SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 山东航空股份有限公司 SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT August, 2009 Jinan, P.R.C.SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 2 Important Notes: The Board of Directors and the Supervisory Committee of Shandong Airlines Co., Ltd. (hereinafter referred to as the Company) and its directors, supervisors and senior executives hereby confirm that there are no any fictitious statements,misleading information or important omissions carried in this report, and shall take all responsibilities, individual and/or joint, for the reality, accuracy and completion of the whole contents. Director Ms. Wang Jieming was absent from the Board meeting and authorized Mr. Kou Zunqian to vote on his behalf. Chairman of the Board Mr. Zhang Xingfu, General Manager Mr. Zeng Guoqiang, and Chief Accountant Mr. Xiao Feng of the Company hereby confirm that the Financial Report of the Semi-annual Report 2009 is true and complete. The Financial Report and accounting data cited in this Semi-annual Report has not been audited. Contents SECTION I. COMPANY PROFILE------------------------------------------------------------------------------------------------3 SECTION II. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHARES HELD BY MAIN SHAREHOLDERS---------------------------------------------------------------------------------------------------------------------5 SECTION III. PARTICULARS ABOUT DIRECTORS, SUPERVISORS AND SENIOR EXECUTIVES----------7 SECTION IV. REPORT OF THE BOARD OF DIRECTORS-----------------------------------------------------------------8 SECTION V. SIGNIFICANT EVENTS--------------------------------------------------------------------------------------------13 SECTION VI. FINANCIAL REPORT---------------------------------------------------------------------------------------------17 SECTION VII. DOCUMENTS AVAILABLE FOR REFERENCE----------------------------------------------------------79 Paraphrases: The Company: Shandong Airlines Co., Ltd. SDA: Shandong Aviation Group; the 1st largest shareholder of the Company Air China: Air China Limited, the actual controller of the CompanySHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 3 Section I. Company Profile I.Company Profile 1. Legal Chinese Name of the Company: 山东航空股份有限公司 Legal English Name of the Company: SHANDONG AIRLINES CO., LTD. 2. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: SHANHANG B Stock Code: 200152 3. Registered Address: Yaoqiang International Airport, Jinan, Shandong Office Address: SDA Bldg., No. 5746, Er Huan East Road, Jinan, Shandong Post Code: 250014 Company’s Web Site: http://www.shandongair.com.cn E-mail: zqb@shandongair.com.cn 4. Legal Representative: Zhang Xingfu 5. Secretary of Board of Directors of the Company: Dong Qiantang Contact Address: 12/F, SDA Bldg., No. 5746, Er Huan East Road, Jinan, Shandong E-mail: dongqt@shandongair.com.cn Tel.: (86)531-85698229 Authorized Representative: Fan Peng E-mail: fanp@shandongair.com.cn Tel.: (86) 531-85698678 Fax: (86) 531-85698679 6. Newspapers for Disclosing the Information Designated by the Company: Domestic: China Securities Jourrnal and Securities Times Overseas: Hong Kong Wen Wei Po Internet Web Site for Publishing the Semi-annual Report: http://www.cninfo.com.cn The Place Where the Semi-Annual Report is Prepared and Placed: Office of the Board of the Company Liaison Tel: (86) 531-85698678 7. Other Relevant Information of the Company Registered number for enterprise corporation business license: 370000400002351 Registered number for taxation: Local Tax Zi 370112720721201 Registration date after latest change: Dec. 29, 2008SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 4 Registration address: Industrial and Commercial Administration Bureau of Shandong Province II. Major financial data and indexes (I) Major accounting data and financial indexes Unit: RMB At the end of this report period At the period-end of last year Increase/decrease at the end of this report period compared with that in period-end of last year (%) Total assets (RMB) 7,900,175,750.55 7,844,104,901.47 0.71 Owners’ equiy ( or Shareholders’ equity) (RMB) 662,522,152.84 550,012,296.30 20.46 Net assets per share attributable to shareholders of the listed company (RMB) 1.66 1.38 20.46 This report period (Jan. to Jun.) The same period of last year Increase/decrease in this report period yearon- year (%) Operating profit 36,485,643.44 84,332,253.18 -56.74 Total profit 150,074,661.90 78,568,391.09 91.01 Net profit to shareholders of the listed company 112,509,856.54 58,639,158.40 91.87 Net profit after deducting non-recurring gains and losses to shareholders of the listed company (RMB) 30,381,048.36 62,962,054.97 -51.75 Basic earnings per share (RMB) 0.28 0.15 91.87 Diluted earnings per share (RMB) 0.28 0.15 91.87 Return on equity (%) 16.98 11.83 Increased 5.15 percentage points Net cash flow arising from operating activities (RMB) 566,738,602.82 446,099,849.83 27.04 Net cash flow arising from operating activities per share (RMB) 1.42 1.12 27.04SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 5 (II) Items of non-recurring gains and losses and the relevant amount: Unit: RMB Items of non-recurring gains and losses Amount Gains and losses from the disposal of non-current asset -2,084,968.43 Governmental subsidy calculated into current gains and losses 114,651,145.51 Held transaction financial asset, gains/loses of changes of fair values from transaction financial liabilities, and investment gains from disposal of transaction financial asset, transaction financial liabilities and financial asset available for sales, exclude the effective hedging business relevant to normal operations of the Company -4,056,192.64 Other non-operating income and expense excluded the aforementioned items 1,022,841.38 Reversal of provisions for asset impairment of account receivable which is made singly impairment test -27,748.25 Subtotal 109,505,077.57 Impact on income tax -27,376,269.39 Total 82,128,808.18 Section II. Changes in Share Capital and Particulars about Shares Held by Main Shareholders I. Particulars about the share structure In the report period, the Company’s total shares and its structure remained unchanged. II. Ended as June 30, 2009, particulars about shares held by the top ten shareholders and top ten circulating shareholders: Total shareholders at the end of the report period 19,942 Particulars about shares held by the top ten shareholders Full name of Shareholder Increase / decrease in the report period Number of shares held at the period-end (share) Proporti on (%) Type of shares Number of shares pledged or frozen Nature of shareholdersSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 6 SHANDONG AVIATION GROUP 0 168004000 42 Uncirculated share 0 State-owned shareholder AIR CHINA LIMITED 0 91200000 22.8 Uncirculated share 0 State-owned shareholder GUOTAI JUNAN SECURITIES (HONGKONG) LIMITED -99900 1719100 0.43 Circulated Unknown Foreign shareholder CHEN CHUN PENG -14800 1530000 0.38 Circulated Unknown Foreign shareholder CHEN JING JIAN 0 1304200 0.33 Circulated Unknown Foreign shareholder WU HAO YUAN 0 1062700 0.27 Circulated Unknown Foreign shareholder LIU LI YA -63600 951616 0.24 Circulated Unknown Foreign shareholder HE BIN 50000 879407 0.22 Circulated Unknown Foreign shareholder JOHN POSS 0 756000 0.19 Circulated Unknown Foreign shareholder DENG HONG WEI 0 650609 0.16 Circulated Unknown Foreign shareholder Particulars about shares held by the top ten shareholders of circulation share Shareholder’s name Circulation share held at the periodend Type GUOTAI JUNAN SECURITIES(HONGKONG) LIMITED 1719100 B-share CHEN CHUN PENG 1530000 B-share CHEN JING JIAN 1304200 B-share WU HAO YUAN 1062700 B-share LIU LI YA 951616 B-share HE BIN 879407 B-share JOHN POSS 756000 B-share DENG HONG WEI 650609 B-share CHEN ZI XIANG 610700 B-share XU ZHAO HUAN 608000 B-share Explanation on the associated relationship or consistent Air China Limited is the first largest shareholder of ShandongSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 7 action among the top ten shareholders Aviation Group; there exists no associated relationship between SDA and Air China and the other top ten shareholders; the Company is not aware of their associated relationship among the other shareholders of circulation share. III. Change of controlling shareholder and actual controller The controlling shareholder and actual controller of the Company did not change in the report period. Section III. Particulars about Directors, Supervisors and Senior Executives I. In the report period, directors, supervisors and senior executives of the Company did not hold the Company’s shares; the holding amount in the report period remained unchanged. II. In the report period, The Company accomplished the election and engagement of new office term of directors, supervisors and senior executives. On June 26, 2009, the Company’s 2008 Annual Shareholders’ General Meeting elected Mr. Zhang Xingfu, Mr. Feng Gang, Mr. Zeng Guoqiang, Mr. Su Zhongmin, Mr. Kou Zunqian, Ms. Wang Jieming, Mr. Xiao Feng and Mr. Wang Mingyuan as the directors for the 4th Board of Directors of the Company; elected Mr. Wei Jincai, Mr. Li Chun, Mr. Qu Wenzhou as the independent directors for the 4th Board of Directors of the Company; elected Mr. Wang Fuzhu, Mr. Xue Ruitao and Mr. Zhang Kai as the supervisors for the 4th Supervisory Committee who constituted the 4th Session of Supervisory Committee of the Company with two employee representative supervisors Mr. Miao Liubin and Ms. Zhou Qiaoyan elected in Employee Representative Conference of the Company. In the same day, the 1st meeting of the 4th board of the Company elected Mr, Zhang Xingfu as the Chairman of the Company and Mr. Feng Gang as the Vice-chairman of the Company; Mr. Zeng Guoqiang was engaged as the General Manager of the Company, Mr. Su Zhongmin was engaged as the Standing Deputy General Manager; Mr. Yu Haitian, Ms. Song Yuxia, Mr. Li Qing’en, Mr. Xiao Feng and Mr. Qiu Feng were engaged as Deputy General Managers; Mr. Zhang Qingshe was engaged as Chief Pilot; Mr. Xiao Feng was engaged as Chief Accountant(concurrently); and Mr. Dong Qiantang was engaged as Secretary of the Board. In the same day, the 1st meeting of the 4th Supervisory Committee of the Company elected Mr. Wang Fuzhu as the Chairman of the Supervisory Committee of the CompanySHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 8 Section IV. Report of Board of Directors I. Main operations in the report period (I) Scope of main operations and operation status The Company is the civil air transportation enterprise, which mainly operates business of international and domestic air transportation of both travelers and goods, and also operates hotels (only branch institution), maintenance of aircraft, agent business among the Airlines Companies, and ground services relevant to main operations. 1. Facing serious economy crisis, the Company deeply studied and practiced the View of Science Development, comprehensively promoted and implemented Overwinter strategy, actively dealt with challenge, held together and worked resolutely, and reached a good operation achievement: safe production stably developed; profit level kept ahead, organization innovation was steadily promoted; service quality was constantly improved; party building and ideological and political work made new progress, and settled a new basis for realizing science development. In the report period, the Company realized flying for 69,976.7 hours and 40,568 on-and-off flights, increased by 16.0% and 12.1% year-on-year respectively; passengers were transported amounting to 3,514,000 persons, increased by 13.5% year-on-year; the volume of cargo and mail transported amounting to 37,000 tons, decreased by 3% year-on-year; the transportation turnover volume totaling 440 million ton-kms, increased by 15.9% year-on-year. In the report period, the Company realized the income from main operations amounting to RMB 2.342 billion, decreased by 3.58% year-on-year, of which the income from air passenger transportation amounted to RMB 2.229 billion, taking up 95.17% of the total income; the income from air cargo and mail transportation amounted to RMB 76 million, taking up 3.25% of the total income; and the other income amounted to RMB 37 million, taking up 1.58% of the total income. (1) Formation classified according to industries and products Industries Operating income Operating cost Gross profit ratio (%) Increase/d ecrease in operating income over the last year (%) Increase/d ecrease in operating cost over the last year (%) Increase/d ecrease in gross profit ratio over the last year (%) Aviation 2,305,193,594.13 1,845,474,482.25 19.94% -2.77% -5.52% 2.33%SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 9 transportation service Logistics transportation service 3,377,523.46 969,854.35 71.29% -7.16% 44.68% -10.29% Hotel and food service 12,033,696.77 8,778,465.46 27.05% 4.10% 34.34% -16.42% Other 21,023,352.07 439,084.54 97.91% 42.15% -76.51% 10.55% Total 2,341,628,166.43 1,855,661,886.60 20.75% -3.58% -6.86% 2.79% (2) Particulars about different areas for main operation Areas Operating income Increase/decrease compared with that in last period % Domestic 2,289,871,920.27 -2.81% International 51,756,246.16 -28.67% Total 2,341,628,166.43 -3.58% (3) Particulars about main asset and analysis to financial index in the report period Item Jun.30, 2009 Dec.31, 2008 Increase/decrease % Monetary fund 137,460,538.87 71,872,933.88 91.25% Other account receivable 201,061,709.72 144,978,136.24 38.68% Notes payable 96,000,000.00 10,000,000.00 860.00% Tax payable 159,552,985.31 111,337,241.37 43.31% Wages payable 54,468,944.55 91,119,967.07 -40.22% Item Jan.-Jun., 2009 Jan.-Jun., 2008 Increase/decrease % Non-operating income 115,765,523.38 722,266.53 15928.09% Income tax 37,393,723.46 19,484,114.18 91.92% Net profit 112,680,938.44 59,084,276.91 90.71% Reasons for changes of increase/decreaseSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 10 Item Explanation Monetary fund Mainly because of newly increased deposit of commercial acceptance bill. Other account receivable Mainly because of return of civil air fund receivable. Notes payable Mainly because of newly increased commercial acceptance bill. Tax payable Mainly because of increase of enterprise income tax in this period. Wages payable Mainly because of payment of 2008 annual bonus in this period. Non-operating income Mainly because of subsidy from government. Income tax Mainly because of increase of profit in this period. Net profit Mainly because of increase of profit in this period. 2. In the report period, the management team of the Company continued to improve the management reform, and phase progress was made in the various works. (1) In the report period, the Company continued to step up efforts to promote the construction of safety information management system, improved the level-by-level responsibility system of safety liability, began on safety performance evaluation reform, the Company continued to maintain overall stable safety situation and no unsafe event occurred above man-made air accident. (2) Optimized the production organization which made new breakthrough in realizing the beneficial objective. The Company adjusted the orientation of transport capacity in time, reduced international flights, increased input of domestic transport capacity and made seasonal adjustment for transport capacity among bases, intensified the efforts on the work of oil saving management and rationally controlled the maintenance cost. (3) Encouraged innovation in service management to promote the service quality,intensified development of service quality management system and promoted management and control ability of service quality; encouraged innovation in service management taking customer experience as the guidance; perfected the management system of brand establishment taking the chance of guaranteeing the National Games. (4) Steadily carried out organization innovation and orderly advanced management construction. (5) Party building and ideological and political work made new progress. (II) In the report period, the breakdown of the profit, the main operations and their structure have no significant changes.SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 11 (III) There were no other operating activities that would exert significant influence upon the profit in the report period. (IV) There was no investment yield from a single shareholding company that had influenced over 10% of the net profit of the Company in the report period. (V)There were no significant changes of the operation environment and policies of the Company in the report period. (VI) Problems and difficulties in operation Seeing from the economy environment, each policy and measure the state took for dealing with global financial crisis achieved initial success, economy operation actively changed, and the overall situation went better. However, it also should be known that, the economy of our country was still in the key phase of stable rise, and the rise trend of economy was unsteady, unconsolidated and imbalanced. The whole recovery of global aviation industry could not be forecasted, and the international price of raw oil presented a trend of gradual rise, which could further increase the cost pressure of aviation companies. II. Investments of the Company (I) In the report period, the Company neither used any raised proceeds nor used any proceeds that were raised in previous periods lasting to the report period. (II) Actual development and yield-gaining status of the important projects invested with non-raised proceeds 1. Qingdao International Aviation Logistic Center Co., Ltd., a company controlled by the Company, made an income from main operations from Jan. to Jun., 2009 amounting to RMB 3,377,520, and its total profit amounted to RMB 652,700. 2. Sichuan Airlines Co., Ltd., a company with shares held by the Company, made an income from main operations from Jan. to Jun., 2009 amounting to RMB 2,927,487,000, and its total profit amounted to RMB -142,981,000. 3. Shandong Airlines Rainbow Jet Co., Ltd., a company with shares held by the Company, made an income from main operations from Jan. to Jun., 2009 amounting to RMB 4,955,440, and its total profit amounted to RMB 1,701,700.SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 12 4. The business data of the upper half year of Jinan International Airport Co., Ltd., a company with shares held by the Company, are not available now. 5. TravelSky Technology Limited, a company with shares held by the Company, has not publicized its business data of the upper half year. III. Forecast of operation performance in the past three quarters in 2009 Section V. Significant Events I. Corporate governance In the report period, the Company strictly obeyed the requirments in Company Law, Security Law and Code of Corporate Governance for Listed Companies in China, made delicate decisions on significant issues, such as periodical reports, business programs, airplane import, governance structure, internal control system and self-inspection rectification etc. and disclosed relevant information accurately, timely and completely. The Company gave full play to the fuction of decision, audition and evaluation of special committees of the Board of Directors, guaranteed the independent directors, special committees and supervisory committee to fulfill the responsibilities, practically provided necessary and convenient conditions for the supervision, made elaborate efforts to amplify and improve the internal control system Forecast of operation performance Increased greatly year-on-year From the year-begin to the next period-end The same period of last year Increase/decrease % Forecasted accumulated net profit (RMB ’0000) 24000-26000 4105.35 485%-533% Basic income per share (RMB/share) 0.6-0.65 0.10 500%-550% Explanation on peromance forecast 1. Industry supporting policy of government department increased the Company’s income; 2. with the influence of international oil price fluctuation, the average fuel cost of the Company had some decrease compared with that of last year; 3. The marketing sales were better than expectation, and the Company actively explored the potential and further started activities of reducing cost and improving effectiveness. The various measures on improving operation performance had obvious effects.SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 13 and management in accordance with basic norms and specific regulations on internal control in enterprise issued by related departments. II. Implementation of the profit distribution plan for the year 2008 The Company did not distribute profits nor convert public reserve into share capital in 2008. III. Profit distribution plan in the Semi-annual of 2009 The Company would neither distribute any profit nor convert any public reserves into share capital in the Semi-annual of 2009. IV. The Company had no significant lawsuits or arbitrations in the report period, nor did it have any lawsuits or arbitrations that happened in previous periods and lasted into the report period. V. The Company had no significant purchases, sales or reorganization of assets, nor did it have any such kind of events that occurred in previous periods and lasted into the report period. VI. Important related transactions (I) Significant related transactions on commodity purchase or service offer 1. In the report period, the aircraft maintenance charges that happened between Taikoo (Shandong) Aircraft Engineering Co., Ltd and the Company amounted to RMB 42,506,000, taking up 19.23% of the amount of the same kind of transactions. For this transaction, the Company has paid in cash according to the market price. 2. The Company continued to strengthen the cooperations with the actual controller Air China in markets and branch routes. In the report period, the settlement that occurred between the two parties amounted to RMB 325,745,000. 3. Implementation of routine related transactions in the report period Transaction type Related party Amount of the transaction (RMB’000) Proportion taking up the same kind of transactions Taikoo (Shandong) Aircraft Engineering Maintenance of Co., Ltd 42,506 19.23% aircrafts and parts Shandong Xiangyu Aero-Technology Service Co., Ltd 9,543 4.32%SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 14 Shandong International Aviation Training Co., Ltd 3,624 19.90% Training expense Qingdao Feisheng International Aero-Technology Training Co., Ltd 2,610 14.33% Shandong Rent for office land Aviation Group (rent for office land) 4,480 37.22% and daily boarding Shandong Aviation Group (daily boarding) 601 3.70% Air China Limited (airplane lease) 307,987 99.98% Air China Limited (affiliated operations with South Korea route) 13,018 100% Airplanes lease and market cooperation Air China Limited(labor force supports) 5,100 77.54% (II) Other important related transactions The Company had no other significant related transactions. VII. Important contracts and their implementation (I) The Company has not newly entrusted, contracted or leased any assets in the report period. (II) The Company had no external guarantees in the report period. (III) The Company has not entrusted any assets management in the report period. (IV) Other important contracts By the end of the report period, the long-term and the short-term loans of the Company amounted to RMB 4,502,642,810. There are no other significant contracts that have not been disclosed by the Company. VIII. Neither the Company nor any shareholder holding over 5% (including 5%) shares of the Company has made any commitments that might exert significant influence upon the operation achievements or financial status of the Company in the report period, nor did them have any such commitments that were made in previous periods and lasted into the report period. IX. Neither the Company nor any of its directors, supervisors or senior executives has been punished in any way by the regulatory institutes.SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 15 X. Other significant matters and its influences, and explanations on the analysis to the solutions (1) The company holds 8,697,000 shares of Chinese Information Network Incorporation of Civil Aviation which is listed in Hong Kong Exchanges and Clearing Limited. The nature of these shares is noncirculated domestic shares. The Company did not hold the equities of financial enterprises such as holding the equities of other listed company, shareholding commercial bank, securities company, insurances company, trust company and future company. (2)Special explanation and independent opinion on capital occupation of the Company by the controlling shareholder and other related parties and external guarantee of the Company happened in the report period or lasting till the report period presented by independent directors Ended as June 30, 2009, the Company had no situations such as capital occupation of the Company by the controlling shareholder and other related parties happened in the report period or happened in previous period but lasting till the report period. In the report period, the Company had no external guarantee. XI. Establishement of inner control systment and implementations of social responsibilities Taking the opportunity of special corporate governance activities, the Company strengthened internal control and perfected governance structure. In the report period, the Company continued to perfect the setting organization of the special committees of the Board. During the preparing period of 2008 Annual Report, independent directors and the Audit Committee actively made negotiation and communication with the audit accountants, made inspection on the financial statements of the Company which advanced the standardization of work for preparing annual report and assured reality and accuracy of financial data according to the requirements of relevant laws and regulations. In the report period, the internal control system of the Company has already covered every operation level and tache of the Company. The Company strictly and effectively executed the internal control system, which met the demands required by CSRC and Shenzhen Stock Exchange for listed companies in work of internal control. During the report period, the Company fulfilled its social responsibility under the requirement of Guiding for Social Responsibility of Listed Company. The Company perfected its governance structure, did well in information disclosure and protected benefit of its shareholders, especially its medium and small shareholders.SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 16 During the outbreaks of H1N1 flu, the Company tightly deployed with the prevention of H1N1 flu, made perfect specific rules, operation criteria and preplan on prevention and control, and correctly handled ten particular cases of passengers with a fever on planes. As the only partner for the 11th National Games in air transportation, the Company orderly promoted preparatory work of service support for the National Games, satisfactorily fulfilled the torch transportation for the National Games, succeeded in performance of service guarantee for several trial contests and realized no errors and no complaints. XII. Registration form for receiving research, communication and interview in the report period. In the report period, the Company received specific persons(organization investors and individual investors) with receiving and answering individual investors’ calls for communications, there did not happen such situations as selectively or privately disclose, reveal or leak significant information which is not yet published publicly to specific objects(organization investors and fund). Date Place Way The received parties Contents discussed and materials supplied Jan.-June, 2009 Jinan Telephone communications Individual investor Operations of the Company; material was not supplied. June 26, 2009 Jinan Had conversation face to face Securities media, legal person’s Shareholder and private investor Operations of the Company; Annual Report of the Company was supplied.SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 17 Section VI. Financial Report Consolidated Balance Sheet June 30st, 2009 Name of the company : Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan Asset Note 30-Jun-09 31-Dec-08 Liabilities and Shareholders' equities Note 30-Jun-09 31-Dec-08 Current assets: Current liability: Monetary funds VIII(1) 137,460,538.87 71,872,933.88 Short-term loan VIII(15) 770,000,000.00 1,006,887,514.55 Tradable financial assets VIII(2) 19,404,619.47 23,460,812.11 Tradable financial liabilities Note receivable Notes payable VIII(16) 96,000,000.00 10,000,000.00 Accounts receivable VIII(3) 155,348,376.24 126,118,032.09 Accounts payable VIII(17) 926,489,149.08 875,319,060.11 Advance to suppliers VIII(4) 33,569,286.58 29,124,244.97 Advance from customers VIII(18) 111,346,467.06 87,735,493.54 Interests receivable Payroll payable VIII(19) 54,468,944.55 91,119,967.07 Dividend receivable 1,617,642.00 Tax payable VIII(20) 159,552,985.31 111,337,241.37 Other accounts receivables VIII(5) 201,061,709.72 144,978,136.24 Interests payable VIII(21) 6,088,936.83 9,634,990.00 Inventories VIII(6) 65,969,246.06 74,347,529.57 Dividend payable 11,940.00 11,940.00 Non-current assets due within one year Other accounts payable VIII(22) 153,930,087.38 161,736,748.70 Other current assets Non-current liabilities due within one year VIII(23) 423,523,639.73 615,589,677.22 Total current assets 614,431,418.94 469,901,688.86 Other current liabilities Non-current assets: Total current liabilities 2,701,412,149.94 2,969,372,632.56 Availablefor- sale financial assets Non-current liabilities: Held-tomaturity investment Long-term borrowings VIII(24) 3,414,047,061.31 3,159,333,277.39 Long-term accounts receivable Bonds payable Long-term equity investment VIII(7) 88,352,100.00 88,352,100.00 Long-term accounts payable VIII(25) 1,072,332,374.98 1,114,459,905.38 Investment property Deferred income VIII(26) 18,898,771.94 18,319,557.83 Fixed assets VIII(8) 6,150,606,598.57 5,684,074,945.46 Accrued liabilties Construction in process VIII(9) 676,523,186.09 1,277,744,153.32 Deferred income tax liabilities VIII(27) 18,001,502.09 19,816,576.46 Construction materials Other noncurrentSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 18 liabilities Liquidation of fixed assets Total noncurrent liabilities 4,523,279,710.32 4,311,929,317.06 Production biology assets Total liabilities 7,224,691,860.26 7,281,301,949.62 Oil and gas assets Shareholders' equity: Intangible assets VIII(10) 46,574,486.66 46,945,074.17 Share capital VIII(28) 400,000,000.00 400,000,000.00 Development expenses Capital reserve VIII(29) 84,050,162.84 84,050,162.84 Goodwill Less: inventory shares Long-term deferred assets VIII(11) 228,450,845.38 208,312,781.55 Surplus reserve VIII(30) 29,490,727.77 29,490,727.77 Deferred income tax assets VIII(12) 95,237,114.91 68,774,158.11 Retained earnings VIII(31) 148,981,262.23 36,471,405.69 Other noncurrent assets Exchange difference of foreign currency financial statements translation Total noncurrent assets 7,285,744,331.61 7,374,203,212.61 Shareholders' equity attributable to parent company: 662,522,152.84 550,012,296.30 Minority interests 12,961,737.45 12,790,655.55 Total shareholders’ equities 675,483,890.29 562,802,951.85 Total assets 7,900,175,750.55 7,844,104,901.47 Total liabilities and shareholders’ equities 7,900,175,750.55 7,844,104,901.47 Consolidated Income Statement June 30st, 2009 Name of the company : Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan Item Note 30-Jun-09 30-Jun-08 1. Total operating income VIII(32) 2,341,628,166.43 2,428,664,238.87 Minus: operating cost VIII(32) 1,855,661,886.60 1,992,303,001.82 Business taxes and surtax VIII(33) 69,042,767.26 70,308,687.96 Selling expense 143,786,115.87 98,975,491.57 Administration expense 105,357,851.54 93,298,161.82SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 19 Financial expenses VIII(34) 131,687,423.69 89,574,593.25 Impairment loss of assets VIII(35) 380,135.04 1,002,659.27 Add: profits from the fair value changes (The loss is listed beginning with “-“) VIII(36) -4,056,192.64 Investment income (The loss is listed beginning with “-“) VIII(37) 4,829,849.65 1,130,610.00 Including: the investment income from associated and joint ventures enterprises II. Operating profit 36,485,643.44 84,332,253.18 Add: non-operating income VIII(38) 115,765,523.38 722,266.53 Less: non-operating expense VIII(39) 2,176,504.92 6,486,128.62 Including: loss from disposal of non-current assets 2,169,256.17 6,367,094.29 III. Total profits (The loss is listed beginning with “-“) 150,074,661.90 78,568,391.09 Less: income tax expense VIII(40) 37,393,723.46 19,484,114.18 IV. Net profits (the net loss is listed beginning with “-”) 112,680,938.44 59,084,276.91 Net profits attributable to parent company 112,509,856.54 58,639,158.40 Minority interests 171,081.90 445,118.51 V. Earnings per share 1.Basic earnings per share 0.28 0.15 2.Diluted earnings per share 0.28 0.15 VI. Other comprehensive income VII.Total amount of comprehensive income 112,680,938.44 59,084,276.91 Total amount of comprehensive income attributable to parent company 112,509,856.54 58,639,158.40 Total amount of comprehensive income attributable to Minority shareholders 171,081.90 445,118.51 Consolidated Cash Flow Statement June 30st, 2009 Name of the company : Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan Item Note 30-Jun-09 30-Jun-08 I. Cash flows from operating activities Cash received from sales of goods or rendering of services 2,336,429,221.15 2,405,107,325.08 Tax refund - - Cash received related to other operating activities VIII(42) 93,215,476.76 17,089,563.80 Subtotal of cash inflow from operating activities 2,429,644,697.91 2,422,196,888.88SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 20 Cash received from sales of goods or rendering of services 1,338,317,681.18 1,446,382,639.72 Cash paid to and on behalf of employees 299,050,769.59 275,772,293.44 Tax payments 158,632,335.13 126,406,124.30 Other cashes paid to operating activities VIII(43) 66,905,309.19 127,535,981.59 Subtotal of Cash outflow from operating activities 1,862,906,095.09 1,976,097,039.05 Net cash flow from operating activities 566,738,602.82 446,099,849.83 II. Cash flow from investment activities: Cash received from investments - Cash dividents received from investment 3,212,207.65 1,130,610.00 Net cash received from disposal of fixed assets, intangible assets and other long-term assets 317,139,020.01 16,595.00 Net cash amount received from the disposal of subsidiaries an other business units - Cash received related to other investment activities Subtotal of cash inflow from the investment activities 320,351,227.66 1,147,205.00 Cash paid to acquire and construct fixed assets, intangible assets and other long-term assets 456,905,808.57 467,976,097.79 Cash paid to acquire investments - Net cash amount paid to acquire the subsidiaries and other business units - Cash paid related to other investment activities 25,800,000.00 Subtotal of Cash outflow from investment activities 482,705,808.57 467,976,097.79 Net cash flow from investment activities -162,354,580.91 -466,828,892.79 III. Cash flow from financing activities: Cash received from investors Cash received from loans 1,118,132,976.67 1,168,713,800.00 Cash received related to other financing activities 5,009,602.50 Subtotal of cash inflow from the financing activities 1,118,132,976.67 1,173,723,402.50 repayment of loans 1,268,237,935.34 828,019,960.57 Cash dividends, profits and interests paid 109,218,730.63 128,790,723.46 Cash payments related to other financing activities VIII(44) 105,176,772.22 148,960,663.62 Sub-total of cash outflow from the financing activities 1,482,633,438.19 1,105,771,347.65 Net cash flow from finacing activities -364,500,461.52 67,952,054.85 IV. Effect of Foreign Exchange Rate Changes on Cash and cash equivalents -95,955.40 -614,021.22 V. Net increase in cash and cash equivalents 39,787,604.99 46,608,990.67 Add: beginning balance of cash and cash equivalents 44,937,058.88 42,131,848.82 VI ending balance of cash and cash equivalents 84,724,663.87 88,740,839.49SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT Consolidated statement of changes in the shareholders' equity June 30st, 2009 Name of the company : Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan 30-Jun-09 shareholders' equity belongs to parent company Item Share capital Capital reserve minus: Shares at stock Capital surplus Undistributed Profit Others Minority interest Toatl of shareholder's equity I. Balance at the end of previous year 400,000,000.00 84,050,162.84 29,490,727.77 36,471,405.69 12,790,655.55 562,802,951.85 plus(I): changes of accounting policies (II)Correction of errors in previous years II. Balance at the beginning of this year 400,000,000.00 84,050,162.84 29,490,727.77 36,471,405.69 12,790,655.55 562,802,951.85 III. Increase or decrease of change amount in this year(the decrease is listed beginning with “-”) - 112,509,856.54 171,081.90 112,680,938.44 (I)Net profits in the year 112,509,856.54 171,081.90 112,680,938.44 (II)Profit and loss directly accrued to owners’ equities 1.Net amount of fair value changes of saleable financial assets 2.Net amount about the change of fair values of cash flow arbitrage tools 3. Income tax effect related to the projects accrued to owner's euity 4. Others Subtotal of (I)and (II) 112,509,856.54 171,081.90 112,680,938.44 (III) Capitals invested by the owners 1.Capital investment by owners in current periodSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 22 2. Repurchase of shares at stock in the year 3.others (IV)Profit distribution in the yea - - Withdrawal of surplus reserve - 2.Withdrawal of general risk preparation 3. Distribution to shareholders 4.Others (V) Internal settlement and transfer of owners’equity 1. Transfer of capital reserve to capital 2. Transfer of surplus reserve to capital 3. Surplus reserve makes up for the loss 4. others IV. Balance at the end of this period 400,000,000.00 84,050,162.84 29,490,727.77 148,981,262.23 12,961,737.45 675,483,890.29 4 Consolidated statement of changes in the shareholders' equity June 30st, 2009 Name of the company : Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan 31-Dec-08 shareholders' equity belongs to parent company Item Share capital Capital reserve minus: Shares at stock Capital surplus Undistributed Profit Others Minority interest Toatl of shareholder's equity I. Balance at the end of previous year 400,000,000.00 84,050,162.84 24,919,586.71 -39,938,895.93 12,133,486.03 481,164,339.65 plus(I): changes of accounting policiesSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 23 (II)Correction of errors in previous years - II. Balance at the beginning of this year 400,000,000.00 84,050,162.84 24,919,586.71 -39,938,895.93 12,133,486.03 481,164,339.65 III. Increase or decrease of change amount in this year(the decrease is listed beginning with “-”) 4,571,141.06 76,410,301.62 657,169.52 81,638,612.20 (I)Net profits in the year 80,981,442.68 657,169.52 81,638,612.20 (II)Profit and loss directly accrued to owners’ equities - - 1.Net amount of fair value changes of saleable financial assets 2.Net amount about the change of fair values of cash flow arbitrage tools 3. Income tax effect related to the projects accrued to owner's euity 4. Others - Subtotal of (I)and (II) 80,981,442.68 657,169.52 81,638,612.20 (III) Capitals invested by the owners 1.Capital investment by owners in current period 2. Repurchase of shares at stock in the year 3.others (IV)Profit distribution in the yea 4,571,141.06 -4,571,141.06 Withdrawal of surplus reserve 4,571,141.06 -4,571,141.06 2.Withdrawal of general risk preparation 3. Distribution to shareholders 4.Others (V) Internal settlement and transfer of owners’equity - - -SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 24 1. Transfer of capital reserve to capital 2. Transfer of surplus reserve to capital 3. Surplus reserve makes up for the loss 4. others - IV. Balance at the end of this period 400,000,000.00 84,050,162.84 29,490,727.77 36,471,405.69 12,790,655.55 562,802,951.85SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT Balance Sheet June 30st, 2009 Name of the company : Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan Asset Note 30-Jun-09 31-Dec-08 Liabilities and Shareholders' equities Note 30-Jun-09 31-Dec-08 Current assets: Current liability: Monetary funds 122,756,155.64 57,648,117.02 Short-term loan 770,000,000.00 1,006,887,514.55 Tradable financial assets 19,404,619.47 23,460,812.11 Tradable financial liabilities Note receivable Notes payable 96,000,000.00 10,000,000.00 Accounts receivable IX.(1) 153,905,658.26 125,105,495.35 Accounts payable 924,064,652.85 873,297,361.73 Advance to suppliers 33,538,990.42 28,986,600.63 Advance from customers 110,691,218.28 86,115,566.69 Interests receivable - Payroll payable 54,463,056.57 91,114,079.09 Dividend receivable 1,617,642.00 Tax payable 159,244,727.56 111,270,281.82 Other accounts receivables IX.(2) 201,005,845.80 145,198,107.29 Interests payable 6,088,936.83 9,634,990.00 Inventories 65,968,163.56 74,347,529.57 Dividend payable 11,940.00 11,940.00 Non-current assets due within one year Other accounts payable 153,821,320.51 161,909,084.49 Other current assets Non-current liabilities due within one year 423,523,639.73 615,589,677.22 Total current assets 598,197,075.15 454,746,661.97 Other current liabilities Non-current assets: Total current liabilities 2,697,909,492.33 2,965,830,495.59 Available-for-sale financial assets Non-current liabilities: Held-to-maturity investment Long-term borrowings 3,414,047,061.31 3,159,333,277.39 Long-term accounts receivable Bonds payable Long-term equity investment IX.(3) 112,165,305.97 112,165,305.97 Long-term accounts payable 1,072,332,374.98 1,114,459,905.38 Investment property Deferred income 18,898,771.94 18,319,557.83 Fixed assets 6,137,725,809.20 5,670,839,727.85 Accrued liabilties Construction in process 676,523,186.09 1,277,744,153.32 Deferred income tax liabilities 18,001,502.09 19,816,576.46 Construction materials Other non-current liabilities Liquidation of fixed assets Total non-current liabilities 4,523,279,710.32 4,311,929,317.06 Production biology assets Total liabilities 7,221,189,202.65 7,277,759,812.65 Oil and gas assets Shareholders' equity: Intangible assets 31,675,647.73 32,028,907.27 Share capital 400,000,000.00 400,000,000.00 Development expenses Capital reserve 84,050,162.84 84,050,162.84 Goodwill Less: inventory shares Long-term deferred assets 228,450,845.38 208,312,781.55 Surplus reserve 28,830,023.24 28,830,023.24 Deferred income tax assets 95,230,113.53 68,767,156.73 Retained earnings 145,898,594.32 33,964,695.93 Other non-current assets Total shareholders’ equities 658,778,780.40 546,844,882.01 Total non-current assets 7,281,770,907.90 7,369,858,032.69SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 26 Total assets 7,879,967,983.05 7,824,604,694.66 Total liabilities and shareholders’ equities 7,879,967,983.05 7,824,604,694.66 Income Statement June 30st, 2009 Name of the company : Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan Item Note 30-Jun-09 30-Jun-08 1. Total operating income IX(4) 2,338,250,642.97 2,425,026,349.26 Minus: operating cost IX(4) 1,854,692,032.25 1,991,632,679.42 Business taxes and surtax 68,873,891.08 70,115,993.48 Selling expense 143,786,115.87 98,975,491.57 Administration expense 103,808,136.48 92,253,341.29 Financial expenses 131,827,809.88 89,726,012.02 Impairment loss of assets 380,135.04 1,002,659.27 Add: profits from the fair value changes (The loss is listed beginning with “-“) -4,056,192.64 Investment income (The loss is listed beginning with “-“) IX(5) 4,829,849.65 1,130,610.00 Including: the investment income from associated and joint ventures enterprises II. Operating profit 35,656,179.38 82,450,782.21 Add: non-operating income 115,765,523.38 722,066.53 Less: non-operating expense 2,176,504.92 6,486,128.62 Including: loss from disposal of non-current assets 2,169,256.17 6,367,094.29 III. Total profits (The loss is listed beginning with “-“) 149,245,197.84 76,686,720.12 Less: income tax expense 37,311,299.45 19,262,938.67 IV. Net profits (the net loss is listed beginning with “-”) 111,933,898.39 57,423,781.45 V. Earnings per share 57,423,781.45 1.Basic earnings per share 2.Diluted earnings per shareSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 27 VI. Other comprehensive income VII.Total amount of comprehensive income 111,933,898.39 57,423,781.45 Total amount of comprehensive income attributable to parent company Total amount of comprehensive income attributable to Minority shareholders Cash Flow Statement June 30st, 2009 Name of the company : Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan Item Note 30-Jun-09 30-Jun-08 I. Cash flows from operating activities Cash received from sales of goods or rendering of services 2,334,446,557.00 2,402,737,213.92 Tax refund - - Cash received related to other operating activities 93,075,090.57 16,936,040.23 Subtotal of cash inflow from operating activities 2,427,521,647.57 2,419,673,254.15 Cash received from sales of goods or rendering of services 1,338,332,467.49 1,444,699,080.41 Cash paid to and on behalf of employees 297,851,797.47 275,239,360.70 Tax payments 158,622,333.14 125,451,226.92 Other cashes paid to operating activities 66,514,013.02 127,510,793.09 Subtotal of Cash outflow from operating activities 1,861,320,611.12 1,972,900,461.12 Net cash flow from operating activities 566,201,036.45 446,772,793.03 II. Cash flow from investment activities: Cash received from investments Cash dividents received from investment 3,212,207.65 1,130,610.00 Net cash received from disposal of fixed assets, intangible assets and other long-term assets 317,139,020.01 16,595.00 Net cash amount received from the disposal of subsidiaries an other business units Cash received related to other investment activities Subtotal of cash inflow from the investment activities 320,351,227.66 1,147,205.00 Cash paid to acquire and construct fixed assets, intangible assets and other long-term assets 456,847,808.57 467,853,657.79 Cash paid to acquire investments Net cash amount paid to acquire the subsidiaries and other business units Cash paid related to other investment activities 25,800,000.00 Subtotal of Cash outflow from investment activities 482,647,808.57 467,853,657.79 Net cash flow from investment activities -162,296,580.91 -466,706,452.79 III. Cash flow from financing activities: Cash received from investorsSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 28 Cash received from loans 1,118,132,976.67 1,168,713,800.00 Cash received related to other financing activities 5,009,602.50 Subtotal of cash inflow from the financing activities 1,118,132,976.67 1,173,723,402.50 repayment of loans 1,268,237,935.34 828,019,960.57 Cash dividends, profits and interests paid 109,218,730.63 128,790,723.46 Cash payments related to other financing activities 105,176,772.22 148,960,663.62 Sub-total of cash outflow from the financing activities 1,482,633,438.19 1,105,771,347.65 Net cash flow from finacing activities -364,500,461.52 67,952,054.85 IV. Effect of Foreign Exchange Rate Changes on Cash and cash equivalents -95,955.40 -613,652.92 V. Net increase in cash and cash equivalents 39,308,038.62 47,404,742.17 Add: beginning balance of cash and cash equivalents 30,712,242.02 30,096,953.79 VI ending balance of cash and cash equivalents 70,020,280.64 77,501,695.96SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT Statement of changes in the shareholders' equity June 30st, 2009 Name of the company : Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan 30-Jun-09 Item Note Share capital Capital reserve Minus;share at stock Capital surplus Undistributed profit Toatl of shareholder's equity I. Balance at the end of previous year 400,000,000.00 84,050,162.84 28,830,023.24 33,964,695.93 546,844,882.01 plus(I): changes of accounting policies (II)Correction of errors in previous years II. Balance at the beginning of this year 400,000,000.00 84,050,162.84 28,830,023.24 33,964,695.93 546,844,882.01 III. Increase or decrease of change amount in this year(the decrease is listed beginning with “-”) - 111,933,898.39 111,933,898.39 (I)Net profits in the year 111,933,898.39 111,933,898.39 (II)Profit and loss directly accrued to owners’ equities 1.Net amount of fair value changes of saleable financial assets 2.Net amount about the change of fair values of cash flow arbitrage tools 3. Income tax effect related to the projects accrued to owner's euity 4. Others Subtotal of (I)and (II) 111,933,898.39 111,933,898.39 (III) Capitals invested by the owners 1.Capital investment by owners in current period 2. Repurchase of shares at stock in the year 3.others (IV)Profit distribution in the yea - -SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 30 1.Withdrawal of surplus reserve - 2. Distribution to shareholders 3.Others (V) Internal settlement and transfer of owners’equity 1. Transfer of capital reserve to capital 2. Transfer of surplus reserve to capital 3. Surplus reserve makes up for the loss 4. others IV. Balance at the end of this period 400,000,000.00 84,050,162.84 28,830,023.24 145,898,594.32 658,778,780.40 Statement of changes in the shareholders' equity June 30st, 2009 Name of the company : Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan 31-Dec-08 Item Note Share capital Capital reserve Minus;share at stock Capital surplus Undistributed profit Toatl of shareholder's equity I. Balance at the end of previous year 400,000,000.00 84,050,162.84 24,442,948.14 -41,199,838.89 467,293,272.09 plus(I): changes of accounting policies (II)Correction of errors in previous years - II. Balance at the beginning of this year 400,000,000.00 84,050,162.84 24,442,948.14 -41,199,838.89 467,293,272.09 III. Increase or decrease of change amount in this year(the decrease is listed beginning with “-”) 4,387,075.10 75,164,534.82 79,551,609.92 (I)Net profits in the year 79,551,609.92 79,551,609.92 (II)Profit and loss directly accrued to owners’ equities - - 1.Net amount of fair value changes of saleable financial assets 2.Net amount about the change of fair values of cash flow arbitrage toolsSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 31 3. Income tax effect related to the projects accrued to owner's euity 4. Others - Subtotal of (I)and (II) 79,551,609.92 79,551,609.92 (III) Capitals invested by the owners 1.Capital investment by owners in current period 2. Repurchase of shares at stock in the year 3.others (IV)Profit distribution in the yea 4,387,075.10 -4,387,075.10 1.Withdrawal of surplus reserve 4,387,075.10 -4,387,075.10 2. Distribution to shareholders 3.Others (V) Internal settlement and transfer of owners’equity 1. Transfer of capital reserve to capital 2. Transfer of surplus reserve to capital 3. Surplus reserve makes up for the loss 4. others IV. Balance at the end of this period 400,000,000.00 84,050,162.84 28,830,023.24 33,964,695.93 546,844,882.01SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT Shandong Airlines Co., Ltd Notes to Financial Statements For the period ended June 30,2009 (All amounts are expressed in RMB Yuan unless otherwise stated) I. General Shandong Airlines Co., Ltd. (the "Company") was established in the People's Republic of China ("PRC") on JULY 29, 1999, and is responsible for its own operation, subject to the supervision and regulation of the Civil Aviation Administration of China (“CAAC”), a regulatory authority of the civil aviation industry in the PRC. Its B shares are listed on the Shenzhen Stock Exchange (“the Stock Exchange”) with effect from September 12, 2000. Its holding company is Shandong Aviation Group 山东航空集团有限公司 (formerly Shandong Airlines Limited 山东航空集团有限公司), a company also established in the PRC.. The company is engaged in the provision of domestic passenger and cargo air transportation services. The principle activities of subsidiaries and associates are set out in notes VII (1) and (2). The Company and its subsidiaries are hereinafter collectively referred to as “the Group”. II. Basis for Preparation The financial statements of the company are prepared on the assumption of going concern and actual transactions and items ,in accordance with the Enterprise Accounting Standards issued by the Ministry of Finance in February 2006 and accounting policy ,accounting estimation which presented in the Part four of the accounting Notes. III. Declaration of Compliance with the Enterprise Accounting Standards The Company’s financial statements prepared meet the requirements of the Enterprise Accounting Standards, fairly and completely presents the financial position, operation result and cash flow, and other relevant information of the company. IV. Main Accounting Policies and Accounting Estimates and Methods of Consolidation (1) Accounting Year The company employs the period of the calendar days from the January 1 to December 31 each year as the accounting year. (2) Reporting Currency The Company’s reporting currency is Renminbi (“RMB”). (3) Measurement Characters The Company commonly measures accounting factors by historical cost method; if the determined accounting factor amount can be obtained or reliably measured, the replacement cost, net realizable value, net value and fair value method may be employed. Within the reporting period,financial assets and liabilities measured at fair value through profit and loss, available for sale financial assets and financial derivative instrument are measured at fair value; for the payment terms of purchasedSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 33 inventory and fixed assets are more than more than normal credit terms, these inventory and fixed assets are measured at their purchase price; if impairment Loss occurs on inventory, the inventory is measured at net realizable value; if impairment Loss occurs on other assets ,they are measured at recoverable value; Asset inventory surplus are measured at replacement cost, other items of financial statement are measured at historical cost. (4) Standard of Cash Equivalents In preparing cash flow statement, cash equivalents of the company include the investments with short term (it usually expires within three months from the purchase date), highly liquidity, easy to convert into known amount of cash, and lowrisk of changes in value. Equity investments shall not deem as cash equivalents. (5) Foreign Currency Transactions Foreign currency (currency other than the reporting currency) transactions are translated into reporting currency at spot exchange rates prevailing on the day in which the transactions take place. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are restated into the reporting currency using the spot exchange rates at that date. The exchange gains or loses are dealt with in the income statement for the year. The exchange gains or loses arising from foreign currency borrowings in relation to the acquisition or construction of fixed assets are accounted for according to the requirements of capitalization of borrowing costs. Conversion of Financial Statement in Foreign Currency Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are converted into the reporting currency using the spot exchange rates at that date. Among shareholders’ equity items, all items except “undistributed profits” are converted into reporting currency at the spot exchange rate on the occurrence date. Income and expense items in Income Statement are converted into reporting currency at spot exchange rate on the occurrence date. (6) Financial Assets and Financial Liabilities (1) The Recognition of the Financial Instruments: The company should recognize a financial asset or a financial liability on its balance sheet when, and only when the entity becomes a party to the contractual provision of the instrument. (2) Classification of Financial Assets and Financial Liabilities: Financial assets and liabilities include financial assets and liabilities held for trading, and financial asset or financial liability at fair value through profit or loss; held-to-maturity investments; loans and accounts receivable; available-for-sale financial assets; and other financial liabilities. 1. Financial asset or financial liabilities at fair value through profit or loss which including tradable financial assets or liability and designated financial asset or financial liability at fair value through profit or loss. The tradable financial asset or liability is financial assets or liability meets one of the following criteria: a. The purpose of the obtaining the financial asset or liability is for sale or repurchase in the near future. b. Forming a part of the identifiable combination of financial instruments which are managed in a centralized way and for which there are objective evidences proving that the enterprise may manage the combination by way of short term profit making in the near future; c. Being a derivative instrument, excluding the designated derivative instrument which are effective hedging instruments, or derivative instruments to financial guarantee contracts, and the derivative instruments which are connected with the equity instrument investments for which there is no quoted price in the active market, whose fairSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 34 value cannot be reliably measured, and which shall be settled by delivering the said equity instruments. The financial assets or financial liabilities meeting any of the following requirements can be designated, when they are initially recognized, as financial assets or financial liabilities as measured at its fair value and of which the variation is included in the current profits and losses: (1) The designation is able to eliminate or obviously reduce the discrepancies in the recognition or measurement of relevant gains or losses arisen from the different basis of measurement of the financial assets or financial liabilities; (2) The official written documents on risk management or investment strategies of the enterprise concerned have recorded that the combination of said financial assets, the combination of said financial liabilities, or the combination of said financial assets and financial liabilities will be managed and evaluated on the basis of their fair values and be reported to the key management personnel. 2. held-to-maturity investment" refers to a non-derivative financial asset with a fixed date of maturity, a fixed or determinable amount of reportable price and which the enterprise holds for a definite purpose or the enterprise is able to hold until its maturity. 3. Loans and accounts receivable" refers to the non-derivative financial assets for which there is no quoted price in the active market and of which the repo amount is fixed or determinable. 4. The "sellable financial assets" refers to the non-derivative financial assets which are designated as sellable when they are initially recognized as well as the financial assets other than those as described below: (1) Loans and accounts receivables; (2) Investments held until their maturity; and (3) Financial assets measured at their fair values and of which the variation is recorded into the profits and losses of the current period. 5. Other financial liability refers to financial liability are not measured at fair value through profit and loss. (3) Measurement of Financial Instruments The financial assets and financial liabilities initially recognized by an enterprise shall be measured at their fair values. For the financial assets and liabilities measured at their fair values and of which the variation is recorded into the profits and losses of the current period, the transaction expenses thereof shall be directly recorded into the profits and losses of the current period. The subsequent measurement of the financial assets and financial liability: 1. The financial asset and liability at fair value through profit and loss are subsequently measured at fair value, the profit and loss caused by changes in the fair value and de-recognition of the financial asset and liability should be recorded in the profit and loss accounts. 2. The investments held until their maturity, are measured on the basis of the post-amortization costs by adopting the actual interest rate method; the profit and loss caused by de-recognition, impairment or amortization are recorded in the profit and loss account of the current period. 3. The accounts receivable are measured on the basis of the post-amortization costs by adopting the actual interestSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 35 rate method; the profit and losses caused by de-recognition, impairment or amortization is recorded in the profit and loss account of the current period. 4. Available for sale financial asset, subsequently measured at fair value, the profit and losses caused by changes in fair value are recorded in the Capital reserve. The differences between purchase value and book value as disposal of available for sale financial asset should be recognized in the profit and loss on investments. At the same time, roll out the amount of the disposal part corresponding with the cumulative amount of the changes in the fair value recognized in the owner’s equity into the Capital reserve. The interest and cash dividend received during hold for available for sale financial asset, are recognized in the profit and loss on investments. 5. Other financial liability , the derivative instruments which are connected with the equity instrument investments for which there is no quoted price in the active market, whose fair value cannot be reliably measured, and which shall be settled by delivering the said equity instruments For the financial guarantee contracts which are not designated as a financial liability measured at its fair value and the variation thereof is recorded into the profits and losses of the current period, and for the commitments to grant loans which are not designated to be measured at the fair value and of which the variation is recorded into the profits and losses of the current period and which will enjoy an interest rate lower than that of the market, a subsequent measurement shall be made after they are initially recognized according to the higher one of the following: i. the amount as determined according to the Accounting Standards for Enterprises No. 13 - Contingencies; or ii. The surplus after accumulative amortization as determined according to the principles of the Accounting Standards for Enterprises No. 14 - Revenues is subtracted from the initial recognized amount Other financial liabilities are measured on the basis of the post-amortization costs by adopting the actual interest rate method; the profit and losses caused by de-recognition, impairment or amortizations are recorded in the profit and loss account of the current period. 6. The "fair value" refers to the amount, at which both parties to a transaction who are familiar with the condition exchange their assets or clear off their debts under fair conditions. In a fair transaction, both parties to it shall be enterprises in continuous operation, and do not plan or do not need to carry out any liquidation, significantly reduce their operational scale or carry out transactions notwithstanding the unfavorable conditions they face. 7. Amortized cost Preferred term for the apportionment (charging or writing off) of the cost of an intangible asset as an operational cost over the asset's estimated useful life. It is identical to depreciation, the preferred term for tangible assets. The purpose of both terms is to (1) reflect reduction in the book value of the asset due to usage and/or obsolescence, (2) spread a large expenditure proportionately over a fixed period, and thereby (3) reduce the taxable income (not the actual or cash income) of a firm. In effect, it is a process by which invested capital of a firm is recovered by gradual sale of the firm's asset(s) to its customers over the years. 8. Effective interest methods refers to a financial Asset (including a group of financial assets) or financial liability (including a group of financial liabilities), means a method of— calculating the amortized cost of the asset or liability, as the case may be; and allocating the interest income and interest expense of the asset or the interest income and interest expense of the liability, as the case may be, over the expected life of the asset or liability, as the case may be. (4) Termination of Recognition of Financial AssetsSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 36 1. Where a financial asset satisfies any of the following requirements the recognition of it shall be terminated: a. Where the contractual rights for collecting the cash flow of the said financial asset are terminated; b. Where the said financial asset has been transferred and meets the conditions for recognizing the termination of financial assets as provided for in Accounting Standards for Enterprises No. 23 - Transfer of Financial Assets 2. When conditions of entire transferred assets de-recognition has been satisfied, the differences between the amount of following two items shall be accounted for profits and losses of current period. a. The book value of transferred financial assets; b. The sum of consideration received from the transfer, and the accumulative amount of the changes of the fair value originally recorded in the shareholders’ equities (in the event that the financial asset involved in the transfer is a financial asset available-for-sale) 3. If the transfer of partial financial assets satisfies the conditions of de-recognition, the entire book value of the transferred financial asset shall, between the portion whose de-recognition and the recognized portion (under such circumstance, the service asset retained shall be deemed as a portion of financial asset whose de-recognition), be apportioned according to their respective relative fair value, and the difference between the amounts of the following two items shall be accounted for the profits and losses of the current period . a. The book value of the portion whose de-recognition. b. The sum of consideration of the portion whose de-recognition and the portion of accumulative amount of the changes in the fair value originally recorded in the shareholders’ equity which is corresponding to the portion whose derecognized ( in the event that the financial assets involved in the transfer is a financial assets available-for-sale). 4. If the Company fails to satisfy the conditions of de-recognition for transferred financial assets, it shall continue to recognize the entire financial assets to be transferred and shall recognize the consideration it receives as a financial liability. 5. Impairment of financial assets The Company assesses the financial assets that carry at fair value, and those financial assets which changes of fair value are recognized in profit and loss accounts at the balance sheet date. If there is objective evidence that the one or several financial assets are impaired, the Company shall determine the amount of any impairment loss. a. Accounts Receivable At the end of the period, if there is objective evidence that the accounts receivable have been impaired, the impairment loss shall be recognized based on the difference between book values and expected cash inflow values. At the end of the period, impairment test shall be made on individual accounts receivable with significant amounts. If there is objective evidence that they have been impaired, bad debt loss shall be recognized and provision for bad debts shall be made based on the difference between the expected cash inflow values and book values. For those individual accounts receivable with not significant amounts at the end of the period, along with those accounts receivable that have been tested individually but not impaired, the Company classifies them in line with similar credit risk characteristics into several groups, and make 5% of bad debts provision on the accounts receivable balances at balance sheet date. This percentage reflects the actual impairment loss, that is, the amount of which book values of each group are over their expected inflow values.SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 37 On the basis of the actual loss rate of receivable accounts, with same or similar credit risk characteristics of accounts receivable package in previous year, the Company also considers current situation and determine the percentage of bad debt provision. No bad debts provision has been made for security deposits for the operating lease aircrafts and aircraft machineries. b. Held-to-maturity Investment The measurement of impairment loss of held-to-maturity investment, please refer to impairment loss treatment of accounts receivable. c. Available-for-sale Financial Assets If there is objective evidence that available-for-sale financial assets have significant depreciated, or after considering various relevant factors, this downward tendency is deemed as not temporary, the impairment loss shall be recognized based on the difference between the expected cash inflow values and book values. In case of impairment loss of available-for-sale financial assets recognized, it can not be written back. (7) Inventory 1. Inventories category: aircraft consumable parts, low-value consumable supplies for airplanes. 2. Inventories stock taking system: perpetual inventory method. 3. Valuation of methods of inventories:Inventories are calculated at actual costs when acquire, and issuance of inventories is determined on first in first out basis. 4. low-value consumable products amortization method The low–value consumable supplies are amortized at one time. 5. Impairment loss of inventories For inventories at balance sheet date, the evaluation criteria should base on the lower value between costs and net values that can be converted into cash. When net values that can be converted into cash are lower than costs, provision for impairment loss of inventories shall be made. For large quantity and low-unit-price inventories, provision for impairment loss of inventories shall be made based on the category of inventories; for those inventories that relate to product series which production and sale are in same areas, have same or similar final usages or purposes, and are hard to separate calculation from other items, their impairment loss provision shall be consolidated. The net value that can be converted into cash is referred to the value after estimated the selling price subtracts the estimated finished cost and estimated sales expenses and related tax and fees in normal operating process. (8)Recognition and Measurement of Long-term Equity Investment 1. Initial Measurement Long-term Equity Investment Including the company's investment that was able to exercise control, joint control or equity investment which may have significant influence on the invested company or the Company’s investment does not have control, joint control or significant influence on the invested company, and there is no active market quotation, the fair value can not be reliably measured. a. For the merger of enterprises under the same control, if the consideration of the merging enterprise is that it makes payment in cash, transfers non-cash assets or bear its debts, it shall, on the date of merger, regard the share of the book value of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. The difference between the initial cost of the long-term equity investment and the payment in cash, non-cash assets transferred as well as the bookSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 38 value of the debts borne by the merging party shall offset against the capital reserve. If the capital reserve is insufficient to dilute, the retained earnings shall be adjusted. If the consideration of the merging enterprise is that it issues equity securities, it shall, on the date of merger, regard the share of the book value of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. The total face value of the stocks issued shall be regarded as the capital stock, while the difference between the initial cost of the long-term equity investment and total face value of the shares issued shall offset against the capital reserve. If the capital reserve is insufficient to dilute, the retained earnings shall be adjusted. For obtaining subsidiary not under common control, the cost of long-term equity investment is fair value of assets paid or liabilities undertaken by the Company. Where the cost of a business combination exceeds the acquirer’s interest in the fair value of the acquiree’s identifiable net assets, the difference shall be recognized as goodwill, goodwill shall be measured at cost less accumulated impairment losses. Where the cost of combination is less than the acquirer’s interest in the fair value of the acquiree’s identifiable net assets, after reassessment, the difference shall be recognized in profit or loss for the current period. other types of long-term equity investment Besides the long-term equity investments formed by the merger of Enterprises, the initial cost of a long-term equity investment obtained by other means shall be ascertained in accordance with the provisions as follows: (1) The initial cost of a long-term equity investment obtained by making payment in cash shall be the purchase cost which is actually paid. The initial cost consists of the expenses directly relevant to the obtainment of the long term equity investment, taxes and other necessary expenses. (2) The initial cost of a long-term equity investment obtained on the basis of issuing equity securities shall be the fair value of the equity securities issued. (3) The initial cost of a long-term equity investment of an investor shall be the value stipulated in the investment contract or agreement except the unfair value stipulated in the contract or agreement. (4) The initial cost of a long-term investment obtained by the exchange of nonmonetary assets shall be ascertained in accordance with the Accounting Standards for Enterprises No.7 – Exchange of Non-monetary Assets. (5) The initial cost of a long-term equity investment obtained by recombination of liabilities shall be ascertained in accordance with Accounting Standards for Enterprises No. 12 – Debt Restructuring. 2. Subsequent Measurement The cost method is employed to calculate the long-term equity investment of subsidiaries and will be adjusted in accordance with the equity method in the preparation of the consolidated financial statements. The Company uses cost method for the following conditions: a long-term equity investment where the investing enterprise can exercise control over the investee, or the investing enterprise does not have joint control or significant influence over the investee, the investment is not quoted in an active market and its fair value can’t be reliably measured. When an investing enterprise can exercise joint control or significant influence over the investee, a long-term equity investment shall be treated as a recovery of initial investment cost. a. When using cost method, cash dividends or profit distributions declared by the investee shall be recognized as investment income in the current period. Declaration made by the invested units or payment of cash dividends of profits, in addition to the actual investment made to pay the price or prices have been contained but has not yet issued a declaration ofSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 39 cash dividends or profits, It will invest in units in accordance with the enjoyment of being paid cash dividends declared or profits recognized current investment income. b. When using equity method, after the investing enterprise has acquired a long-term equity investment, it shall recognize its share of net profits or losses made by the investee as investment income or losses, and adjust the carrying amount of the investment accordingly. The carrying amount of the investment shall be reduced by the portion of any profit distributions or cash dividends declared by the investee that is attributed to the investing enterprise. The impairment of a long-term equity investment which is measured by employing the cost method as prescribed in these Standards, for which there is no offer in the active market and of which the fair value cannot be reliably measured, its impairment shall be disposed in accordance with the Accounting Standards for Enterprises No. 22 – Recognition and Measurement of Financial Instruments. The impairment of any other long-term equity investment measured in accordance with these Standards shall be disposed in accordance with the Accounting Standards for Enterprises No. 8 – Asset Impairment. (9)Recognition and Measurement of Fixed Asset 1. Fixed assets refer to simultaneously have the following characteristics of tangible assets: for the production of merchandise, and providing labor services, lease or operation and management of holdings; life of more than one fiscal year. 2. Fixed assets are tangible assets that are held for use in production or supply of goods or services, for rental to others, or for administrative purpose, and have useful lives more than one accounting year. Fixed assets shall be recognized if they meet the following conditions: (a) The economic benefits related to fixed asset probably flows to the enterprise; (b) The cost of fixed asset may be reliably measured. 3. Fixed assets are measured in accordance with initial cost, the value of the financing leased fixed assets are measured at the lower of the fair value of the start date of the leasing and the present value of minimum lease payments, depreciation policy is in accordance with its own policy 4. The depreciation method of fixed assets: straight-line method is in used to calculate the depreciation of fixed assets (including finance leased fixed assets). The estimated useful lives, expected residual value and annual depreciation rate of various types fixed assets are listed as follows: Category Estimated useful lives (years) Residual value (%) Annual depreciation rate Buildings and structures 27-33 5.00 2.88-3.52 LLP and APU 15-20 5.00 4.75-6.33 Aircraft frame replaceable parts 6-8 0.00 12.5-16.67 Engine replaceable parts 3-5 0.00 20-33.33 Machineries, Electronics and equipments 4-10 0-5.00 9.5-23.75 High price rotables 15-18 0.00 5.56-6.67 Vehicles 5-10 5.00 9.5-19 5. The fixed asset would be recognized as idle fixed assets if the fixed asset be unused in 6months (except for seasonal disable), the deprecation method of idle fixed assets is in line with other types of fixed assets.SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 40 6. The high price rotables were classified into fixed assets according to the Ministry of Finance CAIKUAIHAN [2004] No. 54 Ministry of Finance regarding the reply for the expansion of scope for civil aviation capitalization flow management 7. At balance sheet date, if there is evidence indicates that the fixed asset has been impaired, the provision for the impairment is prepared in accordance with methods described in14, note 4. (10)Construction in Progress Construction in progress shall be calculated based on the classification of proposed projects. Construction in progress is measured at actual cost. Construction in progress is transferred to fixed assets when the project is substantially ready for its intended use. Borrowing costs relating to construction in progress are measured according to borrowing costs measurement method. At the end of period, the company makes judgment if any provision of impairment loss is necessary. If the project has been stopped for a long time and will not be constructed within three years, the impairment loss for such construction in progress shall be made based on the differences between recoverable amount and book values. Once impairment loss is made, it can not be written back. (11) Intangible Assets 1. The intangible assets shall be initially measured according to its cost 2. As for the intangible assets with limited service life, the enterprise shall estimate the years of its service life, or the amount of the output or any other similar measurement unit, which constitutes its service life. If it is unable to forecast the period when the intangible asset can bring economic benefits to the enterprise, it shall be regarded as an intangible asset with uncertain service life 3. To determine the useful life for the intangible assets with limited useful life, the following factors would be considered: a. the life cycle of the product which produced by the intangible assets. b. present technical, technological, and the trend of future development c. market demand for the products or services that produced by that asset. d. what action the Present or potential competitors will take in the future e. estimated maintenance expenditures for the maintenance of that asset as well as the company ‘s ability to pay for the expenditure. f. the relevant laws and regulations or similar constraints for the duration of that asset. g .the connection with other relevant asset’s useful life which hold by the company. 4. With regard to intangible assets with limited service life, its amortization amount shall be amortized within its service life systematically and reasonably. An enterprise shall amortize intangible assets from the time when it is available for use to the time when it is not confirmed as the intangible assets any more. The method chosen by an enterprise for the amortization of intangible assets shall reflect the expected realization pattern of the economic benefits which relevant to the intangible assets. If it is unable to determine the expected realization pattern reliably, intangible assets shall be amortized by the straightline method The useful lives of intangible assets: Intangible assets Estimated useful lives (years) Land-use rights 50 (12) Maintenance ExpensesSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 41 The maintenance expenses for aircraft and leased aircraft are both treated as current expenditure when they occur. Since January 1, 2007, the occurrence of the maintenance expenses will be capitalized if the maintenance expenses satisfy the conditions for capitalization, confirm as resetting the costs of fixed assets and depreciate in the reasonable terms.For aircraft under operating lease, maintenance are required before return the aircraft to the lessor, the expenses for maintenance is estimated based on straight line method or flight hours. (13) Long-term Deferred Assets The Company’s long-term deferred assets refer to expense which has been paid out and the benefiting period is over one year, such as expenses for pilots’ initial trainings and subsequent trainings. Those expenses are amortized at 20 years according to their benefit period respectively. (14)Impairment of Assets 1. No matter whether there is any sign of possible assets impairment, the goodwill formed by the merger of enterprises and intangible assets with uncertain service lives shall be subject to impairment test every year. Fixed assets, construction in progress, intangible assets, the investment properties measured by cost method and long-term equity investments, if there is any indication for impairment at balance sheet date then impairment test need to be taken Where any evidence shows that there is possible assets impairment, the recoverable amount of the assets shall be estimated. The recoverable amount shall be determined in light of the higher one of the net amount of the fair value of the assets minus the disposal expenses and the current value of the expected future cash flow of the assets. The disposal expenses shall include the relevant legal expenses, relevant taxes, truck age as well as the direct expenses for bringing the assets into a marketable state. Where there is any evidence indicating a possible impairment of assets, the enterprise shall, on the basis of single item assets, estimate the recoverable amount. Where it is difficult to do so, it shall determine the recoverable amount of the group assets on the basis of the asset group to which the asset belongs. 2. The recognition of the impairment a. The current market price of assets falls, and its decrease is obviously higher than the expected drop over time or due to the normal use; b. The economic, technological or legal environment in which the enterprise operates, or the market where the assets is situated will have any significant change in the current period or in the near future, which will cause adverse impact on the enterprise; c. The market interest rate or any other market investment return rate has risen in the current period, and thus the discount rate of the enterprise for calculating the expected future cash flow of the assets will be affected, which will result in great decline of the recoverable amount of the assets; d. Any evidence shows that the assets have become obsolete or have been damaged substantially; e. The assets have been or will be left unused, or terminated for use, or disposed ahead of schedule; f. Any evidence in the internal report of the enterprise shows that the economic performance of the assets have been or will be lower than the expected performance, for example, the net cash flow created by assets or the operating profit (or loss) realized is lower (higher) than the excepted amount, etc.; and Other evidence indicates that the impairment of assets has probably occurred. 3. The recognition of an asset group shall base on whether the main cash inflow generated by the asset group isSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 42 independent of those generated by other assets or other group assets. Simultaneously, when recognizing an asset group, the enterprise shall take into consideration how its managers manage the production and business activities (for example, according to the production lines, business varieties or according to the regions or areas), and the ways of decisionmaking for the continuous use or disposal of the assets, etc Where there is an active market for the products manufactured by (or other outputs of) a combination of several assets, even if some or all of these products (or other outputs) are provided for the internal use, the enterprise shall also recognize this combination of assets as an asset group on the condition that the provisions of the preceding paragraph are accorded with Where the cash inflow of the asset group is affected by the internal transfer price, the future cash flow of the asset group shall be determined on the basis of the best available estimate made by the managers of the enterprise for the future price in the fair transaction. Once an asset group is recognized, it shall be kept consistent during different accounting periods, and not be changed at will. (15) Measurement and Recognition of Employee Compensation 1. Employee Compensation Employee compensation refers to all kinds of payments and other relevant expenditures given by enterprises in exchange of the services offered by the employees. The employee compensation shall include: a. Wages, bonuses, allowances and subsidies for the employees; b. Welfare expenses for the employees; c. Medical insurance, endowment insurance, unemployment insurance, work injury insurance, maternity insurance and other social insurances; d. Housing accumulation fund; e. Labor union expenditure and employee education expenses; f. Non-monetary welfare; g. Compensations for the cancellation of the labor relationship with the employees; and h. Other relevant expenditures of services offered by the employees 2. If an enterprise cancels the labor relationship with any employee prior to the expiration of the relevant labor contract or brings forward any compensation proposal for the purpose of encouraging the employee to accept a layoff, and the following conditions are met concurrently, the enterprise shall recognize the expected liabilities incurred due to the compensation for the cancellation of the labor relationship with the employee, and shall simultaneously record them into the profit or loss for the current period: a. Where the enterprise has formulated a formal plan on the cancellation of labor relationship or has brought forward a proposal on voluntary layoff and will execute it soon. This plan or proposal shall include the department at which the employee to be laid off works, the post of the employee and the number of the employees to be laid off, the amount of compensation for the cancellation of labor relationship or for layoff as determined on the basis of the job category or post according to the relevant provisions, and the planned time for the cancellation of labor relationship or layoff. b. The enterprise is unable to unilaterally withdraw the plan on the cancellation of labor relationship or the layoff proposal.SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 43 (16) Principle of Accrued Liabilities 1. Principle of accrued liabilities The obligations related to some items that meet the following conditions at the same time will be confirmed as the liabilities: a. This obligation is the current obligation of the company; b. The performance of this obligation will probably cause the economic benefits to flow out of the company; c. The amount of this obligation can be reliably calculated. 2. The measurement of accrued liabilities The accrued liabilities are initially measured in accordance with the best estimated outflow of economic benefits to fulfill the current obligation as well as related risks regarding the contingencies, uncertainties and time value of money. Significant impact on the time value of money the best estimation is determined through the related discounted future cash outflows. The increase of book value of accrued liability caused due to the passage of time is recognized as interest. 3. Optimum evaluation of accrued liabilities If the necessary payments have scopes, the optimum evaluation shall be determined based on the average amount between the upper and lower limit amount of scope ; if the necessary payments do not have such scopes, the optimum evaluation shall be determined in the following method: (a) If the contingent event is involved in an individual project, the optimum evaluation amount will be determined based on the possible amount; (b) If the contingent event is involved in some projects, the optimum evaluation amount shall be determined based on possible amount and occurrence probability. In case of all or part of payments about the confirmed liquidation liabilities are expected to be compensated by the third parties or other parties, and the compensation amounts are surely received, then such amounts shall be separately recognized. The confirmed compensation amounts shall not exceed book values of confirmed liabilities. (17) Revenue Recognition 1. Offering labor a. The Company recognizes revenue based on passenger transport services provided or not based on the use of expired ticketed through, rather than as the basis to ticket through sales. The unused tickets will expiry in one year after sale. In addition, the company and other airlines signed code-sharing agreement; under the code-sharing agreements one party's carrier's flight No. classes can use designated code of the other air carrier. The revenue generated from code-sharing is allocated between parties in accordance with ode-sharing agreements; the revenue is confirmed as the provision of passenger transport services. b. In the provision of other aviation services, revenue is confirmed as at the completion of service 2. The company ascertains the amount of revenues from the alienating of right to use assets based on the following circumstances, respectively:SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 44 (1) The amount of interest revenue should be measured and confirmed in accordance with the length of time for which the company's cash is used by others and the actual interest rate; or (2) The amount of royalty revenue should be measured and confirmed in accordance with the period and method of charging as stipulated in the relevant contract or agreement. (18) Government Subsidies 1. No government subsidy may be recognized unless the following conditions are met simultaneously as follows: a. The enterprise can meet the conditions for the government subsidies; and b. The enterprise can obtain the government subsidies. 2. a. If a government subsidy is a monetary asset, it shall be measured in the light of the received or receivable amount. If a government subsidy is a non-monetary asset, it shall be measured at its fair value. If its fair value cannot be obtained in a reliable way, it shall be measured at its nominal amount. b. The government subsidies pertinent to assets shall be recognized as deferred income, equally distributed within the useful lives of the relevant assets, and included in the current profits and losses. But the government subsidies measured at their nominal amounts shall be directly included in the current profits and losses. The government subsidies pertinent to incomes shall be treated respectively in accordance with the circumstances as follows: (1) Those subsidies used for compensating the related future expenses or losses of the enterprise shall be recognized as deferred income and shall included in the current profits and losses during the period when the relevant expenses are recognized; or (2) Those subsidies used for compensating the related expenses or losses incurred to the enterprise shall be directly included in the current profits and losses. 3. If it is necessary to refund any government subsidy which has been recognized, it shall be treated respectively in accordance with the circumstances as follows: a. If there is the deferred income concerned, the book balance of the deferred income shall be offset against, but the excessive part shall be included in the current profits and losses; and b. If there is no deferred income concerned to the government subsidy, it shall be directly included in the current profits and losses. (19) Measurement and Recognition of Borrowing Cost 1. Principle of capitalization of borrowing cost Borrowing costs may be attributable to the construction and productions of assets and complied with the capitalization conditions, they shall be capitalized and accounted for as cost of assets; other borrowing costs shall be recognized as expenses when incurred and accounted for current profit and loss account. The assets complying with the capitalization conditions mean assets such as fixed assets, investment properties and inventories etc, that require a long time of construction and production activities before being intended for use or for sales. The capitalization of borrowing costs shall satisfy the following conditions: (a) The expenditure of assets has been incurred;SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 45 (b) The borrowing costs have been incurred; (c) Activities relating to acquisition, construction or production that are necessary to the assets being intended for use or sales have been launched. Capitalization of borrowing costs shall be suspended during periods in which acquisition, construction or production of assets is interrupted abnormally, and is interrupted for a continuous period of three months. 2. Capitalization period Capitalization of borrowing costs shall be suspended during periods in which acquisition, construction or production of assets is interrupted abnormally, and is interrupted for a continuous period of three months. Capitalization of borrowing costs also shall be suspended when the acquisition, construction or production of assets are prepared being intended for use or sales. Borrowing costs which are incurred by the acquisition, construction or production of assets, and are satisfied with the aforesaid capitalization conditions, are recognized as cost of assets before those assets are intended for use or sales. Any borrowing costs incurred after those assets are intended for use or sales, are recognized as financial costs. 3. Where a general borrowing is used for the acquisition and construction or production of assets eligible for capitalization, the enterprise shall calculate and determine the to-be-capitalized amount of interests on the general borrowing by multiplying the weighted average asset disbursement of the part of the accumulative asset disbursements minus the general borrowing by the capitalization rate of the general borrowing used. The capitalization rate shall be calculated and determined in light of the weighted average interest rate of the general borrowing. The capitalization period shall refer to the period from the commencement to the cessation of capitalization of the borrowing costs, excluding the period of suspension of capitalization of the borrowing costs. During the period of capitalization, the amount of interest capitalized during each accounting period shall not exceed the amount of interest actually incurred to the relevant borrowings in the current period. During the period of capitalization, the exchange balance on foreign currency borrowings shall be capitalized, and shall be recorded into the cost of assets eligible for capitalization. For the ancillary expense incurred to a specifically borrowed loan, those incurred before a qualified asset under acquisition, construction or production is ready for the intended use or sale shall be capitalized at the incurred amount when they are incurred, and shall be recorded into the costs of the asset eligible for capitalization; those incurred after a qualified asset under acquisition and construction or production is ready for the intended use or sale shall be recognized as expenses on the basis of the incurred amount when they are incurred, and shall be recorded into the profits and losses of the current period. The ancillary expenses arising from a general borrowing shall be recognized as expenses at their incurred amount when they are incurred, and shall be recorded into the profits and losses of the current period. (20) Measurement and Recognition of Income Taxes 1.The company uses deferred income tax liability method in calculation of income taxes 2. Where the company obtains assets or liabilities, it shall determine its tax base. Where there is difference between the carrying amount of the assets or liabilities and its tax base, the deferred income tax assets or the deferred income tax liabilities shall be determined. 3. The recognition of the deferred income tax assetsSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 46 a. The company should recognize the deferred income tax liabilities arising from a deductible temporary difference to the extent of the amount of the taxable income which it is most likely to obtain and which can be deducted from the deductible temporary difference. However, the deferred income tax assets, which are arising from the initial recognition of assets or liabilities during a transaction which is simultaneously featured by the following, shall not be recognized: (a) The transaction is not business combination; (b) At the time of transaction, the accounting profits will not be affected, nor will the taxable amount (or the deductible loss) be affected b. Where the deductible temporary difference related to the investments of the subsidiary companies, associated enterprises and joint enterprises can meet the following requirements simultaneously, the enterprise shall recognize the corresponding deferred income tax assets: (a) The temporary differences are likely to be reversed in the expected future; and (b) It is likely to acquire any amount of taxable income tax that may be used for making up the deductible temporary differences. c. As for any deductible loss or tax deduction that can be carried forward to the next year, the corresponding deferred income tax assets shall be determined to the extent that the amount of future taxable income to be offset by the deductible loss or tax deduction to be likely obtained 4. Deferred income tax liabilities Deferred tax liabilities shall be recognized for all taxable temporary differences, except to the extent that the deferred tax liabilities arise from: a. the initial recognition of good will; b. the initial recognition of assets or liabilities arising from the following transactions which are simultaneously featured by the following: (1) The transaction is not business combination; (2) At the time of transaction, the accounting profits will not be affected, nor will the taxable amount (or the deductible loss) be affected. c. The taxable temporary differences related to the investments of subsidiary companies, associated enterprises and joint enterprises shall recognize corresponding deferred income tax liabilities. However, those that can simultaneously meet the following conditions shall be excluded: (1) The investing enterprise can control the time of the reverse of temporary differences; and (2) The temporary differences are unlikely to be reversed in the excepted future. 5.The carrying amount of deferred income tax assets shall be reexamined on balance sheet day. If it is unlikely to obtain sufficient taxable income taxes to offset the benefit of the deferred income tax assets, the carrying amount of the deferred income tax assets shall be written down. When it is probable to obtain sufficient taxable income taxes, such write down amount shall be subsequently reversed. (21) Basis of Consolidation 1. The recognition scope of the consolidation The consolidated financial statements prepared are in accordance with the No. 33 Enterprise Accounting Standards – Consolidated Financial Statement issued in February, 2006. The recognition of the scope of the consolidated financialSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 47 statement based on control bases the consolidation including the company, subsidiaries directly or indirectly controlled by the company and special-purpose financial statements of the entity. Control refers to the Company has the right to decide financial and operating policies of the invested company, and to obtain benefits from the business activities. Company is not included in the scope of consolidation if there is evidence shows that the parent company can not exercise control over it. 2. Purchase or sale of subsidiary share holding The purchase and sale date will be confirmed with the time that major related risks and rewards of equity ownership have been transferred. For the acquisition or sale of a subsidiary under the different control of the consolidation, the operating results and cash flows have been properly included in the consolidated Income Statement and Consolidated Statements of Cash Flows before the sales day and after the purchase day. For the acquisition or sale of a subsidiary under the same control of the consolidation the operating results and cash flows have been properly included in the consolidated Income Statement and Consolidated Statements of Cash Flows and shown separately. The corresponding adjustments have been made for Comparative figures of the consolidated financial statements 3. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by other members of the group. If the accounting policy and accounting period of the subsidiary are inconsistent with the Company, financial statements of subsidiaries have been adjusted accordingly in accordance with the Company's accounting policies as preparation consolidated financial statements, for the subsidiary acquired under different control consolidation, financial statements of subsidiaries have been adjusted accordingly in accordance with fair value of subsidiary's identifiable assets, liabilities and contingent liabilities at purchase day. 4. The method of consolidation All significant intercompany transaction and balances between group enterprises are eliminated on consolidation. The part of net assets of consolidated subsidiaries belongs to the part of minority interests should be reported separately in equity of consolidated financial statements. V.Taxation 1、Company applies to the following major types of taxes and tax rates: Types of tax Tax basis Tax rate Business tax Passenger, cargo transportation business or commissions, lease business 3%or5% Income tax Taxable income 25% Note: According to CAISHUI [2008] NO.178 Document, from 1/1/2008 to 31/12/2010 fuel surcharge are exempted from sales tax for airline company. 2、Civil aviation basic construction fund According to Causing [2004] No. 38 the notice of temporary administration method for civil aviation basic construction fund issued by the Ministry of Finance, civil aviation fund is calculated based on classification of airline, maximum take off weight, airline mileage etc. and related regulation. VI. Corporate Consolidate and the Scope of Consolidated Financial StatementsSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 48 1、Subsidiaries Were not ObtainedThrough Combination Company Name Registered Address Business nature Business scope Qingdao Int'l Aviation Logistics Center Co., Ltd Qingdao Transportation and warehousing Aviation cargo warehousing, ground allocation; Electronic commerce and so on Subsidiaries were not obtained through combination(continued) Company Name Registered capital Actual investment at year end Proportion of shares held by the company Proportion of voting rights Whether consolidated or not Qingdao Int'l Aviation Logistics Center Co., Ltd. 3,000.00 2,381.00 70.00% 70.00% Yes 2. Minority Interest of Subsidiaries Company Name Minority shareholder interests at 31/12/2008 Net profits of subsidiaries The proportion of shares held by minority shareholders Profit and loss attribute to minority shareholders The excess losses by Minority shareholders that parent company has to beared Minority shareholder interests at 30/6/2009 Qingdao Int'l Aviation Logistics Center Co., Ltd. 12,790,655.55 570,273.00 30.00% 171,081.90 0.00 12,961,737.45 VII. Joint Venture and Associated Enterprises List of joint ventures and key financial information: Company Name Registered Address Business nature Registered capital(Million) Holding Proportion Proportion of voting rights Shandong Airlines Rainbow Jet Co., Ltd. Jinan General aviation transportation 50.00 45% 45% List of joint ventures and key financial information(continued): Company Name Total assts at the end of balance date Total liabilities at the end of balance date Total net assets at the end of balance date Total income Net profits Shandong Airlines Rainbow Jet Co., Ltd. 86,923,529.64 203,906,353.72 -116,982,824.08 4,955,435.17 1,701,696.50 VIII. Main Items of Consolidated Financial Statements 1. Monetary Funds Items 30 Jun. 2009 31 Dec 2008 Cash on hand 924,840.03 220,541.02 Bank deposit 83,799,823.84 44,716,517.86 Other monetary fund 52,735,875.00 26,935,875.00 Total 137,460,538.87 71,872,933.88SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 49 30 Jun. 2009 31 Dec 2008 Items Original currency Exchange rate Equivalent to RMB Original currency Exchange rate Equivalent to RMB Cash on hand RMB 901,628.64 1.00 901,628.64 168,989.78 1.00 168,989.78 HKD 1,559.60 0.8815 1,374.79 1,559.60 0.8819 1,375.43 USD 25.92 6.8319 177.08 1,520.92 6.8346 10,394.89 GBP 352.80 11.3379 4,000.01 82.80 9.8798 818.04 CAD 10.00 5.9140 59.14 10.00 5.6146 56.15 JPY 135,000.00 0.0711 9,598.50 135,000.00 0.0757 10,219.50 EUR 830.00 9.6408 8,001.87 2,970.00 9.6590 28,687.23 Sub total 924,840.03 220,541.02 Bank deposit RMB 81,678,288.17 1.00 81,678,288.17 44,483,350.50 1.00 44,483,350.50 USD 310,533.77 6.8319 2,121,535.67 34,115.73 6.8346 233,167.36 Sub total 83,799,823.84 44,716,517.86 Other monetary fund RMB 52,735,875.00 1.00 52,735,875.00 26,935,875.00 1.00 26,935,875.00 USD 0.00 0.00 0.00 0.00 0.00 0.00 Sub total 52,735,875.00 26,935,875.00 Total 137,460,538.87 71,872,933.88 Note:Up to 30/6/2009, Other monetary funds increased 25,800,000.00yuan in comparison with the opening balance, this is mainly caused by commercial acceptance bill. 2. Tradable Financial Assets Items 30 Jun. 2009 31 Dec 2008 Derivative financial Assets 19,404,619.47 23,460,812.11 Total 19,404,619.47 23,460,812.11 Note:Up to 30/6/2009, the total amount of immature interest rate swaps of the company is 205,364,200.90 U.S. dollars, of which redeemable interest rate swaps is 4,420,800.11 U.S. dollars。The bank has confirmed the fair value of the interest rate swaps of the company is 19,404,619.47Yuan (2,840,296.18 U.S. dollars)。 3. Accounts Receivable (1) Composition of Accounts ReceivableSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 50 30 Jun. 2009 31 Dec 2008 Items Balance Proportion Bad debt provision Book value Balance Proportion Bad debt provision Book value Individual transaction with significant amount 152,979,454.19 98.41% 0.00 152,979,454.19 115,826,770.70 91.46% 0.00 115,826,770.70 Credit risk portfolio 0.00 0.00% 0.00 0.00 0.00 0.00% 0.00 0.00 Other transaction with no significant amount 2,470,228.73 1.59% 101,306.68 2,368,922.05 10,812,993.42 8.54% 521,732.03 10,291,261.39 Total 155,449,682.92 100.00% 101,306.68 155,348,376.24 126,639,764.12 100.00% 521,732.03 126,118,032.09 (2) Individual accounts receivable with significant amount Items Amount Bad debt provision reason BSP 56,972,285.35 0.00 balance due to the settlement method, all amount after period are received Netting shall 25,519,116.65 0.00 balance due to the settlement method, all amount after period are received Air China Limited 70,488,052.19 0.00 balance due to the settlement method, all amount after period are received Total 152,979,454.19 0.00 (3) Age analysis of accounts receivable 30.Jun 2009 31 Dec 2008 Age Balance proportion Bad debt provision Net value Balance proportion Bad debt provision Net value Within 1 year 155,411,910.74 99.98% 99,418.07 155,312,492.67 125,431,572.82 99.05% 445,258.73 124,986,314.09 1 to 2 years 12,751.26 0.01% 637.56 12,113.70 1,157,864.08 0.91% 75,222.25 1,082,641.83 2 to 3 years 1,218.50 0.00% 60.93 1,157.57 26,524.80 0.02% 60.93 26,463.87 3 to 4 years 23,802.42 0.01% 1,190.12 22,612.30 23,802.42 0.02% 1,190.12 22,612.30 4 to 5 years 0.00 0.00% 0.00 0.00 0.00 0.00% 0.00 0.00 Total 155,449,682.92 100.00% 101,306.68 155,348,376.24 126,639,764.12 100.00% 521,732.03 126,118,032.09 (4) the first five accounts of account receivable 30.Jun 2009 31 Dec 2008 Items Amounts proportion Amounts proportion Total amounts of the first five accounts of account receivable 133,697,448.52 86.01% 117,636,799.77 92.89%SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 51 (5) As at June 30, 2009, the outstanding amounts of the shareholders who hold over 5% voting rights (including 5%) see "Note 10, Related Party Relationships and transactions. 4. Advance Payable (1) Age analysis of advance payable Age 30.Jun 2009 Proportion 31 Dec 2008 Proportion Within 1 year 32,410,412.91 96.55% 28,449,390.88 97.68% 1-2years 1,158,873.67 3.45% 674,854.09 2.32% Total 33,569,286.58 100.00% 29,124,244.97 100.00% (2) Up to 30 Jun 2009, the account balance did not contain any debt owned by major shareholders who owns 5% or over 5% of voting shares 5. Other Account Receivable (1)Composition of other account receivable 30.Jun 2009 31 Dec 2008 Items Balance Proportion Bad debt provision Book value Balance Proportion Bad debt provision Book value Individual transaction with significant amount 262,519,821.97 83.91% 109,079,465.90 153,440,356.07 203,908,540.13 79.66% 109,051,717.65 94,856,822.48 Other transaction with no significant amount 50,338,423.93 16.09% 2,717,070.28 47,621,353.65 52,065,571.90 20.34% 1,944,258.14 50,121,313.76 Total 312,858,245.90 100.00% 111,796,536.18 201,061,709.72 255,974,112.03 100.00% 110,995,975.79 144,978,136.24 (2)Other individual account receivable with significant amount Debtor Balance bad debts provision Reason Shandong Airlines Rainbow-Jet Co. ,Ltd (SARJ) 109,079,465.90 109,079,465.90 Long-term accounts receivable, the company could not repay debts due to its financial difficulty Deposit of aircraft engine 94,837,363.58 0.00 Deposit for engine maintenance and purchase of aircraft, all amounts is receivable in the future. The return of civil aviation basic construction fund 58,602,992.49 0.00 The return of t civil aviation basic construction fund Total 262,519,821.97 109,079,465.90SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 52 (3)Age analysis of other account receivable 30.Jun 2009 31 Dec 2008 Age Balance Proportion Bad debt provision Net value Balance Proportion Bad debt provision Net value Within 1 year 109,334,118.01 34.95% 2,839,102.68 106,495,015.33 42,992,690.15 16.80% 2,038,542.29 40,954,147.86 1 to 2 years 20,157,238.10 6.44% 669,245.45 19,487,992.65 31,169,427.89 12.18% 669,245.45 30,500,182.44 2 to 3 years 18,462,733.74 5.90% 10,698,669.47 7,764,064.27 17,263,584.49 6.74% 10,698,669.47 6,564,915.02 3 to 4 years 133,486,044.22 42.67% 80,329,246.11 53,156,798.11 133,052,336.46 51.98% 80,329,246.11 52,723,090.35 4 to 5 years 23,343,821.23 7.46% 17,195,422.39 6,148,398.84 23,398,644.42 9.14% 17,195,422.39 6,203,222.03 Above 5 years 8,074,290.60 2.58% 64,850.08 8,009,440.52 8,097,428.62 3.16% 64,850.08 8,032,578.54 Total 312,858,245.90 100.00% 111,796,536.18 201,061,709.72 255,974,112.03 100.00% 110,995,975.79 144,978,136.24 (4)List of significant debtors Name of debtors Balance Nature or content Age Proportion SARJ 109,079,465.90 Disbursement fee 1-5years 34.87% Civil Aviation Administration of China 58,602,992.49 The return of the Civil Aviation Fund Within 1 year 18.73% GuoYin finance lease company 41,354,563.28 Deposit of aircraft 3-4years 13.22% Singapore Aircraft Leasing Enterprise 19,129,320.00 Deposit of aircraft 2-4years 6.11% Rainier Aircraft Leasing (Ireland) Limited 16,757,921.85 Deposit of aircraft 3-6years 5.36% Total 244,924,263.52 78.29% (5) The closing balance of the advanced payments has been increased 38.68% in comparison with the opening balance, this mainly caused by the return of the Civil Aviation Fund. (6) As at June 30, 2009, the outstanding amounts of the shareholders who hold over 5% voting rights (including 5%) see "Note 10, Related Party Relationships and transactions. 6. Inventory (1) Details of inventories 30.Jun 2009 31 Dec 2008 Items Balance Impairment loss provision Net value Balance Impairment loss provision Net value Aviation consumable material 64,349,257.14 353,539.79 63,995,717.35 73,263,438.33 353,539.79 72,909,898.54 Low value consumable 1,235,992.88 0.00 1,235,992.88 762,731.56 0.00 762,731.56 Material 737,535.83 0.00 737,535.83 605,146.87 0.00 605,146.87 Others 0.00 0.00 0.000 69,752.60 0.00 69,752.60 Total 66,322,785.85 353,539.79 65,969,246.06 74,701,069.36 353,539.79 74,347,529.57 (2) Inventories impairment loss provisionSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 53 Items 31 Dec 2008 Impairment loss provision Reversal Write off 30.Jun 2009 Proportion of current reversal to inventories closing balance Aviation consumable material 353,539.79 0.00 0.00 0.00 353,539.79 0.00 Total 353,539.79 0.00 0.00 0.00 353,539.79 0.00 (3) Up to 30 Jun 2009, the company did not use any inventories for guarantee. 7. Long-term Equity Investment (1) Long-term equity investment and impairment loss provision 30.Jun 2009 31 Dec 2008 Items Balance Impairment loss provision Book value Balance Impairment loss provision Book value Long-term Equity Investment 110,852 ,100.00 22,500,000.00 88,352,100.00 110,852 ,100.00 22,500,000.00 88,352,100.00 Include: Investment in Subsidiary 0.00 0.00 0.00 0.00 0.00 0.00 Joint Venture 22,500,000.00 22,500,000.00 0.00 22,500,000.00 22,500,000.00 0.00 Investment in Other Companies 88,352,100.00 0.00 88,352,100.00 88,352,100.00 0.00 88,352,100.00 (2)Long-term equity investments measured with cost method Investee Initial investment cost 31 Dec 2008 Increment Decrement 30.Jun 2009 China Civil aviation information network Co., Ltd 6,690,000.00 6,690,000.00 0.00 0.00 6,690,000.00 SiChuan airlines Co. Ltd 35,000,000.00 35,000,000.00 0.00 0.00 35,000,000.00 JiNan International Airport Co. Ltd 46,662,100.00 46,662,100.00 0.00 0.00 46,662,100.00 Total 88,352,100.00 88,352,100.00 0.00 0.00 88,352,100.00 (3) Long-term equity investments measured with equity method Investee Initial investment cost 31 Dec 2008 Increment Decrement Cash dividend Other decrement 30.Jun 2009 Accumulate Cash dividend SARJ 22,500,000.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total 22,500,000.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (4) Long-term equity investments impairment loss provision Investee 31 Dec 2008 Increment Decrement 30.Jun 2009 SARJ 22,500,000.00 0.00 0.00 22,500,000.00 Total 22,500,000.00 0.00 0.00 22,500,000.00 Note: Due to the insolvency of SARJ, the company decided to set up an impairment provision for this long-term investment of SARJ. 8. Fixed Assets and Accumulated Depreciation (1) Classify Details Item 31 Dec 2008 Increment Decrement 30.Jun 2009SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 54 1.Fixed asset original price total 7,472,780,209.13 720,792,174.51 40,642,848.35 8,152,929,535.29 Building 141,400,628.79 4,101,234.51 0.00 145,501,863.30 Aircraft and engine 6,801,818,456.15 694,774,511.73 35,950,000.00 7,460,642.967.88 High price rotables 401,057,334.04 9,427,336.84 1,854,219.35 408,630,451.53 Vehiclest 34,555,729.63 5,699,129.61 1,870,210.11 38,384,649.13 Machinery and equipment and other office equipment 93,948,060.52 6,789,961.82 968,418.89 99,769,603.45 2.Accumulated depreciation total 1,788,705,263.67 251,990,542.17 38,372,869.12 2,002,322,936.72 Building 22,393,646.58 2,462,822.29 0.00 24,856,468.87 Aircraft and engine 1,584,732,713.81 232,207,884.66 35,485,525.44 1,781,455,073.03 High price rotables 119,773,454.99 11,468,044.82 401,042.34 130,840,457.47 Delivery equipment 18,294,678.86 1,753,578.97 1,742,585.06 18,305,672.77 Machinery and equipment and other office equipment 43,510,769.43 4,098,211.43 743,716.28 46,865,264.58 3. Fixed asset net book value total 5,684,074,945.46 0.00 0.00 6,150,606,598.57 Building 119,006,982.21 0.00 0.00 120,645,394.43 Aircraft and engine 5,217,085,742.34 0.00 0.00 5,679,187,894.85 High price rotables 281,283,879.05 0.00 0.00 277,789,994.06 Delivery equipment 16,261,050.77 0.00 0.00 20,078,976.36 Machinery and equipment and other office equipment 50,437,291.09 0.00 0.00 52,904,338.87 (2) Current year completed construction in progress transferred to fixed asset is 640,686,121.15 Yuan. (3) Finance leases Items Book value Accumulated depreciation Impairment provision Net book value Aircraft and engine 2,505,052,608.99 833,975,747.57 0.00 1,671,076,861.42 Total 2,505,052,608.99 833,975,747.57 0.00 1,671,076,861.42 (4)up toJune 30, 2009, there is nothing indicates that fixed assets have been impaired therefore no impairment provision is provided. 9. Construction in Progress (1) Construction in progress Title 31 Dec 2008 Increment Transferred into fixed asset Decrement 30.Jun 2009 B737-800 (2008) 174,410,921.37 150,402,794.18 324,813,715.55 0.00 0.00 B737-800 (2009) 900,570,911.87 187,941,188.26 312,940,263.65 317,139,020.01 458,432,816.47 B737-800 (2012) 99,982,561.49 1,268,664.66 0.00 0.00 101,251,226.15 ARJ700 60,778,195.00 0.00 0.00 0.00 60,778,195.00 B737NG 6,750,305.12 0.00 0.00 6,750,305.12 Other construction 42,001,563.59 11,456,095.11 2,932,141.95 1,214,873.40 49,310,643.35 Total 1,277,744,153.32 357,819,047.33 640,686,121.15 318,353,893.41 676,523,186.09SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 55 (2) Capitalization of borrowing for construction in progress to 30 Jun 2009 Title 31 Dec 2008 Increment Transferred into fixed asset Other decrease 30.Jun 2009 B737-800 10,435,598.27 15,202,862.64 16,426,198.99 1,159,928.54 8,052,333.38 ARJ21-700 487,587.70 0.00 0.00 0.00 487,587.70 Total 10,923,185.97 15,202,862.64 16,426,198.99 1,159,928.54 8,539,921.08 (3) Up to 30. June 2009, there is nothing indicates that construction in progress have been impaired therefore no impairment provision is provided. 10. Intangible Assets and Accumulated Amortization (1) Intangible assets Items 31 Dec 2008 Increment Decrement 30.Jun 2009 1、Total original value 49,044,696.49 0.00 0.00 49,044,696.49 land Use right 49,044,696.49 0.00 0.00 49,044,696.49 2.Totalaccumulated amortization 2,099,622.32 370,587.51 0.00 2,470,209.83 land Use right 2,099,622.32 370,587.51 0.00 2,470,209.83 3. Total accumulated impairment loss provision for intangible assets 0.00 0.00 0.00 0.00 land Use right 0.00 0.00 0.00 0.00 4.Total book value of intangible assets 46,945,074.17 0.00 0.00 46,574,486.66 land Use right 46,945,074.17 0.00 0.00 46,574,486.66 (2) Up to June 30, 2009, there is nothing indicates that Intangible assets have been impaired therefore no impairment provision is provided. 11. Long-term Deferred Expenses Items Original value 31 Dec 2008 Increment Decrement transfer out accumulated amortization 30.Jun 2009 Expenses of recruitment and training for pilots 284,348,225.82 208,312,781.55 27,835,107.84 7,697,044.01 0.00 83,732,488.28 228,450,845.38 Total 284,348,225.82 208,312,781.55 27,835,107.84 7,697,044.01 0.00 83,732,488.28 228,450,845.38 The amortization period for expenses of recruitment and training for pilots is 20 years, The remaining period is16-19 years。 12. Deferred Income Tax Assets Recognized deferred income tax assets deductible temporary differences deferred income tax assets Items 30.Jun 2009 31 Dec 2008 30.Jun 2009 31 Dec 2008 deductible temporary differences arising from Provision 111,841,831.84 111,461,696.80 27,960,457.97 27,865,424.20SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 56 for impairment of assets Inventory impairment provision 353,539.79 353,539.79 88,384.95 88,384.95 Withholding costs for assets repairing 261,400,539.42 156,828,874.32 65,350,134.86 39,207,218.58 Employee wage payable 7,324,543.00 6,424,516.00 1,831,135.75 1,606,129.00 Deductible difference resulting from loss remedy 0.00 0.00 0.00 0.00 Launch fee amortization 28,005.52 28,005.52 7,001.38 7,001.38 Total 380,948,459.57 275,096,632.43 95,237,114.91 68,774,158.11 Note: According to the history of sales and Prediction of future market of the company, deferred income tax assets recognized in each period can be written back in the following period 13. Provision for Asset Impairment Decrement Items 31 Dec 2008 Increment written back Written off 30.Jun 2009 (1) Accounts receivable bad debt provision 521,732.03 0.00 420,425.35 0.00 101,306.68 (2) Other account receivable bad debt provision 110,995,975.79 800,560.39 0.00 0.00 111,796,536.18 (3) Provision of inventory impairment loss 353,539.79 0.00 0.00 0.00 353,539.79 (4) impairment provision of the long term equity investment 22,500,000.00 0.00 0.00 0.00 22,500,000.00 Total 134,371,247.61 800,560.39 420,425.35 0.00 134,751,382.65 14. Restricted Assets (1) Restricted assets Item 30.Jun 2009 31 Dec 2008 Net worth of pledged assets 4,046,450,476.43 5,217,085,742.34 Self owned aircraft 2,681,452,085.81 3,458,371,814.05 Finance leased aircraft 1,364,998,390.62 1,758,713,928.29 The asset of ownership restrictions caused by other reasons 52,735,875.00 26,935,875.00 Other monetary fund 52,735,875.00 26,935,875.00 Total 4,099,186,351.43 5,244,021,617.34 (2) The obtaining of bank loans and finance leasing aircraft cause the accessing of the above assets to be restricted. 15. Short-term LoansSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 57 (1)Types of short-term loan Types 30.Jun 2009 31 Dec 2008 Credit bank loan 0.00 70,503,800.00 Pledged bank loan 0.00 126,383,714.55 Guaranteed bank loan 770,000,000.00 810,000,000.00 Total 770,000,000.00 1,006,887,514.55 (2)Details of short-term loan Types Amount(RMB) Start Date Maturity Date Remarks Guaranteed bank loan: China Construction Bank 40,000,000.00 2008.12.18 2009.12.17 Shandong airline co. ltd as guarantor Agriculture bank of China, 20,000,000.00 2008.11.5 2009.11.4 Shandong airline co. ltd as guarantor Agriculture bank of China, 50,000,000.00 2008.11.12 2009.11.11 Shandong airline co. ltd as guarantor Agriculture bank of China, 60,000,000.00 2009.1.7 2010.1.6 Shandong airline co. ltd as guarantor Agriculture bank of China, 60,000,000.00 2009.1.14 2010.1.13 Shandong airline co. ltd as guarantor Agriculture bank of China, 60,000,000.00 2009.1.21 2010.1.20 Shandong airline co. ltd as guarantor Agriculture bank of China, 40,000,000.00 2009.3.11 2010.3.10 Shandong airline co. ltd as guarantor Agriculture bank of China, 40,000,000.00 2009.3.17 2010.3.16 Shandong airline co. ltd as guarantor Bank of China 80,000,000.00 2008.12.31 2009.12.30 Shandong airline co. ltd as guarantor Bank of China 50,000,000.00 2009.2.12 2010.2.11 Shandong airline co. ltd as guarantor China Merchants Bank 80,000,000.00 2009.1.13 2009.12.15 Shandong airline co. ltd as guarantor China Merchants Bank. 90,000,000.00 2009.4.15 2009.12.10 Shandong airline co. ltd as guarantor CNAC Finance Companies 100,000,000.00 2009.6.29 2010.6.28 Shandong airline co. ltd as guarantor Total 770,000,000.00 (3) As of June 30, 2009 there are no overdue outstanding loans. 16. Notes Payable Details Items 30.Jun 2009 31 Dec 2008 bank acceptance 96,000,000.00 10,000,000.00 Total 96,000,000.00 10,000,000.00 (2)The closing balance of the notes payable has increased 860.00% in comparison with the opening balance, this is mainly caused by the addition made to the maturity bank acceptance. 17. Accounts Payable (1). Age Age 30.Jun 2009 31 Dec 2008 Within 1 year 921,805,467.83 866,216,091.36 Above I year 4,683,681.25 9,102,968.75SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 58 Total 926,489,149.08 875,319,060.11 (2) Up to 30 June 2009, there are no payables due from shareholders who own 5% or over 5% of voting rights 18. Advanced fromCustomers (1). Age Age 30.Jun 2009 31 Dec 2008 Within 1 year 111,342,067.06 87,709,493.54 Above 1 year 4,400.00 26,000.00 Total 111,346,467.06 87,735,493.54 (2) Up to 30 Jun 2009, there are no advanced payments received from shareholders who own 5% or over 5% of voting rights 19. Payroll Payable Items 31 Dec 2008 Increment Decrement 30.Jun 2009 1、Salary, bonus and allowance 84,396,042.97 180,192,586.08 220,330,805.03 44,257,824.02 2、Employee benefit 0.00 11,128,418.51 11,128,418.51 0.00 3、Social insurance fee 251.24 30,664,506.40 30,664,506.40 251.24 Include:(1). medical insurance 0.00 29,876.00 29,876.00 0.00 (2).Basic retirement insurance 251.24 18,755,145.68 18,755,145.68 251.24 (3).Annuity fee 0.00 8,834,139.09 8,834,139.09 0.00 (4).Unemployment fee 0.00 1,956,544.82 1,956,544.82 0.00 (5).Injury insurance 0.00 418,769.56 418,769.56 0.00 (6).Procreation insurance premium 0.00 670,031.26 670,031.26 0.00 4、Housing accumulation fund 3,042.24 36,116,546.54 36,115,836.54 3,752.24 5、Labor union fee and employee education fee 6,720,630.62 4,894,408.96 1,407,922.53 10,207,117.05 6. Non-monetary benefit 0.00 0.00 000 0.00 7、Redemption of termination of labor contract 0.00 0.00 0.00 0.00 8、Others 0.00 1,020,421.78 1,020,421.78 0.00 Include:share payment by cash 0.00 0.00 0.00 0.00 Total 91,119,967.07 262,996,466.49 299,647,489.01 54,468,944.55 Note:The payroll payable has decreased 40.22% in comparison with the opening balance, this mainly caused by the payment to annual bonus in 2008. 20. Tax Payable Types 30.Jun 2009 31 Dec 2008 VAT & Custom tax 29,000,611.18 42,093,679.29 Sales tax 10,672,249.18 4,783,260.78SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 59 City maintenance construction fee 0.00 1,017.73 Enterprise Income tax 56,643,540.75 7,878,180.11 Property tax 1,158,103.80 1,174,020.58 Tenure tax 225,842.99 3,468.00 Personal income tax 3,737,709.34 1,846,373.79 Stamp duty 1,299,227.26 3,099,249.32 Civil aviation infrastructure construction fund 9,533,423.09 9,223,996.01 Civil aviation airport administration fee 30,934,775.13 26,114,804.00 Income tax in advance 16,347,502.59 15,119,191.76 Total 159,552,985.31 111,337,241.37 Note:The closing balance of the tax payable has increased 43.31% in comparison with the opening balance; this mainly caused by the company has not carried out the Final Settlement and Payment of Enterprise Income Taxes. 21. Interest Payable Items 30.Jun 2009 31 Dec 2008 interest on short and long-term borrowings 6,088,936.83 9,634,990.00 Total 6,088,936.83 9,634,990.00 22. Other Accounts Payable (1). Age Age 30.Jun 2009 31 Dec 2008 Within 1 year 122,616,517.88 117,844,706.36 Above 1 year 31,313,569.50 43,892,042.34 Total 153,930,087.38 161,736,748.70 (2).Details of significant Other accounts payable with age more than one year Name Amount owed age The reasons for arrears Air China Ltd. 20,000,000.00 1-2years Air China prepaid 20 million Yuan for aircraft wet renting on December 10, 2007. Both parties agreed that the settlement should base on the actual operation of these aircrafts and shall settle the payment in the last month before the contract terminated. (3)The total amount of the top five of other account payable is 72,698,048.31 Yuan which is taken 47.23% of the total amount of other account payable. (4)Up to 30 June 2009, amounts due to shareholders who own 5% or over 5% of voting rights see “Note 10, Related parties and transactions”. 23. Non-current Liabilities Due Within One Year (1). TypesSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 60 Items 30.Jun 2009 31 Dec 2008 Long-term borrowing within 1 year 318,595,751.97 487,168,908.19 Long-term account payable within 1 year 209,622,019.70 227,593,094.74 Total 528,217,771.67 714,762,002.93 Less: Unrecognized financing liabilities 104,694,131.94 99,172,325.71 Total 423,523,639.73 615,589,677.22 (2). List of creditors 30.Jun 2009 Items Currency Original currency Equivalent to RMB Interest rate Remark Commerz bank, New York branch USD 3,151,596.51 21,531,392.21 6.0100%-6.0150% pledge Guoyin Financial lease company RMB 83,396,495.55 83,396,495.55 8.1500% pledge Industry and commercial bank Jinan Dongjiao branch RMB 120,000,000.00 120,000,000.00 5.5080% pledge Bank of Communication Co.,Ltd,JiNan Tianqiao branch RMB 57,160,950.00 57,160,950.00 5.3460%-6.4800% Guarantee Bank of China, Jinan branch USD 11,200,000.00 76,517,280.00 3.0638% pledge China Minsheng Bank Jinan branch RMB 50,000,000.00 50,000,000.00 5.9400% pledge Bank of Communication Co.,Ltd,JiNan Tianqiao branch USD 2,183,510.00 14,917,521.97 2.2900%-3.3213% Guarantee Total 423,523,639.73 (3) As of June 30, 2009 there are no overdue outstanding loans. 24. Long-term Borrowing (1) Types Types 30.Jun 2009 31 Dec 2008 Pledge bank loan 1,970,508,341.86 1,157,489,900.59 Guaranteed bank loan 1,443,538,719.45 2,001,843,376.80 Total 3,414,047,061.31 3,159,333,277.39 (2)List of creditors Creditor Original currency Equivalent to RMB Start date Maturity date Interest rate Remark Construction Bank of China 27,600,000.00 27,600,000.00 2007-12-3 2022-3-28 5.5080% Shandong airline co. ltd as guarantorSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 61 Construction Bank of China 83,000,000.00 83,000,000.00 2008-1-2 2022-3-28 5.3460% Shandong airline co. ltd as guarantor Construction Bank of China 54,000,000.00 54,000,000.00 2008-3-3 2022-3-28 5.3460% Shandong airline co. ltd as guarantor Construction Bank of China 53,000,000.00 53,000,000.00 2008-4-1 2022-3-28 5.3460% Shandong airline co. ltd as guarantor Construction Bank of China 26,500,000.00 26,500,000.00 2008-4-29 2022-3-28 5.3460% Shandong airline co. ltd as guarantor Construction Bank of China 52,300,000.00 52,300,000.00 2008-6-2 2022-3-28 7.0470% Shandong airline co. ltd as guarantor Construction Bank of China 51,500,000.00 51,500,000.00 2008-7-1 2022-3-28 7.0470% Shandong airline co. ltd as guarantor Construction Bank of China 120,000,000.00 120,000,000.00 2008-7-15 2022-3-28 7.0470% Shandong airline co. ltd as guarantor construction bank of china 114,000,000.00 114,000,000.00 2009-4-21 2022-3-28 5.0220% Shandong airline co. ltd as guarantor Construction Bank of China 8,539,000.00 58,337,594.10 2007-3-29 2022-3-28 4.7750% Shandong airline co. ltd as guarantor Construction Bank of China 1,250,000.00 8,539,875.00 2007-4-30 2022-3-28 2.3750% Shandong airline co. ltd as guarantor Construction Bank of China 6,765,620.00 46,222,039.28 2007-5-31 2022-3-28 3.3675% Shandong airline co. ltd as guarantor Construction Bank of China 17,954,820.00 122,665,534.76 2007-7-2 2022-3-28 2.5750% Shandong airline co. ltd as guarantor Construction Bank of China 3,749,800.00 25,618,258.62 2007-8-1 2022-3-28 2.4338% Shandong airline co. ltd as guarantor Construction Bank of China 12,000,000.00 81,982,800.00 2007-8-29 2010-8-28 2.5600% Aircraft as pledge Construction bank of china J 1,300,000.00 8,881,470.00 2007-9-10 2010-8-28 2.6000% Aircraft as pledge Construction Bank of China 700,000.00 4,782,330.00 2007-9-21 2010-8-28 2.5413% Aircraft as pledge Construction Bank of China 14,908,900.00 101,856,113.91 2007-9-28 2022-3-28 2.5944% Aircraft Industrial and commercial bank 100,000,000.00 100,000,000.00 2006-12-18 2018-12-17 5.3460% Aircraft Industrial and Commercial Bank 2,200,000.00 2,200,000.00 2008-6-5 2018-12-17 5.5080% Aircraft Industrial and Commercial Bank 2,100,000.00 2,100,000.00 2008-6-18 2018-12-17 5.5080% Aircraft Industrial and Commercial Bank 123,000,000.00 123,000,000.00 2008-6-19 2018-12-17 5.5080% Aircraft Industrial and Commercial Bank 13,500,000.00 13,500,000.00 2008-7-1 2018-12-17 6.9660% Aircraft Industrial and Commercial Bank 30,000,000.00 30,000,000.00 2008-8-19 2018-12-17 5.8320% Aircraft Industrial and Commercial Bank 3,671,400.00 25,082,637.66 2007-5-31 2018.12.17 3.6750% Aircraft Industrial and Commercial Bank 3,671,400.00 25,082,637.66 2007-9-4 2018.12.17 2.6038% Aircraft Industrial and Commercial Bank 3,671,400.00 25,082,637.66 2007-12-3 2018.12.17 3.4063% Aircraft Industrial and Commercial Bank 38,491,654.64 262,971,135.34 2009-6-30 2023-3-20 2.5170% Aircraft Bank of Communication Co.,Ltd 123,900,000.00 123,900,000.00 2006-5-30 2016-12-30 5.7510% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd 94,926,650.00 94,926,650.00 2007-11-12 2016-12-30 6.4800% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd 95,200,000.00 95,200,000.00 2007-12-3 2016-12-30 5.5080% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd 79,950,000.00 79,950,000.00 2008-1-14 2016-12-30 5.3460% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd 2,562,980.00 17,510,023.06 2006-10-31 2016-12-30 2.2750% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd 2,570,505.00 17,561,433.11 2006-11-30 2016-12-30 3.3213% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd 2,562,980.00 17,510,023.06 2007-1-31 2016-12-30 2.3175% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd 2,531,830.00 17,297,209.38 2007-2-15 2016-12-30 2.4725% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd 2,524,445.00 17,246,755.80 2007-4-29 2016-12-30 2.2900% Shandong airline co. ltd as guarantor Bank of Communication Co.,Ltd 2,531,830.00 17,297,209.38 2007-5-31 2016-12-30 3.3213% Shandong airline co. ltd as guarantor Bank of China 24,795,533.60 169,400,606.00 2005-7-15 2019-4-28 3.0638% Aircraft as pledgeSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 62 Bank of China 26,071,798.00 178,119,916.76 2005-10-19 2019-4-28 3.0638% Aircraft as pledge Bank of China 26,213,260.00 179,086,370.99 2005-12-21 2019-4-28 3.0638% Aircraft as pledge Bank of China 923,467.00 6,309,034.20 2005-12-23 2019-4-28 3.0638% Aircraft as pledge Bank of China 525,000.00 3,586,747.50 2006-4-27 2019-4-28 3.0638% Aircraft as pledge China Minsheng Bank Jinan branch 227,000,000.00 227,000,000.00 2004-6-29 2014-6-29 5.9400% Aircraft as pledge China Minsheng Bank Jinan branch 23,000,000.00 23,000,000.00 2004-11-2 2014-6-29 5.9400% Aircraft as pledge Shanghai Pudong Development Bank 40,000,000.00 40,000,000.00 2007-1-9 2009-12-13 4.8600% Aircraft as pledge China Development Bank 3,735,500.00 25,520,562.45 2008-7-1 2023-6-30 2.5913% Transfer the rights of Purchase China Development Bank 18,292,500.00 124,972,530.75 2008-7-11 2023-6-30 2.5913% Transfer the rights of Purchase China Development Bank 7,481,350.00 51,111,835.07 2008-9-2 2023-6-30 2.5913% Transfer the rights of Purchase China Development Bank 3,735,500.00 25,520,562.46 2008-9-26 2023-6-30 2.5913% Transfer the rights of Purchase Total 3,414,047,061.31 Note:As of June 30, 2009there are no overdue outstanding loans. 25. Long-term Account Payable (1) Details Balance due within following dates 30.Jun 2009 31 Dec 2008 First year after balance sheet date 209,622,019.70 227,593,094.76 Second year after balance sheet date 188,324,383.31 227,593,094.76 Third year after balance sheet date 166,792,991.11 184,513,291.73 Over there years 1,049,985,888.91 1,217,418,343.07 Total minimum lease payment 1,614,725,283.03 1,857,117,824.32 Less: unrecognized financing fee 437,465,020.29 614,237,149.91 Finance lease payable 1,177,260,262.74 1,242,880,674.41 Include: finance lease payable within 1 year 104,927,887.76 128,420,769.03 Total 1,072,332,374.98 1,114,459,905.38 (2) List of long-term payable 30.Jun 2009 Item Currency Original currency Equivalent to RMB Loan condition Interest rate maturity date Commerzbank, New York Branch USD 6,003,231.88 40,779,722.86 Finance lease 6.010%-6.015% 2010.7.15 Guoyin finance lease company RMB 1,031,552,652.12 1,031,552,652.12 Finance lease 8.1500% 2020.6.15 Total 1,072,332,374.98 26. Deferred IncomeSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 63 Items Original value 31 Dec 2008 Increment Amortization Accumulative amortization 30.Jun 2009 CRJ leaseback profit 9,741,746.00 3,479,150.11 0.00 695,844.00 6,958,439.89 2,783,306.11 Bonus earnings 9,840,407.72 9,840,407.72 7,625,986.33 6,272,636.56 6,272,636.56 11,193,757.49 Special funds of subsidies for post-disaster reconstruction 5,000,000.00 5,000,000.00 0.00 78,291.66 78,291.66 4,921,708.34 Total 24,582,153.72 18,319,557.83 7,625,986.33 7,046,772.22 13,309,368.11 18,898,771.94 Note: Bonus earning arises from the application of the frequent customer bonus plan; members’ customers of the company can accumulate mileage points as they take the flight of the Company or flight of the China airline 27. Deferred Income Tax Liabilities Recognized deferred income tax liabilities taxable temporary differences deferred income tax liabilities Items 30.Jun 2009 31 Dec 2008 30.Jun 2009 31 Dec 2008 changes in fair value of tradable financial assets 19,404,619.47 23,460,812.12 4,851,154.87 5,865,203.03 Unrealized exchange gain 52,601,388.87 55,805,493.72 13,150,347.22 13,951,373.43 Total 72,006,008.34 79,266,305.84 18,001,502.09 19,816,576.46 28. Share Capital Increase/Decrease (+、-) Unit: shares Items 31 Dec 2008 Issuance of new shares Bonus shares Capitalization of public reserve Others Sub-total 30.Jun 2009 (1) Shares subject to trading moratorium ①founder's shares 260,000,000.00 0.00 0.00 0.00 0.00 0.00 260,000,000.00 Including: Shares held by the state 259,801,000.00 0.00 0.00 0.00 0.00 0.00 259,801,000.00 Shares held by state-owned legal persons 199,000.00 0.00 0.00 0.00 0.00 0.00 199,000.00 Shares held by overseas legal persons 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Others 0.00 0.00 0.00 0.00 0.00 0.00 0.00 ② Raised legal person’s shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 ③ Inner employees’ shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 ④ Preference shares or other 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Include: transferred/allotted shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total unlisted shares 260,000,000.00 0.00 0.00 0.00 0.00 0.00 260,000,000.00 (2)Listed shares ①RMB ordinary shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 64 Increase/Decrease (+、-) Unit: shares Items 31 Dec 2008 Issuance of new shares Bonus shares Capitalization of public reserve Others Sub-total 30.Jun 2009 Including:Shares hold by management 0.00 0.00 0.00 0.00 0.00 0.00 0.00 ②Domestically listed foreign shares 140,000,000.00 0.00 0.00 0.00 0.00 0.00 140,000,000.00 Total listed shares 140,000,000.00 0.00 0.00 0.00 0.00 0.00 140,000,000.00 (3)sell limited shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (4) Total shares 400,000,000.00 0.00 0.00 0.00 0.00 0.00 400,000,000.00 1、The aforesaid listed shares are listed on B shares at RMB1 each。 2、The aforesaid share capital has been examined by Shangdong Yantai Qianju Certified Public Accountants and issued a Capital Verification Report with Yanqianzi[2000]NO.27. 29. Capital Reserve Items 31 Dec 2008 Increment Decrement 30.Jun 2009 Premium on share capital 76,258,081.68 0.00 0.00 76,258,081.68 Other capital reserve 7,792,081.16 0.00 0.00 7,792,081.16 Total 84,050,162.84 0.00 0.00 84,050,162.84 30. Surplus Reserve Items 31 Dec 2008 Increment Decrement 30.Jun 2009 Statutory surplus reserve 29,490,727.77 0.00 0.00 29,490,727.77 Total 29,490,727.77 0.00 0.00 29,490,727.77 31. Retained Earnings Items 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Balance at the beginning of the year 36,471,405.69 -72,004,872.16 Add:Consolidated net profit 112,509,856.54 58,639,158.40 Other transfer-in 0.00 44,969.10 Less:Withdrawal of statuary surplus reserve 0.00 0.00 Withdrawal of employee incentive and welfare fund 0.00 0.00 Withdrawal of reserve fund 0.00 0.00 Withdrawal reserve for business expansion 0.00 0.00 Profits capitalized on return of investment 0.00 0.00 Less:Preference dividends payable 0.00 0.00 Withdrawal of Unspecified surplus reserve 0.00 0.00 Ordinary dividends payable 0.00 0.00 Ordinary share dividend transfer to capital(or share) 0.00 0.00 Undistributed profits at end of year 148,981,262.23 -13,320,744.66SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 65 32. Operating Revenue and Operating Cost (1) Operating Revenue Items 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Main operating revenue 2,320,604,814.36 2,388,001,951.00 Other operating Revenue 21,023,352.07 40,662,287.87 Total 2,341,628,166.43 2,428,664,238.87 (2) Operating Cost Items 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Main operating cost 1,855,222,802.06 1,962,375,090.19 Other operating cost 439,084.54 29,927,911.63 Total 1,855,661,886.60 1,992,303,001.82 (3) Main operation income, main operation cost and gross profit of segment 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Segment Operating Income Operating Cost Gross profit Operating Income Operating Cost Gross profit Aviation transportation service 2,305,193,594.13 1,845,474,482.25 459,719,111.88 2,370,796,635.36 1,953,303,410.58 417,493,324.78 Logistic transportation service 3,377,523.46 969,854.35 2,407,669.11 3,637,889.61 670,322.40 2,967,567.21 Hospitality and Catering service 12,033,696.77 8,778,465.46 3,255,231.31 11,559,801.46 6,534,727.72 5,025,073.74 Lease service 0.00 0.00 0.00 27,880,401.93 29,925,361.63 -2,044,959.70 Others 21,023,352.07 439,084.54 20,584,267.53 14,789,510.51 1,869,179.49 12,920,331.02 Total 2,341,628,166.43 1,855,661,886.60 485,966,279.83 2,428,664,238.87 1,992,303,001.82 436,361,237.05 33. Business Tax and Surtax Item Applicable tax rate 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Business tax 3%、5% 69,042,767.26 70,308,687.96 Total 69,042,767.26 70,308,687.96 34. Financial Expenses Items 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Interest expenses 130,028,226.50 163,406,611.24 Less: Interest income 412,863.03 7,922,478.80 Exchange gains -417,127.63 -68,124,245.23 Others 2,489,187.85 2,214,706.04 Total 131,687,423.69 89,574,593.25 35. Impairment Loss of AssetsSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 66 Items 1.Jan-30.Jun 2009. 1.Jan-30.Jun 2008 Bad debts provision 380,135.04 1,002,659.27 Total 380,135.04 1,002,659.27 36.Earnings from Changes in Fair Value Sources of Earnings from changes in fair value 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Tradable financial assets -4,056,192.64 0.00 Total -4,056,192.64 0.00 Note:Earnings from changes in fair value is -4,056,192.64 Yuan, this is losses result in the changes in fair value of the Interest rate swaps. 37. Investment Income The origin of the investment income 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Realized profit from Financial assets trading 3,212,207.65 0.00 Increase income by equity method 0.00 0.00 Income from equity investment 1,617,642.00 1,130,610.00 Total 4,829,849.65 1,130,610.00 38. Non-operating Income (1)Non-operating income Items 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Government Grant 115,134,743.17 43,995.00 Disposal Proceeds of Fixed Assets 84,287.74 0.00 Other 546,492.47 678,271.53 Total 115,765,523.38 722,266.53 (2) Government Grant Items 1.Jan-30.Jun 2009 Approval documents Approval authority The return of civil aviation infrastructure fund 114,651,145.51 Civil Aviation Authority Ministry of Finance[2009]4 Ministry of Finance in People's Republic of China, Civil Aviation Authority Others 483,597.66 Total 115,134,743.17 39.Non-operating Expenses Items 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Loss on disposal of non-current assets 2,169,256.17 6,367,094.29 Include: Loss on disposal of fixed assets 2,169,256.17 6,367,094.29 Donation 0.00 Extra-ordinary loss 0.00 Others 7,248.75 119,034.33SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 67 Total 2,176,504.92 6,486,128.62 40. Income Taxes Expense Items 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Income tax for current period 65,671,754.63 24,339,471.08 Deferred income tax -28,278,031.17 -4,855,356.90 Total 37,393,723.46 19,484,114.18 41. Net Profit after Deduction of Non-recurring Gains and Losses Items 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Net profit 112,509,856.54 58,639,158.40 Minus: (1) Minus: Profit and loss in disposal of non-circulation assets -2,084,968.43 -6,367,094.29 (2) Governmental allowance accrued to the current profit and loss Gain or loss from combination 114,651,145.51 43,995.00 (3) gains and losses arising from changes in fair value of tradable financial assets and tradable financial liabilities and financial liabilities and investment income arising form disposal of tradable financial assets ,tradable financial liabilities and available for sale financial assets -4,056,192.64 0.00 (4) transferred back of individually impairment tested receivables 0.00 0.00 (5) Non-operating income and expenses other than above items 1,022,841.38 559,237.20 (6) Separate Impairment Test Provision for Receivables Impairment -27,748.25 0.00 (7) other Non-recurring gains and losses 0.00 0.00 Subtotal 109,905,077.57 -5,763,862.09 less:Amount influenced due to income tax -27,376,269.39 1,440,965.52 Net profit after deduction of non-recurring gain/loss 30,381,048.36 62,962,054.97 less:non-recurring gain/loss attributable to minority shareholders 0.00 0.00 Net profit after deduction of non-recurring gain/loss attributable to shareholders of parent company 30,381,048.36 62,962,054.97 42.Cash Received Relating to Other Operating Activities Items 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Government grant 56,453,459.02 5,043,995.00 Interest incomes 412,863.03 2,913,076.30 Cash received from non-operating activities 67,810.00 117,088.36 Cash received from payable and receivable 36,281,344.71 9,015,404.14 Total 93,215,476.76 17,089,563.80 43. Cash Paid Relating to Other Operating Activities Items 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Bank commission charge 2,489,187.85 2,206,337.91 Cash Paid for non-operating activities 7,248.75 470,338.54 Cash paid for current fund 22,738,140.16 28,482,927.27SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 68 Marketing cost, administration cost and cash paid for operating activities 41,670,732.43 96,376,377.87 Total 66,905,309.19 127,535,981.59 44. Cash Paid Relating to Other Financing Activities Item 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Interest expenses for leased aircrafts 105,176,772.22 148,960,663.62 Total 105,176,772.22 148,960,663.62 45. Adjusting Net Profit to Cash Flow from Operating Activities 1.Adusting net profit to cash flow from operating activities: 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Net profit 112,680,938.44 59,084,276.91 Add: Impairment loss provision of assets 380,135.04 1,002,659.27 Depreciation of fixed assets、oil and gas assets and consumable biological assets 251,990,542.17 203,694,724.50 Amortization of intangible assets 370,587.51 318,464.49 Amortization of Long-term deferred and prepaid expenses 7,697,044.01 6,254,098.97 Loss on disposal of fixed assets、intangible assets and other long-term deferred assets (Loss/Gain +/-) 2,084,968.43 0.00 Loss from written off assets(Loss/Gain +/-) 0.00 6,367,094.29 Loss of fair value fluctuation on assets(Loss/Gain +/-) 4,056,192.64 0.00 Financial cost(Loss/Gain +/-) 129,557,207.07 85,618,581.74 Loss on investment(Loss/Gain +/-) -4,829,849.65 1,130,610.00 Decrease of deferred income tax assets(Loss/Gain +/-) -26,462,956.80 21,563,406.95 Decrease of deferred income tax liabilities(Loss/Gain +/-) -1,815,074.37 16,708,050.05 Decrease of inventories(Loss/Gain +/-) 8,378,283.51 31,687,404.83 Decrease of operating receivables(Loss/Gain +/-) -90,139,094.29 11,731,370.64 Increase of operating payables(Loss/Gain +/-) 172,789,679.09 133,164,692.03 Others 0.00 0.00 Net cash flows arising from operating activities 566,738,602.82 446,099,849.83 2.Significant investment and financing activities that without cash flows Liability transfer to capital 0.00 0.00 Convertible corporate bond due within 1 year 0.00 0.00 Finance lease-fixed assets 0.00 0.00 3.Net increase (decrease) of cash and cash equivalents Ending balance of cash 84,724,663.87 88,740,839.49SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 69 Less: Beginning balance of cash 44,937,058.88 42,131,848.82 Add : Ending balance of cash equivalents 0.00 0.00 Less: Beginning balance of cash equivalents 0.00 0.00 Net increase of cash and cash equivalents 39,787,604.99 46,608,990.67 46. Cash and Cash Equivalents Items 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 1.Cash 84,724,663.87 88,740,839.49 Including: Cash on hand 924,840.03 1,561,768.44 Non restricted bank deposit 83,799,823.84 87,179,071.05 Non restricted other monetary fund 0.00 0.00 2.Cash equivalents 0.00 0.00 Including: Bond investment within three month 0.00 0.00 3.Ending balance of cash and cash equivalents 84,724,663.87 88,740,839.49 Inculding: restricted cash and cash equivalents for parent or group ubsidiaries 0.00 0.00 IX. Notes to Financial Statement for Parent Company 1. Accounts Receivable (1) Details of accounts receivable 30.Jun 2009 31.Dec 2008 Item Balance Proportion Provision for bad debts Net book value Balance Proportion Provision for bad debts Net book value Individual transaction with significant amount 152,979,454.19 99.37% 0.00 152,979,454.19 115,826,770.70 92.24% 0.00 115,826,770.70 portfolio credit risk 0.00 0.00% 0.00 0.00 0.00 0.00% 0.00 0.00 Other transaction with no significant amount 974,951.65 0.63% 48,747.58 926,204.07 9,747,897.58 7.76% 469,172.93 9,278,724.65 Total 153,954,405.84 100.00% 48,747.58 153,905,658.26 125,574,668.28 100.00% 469,172.93 125,105,495.35 (2) Individual significant accounts receivable Name Amount Provision for bad debts Reason BSP 56,972,285.35 0.00 Settlement difference, all are received in subsequent date Netting shall 25,519,116.65 0.00 Settlement difference, all are received in subsequent date Air China Limited 70,488,052.19 0.00 Settlement difference, all are received in subsequent dateSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 70 Total 152,979,454.19 0.00 (3)Age 30.Jun 2009 31.Dec 2008 Age Balance % Bad debt provision Net Value Balance % Bad debt provision Net Value Within one year 153,916,633.66 99.98% 46,858.97 153,869,774.69 124,366,476.98 99.04% 392,699.63 123,973,777.35 1-2 years 12,751.26 0.01% 637.56 12,113.70 1,157,864.08 0.92% 75,222.25 1,082,641.83 2-3 years 1,218.50 0.00% 60.93 1,157.57 26,524.80 0.02% 60.93 26,463.87 3-4 years 23,802.42 0.01% 1,190.12 22,612.30 23,802.42 0.02% 1,190.12 22,612.30 4-5 years 0.00 0.00% 0.00 0.00 0.00 0.00% 0.00 0.00 Total 153,954,405.84 100% 48,747.58 153,905,658.26 125,574,668.28 100% 469,172.93 125,105,495.35 (4)Details of top five debtors for accounts receivable 30.Jun 2009 31.Dec 2008 Items Balance Percentage Balance Percentage Total amounts for top five debtors 133,697,448.52 86.84% 117,636,799.77 93.68% (5) Up to 30 Jun 2009, amounts due to shareholders who own 5% or over 5% of voting rights see “Note 10, related parties and transactions” 2. Other Accounts Receivable (1) Details of other accounts receivable 30.Jun 2009 31.Dec 2008 Items Balance % Bad debt provision Net Value Balance % Bad debt provision Net Value Individual transaction with significant amount 262,519,821.97 83.93% 109,079,465.90 153,440,356.07 203,908,540.13 79.59% 109,051,717.65 94,856,822.48 Other transaction with no significant amount 50,279,108.12 16.07% 2,713,618.38 47,565,489.73 52,282,091.05 20.41% 1,940,806.24 50,341,284.81 Total 312,798,930.09 100.00% 111,793,084.28 201,005,845.80 256,190,631.18 100.00% 110,992,523.89 145,198,107.29 (2) Bad debt provision for individual accounts receivable with significant amount. Debtor Balance bad debts provision Reason Shandong Airline Rainbow Jet Co., Ltd 109,079,465.90 109,079,465.90 the company could not repay debts due to its financial difficultySHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 71 Security deposit for airplane engine 94,837,363.58 0.00 Deposit for engine maintenance and purchase of aircraft, all amounts is receivable in the future The return of civil aviation infrastructure fund 58,602,992.49 0.00 The return of the Civil Aviation Fund Total 262,519,821.97 109.079,465.90 (3) Age 30.Jun 2009 31.Dec 2008 Ages Balance % Bad debt provision Net Value Balance % Bad debt provision Net Value Within one year 109,274,802.19 34.95% 2,835,650.78 106,439,151.41 43,209,209.30 16.87% 2,035,090.39 41,174,118.91 1-2 years 20,157,238.10 6.44% 669,245.45 19,487,992.65 31,169,427.89 12.17% 669,245.45 30,500,182.44 2-3 years 18,462,733.74 5.90% 10,698,669.47 7,764,064.27 17,263,584.49 6.74% 10,698,669.47 6,564,915.02 3-4 years 133,486,044.22 42.67% 80,329,246.11 53,156,798.11 133,052,336.46 51.93% 80,329,246.11 52,723,090.35 4-5 years 23,343,821.23 7.46% 17,195,422.39 6,148,398.84 23,398,644.42 9.13% 17,195,422.39 6,203,222.03 Above 5 years 8,074,290.60 2.58% 64,850.08 8,009,440.52 8,097,428.62 3.16% 64,850.08 8,032,578.54 Total 312,798,930.08 100.00% 111,793,084.28 201,005,845.80 256,190,631.18 100.00% 110,992,523.89 145,198,107.29 (4) Details of top five debtors for other accounts receivable Name of debtors Balance Nature or content Age Proporti on SARJ 109,079,465.90 Disbursement fee 1-5years 34.87% Civil Aviation Administration of China 58,602,992.49 The return of the Civil Aviation Fund Within 1 year 18.74% GuoYin finance lease company 41,354,563.28 Deposit of aircraft 3-4years 13.22% Singapore Aircraft Leasing Enterprise 19,129,320.00 Deposit of aircraft 2-4years 6.12% Rainier Aircraft Leasing (Ireland) Limited 16,757,921.85 Deposit of aircraft 3-6years 5.36% Total 244,924,263.52 78.31% (5) Up to 30 Jun 2009, amounts due to shareholders who own 5% or over 5% of voting rights see “Note 10, related parties and transactions. 3. Long-term Equity Investment (1). Long-term equity investment and provision for impairment loss 30.Jun 2009 31.Dec 2008 Items Balance Provision for impairment loss Book value Balance Provision for impairment loss Book value Long-term equity investment 134,665,305.97 22,500,000.00 112,165,305.97 134,665,305.97 22,500,000.00 112,165,305.97 Include: Investment in Subsidiary 23,813,205.97 0.00 23,813,205.97 23,813,205.97 0.00 23,813,205.97SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 72 Joint-venture investment 22,500,000.00 22,500,000.00 0.00 22,500,000.00 22,500,000.00 0.00 Investment in Other Companies 88,352,100.00 0.00 88,352,100.00 88,352,100.00 0.00 88,352,100.00 (2) Long-term equity investment measured by cost method Compay The initial amount 31.Dec 2008 Increment Decrement 30.Jun 2009 ①Subsidiaries: Qingdao International Aviation Logistic center Co., Ltd 23,813,205.97 23,813,205.97 0.00 0.00 23,813,205.97 Sub-total 23,813,205.97 23,813,205.97 0.00 0.00 23,813,205.97 ②Other long-term equity investment China Civil aviation information network Co., Ltd 6,690,000.00 6,690,000.00 0.00 0.00 6,690,000.00 Sichuan airlines Co. Ltd 35,000,000.00 35,000,000.00 0.00 0.00 35,000,000.00 JiNan International Airport Co. Ltd 46,662,100.00 46,662,100.00 0.00 0.00 46,662,100.00 Sub-total 88,352,100.00 88,352,100.00 0.00 0.00 88,352,100.00 Total 112,165,305.97 112,165,305.97 0.00 0.00 112,165,305.97 (3) Long-term equity investment measured by equity method Company Initial investment Opening balance Increment Adjustment for current year profit and loss Cash dividend Other decrement The closing balances Accumulate Cash dividend SARJ 25,000,000.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total 25,000,000.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (4) Impairment loss provision of long-term investment Investee 31.Dec 2008 Increment Decrement 30.Jun 2009 SARJ 22,500,000.00 0.00 0.00 22,500,000.00 Total 22,500,000.00 0.00 0.00 22,500,000.00 Note: Due to the insolvency of SARJ, the company decided to set up an impairment provision for this long-term investment of SARJ. 4. Operating Income and Operating Cost (1) Operating income Items 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Main business income 2,317,227,290.90 2,384,364,061.39 Other business income 21,023,352.07 40,662,287.87 Total 2,338,250,642.97 2,425,026,349.26 (2) Operating cost Items 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 73 Main business cost 1,854,252,947.71 1,961,704,767.79 Other business cost 439,084.54 29,927,911.63 Total 1,854,692,032.25 1,991,632,679.42 (3)The main businesses are listed as per product or category. 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Product or category Operating income Operating cost Gross profit Operating income Operating cost Gross profit Aviation shipping service 2,305,193,594.13 1,845,474,482.25 459,719,111.88 2,370,796,635.36 1,953,303,410.58 417,493,224.78 Logistic service 0.00 0.00 0.00 0.00 0.00 0.00 Catering service 12,033,696.77 8,778,465.46 3,255,231.31 11,559,801.46 6,534,727.72 5,025,073.74 Leasing service 0.00 0.00 0.00 27,880,401.93 29,925,361.63 -2,044,959.70 Others 21,023,352.07 439,084.54 20,584,267.53 14,789,510.51 1,869,179.49 12,920,331.02 Total 2,338,250,642.97 1,854,692,032.25 483,558,610.72 2,425,026,349.26 1,991,632,679.42 433,393,669.84 5. Investment Income The origin of the investment income 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Realized profit from Financial assets trading 3,212,207.65 0.00 Profit distributed by the disposal of shareholder’s right 0.00 0.00 Profit distributed by shareholding company 1,617,642.00 1,130,610.00 Total 4,829,849.65 1,130,610.00 X. Related Party and Related Party Transactions 1. Confirmation Standard of Related Part The other party which is controlled, jointly controlled or substantially influenced by the company, or controls, jointly controls or substantially influences the company, or is under the same control, joint control or substantial influence of the same parties as the company will be deemed as the associated party of the company. 2、The Relationship of Related Rarties (1) The Relationship of Related Parties ①related party with controllable relationship Business name Registered ADD Main business Relationship Business nature Legal representative Air China Limited Beijing air passenger transport, freight transport and related service etc Controlled party Corp. Dongkong Shandong Aviation Group Co. Ltd. Jinan Aircraft and ground equipment repair and maintenance, air passenger transport, freight transport and related service etc Controlled shareholder Limited liability company Gang feng The registered capital and changes the related parties with controllable relationshipSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 74 Business name 31.Dec 2008 Increment Decrement 30.Jun 2009 Air China Limited 11,072,210,909.00 0.00 0.00 11,072,210,909.00 Shandong Aviation Group Co. Ltd. 580,000,000.00 0.00 0.00 580,000,000.00 Changes in share capital and particular about related party with controllable relationship Business name 31.Dec 2008 Proportion Increment Decrement 30.Jun 2009 Proportion Air China Limited 91,200,000.00 22.80% 0.00 0.00 91,200,000.00 22.80% Shandong Aviation Group Co. Ltd. 168,004,000.00 42.00% 0.00 0.00 168,004,000.00 42.00% ② Subsidiaries of the company The information about Subsidiaries of the company, see Note 6.1 (2)The related party with uncontrollable relationship ①The joint ventures and associates of the company The information about joint ventures and associates of the company, see Note7 ②The related party with uncontrollable relationship Name The relationship with company Shandong Taeco Aircraft Engineering Co., Ltd Subsidiary which under the same control of holding company Aviation building management limited company Subsidiary which under the same control of holding company Shandong xiaoyu technology service ltd Subsidiary which under the same control of holding company Qingdao Feisheng international Aviation Training Co., Ltd Subsidiary which under the same control of holding company Shandong International Aviation Training Co., Ltd. Subsidiary which under the same control of holding company SARJ associate 3、 Related Party Transactions (1) The pricing principle of the transaction between the company and related party: the price of the related party transaction will be settled at the market price as the similar product or service。 (2) Related party transactions ① Offering service 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Related party Pricing principle Transaction detail Amount Amount Air China Limited Protocol Price Payment for service 5,100,000.00 2,550,000.00 Total 5,100,000.00 2,550,000.00 ② Acceptance serviceSHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 75 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Related party Pricing principle Transaction detail Amount Amount Shandong Taeco Aircraft Engineering Co., Ltd Marketing price Expenditure for aircraft maintenance 42,505,687.11 32,626,477.86 Shandong Aviation Group Co. Ltd. Marketing price Rental charges in respect of land and buildings 4,479,836.75 3,303,398.94 Shandong Aviation Group Co. Ltd. Marketing price Room and restaurant service charges 600,836.20 616,297.63 Qingdao Feisheng international Aviation Training Co., Ltd Marketing price Training fee 2,609,828.00 1,589,636.65 Shandong International Aviation Training Co., Ltd. Marketing price Training fee 3,624,260.00 5,178,349.36 Shandong xiaoyu technology service ltd Marketing price Repairs and maintenance charges 9,542,930.41 2,300,070.00 Total 63,363,378.47 45,614,230.44 ③ Other transaction 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Related party Pricing principle Transaction detail Amount Amount SARJ Settlement of debt 27,748.25 22,604.23 Air China Limited Protocol Price Leasing of aircraft and engine 307,987,065.37 277,037,963.00 Air China Limited Protocol Price Joint venture route 13,017,976.72 48,713,665.00 Total 321,032,790.34 325,774,232.23 ④ Guarantee Shandong Aviation Group Co. Ltd. Provides guarantee for the company as following: Types of borrowing Creditors currency Amount Start date Maturity date Interest rate China Construction Bank RMB 40,000,000.00 2008-12-18 2009-12-17 5.0220% Agricultural Bank of China RMB 20,000,000.00 2008-11-5 2009-11-4 5.9940% Agricultural Bank of China RMB 50,000,000.00 2008-11-12 2009-11-11 5.9940% Agricultural Bank of China RMB 60,000,000.00 2009-1-7 2010-1-6 4.7790% Agricultural Bank of China RMB 60,000,000.00 2009-1-14 2010-1-13 4.7790% Agricultural Bank of China RMB 60,000,000.00 2009-1-21 2010-1-20 4.7790% Agricultural Bank of China RMB 40,000,000.00 2009-3-11 2010-3-10 4.7790% Agricultural Bank of China RMB 40,000,000.00 2009-3-17 2010-3-16 4.7790% Short-term loans Bank of China RMB 80,000,000.00 2008-12-31 2009-12-30 4.7790%SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 76 Bank of China RMB 50,000,000.00 2009-2-12 2010-2-11 4.7790% China Merchants Bank RMB 80,000,000.00 2009-1-13 2009-12-15 4.7790% China Merchants Bank RMB 90,000,000.00 2009-4-15 2009-12-10 4.7790% CNAC finance companies RMB 100,000,000.00 2009-6-29 2010-6-28 4.7790% China Construction Bank RMB 27,600,000.00 2007-12-3 2022-3-28 5.5080% China Construction Bank RMB 83,000,000.00 2008-1-2 2022-3-28 5.3460% China Construction Bank RMB 54,000,000.00 2008-3-3 2022-3-28 5.3460% China Construction Bank RMB 53,000,000.00 2008-4-1 2022-3-28 5.3460% China Construction Bank RMB 26,500,000.00 2008-4-29 2022-3-28 5.3460% China Construction Bank RMB 52,300,000.00 2008-6-2 2022-3-28 7.0470% China Construction Bank RMB 51,500,000.00 2008-7-1 2022-3-28 7.0470% China Construction Bank RMB 120,000,000.00 2008-7-15 2022-3-28 7.0470% China Construction Bank RMB 114,000,000.00 2009-4-21 2022-3-28 5.0220% China Construction Bank USD $8,539,000.00 2007-3-29 2022-3-28 4.7750% China Construction Bank USD $1,250,000.00 2007-4-30 2022-3-28 2.3750% China Construction Bank UED $6,765,620.00 2007-5-31 2022-3-28 3.3675% China Construction Bank USD $17,954,820.00 2007-7-2 2022-3-28 2.5750% China Construction Bank USD $3,749,800.00 2007-8-1 2022-3-28 2.4338% China Construction Bank USD $14,908,900.00 2007-9-28 2022-3-28 2.5944% Bank of communications RMB 141,600,000.00 2006-5-30 2016-12-30 5.7510% Bank of communications RMB 108,487,600.00 2007-11-12 2016-12-30 6.4800% Bank of communications RMB 108,800,000.00 2007-12-3 2016-12-30 5.5080% Bank of communications RMB 92,250,000.00 2008-1-14 2016-12-30 5.3460% Bank of communications USD $2,929,120.00 2006-10-31 2016-12-30 2.2750% Bank of communications USD $2,937,720.00 2006-11-30 2016-12-30 3.3213% Bank of communications USD $2,929,120.00 2007-1-31 2016-12-30 2.3175% Bank of communications USD $2,893,520.00 2007-2-15 2016-12-30 2.4725% Bank of communications USD $2,885,080.00 2007-4-29 2016-12-30 2.2900% Long-term borrowing Bank of communications USD $2,893,520.00 2007-5-31 2016-12-30 3.3213% (3)The balance of payables and receivables for related party.SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 77 30 Dec 2008 30.Jun 2009 Business name Amounts proportion Amounts proportion Trade receivables : Air China Limited 55,089,147.43 43.50% 70,488,052.19 45.34% Total 55,089,147.43 43.50% 70,488,052.19 45.34% Other receivables : Air China Limited 1,100.00 0.00% 5,112,800.00 1.63% Shandong International Aviation Training Co., Ltd. 780,969.77 0.31% 0.00 0.00% Qingdao Feisheng international Aviation Training Co., Ltd 0.00 0.00 0.00 0.00% Shandong xiaoyu technology service ltd 706,431.65 0.28% 1,386,809.51 0.44% SARJ 109,051,717.70 42.60% 109,079,465.90 34.87% Total . 110,540,219.12 43.19% 115,579,075.41 36.94% Trade payables: Shandong Taeco Aircraft Engineering Co., Ltd 717,414.49 0.08% 8,211,085.97 0.89% Total 717,414.49 0.08% 8,211,085.97 0.89% Other payables: Air China Limited 20,000,000.00 12.37% 20,000,000.00 12.99% Shangdong Aviation Group Co. Ltd. 5,551,323.91 3.43% 4,503,041.28 2.93% Qingdao Feisheng international Aviation Training Co., Ltd 3,827,607.16 2.37% 6,154,435.65 4.00% Shandong Taeco Aircraft Engineering Co., Ltd 24,756,728.86 15.31% 717,414.49 0.47% Shandong International Aviation Training Co., Ltd. 0.00 0.00% 2,431,299.08 1.58% Total 54,135,659.93 33.48% 33,806,190.50 21.97% XI、Financial Instruments and Risk Management The financial instruments of the company include financial derivative instrument and bank borrowings, finance lease liabilities, monetary funds, etc. The main purposes of these financial instruments are in order to finance the operation of the Company which directly arise from the operation activities of the company, such as accounts receivable and accounts payable, etc. The derivative instrument of the company is interest rate swaps; the purpose of interest rate swaps is to avoid the risk of interest rate volatility, these interest rate swaps contract are matched with contract of airplane finance leasing and long-term borrowing contract, therefore the risks arise from interest payment of the financing can be avoided, and to prevent the losses in financing costs in the fluctuation of interest rates.SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 78 In order to strengthen the Company's financial derivative transaction management and control the risk, the control procedures of the financial derivative instruments has been approved by the board. XII、Contingency The pledged assets are listed as in the Note 8 of the 15, 23, and 24 of the financial statements; there is no other significant contingency that needs to be disclosed. XIII、Commitment Up to 30/6/2009, the uncompleted commitments are as following: 30.Jun 2009 Item Within one year 1-2years 2-3years Above 3 years Total Lease commitments 333,194.61 305,784.21 274,734.59 908,491.87 1,822,205.28 Capital Commitments 752,509.48 878,672.52 1,981,838.13 1,829,081.79 5,442,101.92 Total 1,085,704.09 1,184,456.73 2,256,572.72 2,737,573.66 7,264,307.21 XIV. Non-adjusting Events Occurring after the Balance Sheet Date By 30/6/2009 the company has no non-adjusting events occurring after the balance sheet date that need to be disclosed. XV.Supplementary Information Return on equity and earnings per share Return on equity(%) earnings per share(Yuan/Share) Profit in the report period Full dilution Weighted average Basic profit per share Profit per share after dilution Net profit attributable to ordinary shareholders 112,509,856.54 16.98 18.56 0.28 0.28 Net profit attributable to the ordinary shareholders after deduction of non-recurring 30,381,048.36 4.59 5.01 0.08 0.08 Calculation of earning per share: : (1)Basic earning per share: 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Items calculation Amount after deduction of non-recurring Amount after deduction of non-recurring Net profit attributable to ordinary shareholder of the Company (1) 112,509,856.54 30,381,048.36 58,639,158.40 62,962,054.97 The number of shares issued to the public at the beginning of the period (2) 400,000,000.00 400,000,000.00 400,000,000.00 400,000,000.00 The number of shares newly issued in the current period (3) 0.00 0.00 0.00 0.00 The number of shares repurchase in the current period (4) 0.00 0.00 0.00 0.00 The weighted average number of ordinary shares issued to the public (5)=(2)+(3)-(4) 400,000,000.00 400,000,000.00 400,000,000.00 400,000,000.00SHANDONG AIRLINES CO., LTD 2009 SEMI-ANNUAL REPORT 79 Basic earning per share (6)=(1)÷(5) 0.28 0.08 0.15 0.16 (2)Diluted earning per share: 1.Jan-30.Jun 2009 1.Jan-30.Jun 2008 Items calculation Amount after deduction of non-recurring Amount after deduction of non-recurring Net profit attributable to ordinary shareholder of the Company (1) 112,509,856.54 30,381,048.36 58,639,158.40 62,962,054.97 The interest of the potential diluted ordinary shares determined to be expenses in the current period (2) 0.00 0.00 0.00 0.00 The gains or expenses to be resulted from conversion of diluted ordinary shares (3) 0.00 0.00 0.00 0.00 Income tax rate (4) 0.25 0.25 0.33 0.33 The adjustment of the net profit attributable to ordinary shareholder of the Company (5)=(1)+[(2)-(3)]×[1-(4)] 112,509,856.54 30,381,048.36 58,639,158.40 62,962,054.97 Total number of ordinary shares (6) 400,000,000.00 400,000,000.00 400,000,000.00 400,000,000.00 Assumed that the dilution of potential ordinary shares converted into ordinary shares in issue increased the weighted average number of ordinary shares (7) 0.00 0.00 0.00 0.00 Total number of diluted ordinary shares (8)=(6)+(7) 400,000,000.00 400,000,000.00 400,000,000.00 400,000,000.00 Diluted earning per share (9)=(5)÷(8) 0.28 0.08 0.15 0.16 XVI. Approval of Financial Statements This financial statement is approved and authorized for issuance by the Board of Directors on August 21, 2009. Section VII. Documents Available for Reference 1. Financial Statements with the signatures and seals of the Chairman of the Board, the Chief Accountant and the Person in Charge of Finance; 2. Texts of all documents and manuscripts of public notices disclosed in the newspapers designated by CSRC in the report period. The Company shall provide these documents in time at the requirements of the CSRC or the Stock Exchange, or at the requests by shareholders according to the regulations or the Articles of Association. Chairman of the Board: Zhang Xingfu Board of the Directors of Shandong Airlines Co., Ltd. August 21, 2009