the gradual slowdown of the COVID-19
pandemic and the situations such as the Group's future fleet size
and capacity growth.
8. Internal Control Procedures
The Group has adopted the following internal control procedures
to ensure that the CNACG Transactions will be conducted on normal
commercial terms, and in accordance with the CNACG Framework
Agreement and the pricing policies of the Group:
-- Before entering into individual CNACG Transactions, the
Finance Department, the Legal Department, the Asset Management
Department (which has a dedicated subdivision responsible for the
management of connected transactions) and if
--
applicable, certain other relevant departments of the Company
will review the proposed terms for the individual CNACG
Transactions and discuss with the relevant business department of
the Group to ensure that such transactions are conducted on normal
commercial terms and in compliance with the pricing policies of the
Group before these relevant departments approve the finalized
transaction agreements according to their authority within the
Group.
-- The Asset Management Department of the Company is responsible
for overseeing the connected transactions of the Company. The Asset
Management Department will monitor and collect detailed information
on the CNACG Transactions on a regular basis, including but not
limited to the implementation of pricing policies, term of
agreement and actual transaction amount of each finance lease
transaction, operating lease transaction and ground support
services and other services to ensure that the transactions are
conducted in accordance with the framework agreement. In addition,
the Asset Management Department is responsible for monitoring and
reviewing the balance amount of the annual cap for the CNACG
Transactions on a monthly basis and if the annual cap for the CNACG
Transactions is expected to be exceeded for a particular year, it
will report to the management and take appropriate measures in
accordance with the relevant requirements of the Hong Kong Listing
Rules and/or Shanghai Listing Rules.
-- The Company's Internal Audit Department is responsible for
performing annual assessment on the internal control procedures of
the Group, including but not limited to the relevant information on
the management of continuing connected transactions. In addition,
the Internal Audit Department is responsible for compiling the
annual internal control assessment report and submitting the report
to the Board for examination and approval.
-- The independent auditor of the Company and the independent
non-executive Directors will conduct an annual review on the
continuing connected transactions of the Group.
9. Hong Kong Listing Rules Implications
CNACG is a connected person of the Company as defined under the
Hong Kong Listing Rules, and accordingly the CNACG Transactions
constitute continuing connected transactions of the Company under
Chapter 14A of the Hong Kong Listing Rules. As the highest
applicable percentage ratio in respect of the proposed annual caps
applicable to finance and operating lease services provided by
CNACG Group under the CNACG Transactions is, on an annual basis,
higher than 5% but less than 25%, these transactions are therefore
subject to the announcement, annual review, circular (including
advice of independent financial adviser) and Independent
Shareholders' approval requirements under Chapter 14A of the Hong
Kong Listing Rules, and the requirements under Chapter 14 of the
Hong Kong Listing Rules applicable to discloseable
transactions.
In respect of the operating lease not accounted for as
right-of-use assets provided by the CNACG Group, as the highest
applicable percentage ratio in respect of the proposed annual caps
of the rental fee payable by the Group is, on an annual basis,
higher than 0.1% but less than 5%, these
transactions are subject to the announcement and annual review
requirements under Chapter 14A of the Hong Kong Listing Rules but
are exempt from the Independent Shareholders' approval
requirement.
In respect of the ground support services and other services
provided by CNACG Group, as the highest applicable percentage ratio
in respect of the proposed annual caps of the amounts payable by
the Group is, on an annual basis, higher than 0.1% but less than
5%, these transactions are subject to the announcement and annual
review requirements under Chapter 14A of the Hong Kong Listing
Rules but are exempt from the Independent Shareholders' approval
requirement.
In respect of the finance and operating lease services provided
by the Group to CNACG Group, for each of the three years ending 31
December 2023, 2024 and 2025, the aggregate amounts payable to the
Group is expected to fall below the de minimis threshold as
stipulated under Rule 14A.76(1)(a) of the Hong Kong Listing Rules,
therefore, such transaction will be exempt from the announcement,
annual review and Independent Shareholders' approval requirements
under Chapter 14A of the Hong Kong Listing Rules.
In respect of the ground support services and other services
provided by the Group to CNACG Group, for each of the three years
ending 31 December 2023, 2024 and 2025, the aggregate amounts
payable to the Group is expected to fall below the de minimis
threshold as stipulated under Rule 14A.76(1)(a) of the Hong Kong
Listing Rules, therefore, such transactions will be exempt from the
announcement, annual review and Independent Shareholders' approval
requirements under Chapter 14A of the Hong Kong Listing Rules.
10. Shanghai Listing Rules Implications
As CNACG is controlled by CNAHC, the controlling shareholder of
the Company, CNACG is considered as a related party of the Company
according to Shanghai Listing Rules. As a result, the transactions
between the Group and CNACG Group constitute related party
transactions under Shanghai Listing Rules. According to Shanghai
Listing Rules, the transaction amounts of the proposed annual caps
exceed 5% of the latest audited net assets of the Company, and
therefore shall be disclosed in a timely manner and be submitted to
the general meeting of the Company for consideration and approval
by unrelated shareholders of the Company (i.e. the Independent
Shareholders).
Therefore, although the ground support and other services
provided by the CNACG Group are exempted from Independent
Shareholders' approval under Hong Kong Listing Rules, they are
required to be approved by the Independent Shareholders under the
Shanghai Listing Rules.
IV. PROPOSED ENTERING INTO OF THE SUPPLEMENTAL AGREEMENT
Reference is made to the announcement dated 28 August 2020 and
the circular dated 14 September 2020 of the Company in relation to,
among other things, the CNAHC Financial Services Agreement entered
into between CNAF (being a subsidiary of the Company) and CNAHC and
the Trademark License Framework Agreement entered into between the
Company and CNAHC. Reference is made to the
announcement dated 29 October 2021 and the circular dated 12
November 2021 of the Company in relation to the Comprehensive
Services Framework Agreement entered into between the Company and
CNAHC and the Properties Leasing Framework Agreement entered into
between the Company and CNAHC.
As Air China Cargo intends to apply for the initial public
offering and listing of A shares, according to the relevant
requirements under the "Administrative Measures for Initial Public
Offering and Listing" issued by the CSRC, Air China Cargo shall
maintain independence from CNAHC and enter into a framework
agreement with the Company separately. Therefore, the Company
entered into the Supplemental Agreement with CNAHC, Air China Cargo
and CNAF on 20 September 2022, pursuant to which:
(i) Since the effective date of the separate agreement entered
into between Air China Cargo and the Company or CNAF, CNAHC Group
no longer represents Air China Cargo or ACC Group in the
corresponding framework agreements entered into between CNAHC and
the Company or CNAF, and the CNAHC Financial Services Agreement,
the Trademark License Framework Agreement, the Comprehensive
Services Framework Agreement and the Properties Leasing Framework
Agreement (together the "Relevant CNAHC Group Framework
Agreements") no longer govern the relevant transactions between the
Group and ACC Group (the "Relevant ACC Group Transactions"), and
Air China Cargo will, as an independent entity, enter into the
relevant connected transaction agreements with the Company and CNAF
separately (the "ACC Framework Agreements");
(ii) Unless otherwise approved at the general meeting of the
Company, during the term of each of the Relevant CNAHC Group
Framework Agreements, the sum of the actual transaction amount of
the Relevant ACC Group Transactions that were originally regulated
by the Relevant CNAHC Group Framework Agreements and then by the
ACC Framework Agreements, plus the actual transaction amount
between the Group or CNAF and CNAHC Group (excluding the Group and
ACC Group) under each of the Relevant CNAHC Group Framework
Agreements after this Supplemental Agreement takes effect shall not
exceed the corresponding annual cap of the transaction amount under
the Relevant CNAHC Group Framework Agreements approved at the
general meeting of the Company, and as far as the Company or CNAF
is concerned, the transaction conditions of the ACC Framework
Agreements shall be no less favorable than those under the original
corresponding Relevant CNAHC Group Framework Agreements; and
(iii) The Supplemental Agreement shall take effect upon (1)
stamped by all parties and signed by their authorized
representatives; and (2) considered and approved at the general
meeting of the Company, the general manager's office meeting of
CNAHC, the board meeting of CNAF and the general meeting of Air
China Cargo.
Save for the aforementioned amendments, other terms (including
the pricing policies) of the Relevant CNAHC Group Framework
Agreements and the respective annual caps for the transactions
thereunder remain unchanged. In order to comply with the above
provisions under the Supplemental Agreement, the Company will
continue to monitor to ensure that during the validity period of
the Relevant CNAHC Group Framework Agreements, the actual
transaction amount of the Relevant ACC Group Transactions plus the
actual transaction amount of the remaining transactions under the
Relevant CNAHC Group Framework Agreements do not exceed the
existing annual caps under each of the Relevant CNAHC Group
Framework
Agreements, therefore, the annual caps for the remaining
transactions under the CNAHC Group Framework Agreements are not
increased as a result of the signing of the Supplemental Agreement.
Based on the above, the signing of the Supplemental Agreement does
not substantially change the Relevant CNAHC Group Framework
Agreements' governing of the transactions contemplated thereunder,
and the Supplemental Agreement does not constitute material
amendment to the terms of the Relevant CNAHC Group Framework
Agreements. Nevertheless, out of prudence, the Company will submit
the Supplemental Agreement to the independent shareholders of the
Company for consideration and approval of the relevant arrangements
thereunder.
As of the Latest Practicable Date, ACC Framework Agreements
refer to the 2022 ACC Framework Agreement and the ACC Financial
Services Agreement as mentioned below. For details of the 2022 ACC
Framework Agreement, please refer to the section headed "ACC
Transactions" in this circular. CNAF is expected to enter into a
financial services agreement with Air China Cargo (the "ACC
Financial Services Agreement") for the provision of deposit
services, credit services and other financial services by CNAF to
Air China Cargo before the end of 2022. The term of the ACC
Financial Services Agreement will be until 31 December 2023. For
the transactions contemplated under the ACC Financial Services
Agreement, (i) the deposits placed by the ACC 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, it is
fully exempted under Rule 14A.90 of the Hong Kong Listing Rules;
(ii) the credit services and other financial services provided by
CNAF will be carried out on normal commercial terms or better, and
both of the daily balance of the credit services provided by CNAF
to ACC Group and the annual fees to be paid by ACC Group for the
other financial services provided by CNAF are expected to fall
below the de minimis threshold as stipulated under Rule
14A.76(1)(a) of the Hong Kong Listing Rules. Therefore, the ACC
Financial Services Agreement and the transactions contemplated
thereunder will be fully exempt from the reporting, annual review,
announcement and independent shareholders' approval requirements
for connected transactions under Chapter 14A of the Hong Kong
Listing Rules. If Air China Cargo and the Group enter into other
ACC Framework Agreements in the future, the Company will comply
with all applicable requirements under the Hong Kong Listing Rules
in a timely manner.
V. EGM
The Company will convene the EGM at 11:00 a.m. on Friday, 14
October 2022 at The Conference Room C713, No. 30, Tianzhu Road,
Airport Industrial Zone, Shunyi District, Beijing, the PRC, for the
Independent Shareholders to consider and approve the entering into
of the 2022 ACC Framework Agreement, the ACC Transactions and the
proposed annual caps for the ACC Transactions, the renewal of the
CNACG Framework Agreement, the CNACG Transactions and the proposed
annual caps for the CNACG Transactions, and the entering into of
the Supplemental Agreement. Votes on the resolutions to be
considered at the EGM shall be taken by way of poll. A form of
proxy is also enclosed herein, and published on the websites of the
Hong Kong Stock Exchange (www.hkexnews.hk) and the Company
(www.airchina.com.cn). The notice of EGM is reproduced in this
circular.
In respect of the ACC Transactions, pursuant to Rule 14A.36 of
the Hong Kong Listing Rules, any Shareholder with a material
interest in the ACC Transactions is required to abstain from voting
on the relevant resolution at the EGM. As at the Latest Practicable
Date, CNAHC, the controlling shareholder of the Company, held
45.0018% equity interest in Air China Cargo. CNACG, a substantial
shareholder of the Company, is a wholly-owned subsidiary of CNAHC.
In addition, Cathay Pacific is a substantial shareholder
of the Company and Air China Cargo. Therefore, CNAHC, CNACG,
Cathay Pacific and their respective associates are required to
abstain from voting on the resolution in respect of the ACC
Transactions. 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), and controlled or were entitled to control over the
voting right in respect of their shares in the Company. Cathay
Pacific and its associates held an aggregate of 2,633,725,455
shares of the Company (representing approximately 18.13% of the
issued share capital of the Company), and controlled or were
entitled to control over the voting right in respect of their
shares in the Company.
In respect of the CNACG Transactions, pursuant to Rule 14A.36 of
the Hong Kong Listing Rules, any Shareholder with a material
interest in the CNACG Transactions is required to abstain from
voting on the relevant resolution at the EGM. As at the Latest
Practicable Date, CNACG is a substantial shareholder of the Company
and a wholly-owned subsidiary of CNAHC. Therefore, CNAHC and CNACG
and their respective associates are required to abstain from voting
on the resolution in respect of the CNACG Transactions. 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), and controlled
or were entitled to control over the voting right in respect of
their shares in the Company.
In respect of the signing of the Supplemental Agreement, CNAHC,
CNACG, Cathay Pacific and their respective associates are required
to abstain from voting on the relevant resolutions.
To the best knowledge, information and belief of the Directors,
having made all reasonable enquiries, save as disclosed above, no
Shareholder has a material interest in the above resolutions or
should be required to abstain from voting on the relevant
resolutions at the EGM.
The register of members of H Shares will be closed from Tuesday,
11 October 2022 to Friday, 14 October 2022 (both days inclusive),
during which no transfer of H Shares will be effected in order to
determine the list of holders of H shares of the Company who will
be entitled to attend and vote at the EGM. H Shareholders of the
Company whose names appear on the H share register of members of
the Company after the close of business on Monday, 10 October 2022
are entitled to attend the EGM after completing the registration
procedures. In order to qualify for attendance at the EGM, all the
transfer documents must be lodged with the Company's H Share
registrar, Computershare Hong Kong Investor Services Limited, by
4:30 p.m. on Monday, 10 October 2022.
Whether or not you intend to attend the EGM, you are requested
to complete and return the form of proxy in accordance with the
instruction printed thereon as soon as possible but in any event
not less than 24 hours before the time appointed for convening the
EGM or any adjournment thereof. Completion and return of the form
of proxy will not preclude you from attending and voting in person
at the EGM or at any adjourned meeting thereof should you so
wish.
VI. RECOMMATION
The Board (including the independent non-executive Directors)
considers that the ACC Transactions, CNACG Transactions are on
normal commercial terms or better, and are entered into 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 the Independent Shareholders to vote in
favour of the 2022 ACC Framework Agreement and the proposed annual
caps for the ACC Transactions thereunder, and to vote independently
in favour of the renewal of the CNACG Framework Agreement and the
proposed annual caps for the CNACG Transactions thereunder. The
Board also recommends the Independent Shareholders to vote in
favour of the resolution in respect of the proposed entering into
of the Supplemental Agreement at the EGM.
Mr. Song Zhiyong, Mr. Ma Chongxian, Mr. Feng Gang, and Mr.
Patrick Healy were considered to have material interest in the ACC
Transactions and the signing of the Supplemental Agreement, and
have abstained from voting on the relevant board resolutions. Mr.
Song Zhiyong, Mr. Ma Chongxian, Mr. Feng Gang were considered to
have material interest in the CNACG Transactions and have abstained
from voting on the relevant board resolutions. Save the
above-mentioned Directors, no Director is required to abstain from
voting on the relevant board resolutions.
VII. ADDITIONAL INFORMATION
Your attention is drawn to the letter from the Independent Board
Committee of this circular which contains its recommendation to the
Independent Shareholders as to the voting in relation to the
Non-exempt Transactions.
Your attention is also drawn to the letter from the Independent
Financial Adviser of this circular, which contains, among other
things, its advice to the Independent Board Committee and the
Independent Shareholders in relation to the Non-exempt Transactions
as well as the principal factors and reasons considered by it in
concluding its advice.
Your attention is also drawn to the additional information set
out in Appendix I of this circular.
By Order of the Board Air China Limited Song Zhiyong
Chairman
Beijing, the PRC
Independent Board Committee:
Mr. Li Fushen Mr. He Yun Mr. Xu Junxin
Ms. Winnie Tam Wan-chi
28 September 2022
To the Independent Shareholders of the Company
Dear Sir or Madam,
CONTINUING CONNECTED TRANSACTIONS AND DISCLOSEABLE
TRANSACTION
We refer to the circular dated 28 September 2022 issued by the
Company to its Shareholders (the "Circular") of which this letter
forms a part. Terms defined in the Circular shall have the same
meanings in this letter unless the context otherwise requires.
On 20 September 2022, the Board approved the entering into of
the 2022 ACC Framework Agreement in respect of the ACC Transactions
and the proposed annual caps of the transactions contemplated
thereunder for the three years ending 31 December 2024 as set out
in the Circular, and approved the renewal of the CNACG Framework
Agreement in respect of the CNACG Transactions and the proposed
annual caps of the transactions contemplated thereunder for the
three years ending 31 December 2025. The Non-exempt Transactions
are subject to the announcement, annual review, circular (including
advice of independent financial adviser) and Independent
Shareholders' approval requirements under Chapter 14A of the Hong
Kong Listing Rules.
The terms and the reasons for the entering into of the 2022 ACC
Framework Agreement and the renewal of CNACG Framework Agreement
are summarised in the Letter from the Board of the Circular.
We have been appointed to form the Independent Board Committee
to make a recommendation to the Independent Shareholders as to
whether the Non-exempt Transactions are fair and reasonable and
whether such transactions are in the interest of the Company and
the Shareholders as a whole. Somerley 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 Non-exempt
Transactions, their terms and the basis upon which the terms have
been determined. We have also considered the key factors taken into
account by Somerley in arriving at its opinion regarding the above
mentioned transactions and their proposed annual caps as set out in
the Letter from the Independent Financial Adviser of the Circular,
which we urge you to read carefully.
The Independent Board Committee, after taking into account,
among other things, the advice of Somerley, considers that the
Non-exempt Transactions are conducted on normal commercial terms or
on terms no less favourable than those available to independent
third parties and are entered into in the ordinary and usual course
of business of the Group, are fair and reasonable and in the
interest of the Company and the Shareholders as a whole, and that
the proposed annual caps under those transactions are also fair and
reasonable. Accordingly, the Independent Board Committee recommends
the Independent Shareholders to vote in favor of the relevant
ordinary resolutions as set out in the notice of the EGM.
Yours faithfully,
Independent Board Committee
Mr. Li Fushen Mr. He Yun Mr. Xu Junxin Ms. Winnie Tam
Wan-chi
Independent Independent Independent Independent
non-executive non-executive non-executive non-executive
Director Director Director Director
The following is the text of a letter of advice from Somerley
Capital Limited prepared for the purpose of inclusion in this
circular, setting out its advice to the Independent Board Committee
and the Independent Shareholders in respect of the Cargo
Transactions and the Lease Transactions.
To: The Independent Board Committee and the Independent Shareholders
Dear Sirs,
CONTINUING CONNECTED TRANSACTIONS AND DISCLOSEABLE
TRANSACTION
INTRODUCTION
We refer to our appointment to advise the Independent Board
Committee and the Independent Shareholders in connection with (i)
the transactions relating to the Passenger Aircraft Cargo Business
under the 2022 ACC Framework Agreement ("Cargo Transactions"); and
(ii) the finance and operating leases to be entered into by the
Group as lessee with CNACG Group ("Lease Transactions") (together,
the "Transactions"). Details of the aforesaid transactions are set
out in the letter from the Board contained in the circular of the
Company (the "Circular") to its shareholders dated 28 September
2022, of which this letter forms part. Unless otherwise defined,
terms used in this letter shall have the same meanings as those
defined in the Circular.
As at the Latest Practicable Date, Air China Cargo is owned as
to 45.0018% by CNAHC which is a controlling shareholder of the
Company holding approximately 51.70% of the issued share capital of
the Company. Cathay Pacific is also a substantial shareholder of
Air China Cargo and a substantial Shareholder of the Company, and
together with its associates, are holding approximately 18.13% of
the issued share capital of the Company. Therefore, Air China Cargo
is a connected person of the Company as defined under the Hong Kong
Listing Rules. Accordingly, the 2022 ACC Framework Agreement and
the transactions contemplated thereunder constitute continuing
connected transactions of the Company under Chapter 14A of the Hong
Kong Listing Rules.
As the highest applicable percentage ratio in respect of the
proposed annual caps of the transportation service fees of the
Passenger Aircraft Cargo Business payable by the ACC Group under
the ACC Transactions is, on an annual basis, higher than 5%, such
transactions are therefore subject to the announcement, annual
review, circular (including advice of independent financial
adviser) and Independent Shareholders' approval requirements under
Chapter 14A of the Hong Kong Listing Rules.
As at the Latest Practicable Date, CNACG is a substantial
Shareholder of the Company and a wholly- owned subsidiary of CNAHC.
Therefore, CNACG is also a connected person of the Company defined
under the Hong Kong Listing Rules and accordingly, and the renewal
of the CNACG Framework Agreement and the transactions contemplated
thereunder constitute continuing connected transactions of the
Company under Chapter 14A of the Hong Kong Listing Rules.
As the highest applicable percentage ratio in respect of the
proposed annual caps applicable to finance and operating lease
services provided by CNACG Group under the CNACG Transactions is,
on an annual basis, higher than 5% but less than 25%, these
transactions are therefore subject to the announcement, annual
review, circular (including advice of independent financial
adviser) and Independent Shareholders' approval requirements under
Chapter 14A of the Hong Kong Listing Rules, and the requirements
under Chapter 14 of the Hong Kong Listing Rules applicable to
discloseable transactions.
The Independent Board Committee comprising all the independent
non-executive Directors, namely Mr. Li Fushen, Mr. He Yun, Mr. Xu
Junxin and Ms. Winnie Tam Wan-chi has been established to make a
recommendation to the Independent Shareholders as to whether the
terms of the Transactions are on normal commercial terms, in the
ordinary and usual course of business of the Company and are fair
and reasonable and in the interests of the Company and its
shareholders as a whole. Somerley Capital Limited has been
appointed as the independent financial adviser to advise the
Independent Board Committee and the Independent Shareholders in the
same regard.
We are not associated or connected with the Company, Air China
Cargo, CNAHC, CNACG, Cathay Pacific or their respective core
connected persons or associates and, accordingly, are considered
eligible to give independent advice on the Transactions. Apart from
normal professional fees payable to us in connection with this
appointment, no arrangement exists whereby we will receive any fees
or benefits from the Company, Air China Cargo, CNAHC, CNACG, Cathay
Pacific or their respective core connected persons or
associates.
In formulating our advice and recommendation, we have relied on
the information and facts supplied, and the opinions expressed, by
the Directors and management of the Company (collectively, the
"Management"), which we have assumed to be true, accurate and
complete. We have reviewed information on the Company, including
but not limited to, the 2022 ACC Framework Agreement and the
renewal of the CNACG Framework Agreement, annual reports of the
Company for each of the years ended 31 December 2019 ("FY2019")
("2019 Annual Report"), 31 December 2020 ("FY2020") (the "2020
Annual Report") and 31 December 2021 ("FY2021") (the "2021 Annual
Report"), interim report of the Company for the six months ended 30
June 2022 ("1H2022") (the "2022 Interim Report") and other
information contained in the Circular.
In addition, we have relied on the information and facts
supplied, and the opinions expressed by the Group and have assumed
in relation to the facts to be true, accurate and complete in all
material aspects and in relation to any opinions to be honestly
held at the time they were made and will remain, in relation to the
facts to be true, accurate and complete in all material aspects and
in relation to any opinions to be honestly held, up to the date of
the EGM. We have also sought and received confirmation from the
Group that no material facts have been omitted from the information
supplied by them and that their opinions expressed to us are not
misleading in any material respect. We consider that the
information we have received is sufficient for us to formulate our
opinion and recommendation as set out in this letter and have no
reason to
believe that any material information has been omitted or
withheld, nor to doubt the truth or accuracy of the information
provided to us. We have, however, not conducted any independent
investigation into the businesses and affairs of the Group, Air
China Cargo, CNAHC, CNACG, Cathay Pacific, nor have we carried out
any independent verification of the information supplied.
PRINCIPAL FACTORS AND REASONS CONSIDERED
In formulating our opinion and recommendation with regard to the
Transactions, we have considered the following principal factors
and reasons:
1. Information on the parties
The Group
The Company is incorporated in the People's Republic of China
with limited liability, the Shares of which have been listed on the
Main Board of the Hong Kong Stock Exchange since 15 December 2004.
The Group is principally engaged in the provision of air passenger
transportation, freight transportation, postal transportation and
maintenance services in Mainland China, Hong Kong, Macau and other
international regions.
According to the 2021 Annual Report, the Group reported a
revenue of approximately RMB74.5 billion, representing a
year-on-year increase of approximately 7.23%, which was mainly
attributable to, amongst others, the remarkable increase in the
Group's air cargo and mail revenue for FY2021 by around 29.9% to
approximately RMB11,113 million, as compared with that for FY2020.
As reported in the 2022 Interim Report, a further growth of around
50.4% in the Group's air cargo and mail revenue to approximately
RMB6,880 million for the six months ended 30 June 2022 was recorded
as compared to the corresponding period in 2021. The Group has
reported a consistent loss attributable to shareholders of the
Company of approximately RMB14.4 billion and RMB16.6 billion for
each of FY2020 and FY2021 as compared with profit attributable to
shareholders of the Company of approximately RMB7.2 billion, RMB7.4
billion and RMB6.4 billion for each of the three financial years
ended FY2019. Consistent loss attributable to shareholders of the
Company of approximately RMB19.4 billion and approximately RMB6.8
billion for each of 1H2022 and for the six months ended 30 June
2021 was also reported in the 2022 Interim Report.
As disclosed in the 2021 Annual Report, the Group recorded a
total of around 1.59 million safe flight hours. This was comparable
to the safe flight hours of approximately 1.553 million reported
for FY2020. In addition, the volume of cargo and mail carried
amounted to around 1,186.70 thousand tonnes, which represented a
year-on-year increase of around 6.56%. Based on the 2021 Annual
Report, the Group introduced 43 aircrafts during 2021, among which
29 were acquired under finance leases and 14 were acquired under
operating leases. As at 31 December 2021, the Group had a total of
746 passenger aircraft including business jets, with an average age
of 8.23 years. Among the aircraft, the Company operated a fleet of
467 aircraft in total, with an average age of 8.39 years.
As disclosed in the 2022 Interim Report, the Group recorded
0.508 million safe flight hours, which represented a decline of
approximately 40.9% as compared to that for the interim period
ended 30 June 2021. During 1H2022, the volume of cargo and mail
carried decreased by approximately
18.98% to approximately 486,513.58 tonnes. Based on the 2022
Interim Report, the Group introduced a total of 16 aircrafts during
1H2022. As at 30 June 2022, the Group had a total of 748 aircraft
and the Company operated a fleet of 472 aircrafts.
As at 31 December 2021, major subsidiaries of the Company are
Shenzhen Airlines Company Limited (including Kunming Airlines
Company Limited), Air Macau Company Limited, Beijing Airlines
Company Limited, Dalian Airlines Company Limited, Air China Inner
Mongolia Co., Ltd., Aircraft Maintenance and Engineering
Corporation, Air China Import and Export Co., Ltd., Chengdu Falcon
Aircraft Engineering Service Co., Ltd., and Air China Shantou
Industrial Development Company. Associates of the Company are
Cathay Pacific Airways Limited, Shandong Airlines Co., Ltd. and
Tibet Airlines Co., Ltd. As also disclosed in the 2021 Annual
Report, against the backdrop of anti-pandemic work worldwide, the
Company made full use of the resources of route network and among
other actions, the Company adjusted the structure of transport
capacity on the account of domestic macro-circulation and grasped
market opportunities to expand domestic supply which resulted in
the domestic capacity measured by seat kilometres for 2021 to
increase by approximately 7.66% year-on-year. During 2021, the
Company also newly launched domestic routes such as Beijing
Capital-Aksu-Tumushuke and Beijing Daxing-Quzhou; the Chengdu newly
launched domestic routes such as Chengdu Shuangliu-Fuyang and
Chengdu Tianfu-Beihai; and the Shanghai newly launched domestic
routes such as Shanghai Pudong-Zhengzhou and Shanghai
Pudong-Zhanjiang. The Company also newly launched international and
domestic routes such as Changchun-Frankfurt, Tianjin- Nanning,
Wuhan-Ningbo and Hangzhou-Zhongwei.
Air China Cargo
Air China Cargo was established in 2003. Headquartered in
Beijing, Air China Cargo takes Shanghai as its main long haul air
freighter operation base and is primarily engaged in air cargo and
mail transportation. Air China Cargo is held as to 45.0018% by
CNACG. CNACG is a wholly-owned subsidiary of CNAHC which is a
state-owned company incorporated in the People's Republic of China
and the controlling shareholder of the Company. The Company has
developed its cooperation relationship with ACC in relation air
cargo business respectively since 2003.
CNACG
CNACG is an investment holding company whose principal business
include passenger terminal operation, cargo terminal operation,
airport ground handling services, airline catering services,
finance/operating lease, aircraft maintenance, property investment,
logistics and other businesses conducted through its subsidiaries.
CNACG is a substantial Shareholder of the Company and a wholly
owned subsidiary of CNAHC.
The CNACG Group has been providing a wide range of aircraft
related services to the Group since 2008, including but not limited
to, ground support services, aircraft repair and maintenance
services, administrative management services as well as finance
lease and operating lease services in respect of, among other
things, aircrafts, engine, simulator, equipment and vehicles.
2. The Cargo Transactions
2.1 Background of and reasons for the Cargo Transactions
As disclosed in the Circular, the Directors are of the view that
the exclusive contracting operation of the Passenger Aircraft Cargo
Business under the 2022 ACC Framework Agreement is in the interests
of the Group having considered the following factors:
(i) the two-way settlement model of income and expenditure is
adjusted to a one way net settlement. This allows for
simplification of transactions and procedures and facilitates
public understanding;
(ii) instead of conducting estimation at the beginning of year
and year-end reviews, revenue recognition of the Group has been
adjusted to actual revenue recognition, further ensuring the
fairness and independence of transactions; and
(iii) the reward/punishment rate is applied in the operating fee
rate, and the industry yield level is used as incentives and
restrictive mechanisms, which indicated the fairness of pricing for
connected transactions. By enhancing the capacity of the Passenger
Aircraft Cargo Business of Air China Cargo, the Company's income
from passenger aircraft cargo operation will be increased.
We have discussed and understand from the Management that Air
China Cargo has been engaged in the air freighter operation
business since 2003 and has been handling the Passenger Aircraft
Cargo Business for more than 18 years and based on prior
experience, is considered to be equipped with the level of
understanding and experience required.
We have further discussed, and we understand from the Company
that the Cargo Transactions are, in nature, similar to the
bellyhold space business contracting operation transactions under
the 2019 ACC Framework Agreement entered into between the Company
and Air China Cargo where, among other things, the Company
contracted the operation of all bellyhold space business to Air
China Cargo and Air China Cargo shall undertake the overall
responsibilities for transporting the cargos as the contracting
carrier to the consignors with respect to the cargos which are
transported through the bellyhold spaces of passenger aircraft
("Existing Cargo Transactions"). We understand the key differences
between the Existing Cargo Transactions and the Cargo Transactions
include the expansion of bellyhold space coverage from only
involving aircrafts operated by the Company to cover also aircrafts
operated by its subsidiaries, namely Dalian Airlines Company
Limited, Air China Inner Mongolia Co., Ltd., Beijing Airlines
Company Limited, Shenzhen Airlines Company Limited and Air Macau
Company Limited (list of subsidiaries are to be updated from time
to time).
We understand the primary reason leading to the aforementioned
adjustment to the operating model was to resolve concerns raised
regarding business competition. Based on our discussions, we
understand that due to the completion of the transfer of the
Company's 51% shareholding interest in Air China Cargo to Capital
Holding on 28 December 2018, the Company and its subsidiaries'
business including air cargo and mail delivery and cargo
forwarding, warehousing and logistics, cargo terminal operations
the current business operations which may overlap the business
carried out by Air
China Cargo ("Business Overlap"). To address such concern with
the Business Overlap, the Company entered into the Existing Cargo
Transactions under the 2019 ACC Framework Agreement, which is being
further fine-tuned and replaced by the 2022 ACC Framework Agreement
to expand the scope of the Existing Cargo Transactions to cover the
Passenger Aircraft Cargo Business of the Group.
We also understand that under the terms of the Cargo
Transactions, the fee settlement mechanism has also been adjusted
from bilateral to unilateral to allow efficient settlement
calculations. Under this fee settlement mechanism, the Company
would collect transportation service fee from Air China Cargo based
on actual revenue derived from the Passenger Aircraft Cargo
Business after deducting certain operating fee rates payable to Air
China Cargo.
On a best-effort basis, we have reviewed and noted from public
domain, a comparable company being listed for more than 10 years in
Hong Kong with a long-established history, namely China Eastern
Airlines Corporation Limited (Stock Code: 670) ("China Eastern"),
which is engaged in a comparable line of business and geographical
coverage also has in place a similar exclusive passenger aircraft
bellyhold space contractual operation arrangement ("China Eastern
Cargo Transaction"). With reference to circular published by China
Eastern dated 30 October 2020 ("2020 China Eastern Circular"), the
China Eastern Cargo Transaction was also executed for reasons,
among others, to address industry competition issue between itself
and China Cargo Airlines Co., Limited ("China Cargo Airlines") and
under the China Eastern Cargo Transaction, the fee settlement
mechanism was also adjusted from a bilateral arrangement to an
unilateral basis.
In view of the above and in light of the long-established
cooperation relationship between the Company and Air China Cargo as
well as Air China Cargo's proven track record, we agree with the
Directors and would consider continuing its existing relationship
and to expand on such relationship would allow the Group as a whole
to focus on devoting its resources to expanding its air passenger
transportation business while being able to engage the support of
an industry partner to facilitate growth of its Passenger Aircraft
Cargo Business. Furthermore, in view of the China Eastern Cargo
Transaction as discussed above, the exclusive arrangement currently
proposed under the 2022 ACC Framework Agreement is also considered
in line with the general passenger aircraft cargo business
operation trend among major domestic airlines.
2.2 Terms of the Cargo Transactions under the 2022 ACC Framework Agreement
Services: In order to further address the issue of business
competition and optimize transaction structure, after friendly
negotiation between both parties, the Group and the ACC Group have
determined to carry out a long-term collaboration for the Passenger
Aircraft Cargo Business under an exclusive operating model. The
entire Passenger Aircraft Cargo Business of the Group will be
operated exclusively by the ACC Group, and the ACC Group shall
undertake the overall responsibilities for transporting the cargos
to the consignors with respect to the cargos which are transported
through the passenger aircraft.
The term of the exclusive operation of the Passenger Aircraft
Cargo Business between the Group and the ACC Group is commencing
from the effective date of the 2022 ACC Framework Agreement and
ending on 31 December 2034. The commencement date of the term of
the exclusive operation of the Passenger Aircraft Cargo Business
between the airlines controlled by the Group and the ACC Group
shall be subject to the written agreement entered into between such
airlines and ACC Group, if otherwise specified. Upon expiry of the
exclusive operation term, the parties may determine new exclusive
operation term through friendly negotiation.
Pricing terms: During the exclusive operation term, the Group
shall charge the ACC Group the transportation service fee regularly
in each year. Such transportation service fee shall be determined
based on the ACC Group's actual cargo revenue generated from the
exclusive operation of the Group's Passenger Aircraft Cargo
Business after deducting certain operating fee rate. The specific
formulas are as follows:
Transportation service fee = actual revenue from the Passenger
Aircraft Cargo Business x (1 - operating fee rate)
Operating fee rate = operation expense rate + reward/punishment
rate
Reward/punishment rate = (growth rate of yield level of the
Passenger Aircraft Cargo Business of the current year - growth rate
of yield level of the cargo business in the industry of the current
year) ×50%
Of which:
(1) The actual revenue of the Passenger Aircraft Cargo Business
represents the actual cargo revenue generated by ACC Group's
exclusive operation of the Group's Passenger Aircraft Cargo
Business.
(2) The operation expense rate represents the ratio of operating
expenses to actual revenue from the Passenger Aircraft Cargo
Business. Operation expenses are determined by the parties through
arm's length negotiation primarily based on the operation expenses
in the historical years, and with reference to factors such as the
price level in the similar market and industry and its variation
trend.
(3) In order to enhance the operating results of the exclusive
operation of the Passenger Aircraft Cargo Business, both parties
decide to apply the reward/punishment rate after negotiation. The
basic index of the reward/punishment rate is 50% of the difference
between the
(1)
yield level growth rate of the Passenger Aircraft Cargo Business
and the yield level growth rate of the cargo business in the
industry of the current year. The parties may make reasonable
adjustments according to the changes in the market environment and
the operation direction of the Passenger Aircraft Cargo Business
with unanimous consent after negotiation. The rate of 50% is
determined by the Company and Air China Cargo through arm's length
negotiation with reference to industry practice. The rate of 50% is
the same as the relevant ratios of similar transactions of
comparable companies in the industry, which will encourage the ACC
Group to enhance its capacity of the Passenger Aircraft Cargo
Business, thereby boosting operating efficiency of the Group's
Passenger Aircraft Cargo Business, and hence the rate is fair and
reasonable.
(4) The growth rate of yield level of the Passenger Aircraft
Cargo Business of the current year represents the growth rate of
yield level of the Passenger Aircraft Cargo Business of the current
year generated by ACC Group's exclusive operation of the Group's
Passenger Aircraft Cargo Business as compared with that of the
previous year.
(5) The growth rate of yield level of the cargo business in the
industry of the current year represents the growth rate of the
revenue of the cargo business in the industry of the current year
as compared with that of the previous year.
(6) The yield level the cargo business represents the cargo
revenue divided by the investment amount for the cargo business.
The investment amount for the cargo business represents the total
available cargo and mail traffic measured by the capacity available
for the carriage of the cargo and mail for every route, and the
calculation formula of which is (capacity available for the
carriage of the cargo and mail of the route multiplied by the
distance of the route).
Upon the 2022 ACC Framework Agreement becoming effective, the
2019 ACC Framework Agreement shall be terminated immediately. With
respect to the Passenger Aircraft Cargo Business performed between
the parties in accordance with the 2019 ACC Framework Agreement and
the relevant specific agreement in 2022, both parties agreed that
it shall be deemed to have been correspondingly adjusted in
accordance with the above-mentioned principles since 1 January
2022.
We have obtained a copy of the 2022 ACC Framework Agreement and
reviewed the terms associated with the Cargo Transactions.
Duration
As disclosed in the Letter from the Board of the Circular, the
duration for the Cargo Transactions is approximately 12 years
commencing from the effective date of the 2022 ACC Framework
Agreement to 31 December 2034 (the "Duration"). We have discussed
with the Management regarding the reasons for the Duration being
longer than the three years permitted under Rule 14A.52 of the Hong
Kong Listing Rules and, with reference to the letter from the Board
in the Circular and based on our understanding:
(i) Air China Cargo intends to apply for the listing of A shares
and to comply with the applicable guidelines on initial public
offering and listing of shares issued by China Securities
Regulatory Commission ("CSRC"), the Cargo Transactions having a
duration more than three years is necessary for facilitating the
potential listing of Air China Cargo;
(ii) entering into of the Cargo Transactions could provide a
clear delineation of business and thereby eliminating concerns
associated with competition between the Company and Air China
Cargo;
(iii) Air China Cargo is the sole service provider for the
Passenger Aircraft Cargo Business and in view of the shareholding
structure of both the Group and Air China Cargo, it is not
practical or commercially sensible for the Company to entrust such
services with another party in the PRC as such counterparty would
have to have a reasonable business scale to handle the Group's
Passenger Aircraft Cargo Business and possible candidates with such
business scale would normally be under control of an industry
competitor; and
(iv) we consider the practice of having a duration of longer
than three years is not uncommon in the industry because we noted
that the China Eastern Cargo Transaction is also for a long
duration of 12 years.
Having considered the above, we are of the view that the
Duration, being longer than three years, is required for the
effective operation of the Cargo Transactions and is a normal
business practice in the industry.
Transportation Fee
We note that under the terms of the Cargo Transactions,
transportation service fee ("Transportation Fee") is calculated
using the following formula:
Transportation service fee = actual revenue from the Passenger
Aircraft Cargo Business x (1 - operating fee rate)
We further note that the input of operating fee rate referred to
in the formulae above ("Operating Fee Rate") is calculated as the
sum of operation expense rate ("Operating Expense Rate") and
reward/punishment rate ("Reward/Punishing Rate").
The Reward/Punishing Rate is based on the following formula:
Reward/Punishment Rate = (growth rate of yield level of the
Passenger Aircraft Cargo Business of the current year - growth rate
of yield level of the cargo business in the industry of the current
year) ×50%
We have discussed with and understand from the Management that
in determining the pricing mechanism for the Cargo Transactions, it
has referenced the pricing mechanism used in similar transactions
entered into by industry players, including that used in the China
Eastern Cargo Transaction, and considered the Group's own
circumstances as well as the updated market conditions.
In this respect, we have compared the formulae for
Transportation Fee against the pricing mechanism used by the China
Eastern Cargo Transaction as disclosed in the 2020 China Eastern
Circular to ascertain whether the pricing mechanism used by the
Company is in line with those adopted by its industry peers. With
reference to 2020 China Eastern Circular, we noted that whilst
China Eastern has adopted a similar concept, namely transportation
service fee = actual income from passenger aircraft cargo business
x (1- business fee rates), for the purpose of calculating the
amount of transportation service fee payable by China Cargo
Airlines under conventional business circumstances under the China
Eastern Cargo Transaction, and we note that such formulae,
including the plugins therein, are largely similar to that proposed
under the Cargo Transactions. We have noted that both formulae are
of similar calculation concept primarily with reference to
historical revenue derived from the airlines' passenger aircraft
cargo business and historical operating expenses.
We further note that in determining the transportation service
fee payable, a reward/ penalty factor is also considered for both
the Cargo Transactions and the China Eastern Cargo Transactions.
The major difference being that under the China Eastern Cargo
Transactions, the reward/penalty factor is determined based on
comparisons made with revenue growth rate of passenger aircraft
bellyhold space cargo businesses of the PRC's three major
state-owned airlines, namely China Eastern itself, the Group and
China Southern Airlines Company Limited (stock code: 1055) ("China
South") whereas under the Cargo Transactions, performance is
compared with the growth rate of yield level of the Passenger
Aircraft Cargo Business and the growth rate of yield level of the
cargo business industry published by Civil Aviation Administration
of China ("CAAC"). We have discussed and understand from the
Management that the reference to yield level in this case is
considered to be a more specific measurement of performance and
efficiency as it measures revenue generated from the Passenger
Aircraft Cargo Business per cargo capacity provided. Based on this
understanding, we consider the use of the broader industry as a
comparison benchmark is reasonable due to its wider industry
coverage and hence it would be considered as representative of
market conditions. We would also consider measuring
reward/punishment in terms of revenue generated per capacity of
cargo business provided is reasonable because it is an appropriate
measurement of efficiency in cargo space utilisation.
We understand from the Management that the purpose of the
Reward/Punishment Rate is to use it as a mean of motivation for and
to encourage Air China Cargo to continuously improve its bellyhold
space business performance under the Passenger Aircraft Cargo
Business such that both the Company as well as Air China Cargo
would be able to mutually benefit. Based on the disclosures in the
letter from the Board of the Circular, the rate of 50% used in the
formulae for the purpose of calculating the Reward/Punishment Rate
is determined by the Company and Air China Cargo through arm's
length negotiation with reference to industry practice. In light of
the fact that the Reward/Punishment Rate would also benefit the
Group and the fact that a similar concept, including the adoption
of the rate of 50% in the formulae, was also adopted by China
Eastern, we would consider inclusion of this input in the pricing
term also reasonable and in line with the market.
We note from the 2020 China Eastern Circular that China
Eastern's passenger aircraft cargo business has been categorised
into two circumstances, namely conventional business which is the
provision of cargo services by utilisation of bellyhold space of
passenger aircraft, and the unconventional business which is the
provision of cargo services by passenger aircraft which has been
temporarily converted solely for the purpose of carrying cargoes
(i.e. a cargo only passenger aircraft). Under the unconventional
business circumstances, China Eastern has adopted a slightly
different formulae, which involve, among other things, the use of a
reasonable profit margin of the three major airlines in the PRC to
arrive at the business fee rate, for calculating the transportation
service fee, whilst the Group proposes to use the same formulae for
its Passenger Aircraft Cargo Business which essentially covers both
the conventional and unconventional scenarios as referred by China
Eastern.
In this regard, we have discussed and understand from the
Management that from the Group's point of view, both conventional
and unconventional scenarios are highly similar as they both
involve the transportation of cargo using bellyhold spaces
available on passenger aircrafts, and that as disclosed in the 2020
China Eastern Circular, one of the key reasons provided by China
Eastern for the differences in formula used for the calculation of
transportation service fee payable under such two scenarios was
that, in the case of unconventional business described above, there
were no relevant historical data available to be taken as a
reference for calculation of revenue growth rate for the
calculation of the "business fee rates". Taking into account of the
background of the pricing mechanism used for the China Eastern
Cargo Transactions and considering the circumstances under which
Cargo Transactions are entered into, we consider the Management's
view to consider all passenger aircraft cargo related transactions
as one business unit and is equivalent to that of the "conventional
business" described in the China Eastern Cargo Transaction is not
without basis because (i) based on our review of the information
provided and our discussion with the Management, we consider both
the conventional and unconventional businesses described in the
China Eastern Cargo Transactions, being whether or not the
passenger aircraft has been converted for better use of empty
bellyhold spaces such that cargo businesses as a whole can be
carried on during the COVID-19 pandemic, do indeed appear to be of
the same nature; and (ii) in view of (i), a separate formulae would
not be considered necessary, particularly, unlike the China Eastern
Cargo Transaction the pricing of which was first determined in
2020, being at the earlier stage of the COVID-19 pandemic where
historical data for calculation of revenue growth rate for the
purpose of the "business fee rates" have yet been available,
currently more relevant historical revenue growth rate data have
however become available since the outbreak of the COVID-19
pandemic almost three years ago.
In light of the above, we consider that the pricing term of the
Cargo Transactions, namely the calculation methodology for the
Transportation Fee outlined above is, as a whole, fair and
reasonable.
2.3 Historical amounts and historical caps and the proposed annual caps
The table below sets out (i) the annual caps of amounts relating
to the Existing Cargo Transactions for each of the three years
ended/ending 31 December 2020, 2021 and 2022; and (ii) the actual
transacted amounts relating to the Existing Cargo Transactions for
each of the two years ended 31 December 2020 and 2021 and for 6
months ended 30 June 2022.
Historical transacted
amounts Historical caps
For the year
ended For the year ended/
31 December ending 31 December
For 6 months
ended 30
Existing Cargo Transactions 2020 2021 June 2022 2020 2021 2022
(in millions of RMB)
In terms of contracting
operation income
of passenger aircraft
bellyhold space
cargo business 7,685 10,491 6,656 8,000 11,000 14,000
In terms of operation
expenses of bellyhold
space 351 609 351 800 960 1,160
With reference to the table above, we note that the utilisation
rate for the annual caps relating to contracting operation income
of bellyhold space business under the Existing Cargo Transactions
for each of FY2020 and FY2021 was approximately 96.1% and 95.4%
respectively. We note that the Company has revised annual caps for
FY2021 and for the year ending 31 December 2022 ("FY2022") for the
contracting operation income of bellyhold space business under the
Existing Cargo Transactions in December 2021. Based on the circular
of the Company dated 14 December 2021, the annual cap for FY2022 in
respect of the contracting operation income of the bellyhold space
business under the Existing Cargo Transactions, which is in essence
the expected revenue from the bellyhold space business relating to
the aircrafts operated by the Company, was RMB14,000 million.
Also with reference to the table above, we note that the
utilisation rate for the annual caps relating to the operation
expenses of bellyhold space was approximately 43.9% and 63.4%
respectively for each of FY2020 and FY2021. We have discussed and
understand from the Management that relatively lower utilisation
rate for the annual cap relating to operation expenses of bellyhold
space for each of FY2020 and FY2021 was due to the decline in
flights operated by the Company as a result of COVID-19 pandemic
and hence less operation expense incurred for the purpose of
operating the bellyhold space business. We note from the
disclosures in the 2019 Annual Report, the 2020 Annual Report and
the 2021 Annual Report that the number of flights operated by
the Group declined to 551,373 for FY2020 and 572,264 for FY2021,
as compared with pre-Covid-19 pandemic levels of 710,037 in FY2019
and 742,923 for the year ended 31 December 2018 ("FY2018"). The
Management further elaborated that the reduced number of flights
operated by the Company did not impact income generated from the
bellyhold space business in FY2020 and FY2021 because demand for
transportation of cargo in terms of tonnage have not substantially
reduced during such periods.
As a whole, we understand the primary reason for the Company's
proposal to revise the annual cap for FY2022 is to reflect the
changes in business structure and settlement mechanism as described
in the section headed "2.1 Background of and reasons for the Cargo
Transactions" above.
As disclosed in the letter from the Board in the Circular, after
the 2022 ACC Framework Agreement becoming effective, the 2019 ACC
Framework Agreement shall be terminated. Factoring in the changes
to the Existing Cargo Transactions as discussed in the section
headed "2.1 Background of and reasons for the Cargo Transactions"
above, including the expansion of coverage scope and payment
settlement mechanism, the Company has proposed the following
revised annual caps relevant to the Cargo Transactions for FY2022
and proposed the following annual caps for each of the two years
ending 31 December 2023 ("FY2023") and 2024 ("FY2024")
respectively:
Proposed annual caps
for the year ending 31 December
Cargo Transactions 2022 2023 2024
(in millions of RMB)
In terms of the transportation
service fees of
the Passenger Aircraft Cargo
Business payable by the ACC
Group to the Group 15,500 17,000 18,000
As disclosed in the letter from the Board in the Circular, in
arriving at the annual caps for the Transportation Fees payable by
the ACC Group for each of the three years ending 31 December 2024,
the Company has considered, among other things, the historical
transaction amounts and the following factors:
(i) in terms of income, based on the historical contracting
operation income of passenger aircraft bellyhold space cargo
business of the Company, it is estimated that the Company's income
from the Passenger Aircraft Cargo Business for the year 2022 will
not exceed RMB14.0 billion (i.e. not exceeding the revised annual
cap of the contracting operation income of passenger aircraft
bellyhold space cargo business for the year 2022 which was approved
by the Independent Shareholders at the general meeting held on 30
December 2021). Moreover, having considered that the Passenger
Aircraft Cargo Business will be expanded to include the
subsidiaries of the Company, the estimated income of the Passenger
Aircraft Cargo Business of the Group for the year 2022 is expected
to not exceed RMB15.4 billion (the "Revised Expected Income")
accordingly. In terms of the operating fee rate, the lower of the
historical operating fee rates was used in calculating the annual
cap of 2022. A reasonable buffer has also been included in the
estimated amount of transportation fees of the Passenger
(i)
Aircraft Cargo Business to cater for the operating needs from
time to time. After taking into account the above factors, it is
estimated that the amount of transportation service fee payable by
the ACC Group to the Group in respect of the Passenger Aircraft
Cargo Business for the year 2022 shall not exceed RMB15.5 billion;
and
(ii) based on the estimated amount of transportation service fee
in respect of the Passenger Aircraft Cargo Business in 2022, it is
assumed that the average annual growth rate in 2023 and 2024 will
be 7%. The average annual growth rate of 7% is determined with
reference to certain expected indicators of civil aviation
development during the "14th Five-Year" period (i.e. the average
annual growth rate of civil aviation passenger traffic volume of
5.9% and the average annual growth rate of guaranteed take-offs and
landings of 6.5% during the "14th Five-Year" period (2021 to
2025)), while taking into account the expected gradual slowdown of
the COVID-19 pandemic in the future and the situations such as the
Group's future fleet size and capacity growth.
Proposed annual cap for FY2022
Revenue from the Passenger Aircraft Cargo Business
We note that the key input for the estimation of annual cap for
the Cargo Transactions for FY2022 is the expected revenue to be
derived from the Passenger Aircraft Cargo Business. We have
reviewed and discussed the basis and assumptions for estimating the
expected revenue from the Passenger Aircraft Cargo Business and we
agree with such basis for which it was used because:
(a) based on the circular of the Company dated 14 December 2021,
the existing annual cap for FY2022 in respect of the contracting
operation income of the bellyhold space business under the Existing
Cargo Transactions, which is in essence the expected revenue from
the bellyhold space business relating to the aircrafts operated by
the Company, was estimated as RMB14,000 million (the "Previous
Income Cap"). The Previous Income Cap of RMB14,000 million
represents around 33.4% increase from the actual historical
transacted amount of the contracting operation income of bellyhold
space business. In view of (i) the remarkable increase in air cargo
and mail demand as discussed in the section headed "1. Information
on the parties - The Group" above and as reflected by the increase
in the Group's air cargo and mail revenue by approximately 29.9%
for FY2021 and 50.4% for 1H2022 as compared with corresponding
year/period respectively; and (ii) the increase by approximately
36.5% increase in the actual historical transacted amount of the
contracting operation income of bellyhold space business for FY2021
under the Existing Cargo Transactions as compared to that for
FY2020, such estimated amount of the Previous Income Cap is not
considered excessive. In addition, as discussed in the section
headed "2.1 Background of and reasons for the Cargo Transactions",
the Cargo Transactions under the 2022 ACC Framework will be
expanded to not only cover aircrafts operated by the Company under
the Existing Cargo Transactions, but also to cover aircrafts
operated by its subsidiaries, namely Dalian Airlines Company
(a)
Limited, Air China Inner Mongolia Ltd., Ltd., Beijing Airlines
Company Limited, Shenzhen Airlines Company Limited and Air Macau
Company Limited. Based on disclosures made in the 2022 Interim
Report, we are able to derive that the Company's subsidiaries
operated 276 aircrafts, representing roughly 36.9% of the total
fleet of the Group. In this respect and against such backdrop, we
understand that the Revised Expected Income adopted for estimating
the proposed revised annual caps for FY2022, with only a 10%
increment as compared to the Previous Income Cap, is considered not
excessive; and
(b) as shown in the table above, as at 30 June 2022,
approximately 47.5% of the Previous Income Cap, or approximately
43.2% of the Revised Expected Income, has been utilised under the
Existing Cargo Transactions.
Operating Fee Rate
Under the terms to the Cargo Transactions, the concept for the
Operating Fee Rate is similar to the concept of operating expense
relating to the bellyhold space business under the Existing Cargo
Transactions. We note that the Company has considered the actual
Operating Fee Rate from each of FY2018, FY2019, FY2020 and FY2021
in determining the estimated Operating Fee Rate for the purpose of
estimating the annual cap for FY2022. We have reviewed and noted
that the Company has adopted the low end of the Operating Fee Rate
range from each of the aforementioned financial years.
In assessing the fairness and reasonableness of such adoption of
estimated Operating Fee Rate, we have reviewed the historical
Operating Fee Rate and noted that it has been relatively steady
within a narrow range for periods prior to FY2020. The reported
Operating Fee Rate revealed a notable decline in FY2020 and based
on our discussion with the Management, this was mainly as a result
of the COVID-19 pandemic, which as previously discussed, was a
consequence to the reduced number of flights operated by the
Company. In view of the continuous uncertainties surrounding the
COVID-19 pandemic, we consider using a lower Operating Fee Rate as
an input for the estimation of the annual cap to be not
unreasonable.
As such, we consider the inputs used by the Company, namely
expected revenue from the Passenger Aircraft Cargo Business and
Operating Fee Rate for the purpose of estimating the annual cap for
FY2022 to be fair and reasonable.
Proposed annual caps for FY2023 and FY2024
Growth in the Group's fleet of aircrafts
We have discussed and understand from the Company that the
expected growth in the Passenger Aircraft Cargo Business and in
turn, the Transportation Fee, is positively co-related to the
growth in the Group's fleet of aircrafts. We also note that the
Group have adopted an
annual growth rate of roughly 7% in the expected growth in its
fleet of aircraft and such growth rate was used for the purpose of
estimating the proposed annual caps for Cargo Transactions for each
of FY2023 and FY2024.
We have reviewed and noted that due to COVID-19 pandemic, the
Company has been postponing/slowing its pace to acquire aircraft
and equipment to update and/or replace its existing fleet and
portfolio. Nevertheless, the Company has demonstrated its
consistent effort in acquiring aircrafts, including but not limited
to, the major transaction of aircrafts acquisition conducted in
July 2022. As disclosed in the 2021 Annual Report and based on our
further understanding from the Management, the Group adheres its
growth plans to align with the national and industry developments
and formulated its "14(th) Five-Year Plan" in accordance with the
targets set out by the CAAC. The CAAC have, among other targets,
set out average annual compounded growth expectations of
approximately 17.0%, 17.2%, 7.0% and 9.5% in the areas of traffic,
number of passengers carried, cargo and mail carried and flight
hours (together, the "CAAC Targets") respectively, over the years
from 2020 to 2025. In order to meet such CAAC Targets, the Company
would need to, among other things, have a sufficient fleet of
aircrafts that are up to standards. The Management considers that,
should the global COVID-19 pandemic stabilises, the Group would
revive its continuous efforts to review its fleet and take more
proactive approach to update its existing fleet of aircrafts. In
this respect, should the global COVID-19 pandemic stabilises as
discussed above, it is expected that the growth rate for the
Group's fleet would resume to at least its previous level.
In addition to our discussion with the Management as outlined
above, we have independently reviewed the Group's annual reports
for the seven years prior to COVID-19 pandemic and noted that the
average annual growth of the Group's fleet was approximately 6% and
prior to FY2020, the Group has been acquiring on average, 57
aircrafts per year, and phasing out, on average 22 aircrafts per
year. We also note that the average age of the Group's fleet prior
to COVID-19 pandemic was approximately 6.4 years. However, since
the start of the COVID-19 pandemic in 2020, which have had
detrimental impacts on the global aviation industry, the planned
growth in the size of the Group's fleet has almost halted entirely.
In particular, growth in total fleet dropped to approximately 1.1%
in FY2020 with the Group acquiring a mere 14 aircrafts during the
year and phasing out only 6. Whilst the growth in the Group's total
fleet increased to 746 aircrafts in FY2021, however, total
acquisition and phasing out of aircrafts were still significantly
below pre-COVID-19 pandemic's averages. We also note that the
average age of the Group's fleet has also significantly increased
to 8.23 years in 2021, which is much higher than the average age of
around 6.4 years during the pre-COVID- 19 period as mentioned
above. Furthermore, based on our research, the Company is currently
operating a fleet with relatively
higher average age amongst its peers. For the purpose of
comparison, we have also reviewed the annual reports of China
Eastern and China South and we noted that as at end of 2021, China
Eastern operated a fleet of 758 passenger aircrafts with an average
fleet age of 7.7 years whilst China South operated a fleet of 878
aircrafts (of which 862 are passenger aircrafts) with an average
fleet age of 8 years. As such, we consider that the Group's
expected plans to catch up on the updating of its existing aircraft
portfolio and the expansion of its fleet size, which were halted as
a result of COVID-19 pandemic as discussed
above is not unreasonable from in particular, a business
perspective so that it would be able to remain competitive to its
closest peers and as such, the growth rate used for the purpose of
estimating the annual caps for FY2023 and FY2024 is also not
without basis.
3. The Lease Transactions
3.1 Background of and reasons for the Lease Transactions
As disclosed in the letter from the Board of the Circular, the
Management considers that the entering into of the Lease
Transactions helps to streamline the process for the Group to
secure relevant equipment that meets the specific needs of the
Group with a lower cost of financing, higher flexibility and less
impact on the Group's cash flow as compared to direct purchasing.
In addition, in respect of aircraft finance lease business, certain
subsidiaries of CNACG, being the lessors, are registered in the
free trade zones in the PRC and are entitled to certain favourable
tax treatments which will further lower the transaction costs of
the Group. The business team of CNACG Group also has extensive
experience in aircraft leasing and has a better understanding of
the Group's business needs. Therefore, communications of businesses
between the Company and CNACG Group tend to be smoother and it will
be easier for them to reach an agreement in the best interests of
both parties in the stage of negotiation. In terms of the aircraft
finance lease, the Company expects that through adopting aircraft
finance lease under the CNACG Framework Agreement with CNACG Group,
the estimated total savable financing costs for the Group as
compared to adopting secured loans arrangements with equivalent
interest rates provided by the market over the same period will be
approximately US$27.64 million, US$31.32 million and US$33.12
million, respectively for each of the years from 2023 to 2025.
We have discussed and understand from the Management that the
Lease Transactions entered into with CNACG are broadly divided into
two categories, namely finance leases ("Finance Leases") and
operating leases ("Operating Leases"). Whilst there are a number of
finance institutions offering aircraft finance lease
plans/services, such finance institutions do not necessarily offer
operating leases for smaller value equipments such as machinery and
equipment designed solely for the aviation industry. We understand
the reason for this is because aviation equipment or machinery are
usually smaller in transaction value as compared to aircrafts,
specific and could even be tailor-made in nature, and such
equipment/machinery may not necessarily have a readily available
second hand market and as such, independent finance institutions
may not be willing to provide the financing options due to the
limited market. We however understand from the Management that,
other than servicing the specific needs of the Group, CNACG has
independent third party clients such as airports, for operating
leases involving aviation equipment/machinery.
We noted from the annual reports for FY2019, FY2020 and FY2021
that around 59.08%, 58.56% and 59.79% of the aircraft fleet of the
Group were held under either finance lease or operating lease as at
31 December 2019, 31 December 2020 and 31 December 2021
respectively. As such, the renewal of the CNACG Framework
Agreement, in particular, in relation to the finance and operating
lease services of aircrafts, engines, simulators, equipment and
vehicles is considered in line with the Group's financing strategy
for its business operation.
Given that (i) members of the CNACG Group possess experience,
expertise and have been providing similar services to the Group
over the last 6 years, and (ii) not only that the renewal of the
CNACG Framework Agreement will continue to allow financing costs
saving and financing flexibility for the Group as discussed in the
paragraphs above, most importantly, it will not obligate the Group
to enter into any transactions with CNACG Group, but will only
allow CNACG Group to be one of the available choices for the
Group's selection for its finance/operating lease arrangements if
the financing terms provided are at a market rate or better, we are
of the view that the entering into of the Lease Transactions
pursuant to the renewal of the CNACG Framework Agreement is in the
ordinary and usual course of business of the Group and is in the
interests of the Company and the Shareholders.
3.2 Terms of the Lease Transactions under the CNACG Framework Agreement
Services: CNACG Group will provide finance lease and operating
lease services in respect of, including but not limited to,
aircraft, engines, simulators, aircraft-related materials,
equipment and vehicles to the Group.
Pricing terms: The final transaction price will be determined on
arm's length negotiations between both parties with reference to
the prices for the same type of lease services offered by
independent third parties and after taking into account certain
factors. Such factors include purchasing price of the leasing
subject, interest rate, arrangement fees (if any) (for finance
lease), rental fee (for operating lease), the lease terms, the
feature of the leasing subject and the comparable market rental
prices. The final transaction price should not be higher than the
transaction prices offered by at least two independent third
parties on the same conditions.
We have discussed with and understand from the Management,
historical transacted value for Lease Transactions under the CNACG
Framework Agreement was predominately relevant to Finance Leases.
Before entering into any Finance Leases, the Company would compare
the terms, including pricing terms offered by independent third
parties so as to ensure that the terms offered by CNACG Group are
fair and reasonable, no less favourable compared to independent
third parties and on normal commercial terms. We have further
discussed with and understand from the Management that before
entering into any Operating Leases, it would firstly research into
the costs associated with direct purchase of the aviation
machinery/equipment it requires ("Required Aviation Equipment").
The Company would then compare the outright purchase cost of the
Required Aviation Equipment against potential costs of lease
associated with entering into an operating lease for the same
Required Aviation Equipment. After taking into consideration the
commercial factors including business needs, should the Company
decide to enter into an Operating Lease for the Required Aviation
Equipment, the Company would then either compare the terms offered
by CNACG Group with terms offered for similar Required Aviation
Equipment already leased by the Company and/or request CNACG Group
to provide terms offered by CNACG Group for the same or similar
Required Aviation Equipment to its independent third party clients,
so as to ensure that the terms offered by CNACG Group in relation
to the Required Aviation Equipment are fair and reasonable, no less
favourable and on normal commercial terms.
Based on our understanding from the Management, interest rates
used for Finance Leases for, among others, aircrafts, is usually
with reference to loan market quoted interest rate ("LPR")
promulgated by the People's Bank of China ("PBOC"). We note the LPR
for period greater than 5 years is 4.3% as at the Latest
Practicable Date. We have also understood from the Management that
the period of finance leases for aircrafts would normally exceed
three years and usually greater than five years.
We understand from the Management that the Group has entered
into similar leasing arrangements with CNACG Group and/or
independent third parties from time to time in the past. In this
regard, we have requested the Company to provide us with, among
other things, 7 samples of leasing transactions with independent
third parties from 2020 to 2022 as regards aircraft finance lease
("Sample Aircraft Finance Leases") for comparing with transactions
with CNACG Group for the same type of the leasing subject. We note
from the Sample Aircraft Finance Leases that the relevant lease
interest were all determined with reference to the LPR promulgated
by the PBOC plus a spread ranged from 1.17% to 2.01%, whilst the
terms for such Sample Aircraft Finance Leases ranged between 10-12
years in duration. In this regard, we noted that the Finance Leases
for aircraft was in the duration of 10 years and was based on the
LPR promulgated by the PBOC with nil handling fee, which compared
favourably to the terms of the Sample Aircraft Finance Leases. We
further noted from the Sample Aircraft Finance Leases and from our
discussion with the Management that the Company would consider,
among other factors, whether total cost of borrowing (i.e., the
rate offered and other fees involved)) by the lender is considered
favourable among the quotes received and whether the amount of
financing available to be provided by the lender is sufficient to
satisfy the Company's requirements, before entering into any formal
lease agreements. Based on the supporting documents relevant to the
approval of the Sample Aircraft Finance Leases, we also noted that
the Sample Aircraft Finance Leases were jointly reviewed and
approved by at least three different departments of the
Company.
We have also separately requested for and were provided with 3
previous operating leases which CNACG Group entered into with its
independent third party clients ("Sample Operating Leases") for
comparison purposes. We noted that the payment terms under the
Sample Operating Leases are similar to those offered to the Group
by CNACG Group. We also noted that rental expenses on a monthly
basis for similar equipments charged by the CNACG Group on the
Group are lower than those charged on the independent third
parties. As with that of Finance Leases, prior to entering into of
any Operating Leases, the proposed agreements would be jointly
reviewed and approved by at least three different departments of
the Company.
Based on the above, we consider that terms of the Lease
Transactions are generally in line with the market and such
arrangement with CNACG Group is fair and reasonable.
3.3 Historical amounts and historical caps and the proposed annual caps
The table below sets out (i) the annual caps of the Group
relevant to the Lease Transactions for FY2020, FY2021 and FY2022;
and (ii) the actual aggregate amounts paid by the Group for FY2020,
FY2021 and the six months ended 30 June 2022 and the estimated
aggregate amounts payable for FY2022.
Historical transacted amounts Historical caps
For the For the year
year ended ended/
31 December ending 31 December
For the Estimated
six months annual
ended 30 amount
Transactions 2020 2021 June 2022 for 2022 2020 2021 2022
(in millions of RMB)
Total value of
right-of-use
assets in relation
to finance
lease and operating
lease
entered into
by the Group
as lessee 1,959 3,526 1,032 9,140 14,500 16,000 16,500
We have discussed the basis for its estimated transaction amount
for 2022 with the Management and understand it has considered,
among others, the actual value of the leases already entered into
and expected leases to be entered into with CNACG Group in 2022. We
note the utilisation rate of annual caps for each of 2020 and 2021
is approximately 13.51% and 22.04% respectively for the total value
of right-of-use assets in relation to Finance Leases and Operating
Leases entered into by the Group as lessee. We further understand
that the expected utilisation rate for 2022 for the total value of
right-of-use assets in relation to Finance Leases and Operating
Leases entered into by the Group as the lessee is approximately
55.39%. We have discussed with and understand from the Management
that the above relatively lower utilisation rates, especially for
2020 and 2021, were attributable to the effects from the COVID-19
pandemic. Given the value of right-of- use assets in relation to
Finance Leases and Operating Leases entered into by the Group as
lessee being directly relevant to the number of aircraft introduced
by the Group, we have also reviewed the disclosures in the 2019
Annual Report, the 2020 Annual Report and the 2021 Annual Report
and noted the fact that the actual number of aircrafts introduced
for each of FY2020 and FY2021 fell short by approximately 62% and
27% respectively or an average of approximately 45%.
Nevertheless, the Group has reviewed its business plans for the
next three financial years ending 31 December 2025 and the table
below sets out the proposed annual caps for the total amount
payable to CNACG Group by the Group relating to the Lease
Transactions for each of the three years ending 31 December 2023,
2024 and 2025, respectively:
Proposed Annual Caps
for the year ending 31 December
Transactions 2023 2024 2025
(in millions of RMB)
Total value of right-of-use
assets in relation to finance
lease and operating lease
entered into by the Group
as lessee 14,000 16,500 17,500
As disclosed in the Circular, the Company considered the
following key factors when estimating the total value of
right-of-use assets in the following three years in relation to the
finance and operating leases entered into by the Group as
lessee:
-- approximately 95% of the total annual cap for finance lease
and operating lease to be entered into by the Group as lessee is
attributable to the anticipated total value of right- of-use assets
in relation to the finance lease of aircraft and other assets
("Aircraft Finance Leases PV"). Based on the disclosures made in
the Circular, the total annual rental fee expected to be paid to
CNACG Group throughout the lease term for the Finance Leases to be
entered into (as set under the Shanghai Listing Rules) for the
three years ending 2025 would not exceed RMB15 billion, RMB17
billion and RMB18 billion respectively, which is estimated with
reference to, among others, the following key factors:
(i) the aircraft introduction plan for each of the three years,
and the aggregate principal amount of the aircraft finance lease
with CNACG Group is estimated based on the assumption that half of
the aggregate consideration amounts of aircraft scheduled to be
introduced during the period from 2023 and 2025 by the Company with
no funding arrangements will be introduced by way of finance lease
with CNACG Group;
(ii) the number of aircrafts delayed in 2020 and 2021 as a
result of COVID-19 pandemic will be delivered over the next three
financial years ending 31 December 2025 under finance leases
entered into by the Group;
(iii) the average lease term of aircraft being 10 to 12 years;
(iv) the LPR; and
(v) the Company's incremental borrowing rate of 4.9% as the discount rate.
(i)
-- About 5% of estimated total value of right-of-use assets in
relation to the finance and operating leases entered into by the
Group as lessee is the value of right-of-use assets in relation to
operating lease. The total value of right-of-use assets in relation
to operating leases entered into (as set under the Shanghai Listing
Rules) involving engines, simulators and equipment (together
"Aviation Equipment") for each of 2023, 2024, 2025 of approximately
RMB500 million, RMB700 million and RMB800 million respectively, are
estimated with reference to, among others, the following key
factors:
(i) the operation condition of the Group's engines, simulators,
and equipment and the Group's commercial demand for operating
leases in the following three years (based on information currently
available to the Company, the Group plans to lease 2 to 4 used
engines, 3 back-up engines and 8 equipment from CNACG Group in each
of the three years from 2023 to 2025, respectively); and
(ii) the operating lease price and terms of the same or similar
assets in the domestic market (taking a certain kind of heavy
aircraft tractor, its annual rental fee for operating lease in
domestic market usually ranges from RMB600,000 to RMB900,000 and
its lease term ranges from 3 years to 12 years); and
(iii) an incremental borrowing rate of 4.9% for leases with
terms over 5 years and 4.75% for leases with terms ranging from 1
to 5 years as the discount rate.
As also discussed above, in determining the annual caps for the
Lease Transactions, the Company has also considered the number of
aircrafts, the introduction of which were delayed in prior years
due to COVID-19 pandemic, currently expected to be delivered over
the next three financial years ending 31 December 2025 under
Finance Leases entered into by the Group. We understand from the
Management that as a result of the COVID-19 pandemic, a significant
number of aircrafts scheduled to be introduced in 2020, 2021 and
2022 were or is expected to be delayed to 2023 and possibly beyond.
We have reviewed and discussed with the Management and noted that
the total value of the delayed aircrafts accounts for approximately
50%, 40% and 40% of the annual caps (without accounting for the
buffer, which is to be discussed below) for each of 2023, 2024 and
2025 respectively.
In addition, we have discussed with and understand from the
Management that due to the effects of COVID-19 pandemic, the
Company has also been postponing/slowing its pace to acquire
aircraft and equipment to update and/or replace its existing fleet
and portfolio. Nevertheless, for reasons outlined in the section
above headed "2.3 Historical amounts and historical caps and the
proposed annual caps - Proposed annual caps for FY2023 and FY2024 -
Growth in the Group's fleet of aircrafts", we consider the Group's
expected plans to update its existing portfolio of aircrafts which
were halted as a result of COVID-19 pandemic is not unreasonable,
in particular, from a business perspective so that it would be able
to remain competitive to its closest peers and as such, leaving a
sufficient portion on buffer when determining the annual cap for
the coming three financial years ending 31 December 2025 is also
not without basis.
As stated in the Circular, the maximum aggregate principal
amount of the Aircraft Finance Lease PV for any particular year,
hence transactions with the CNACG Group, shall not exceed half of
the aggregate consideration amounts for the total aircraft
projected to be added using finance leases during the said year. We
have reviewed the Company's 2019 Annual Report, 2020 Annual Report
and 2021 Annual Report and noted that the Group introduced 48, 14
and 43 aircrafts respectively for 2019, 2020 and 2021, in which 27,
11, 29 were acquired under finance leases for 2019, 2020 and 2021
respectively. To assess whether the computation process adopted by
the Company to account for half of the expected total amount of
aircrafts scheduled to be introduced using finance lease as the
relevant principal amount is a market norm, we have reviewed and
also noted that the Company's peers, China South and China Eastern
in their respective continuing connected transaction circulars
dated 26 October 2019 and 30 September 2019 also adopted a similar
computation process of accounting for 60% and half of the expected
total purchase price of total aircrafts scheduled to be introduced
as the relevant principal amount respectively.
Similar to previous financial years, pursuant to IFRS 16, the
finance leases entered into by the Company as the lessee will be
recognised as right-of-use assets and discounted using the
Company's incremental borrowing rate, and the result of such
calculation is used to determine the annual caps relating to the
Lease Transactions. Therefore, the amounts of the Aircraft Finance
Leases PV for each of the years 2023, 2024 and 2025 are derived
based on the total value of right-of-use assets relating to the
aircraft finance leases expected to be entered into between the
Company and CNACG Group during 2023, 2024 and 2025 respectively. We
have reviewed the computation inputs of the respective values for
the right-of-use assets relating to the planned aircraft finance
leases and noted that it is calculated by discounting the estimated
total financing amount required for new aircrafts (including
interest with zero arrangement fees) to be introduced for the
particular year by a discount rate of 4.9% (for leases with terms
over 5 years) which is equivalent to the Company's prescribed
internal incremental borrowing rate for loans/leases over five
years. We have reviewed the 2021 Annual Report and noted that the
fixed interest rate for the Group's interest-bearing bank and other
borrowings ranged from 1.30% to 4.38% (median interest rate being
2.84%), the rate for floating rate bank and other borrowings ranged
between 2.66% and 4.65% (median interest rate being 3.66%) and
range of interest rates for corporate bonds repayable is from 2.34%
to 5.30% (median interest rate being 3.82%). Given the
abovementioned ranges and medians of interest rates applicable to
the Group's interest-bearing bank loans and other borrowings, and
the fact that the internal rate being 4.9% is towards the high end
of the aforementioned quoted ranges, we would consider the
Company's use of internal rate of 4.9% to be prudent.
In addition to the above, we have also carried out the following
independent work and considered the following factors:
(1) we understand from the Management that the finance lease
contracts for aircraft is usually between 10 years and 12 years in
duration. As mentioned under the paragraph headed "3.2 Terms of the
Lease Transactions under the CNACG Framework Agreement" above, we
have obtained and reviewed the Sample Aircraft Finance Leases with
independent third parties and noted that the duration for the
leases were all between 10 and 12 years. In this respect, we would
consider the expected lease period of between 10 years and 12 years
assumed in determining the annual caps to be normal business
practice for the Chinese aviation industry; and
(1)
(2) in light of the fact that the aircraft finance leases are
usually between 10 and 12 years in length, we have reviewed the
PBOC website and have observed that the LPR promulgated by the PBOC
for loan period longer than 5 years ranged between 4.3% and 4.6%
over the last two years between August 2020 and August 2022. Based
on the Sample Aircraft Finance Leases, we also noted that the
leases entered into between the Group and independent third parties
were all with reference to the LPR prescribed by the PBOC. We are
therefore of the view that it is common reference interest rate for
aircraft finance leases to be determined with reference to the
LPR.
We also understand that the Management has also included a
buffer of approximately 5% in its estimated amounts for Aircraft
Finance Leases PV for each of the annual caps for 2023, 2024 and
2025. We have discussed and understand that the aforementioned
buffer is included to cater for other operating needs which may
arise in case of uncertainties. We consider the use of buffer of
approximately 5% to be commercially acceptable.
In this respect, and considering the above, we are of the view
that such estimates for calculating the Aircraft Finance Lease PV
for 2023, 2024 and 2025, which accounts for approximately 95% of
each of the respective proposed annual caps for the Lease
Transactions is fair and reasonable.
We have discussed and understand from the Management that
anticipated total value of right- of-use assets in relation to the
operating leases of Aviation Equipment for each of 2023, 2024 and
2025 ("Aviation Equipment Leases PV") represents the present value
of engines and other aviation related equipment that are capable to
be supplied by CNACG with reference their respective market and in
response to the Group's estimated demand which is based on internal
budgets and purchase schedules. The Group will only enter into
lease agreements with members of the CNACG Group if terms offered
by CNACG Group are on normal commercial terms or better.
From the information provided that the finance lease and
operating lease period for engines normally ranges between 5 to 12
years and for other aviation equipment, the average lease period is
around 6 years. Similar to that of Aircraft Finance Leases PV,
pursuant to IFRS 16, Aviation Equipment will be recognised as
right-of-use assets and such right-of-use asset value is used to
determine the annual cap for Lease Transactions. The Aviation
Equipment Leases PV are derived from the expected total value of
right-of-use assets relating to the engines and other aviation
equipment operating lease, which is computed by discounting the
estimated total rental fee for Aviation Equipment introduced each
year as discussed above, by the Company's internal incremental
borrowing rate. As advised by the Management, the prescribed
internal incremental borrowing rate referred to for leases with a
term longer than five years is 4.9%, and 4.75% for leases with a
term of
5 years or below. Similar to the aforementioned with Aircraft
Finance Lease PV, we have also reviewed the 2021 Annual Report and
noted that the fixed interest rate for the Group's interest-
bearing bank and other borrowings ranged from 1.30% to 4.38%
(median interest rate being 2.84%), the rate for floating rate bank
and other borrowings ranged between 2.66% and 4.65% (median
interest rate being 3.66%) and range of interest rates for
corporate bonds repayable is from 2.34% to 5.30% (median interest
rate being 3.82%). Given the abovementioned ranges and medians of
interest rates applicable to the Group's interest-bearing bank
loans and other borrowings, and the fact that the
internal rates, being 4.9% (for leases with term longer than 5
years) or 4.79% (for leases with term of 5 years or below) are both
towards the high end of the aforementioned quoted ranges, we would
consider the Company's use of internal rates of 4.9% and 4.79% to
be prudent.
Based on the discussion above, we consider the estimation for
Aviation Equipment Operating Leases PV for years 2023, 2024 and
2025 are fair and reasonable as far as the Company and Independent
Shareholders are concerned.
4. Internal control procedures
As disclosed in the letter from the Board, the Company has
adopted a set of effective internal control measures to supervise
the continuing connected transactions of the Group:
ACC Transactions (including the Cargo Transactions)
-- Before entering into individual ACC Transactions, the Finance
Department, the Legal Department, the Asset Management Department
(which has a dedicated sub-division responsible for the management
of connected transactions) and if applicable, certain other
relevant departments of the Company will review the proposed terms
for the individual ACC Transactions and discuss with the relevant
departments of the Group to ensure that such transactions are
conducted on normal commercial terms and in compliance with the
pricing policies of the Group before these relevant departments
approve the finalized transaction agreements according to their
authority within the Group.
-- The Asset Management Department of the Company is responsible
for overseeing the connected transactions of the Company. The Asset
Management Department will monitor and collect detailed information
on the ACC Transactions on a regular basis, including but not
limited to the implementation of pricing policies, the Terms of the
Agreement and actual transaction amount to ensure that the
transactions are conducted in accordance with the framework
agreement. In addition, the Asset Management Department is
responsible for monitoring and reviewing the balance amount of the
annual cap for the ACC Transactions on a monthly basis and if the
annual cap for the ACC Transactions is expected to be exceeded for
a particular year, it will report to the management and take
appropriate measures in accordance with the relevant requirements
of the Hong Kong Listing Rules and/or Shanghai Listing Rules.
-- The Company's Internal Audit Department is responsible for
performing annual assessment on the internal control procedures of
the Group, including but not limited to the relevant information on
the management of continuing connected transactions. In addition,
the Internal Audit Department is responsible for compiling the
annual internal control assessment report and submitting the report
to the Board for examination and approval.
-- The independent auditor of the Company and the independent
non-executive Directors will conduct an annual review on the
continuing connected transactions of the Group.
--
CNACG Transactions (including the Leasing Transactions)
-- Before entering into individual CNACG Transactions, the
Finance Department, the Legal Department, the Asset Management
Department (which has a dedicated sub- division responsible for the
management of connected transactions) and if applicable, certain
other relevant departments of the Company will review the proposed
terms for the individual CNACG Transactions and discuss with the
relevant departments of the Group to ensure that such transactions
are conducted on normal commercial terms and in compliance with the
pricing policies of the Group before these relevant departments
approve the finalized transaction agreements according to their
authority within the Group.
-- The Asset Management Department of the Company is responsible
for overseeing the connected transactions of the Company. The Asset
Management Department will monitor and collect detailed information
on the CNACG Transactions on a regular basis, including but not
limited to the implementation of pricing policies, term of
agreement and actual transaction amount of each finance lease
transaction, operating lease transaction and ground support
services and other services to ensure that the transactions are
conducted in accordance with the framework agreement. In addition,
the Asset Management Department is responsible for monitoring and
reviewing the balance amount of the annual cap for the CNACG
Transactions on a monthly basis and if the annual cap for the CNACG
Transactions is expected to be exceeded for a particular year, it
will report to the management and take appropriate measures in
accordance with the relevant requirements of the Hong Kong Listing
Rules and/or Shanghai Listing Rules.
-- The Company's Internal Audit Department is responsible for
performing annual assessment on the internal control procedures of
the Group, including but not limited to the relevant information on
the management of continuing connected transactions. In addition,
the Internal Audit Department is responsible for compiling the
annual internal control assessment report and submitting the report
to the Board for examination and approval.
-- The independent auditor of the Company and the independent
non-executive Directors will conduct an annual review on the
continuing connected transactions of the Group.
We consider the above internal procedures are reasonable for the
Company to assess the then prevailing market terms of continuing
connected transactions, including the Cargo Transactions and the
Lease Transactions, and have demonstrated the Group's practices of
getting access to market information so as to make sure that its
terms will be no less favourable (so far as the Group is concerned)
than those prevailing in the market for similar transactions.
OPINION AND RECOMMATION
Having considered the principal factors and reasons set out
above, we consider the Non-exempt Transactions including the Cargo
Transactions and the Lease Transactions, are conducted on normal
commercial terms and in the ordinary and usual course of business
of the Group and in the interests of the Company and the
Shareholders as a whole, and the terms of the Non-exempt
Transactions and their respective annual caps are fair and
reasonable so far as the Independent Shareholders are concerned.
Accordingly, we advise the Independent Shareholders, and the
Independent Board Committee to recommend the Independent
Shareholders, to vote in favour of the ordinary resolution to be
proposed at the EGM.
Yours faithfully, for and on behalf of
SOMERLEY CAPITAL LIMITED
Lyan Tam
Director
Ms. Lyan Tam is a licensed person registered with the Securities
and Futures Commission and as a responsible officer of Somerley to
carry out Type 6 (advising on corporate finance) regulated
activities under the SFO and has over 19 years of experience in
corporate finance industry.
1. RESPONSIBILITY STATEMENT
This circular, for which the Directors collectively and
individually accept full responsibility, includes particulars given
in compliance with the Hong Kong Listing Rules for the purpose of
giving information with regard to the Group. The Directors, having
made all reasonable enquiries, confirm that to the best of their
knowledge and belief the information contained in this circular is
accurate and complete in all material respects and not misleading
or deceptive, and there are no other matters the omission of which
would make any statement herein or this circular misleading.
2. DISCLOSURE OF INTERESTS OF DIRECTORS AND SUPERVISORS
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 Hong Kong Stock Exchange pursuant to the SFO,
or were recorded in the register maintained by the Company pursuant
to section 352 of the SFO, or which were notifiable to the Company
and the Hong Kong 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 has any direct or indirect interest in any assets which
have been, since 31 December 2021 (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 is
materially interested in any contract or arrangement which is
significant in relation to the business of the Group and subsisting
at the Latest Practicable Date.
Mr. Patrick Healy is a non-executive Director of the Company and
is concurrently the chairman and an executive director of the board
of directors of Cathay Pacific. Cathay Pacific is a substantial
shareholder of the Company, holding 2,633,725,455 H shares as at
the Latest Practicable Date. Mr. Song Zhiyong, the chairman and an
executive Director of the Company, and Mr. Ma Chongxian, an
executive Director of the Company, are concurrently non-executive
directors of Cathay Pacific. Cathay Pacific competes or is likely
to compete either directly or indirectly with the Company in some
aspects of the business of the Company as it operates airline
services to certain destinations, which are also served by 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 has any existing or proposed service contract with any
member of the Group which is not expiring or terminable by the
Group within one year without payment of compensation (other than
statutory compensation).
4. DIRECTORS' AND SUPERVISORS' EMPLOYMENT WITH SUBSTANTIAL SHAREHOLDERS
The followings are the particulars of Directors' and
Supervisors' employment with substantial Shareholders (holding
interests or short positions in the shares and underlying shares of
the Company required to be disclosed to the Company pursuant to
Divisions 2 and 3 of Part XV of the SFO) as at the Latest
Practicable Date:
Mr. Song Zhiyong, the chairman of the Board, an executive
Director and the Secretary of the Communist Party Committee of the
Company, served as a non-executive director and the vice chairman
of the board of directors of Cathay Pacific, and the chairman of
CNACG.
Mr. Ma Chongxian, an executive Director, vice chairman of the
Board, the president and the Deputy Secretary of the Communist
Party Committee of the Company, serves as the chairman and the
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 and the Deputy Secretary
of the Communist Party Committee of the Company, serves as a
director and the Deputy Secretary of the Communist Party Group of
CNAHC.
Mr. Patrick Healy, a non-executive Director of the Company, is
the chairman of the board of directors and an executive director of
Cathay Pacific, a director of Swire Pacific Limited, and a director
and the chairman of the Charity Committee of John Swire & Sons
(H.K.) Limited.
Mr. He Chaofan, a Supervisor of the Company, serves as a
director, the president and a member of the Party Committee of
CNACG.
Mrs. Lyu Yanfang, a Supervisor of the Company, serves as the
general manager of the law department of CNAHC.
Mrs. Guo Lina, a Supervisor of the Company, serves as the
general manager of the audit department of CNAHC.
5. MATERIAL ADVERSE CHANGE
Other than the impact brought by the sporadic outbreak of the
pandemic and those as disclosed in the interim results announcement
of the Company dated 30 August 2022, 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 2021, being the date to which the latest published audited
financial statements of the Group have been made up.
6. EXPERT
The following is the qualifications of the expert who has given
its opinions or advices, which are contained in this circular:
Name Qualification
Somerley Capital Limited a corporation licensed to carry
out Type 1 (dealing in securities)
and Type 6 (advising on corporate
finance) regulated activities under
the SFO
a. As at the Latest Practicable Date, Somerley 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 2021 (the date to which the latest
published audited financial statements of the Group were made
up);
b. As at the Latest Practicable Date, Somerley 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. Somerley has given and has not withdrawn its written consent
to the issue of this circular with inclusion of its opinion and the
references to its name included herein in the form and context in
which they respectively appear.
7. MISCELLANEOUS
a. The joint company secretaries of the Company are Mr. Huang
Bin and Mr. Huen Ho Yin. Mr. Huen Ho Yin is a practicing solicitor
of the High Court of Hong Kong.
b. The registered address of the Company is at 1st Floor - 9th
Floor 101, Building 1, 30 Tianzhu Road, 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, Shops 1712-1716,
17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong
Kong.
8. DOCUMENTS ON DISPLAY
Copies of the following documents will be published on the
websites of the Hong Kong Stock Exchange (www.hkexnews.hk) and the
Company (www.airchina.com.cn) for a period of 14 days from the date
of this circular:
a. the 2022 ACC Framework Agreement;
a.
b. the CNACG Framework Agreement; and
c. this circular.
As the Supplemental Agreement is not a connected transaction
subject to shareholders' approval under the Hong Kong Listing
Rules, the Supplemental Agreement will not be presented as a
document on display. The principal terms of the Supplemental
Agreement have been disclosed in the Circular.
NOTICE OF EXTRAORDINARY GENERAL MEETING
NOTICE IS HEREBY GIVEN that an extraordinary general meeting
(the "EGM") of Air China Limited (the "Company") will be held at
11:00 a.m. on Friday, 14 October 2022 at The Conference Room C713,
No. 30, Tianzhu Road, Airport Industrial Zone, Shunyi District,
Beijing, the PRC to consider and, if thought fit, to pass the
following resolutions. Unless otherwise indicated, capitalised
terms used herein shall have the same meaning as those defined in
the circular of the Company dated 28 September 2022.
ORDINARY RESOLUTIONS
1. To consider and approve the resolution on the matters related
to the continuing related (connected) transactions entered into
between the Company and Air China Cargo and the application for the
annual transaction caps for 2022 to 2024
1.1 To consider and approve the resolution on the entering into
of a new related (connected) transaction framework agreement by the
Company and Air China Cargo and the application for the annual
transaction caps for 2022 to 2024
1.2 To consider and approve the resolution on the entering into
of the Agreement on Matters Related to Related (Connected)
Transactions of Air China Cargo Shares by the Company and CNAHC,
CNAF and Air China Cargo
2. To consider and approve the resolution on the renewal of the
related (connected) transaction framework agreement entered into
between the Company and CNACG and the application for the annual
transaction caps for 2023 to 2025
By Orders of the Board
Air China Limited Huang Bin Huen Ho Yin Joint Company Secretaries
Beijing, the PRC, 28 September 2022
As at the date of this notice, the directors of the Company are
Mr. Song Zhiyong, Mr. Ma Chongxian, Mr. Feng Gang, Mr. Patrick
Healy, Mr. Li Fushen*, Mr. He Yun*, Mr. Xu Junxin* and Ms. Winnie
Tam Wan-chi*.
* Independent non-executive director of the Company
Notes:
1. Closure of register of members
Holders of H shares of the Company are advised that the H share
register of members of the Company will be closed from Tuesday, 11
October 2022 to Friday, 14 October 2022 (both days inclusive),
during which time no transfer of H shares will be effected and
registered. In order to qualify for attendance and voting at the
EGM, holders of H shares shall lodge all instruments of transfer
with the Company's H share registrar in Hong Kong, Computershare
Hong Kong Investor Services Limited, at Shops 1712- 1716, 17/F,
Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, by 4:30
p.m. on Monday, 10 October 2022.
H Shareholders whose names appear on the H shares register of
members of the Company at the close of business on Monday, 10
October 2022 are entitled to attend and vote at the EGM.
2. Proxy
Every Shareholder who has the right to attend and vote at the
EGM is entitled to appoint one or more proxies, whether or not they
are members of the Company, to attend and vote on his/her behalf at
the EGM.
A proxy shall be appointed by an instrument in writing. Such
instrument shall be signed by the appointor or his attorney duly
authorized in writing. If the appointor is a legal person, then the
instrument shall be signed under a legal person's seal or signed by
its director or an attorney duly authorized in writing. The
instrument appointing the proxy for holders of H shares shall be
deposited at the Company's H share registrar not less than 24 hours
before the time specified for the holding of the EGM (or any
adjournment thereof). If the instrument appointing the proxy is
signed by a person authorized by the appointer, the power of
attorney or other document of authority under which the instrument
is signed shall be notarized. The notarized power of attorney or
other document of authority shall be deposited together and at the
same time with the instrument appointing the proxy at the Company's
H share registrar.
3. Important notice in relation to COVID-19 pandemic prevention and control
In the event that the containment of COVID-19 pandemic is still
ongoing at the time of the EGM, in order to cooperate with the
prevention and control of the pandemic so as to safeguard the
health and safety of the Shareholders and the participants of the
meeting, at the same time ensuring that the Shareholders may
exercise their respective shareholders' rights, the Company
recommends H share Shareholders and their proxies intending to
attend the EGM to vote by completing and submitting the proxy form,
i.e. to indicate how you wish your votes to be casted in the proxy
form, and appoint the Chairman of the EGM as your proxy to vote on
your behalf on site.
In case H share Shareholders or their proxies choose to attend
the meeting in person by then, they must comply with the policies
and requirements of Beijing regarding the containment of COVID-19
pandemic. On the way to, from and at the venue of the EGM, please
adopt proper personal preventive measures. Upon arrival at the
venue of the EGM, please follow the arrangement and guidance of the
staff and cooperate with the pandemic prevention and control
requirements including, among others, attendee registration,
temperature checks and wearing of masks. Please provide the proof
of negative nucleic acid test results within 72 hours and comply
with the temperature checking procedures, and take the initiative
to scan and present the "Beijing Health Kit" green code.
4. Other businesses
(i) The EGM is expected to last for no more than half of a
working day. Shareholders and their proxies attending the meeting
shall be responsible for their own traveling and accommodation
expenses.
(ii) The address of Computershare Hong Kong Investor Services Limited is: 17M Floor
Hopewell Centre
183 Queen's Road East Wanchai
Hong Kong
Tel No.: (852)28628628
Fax No.: (852)28650990
FORM OF PROXY FOR EXTRAORDINARY GENERAL MEETING
Number of shares to which this form of proxy relates (Note
(1)
I/We (Note 2)
of
being the registered holder(s) of (Note (3)
H Shares in the share capital of Air China Limited (the
"Company") HEREBY APPOINT (Note(4) the chairman of the meeting
and/or (Note 4)
of
as my/our proxy/proxies: (a) to act for me/us at the
extraordinary general meeting (or at any adjournment thereof) of
the Company to be held at 11:00 a.m. on Friday, 14 October 2022 at
The Conference Room C713, No. 30 Tianzhu Road, Airport Industrial
Zone, Shunyi District, Beijing, the PRC (the "Meeting") for the
purpose of considering and, if thought fit, passing the resolutions
(the "Resolutions") as set out in the notice (the "Notice")
convening the Meeting; and (b) at the Meeting (or at any
adjournment thereof) to vote for me/us and in my/our name(s) in
respect of the Resolutions as hereunder indicated or, if no such
indication is given, as my/our voting proxy thinks fit. Unless
otherwise indicated, capitalised terms used herein shall have the
same meaning as those defined in the Notice.
ORDINARY RESOLUTIONS FOR (Note AGAINST ABSTAIN
5) (Note 5) (Note 5)
1. To consider and approve the resolution
on the matters related to the
continuing related (connected)
transactions entered into between
the Company and Air China Cargo
and the application for the annual
transaction caps for 2022 to
2024
---------------------------------------- ------------- ---------- ----------
1.1 To consider and approve the
resolution on the entering into
of a new related (connected)
transaction framework agreement
by the Company and Air China
Cargo and the application for
the annual transaction caps for
2022 to 2024
---------------------------------------- ------------- ---------- ----------
1.2 To consider and approve the
resolution on the entering into
of the Agreement on Matters Related
to Related (Connected) Transactions
of Air China Cargo Shares by
the Company and CNAHC, CNAF and
Air China Cargo
---------------------------------------- ------------- ---------- ----------
2. To consider and approve the resolution
on the renewal of the related
(connected) transaction framework
agreement entered into between
the Company and CNACG and the
application for the annual transaction
caps for 2023 to 2025
---------------------------------------- ------------- ---------- ----------
Dated this day of Signature (Note (6) :
Notes:
1. Please insert the number of shares registered in your name(s)
to which this proxy form relates. If no number is inserted, this
form of proxy will be deemed to relate to all shares registered in
your name(s).
2. Full name(s) and address(es) to be inserted in BLOCK CAPITALS .
3. Please insert the total number of shares registered in your name(s).
4. A member entitled to attend and vote at the Meeting is
entitled to appoint one or more proxies of his own choice to attend
and vote instead of him. A proxy need not be a member of the
Company. If any proxy other than the chairman of the Meeting is
preferred, please strike out the words "the chairman of the meeting
and/or" and insert the name(s) and address(es) of the proxy/proxies
desired in the space provided. In the event that two or more
persons (other than the chairman of the Meeting) are named as
proxies and the words "the chairman of the meeting and/or" are not
deleted, those words and references shall be deemed to have been
deleted.
5. IMPORTANT: IF YOU WISH TO VOTE FOR THE RESOLUTION, TICK IN
THE BOX MARKED "FOR". IF YOU WISH TO VOTE AGAINST THE RESOLUTION,
TICK IN THE BOX MARKED "AGAINST". IF YOU WISH TO ABSTAIN FROM
VOTING, TICK
THE APPROPRIATE BOX MARKED "ABSTAIN". Failure to complete the
boxes will entitle your voting proxy to cast his vote at his
discretion. A member is entitled to one vote for every fully-paid
share held and a member entitled to more than one vote need not use
all his votes in the same way. A tick in the relevant box indicates
that the votes attached to all the shares stated above as held by
you will be cast accordingly. The total number of shares referred
to in the two boxes for the same resolution cannot exceed the
number of Shares stated above as held by you. The shares abstained
will be counted in the calculation of the required majority.
6. This form of proxy must be signed by you or your attorney
duly authorised in writing, or in the case of a corporation, must
be either under seal or under the hand of a director or attorney
duly authorised. If this form of proxy is signed by your attorney,
the power of attorney or other document of authorisation must be
notarised.
7. In order to be valid, this form of proxy, together with the
notarised copy of the power of attorney or other document of
authorisation (if any) under which it is signed, for holders of H
Shares, must be delivered to the Company's H Share registrar,
Computershare Hong Kong Investor Services Limited, 17M Floor,
Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong, not
less than 24 hours prior to the time appointed for holding the
Meeting (or any adjournment thereof).
8. Completion and delivery of a form of proxy will not preclude
you from attending and/or voting at the Meeting (or any adjournment
thereof) if you so wish.
9. ANY ALTERATION MADE TO THIS FORM OF PROXY MUST BE INITIALLED
BY THE PERSON(S) WHO SIGN(S) IT.
10. To attend and represent the shareholder(s) at the Meeting,
the proxy so appointed must produce beforehand his identification
document and any power of attorney duly signed by his appointor(s)
or the legal representative(s) of his appointor(s). The power of
attorney must state the date of issuance.
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END
STRVVLBLLKLBBBX
(END) Dow Jones Newswires
September 28, 2022 04:07 ET (08:07 GMT)
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