Shandong Airlines Co., Ltd. 2009 Annual Report 1 山东航空股份有限公司 2009 年年度报告 SHANDONG AIRLINES CO., LTD. 2009 ANNUAL REPORT March / Year 2010 Jinan · P.R.C.Shandong Airlines Co., Ltd. 2009 Annual Report 2 Contents and Important Notes I. Company Profile -------------------------------------------------------------------------3 II. Summary of Financial Highlight and Business Highlight -------------------------4 III. Changes in Capital Shares and Particulars about Shareholders ------------------7 IV. Particulars about Directors, Supervisors, Senior Executives and Employees ---11 V. Administrative Structure -------------------------------------------------------------- --19 VI. Brief Introduction to the Shareholders’ General Meeting ---------------------- ---22 VII. Report of the Board of Directors -----------------------------------------------------23 VIII. Report of the Supervisory Committee ----------------------------------------------33 IX. Significant Events -----------------------------------------------------------------------35 X. Financial Report --------------------------------------------------------------------------39 XI. Documents for Reference --------------------------------------------------------------133 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 Mr.Wang Mingyuan was absent from the Board meeting and authorized Director Mr.Feng Gang to vote on his behalf. Reanda Certified Public Accountants issued the standard unqualified Auditors’ Report for the Company. Chairman of the Board Mr. Zhang Xingfu, General Manager Mr. Zeng Guoqiang, and Chief Accountant Mr. Xu Guojian of the Company hereby confirm that the Financial Report of the Annual Report is true and complete. Paraphrases: The Company: Shandong Airlines Co., Ltd. SDA: Shandong Aviation Group; the controlling shareholder of the Company Air China: Air China Limited, the actual controller of the Company Air China Group: China National Aviation Group Co., Ltd., the controlling shareholder of Air ChinaShandong Airlines Co., Ltd. 2009 Annual Report 3 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. Legal Representative: Zhang Xingfu 3. Secretary of Board of Directors of the Company: Dong Qiantang Contact Address: SDA Bldg., No. 5746, Er Huan East Road, Jinan, Shandong Tel.: (86) 531-85698229 E-mail: dongqt@shandongair.com.cn Authorized Securities Affairs Representative: Fan Peng E-mail: fanp@shandongair.com.cn Tel.: (86) 531-85698678 Fax: (86) 531-85698679 4. Registered Address: Yaoqiang International Airport, Jinan, Shandong Office Address: SDA Bldg., No. 5746, Er Huan East Road, Jinan, Shandong Post Code: 250014 Company’s Website: http://www.shandongair.com.cn E-mail: zqb@shandongair.com.cn 5. Newspapers for Disclosing the Information Designated by the Company: Domestic: China Securities Journal and Securities Times Overseas: Hong Kong Commcercial Daily Internet Website for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Office of the Board of the Company (Room 1920, SDA Bldg.) Liaison Tel: (86) 531-85698678 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: SHANHANG B Stock Code: 200152 7. Other Relevant Information of the Company Initial registration date: Dec. 13, 1999 Registration date after change: Sep. 16, 2009 Registration address: Industrial and Commercial Administration Bureau of Shandong Province Registered number for enterprise corporation business license: 370000400002351 Registered number for taxation: 370112720721201 Name and address of certified public accountants engaged by the Company:Shandong Airlines Co., Ltd. 2009 Annual Report 4 Reanda Certified Public Accountants Address: Room 2008 on 20/F, East District of No.1 Building, No.100, Xili Street, Balizhuang, Chaoyang District, Beijing II. Summary of Financial Highlight and Business Highlight Unit: RMB (I)Main profit index of the Company as of the report year Items Amount Operating profit 261,760,990.12 Total profit 403,361,305.82 Net profit attributable to the shareholders of the listed company 302,282,325.68 Net profit attributable to the shareholders of the listed company after deducting non-recurring losses/gains 203,597,306.19 Net cash flow arising from operating activities 1,317,347,150.42 (II) Items of deducting non-recurring gains and losses and the involved amounts are as following: Items of non-recurring gains and losses Amount Net profit 302,743,202.40 Add: (1) Gains and losses from the disposal of non-current asset, including the offsetting parts which was made accrual of provision for asset impairment -2,758,500.92 (2) Governmental subsidy calculated into current gains and losses, while closely related with the business of the Company, excluding the fixed-amount or fixed-proportion governmental subsidy according to the unified national standard -135,213,761.47 (3) Losses/gains from changes of fair values occurred in holding transaction financial assets and transaction financial liabilities, and investment income obtaining from the disposal of transaction financial assets and transaction financial liabilities and financial assets available for sales, excluded effective hedging business relevant with normal operations of the Company 10,020,739.69 (4) Other non-operating income and expenditure except for the aforementioned items -3,628,053.31 Subtotal -131,579,576.01 Less: Influenced number of income tax of non-recurring losses/gains -32,894,894.00 Net profit after deducting non-recurring gains and losses 204,058,520.39 Less: Net profit deducted non-recurring losses/gains attributable to 461,214.20Shandong Airlines Co., Ltd. 2009 Annual Report 5 minority shareholder Net profit attributable to shareholder of parent company after deducting non-recurring losses/gains 203,597,306.19 (III) Major accounting data and financial highlights over the previous three years as at the end of the report period 1. Main accounting data 2007 Items 2009 2008 Increase/decrea se in this year compared with that in last year (%) Before adjustment After adjustment Operating income 5,366,113,363. 68 5,049,391,116. 47 6.27% 4,630,130,538. 19 4,630,130,538. 19 Total profit 403,361,305.82 108,260,827.56 272.58% 57,546,814.19 98,768,111.17 Net profit attributable to shareholder s of the listed company 302,282,325.68 80,981,442.68 273.27% 37,255,985.51 68,171,958.24 Net profit attributable to shareholder s of the listed company after deducting non-recurri ng gains and losses 203,597,306.19 92,440,296.87 120.25% 50,392,077.82 53,689,781.57 Net cash flow arising from operating activities 1,317,347,150. 42 1,059,833,106. 56 24.30% 734,571,420.98 734,571,420.98 Items At the end of 2009 At the end of 2008 Increase/decrea At the end of 2007Shandong Airlines Co., Ltd. 2009 Annual Report 6 se at the end of this year compared with that at the end of last year (%) Before adjustment After adjustment Total assets 8,096,403,730. 75 7,844,104,901. 47 3.22% 7,039,689,367. 94 7,082,444,002. 92 Owners’ equity( or Shareholder s’ equity) 852,294,621.98 550,012,296.30 54.96% 436,964,877.39 469,030,853.62 2. Main financial indexes 2007 2009 2008 Increase/decrease in this year compared with that in last year (%) Before adjustment After adjustment Basic earnings per share 0.76 0.20 280% 0.09 0.17 Diluted earnings per share 0.76 0.20 280% 0.09 0.17 Basic earnings per share after deducting non-recurring gains and losses 0.51 0.23 121.74% 0.13 0.13 Fully diluted return on equity 35.47% 14.72% Up20.75 percentage points 8.53% 14.53% Weighted average return on equity 43.11% 15.89% Up27.22 percentage points 8.90% 15.67% Fully diluted return on equity after deducting non-recurring gains and losses 23.89% 16.81% Up7.08percentage points 11.53% 11.45% Weighted average return on equity after deducting non-recurring gains and losses 29.04% 18.14% Up10.9percentage points 12.04% 12.34% Net cash flow per share arising from operating activities(RMB) 3.29 2.65 24.15% 1.84 1.84 At the end of 2007 At the end of 2009 At the end of 2008 Increase/decrease at the end of this year compared with that at the end of last year (%) Before adjustment After adjustment Net asset per share attributable to shareholders of listed company 2.13 1.38 54.35% 1.09 1.17Shandong Airlines Co., Ltd. 2009 Annual Report 7 (IV) The Company’s return on equity and earnings per share as of the year 2009 as calculated based on fully diluted method and weighted average method taking Requirements on the Information Disclosure of Companies Publicly Issuing Shares No. 9 as the reference 1. Return on Equity Amount in this period Amount in same period Profit in the report of last report period Period Fully diluted Weighted average Fully diluted Weighted average Net profit attributable to common shareholders 35.47% 43.11% 14.72% 15.89% Net profit attributable to common shareholders after deducting the non-recurring losses and gains 23.89% 29.04% 16.81% 18.14% 2. Earnings per Share Amount in this period Amount in same period of last report Profit in the report period period Basic earnings per share Diluted earnings per share Basic earnings per share Diluted earnings per share Net profit attributable to common shareholders 0.76 0.76 0.20 0.20 Net profit attributable to common shareholders after deducting the non-recurring losses and gains 0.51 0.51 0.23 0.23 III. Changes in Shares Capital and Particulars about the Shareholders (I) Statement of changes in share Unit: Shares Before change Increase/decrease in this time (+ , - ) After change Rationed share Bonus share Conversion of capital public reserve Additional insurance Others Subtotal I. Unlisted shares 260000000 260000000 1. Sponsor’s shares 168780100 168780100Shandong Airlines Co., Ltd. 2009 Annual Report 8 Including: State-owned shares 168581100 168581100 Domestic legal person’s shares 199000 199000 Foreign legal person’s shares Others 2. Raised legal person’s shares 3. Inner employees’ shares 4. Preference shares or other 91219900 91219900 Total unlisted shares 260000000 260000000 II. Listed shares 140000000 140000000 1. RMB ordinary shares 2.Domestically listed foreign shares 140000000 140000000 3. Overseas listed foreign shares 4. Other Total listed shares 140000000 140000000 III. Total shares 400000000 400000000 (II) Particulars about issuance and listing of shares 1. Issuance and listing of shares The previous three year ended by the period-end, the Company did not issue shares and derivative securities for trading. 2. During the report period, there were no changes in the number and structure of the Company’s shares due to bonus share, capital public reserve transferring into share capital, rationed share, additional issuance, share merger, convertible company’s bonds transferring shares, disinvestments, listing of inner employees’ shares or company’s employee’s shares, etc. There were no inner employees’ shares in the Company. (III) About Shareholders 1. Total shareholders as at the end of the report period Up to Dec. 31, 2009, the Company had totally 20,162 shareholders, including 20,156 ones of domestically listed foreign shares. The top ten shareholders of the CompanyShandong Airlines Co., Ltd. 2009 Annual Report 9 are as following: Unit: Share No. Shareholders’ name Number of shares held at the year-end Proportion (%) Type Number of shares pledged or frozen 1 SHANDONG AVIATION GROUP 168004000 42 State-owned legal person’s share Naught 2 AIR CHINA LIMITED 91200000 22.8 State-owned legal person’s share Naught 3 CHEN TIAN MING 1769072 0.44 Circulation share Unknown 4 CHEN CHUN PENG 1430000 0.36 Circulation share Unknown 5 CHEN JING JIAN 1304200 0.33 Circulation share Unknown 6 WU HAO YUAN 1062700 0.27 Circulation share Unknown 7 LIU LI YA 904217 0.23 Circulation share Unknown 8 JOHN POSS 700000 0.18 Circulation share Unknown 9 DENG HONG WEI 650609 0.16 Circulation share Unknown 10 FENG WU CHU 631700 0.16 Circulation share Unknown Note: 1. Shandong Aviation Group is the first largest shareholder of the Company, who holds the shares of the Company on behalf of the State with unlisted shares. 2. Air China Limited is the second largest shareholder of the Company, who holds the shares of the Company on behalf of the State with unlisted shares; Air China is the first largest shareholder of SDA and the actual controller of the Company. 3. Among the above the top ten shareholders, Air China, shareholders of state-owned legal person’s share, is the first largest shareholder of the SDA, and there exists no associated relationship between SDA and Air China and the other shareholders, and they don’t belong to the consistent actionist regulated by the Management Regulation of Information Disclosure on Change of Shareholding for Listed Companies with the other shareholders. The Company is not aware of their associated relationship among the other shareholders of circulation share, whether belongs to the consistent actionist regulated by the Management Regulation of Information Disclosure on Change of Shareholding for Listed Companies. 2. The controlling shareholder of the Company Name of the controlling shareholder: Shandong Aviation Group Legal representative: Feng Gang Date of foundation: Feb. 9, 1995 Place of SDA: No. 5746, Er Huan East Road, Lixia District, Jinan, Shandong Business scope: Investment and management on aviation transportation; maintaining of aerostat and ground facilities limited by permission; conference and exhibitionShandong Airlines Co., Ltd. 2009 Annual Report 10 service; working service; maintaining on vehicles of ground passenger transportation and ground transportation; the sales of general merchandise, handicraft and souvenir; the lodgings; the dining service; retail sales of the tobacco product; lease of house (limitedly managed by branches) Registered capital: RMB 580 million 3. The actual controller of the Company Actual controller of the Company: Air China Limited. Place: 9F/Sky Mansion, No.28 Buliding Tianzhu Road, Block A of Tianzhu Airport Industrial Zone, Shunyi District, Beijing. Legal Representative: Kong Dong Registered capital: RMB 12.251 billion Business scope: It was engaged in the domestic and overseas transportation business such as periodic and aperiodic aviation passenger, cargo, letter and baggage; domestic and overseas official flight business; aeroplane management business; repairing of aerostat; business agent among air companies; ground service and air courier services related with the main operations (excluding letter and articles with the nature of letters); tax-free commodities in airplane. Main shareholders: China National Aviation Group Co., Ltd., which accounted for 40.4% in total shares; Cathay Pacific Airways Ltd., which accounted for 18.1% in total shares. 100% 40.4% 49.406% 22.8% 42% 4. The Company has no shareholders holding over 10% of shares of the Company Air China Limited Shandong Aviation Group Shandong Airlines Co., Ltd. China National Aviation Group Co., Ltd. State-owned Assets Supervision & Administration Commission of State CouncilShandong Airlines Co., Ltd. 2009 Annual Report 11 except for the controlling shareholder SDA and actual controller Air China Limited. 5. Particulars about the top ten shareholders of circulation share No. Name of shareholders Number of shares held at the year-end (share) Type of shares held 1 CHEN TIAN MING 1769072 B-share 2 CHEN CHUN PENG 1430000 B-share 3 CHEN JING JIAN 1304200 B-share 4 WU HAO YUAN 1062700 B-share 5 LIU LI YA 904217 B-share 6 JOHN POSS 700000 B-share 7 DENG HONG WEI 650609 B-share 8 FENG WU CHU 631700 B-share 9 XU ZHAO HUAN 623400 B-share 10 CHEN ZI XIANG 610700 B-share The Company is not aware of their associated relationship among the top ten shareholders of circulation share, and is unknown whether other circulation shareholders belong to the consistent actionist regulated by the Management Regulation of Information Disclosure on Change of Shareholding for Listed Companies. IV. Particulars about Directors, Supervisors, Senior Executives and Employees (I) Directors, Supervisors and Senior Executives Name Sex Birthday Title Office term Amounts at the year-begin Amounts at the year-end Zhang Xingfu Male Apr. 1955 Chairman June 26, 2009- June 25, 2012 0 0 Feng Gang Male Sep. 1963 Vice Chairman June 26, 2009- June 25, 2012 0 0 Zeng Guoqiang Male Oct. 1953 Director, General Manger June 26, 2009- June 25, 2012 0 0 Su Zhongmin Male March 1954 Director, June 26, 2009- 0 0Shandong Airlines Co., Ltd. 2009 Annual Report 12 Standing Deputy General Manager June 25, 2012 Xiao Feng Male Oct. 1968 Director June 26, 2009- March 24, 2010 0 0 Wang Mingyuan Male Sep. 1965 Director June 26, 2009- June 25, 2012 0 0 Kou Zunxian Male Aug. 1955 Director June 26, 2009- June 25, 2012 0 0 Wang Jieming Female June 1958 Director June 26, 2009- June 25, 2012 0 0 Wei Jincai Male Feb. 1950 Independent Director June 26, 2009- June 25, 2012 0 0 Li Chun male March 1957 Independent Director June 26, 2009- June 25, 2012 0 0 Qu Wenzhou Male June 1972 Independent Director June 26, 2009- June 25, 2012 0 0 Wang Fuzhu Male June 1953 Chairman of the Supervisory Committee June 26, 2009- June 25, 2012 0 0 Xue Ruitao Male March 1961 Supervisor June 26, 2009- June 25, 2012 0 0 Zhang Kai Male May 1965 Supervisor June 26, 2009- June 25, 2012 0 0 Miao Liubin Male Feb. 1971 Employee Supervisor, GM of Flight Depratment June 26, 2009- June 25, 2012 0 0 Zhou Qiaoyan Female Jan. 1975 Employee Supervisor, Deputy Head June 26, 2009- June 25, 2012 0 0Shandong Airlines Co., Ltd. 2009 Annual Report 13 of Cabin Service Department Yu Haitian Male Sep. 1969 Deputy General Manager June 26, 2009- June 25, 2012 0 0 Song Yuxia Female Jan. 1956 Deputy General Manager June 26, 2009- June 25, 2012 0 0 Li Qing’en Male Aug. 1955 Deputy General Manager June 26, 2009- June 25, 2012 0 0 Xiao Feng Male Oct. 1968 Deputy General Manager, Chief Accountant June 26, 2009- Jan. 26, 2010 0 0 Qiu Feng Male Jan. 1967 Deputy General Manager June 26, 2009- June 25, 2012 0 0 Zhang Qingshe Male Oct. 1958 Chief Pilot June 26, 2009- June 25, 2012 0 0 Xiong Jianbo Male Jan. 1965 General Engineer Dec. 1, 2009- June 25, 2012 0 0 Dong Qiantang Male Jan. 1962 Secretary of the Board June 26, 2009- June 25, 2012 0 0 Note: 1. There was no change in the number of shares held by directors, supervisors and senior executives in the report period. 2. Particulars about directors, supervisors holding the post in Shareholding Company Name Name of the Shareholding Company Position in the Shareholding Company Draw remuneration and allowance from the Shareholding Company (Yes or no) Feng Gang SDA Chairman, President, Vice-Secretary of Party Committee Yes Zhang Xingfu SDA Secretary of Party Committee, Vice-president Yes Wang Fuzhu SDA Chief Accountant Yes Xue Ruitao SDA General Manager of Financial Department YesShandong Airlines Co., Ltd. 2009 Annual Report 14 Wang Mingyuan Air China Director of Commerce Commission Yes Zhang Kai Air China Senior Management of Investment Enterprise Management of Assets Management Department Yes (II) Main work experiences in the near five years of the directors, supervisors and senior executives, as well as particulars of their full time or part time posts in other units other than the shareholding companies Name Main work experience Full-time or part-time posts in other units other than the shareholding companies Zhang Xingfu 01/2004-12/2005, Deputy Mayor in Yantai; 12/2005 till now, Party Secretary, Vice-president of SDA; 03/2006 till now, Chairman of the Board of the Company. Chairman of Taikoo Shandong Aircraft Engineering Co., Ltd. Feng Gang 01/2004-05/2007, General Manager and Party Secretary of China National Aviation Asset Management Co., Ltd.; 05/2007 till now, Chairman, President and Vice Party Secretary of SDA; 06/2007 till now, Vice-chairman of the Company. Zeng Guoqiang 01/2004 till now, Director and General Manager of the Company. Su Zhongmin 01/2004 till now, Director and Standing Deputy General Manager of the Company. Chairman of the Board of Qingdao International Logistics Centre Co., Ltd. Xiao Feng 01/2004-08/2005, Deputy General Manager of Financial Department of Air China ; 08/2005-01/2010, Chief Accountant of the Company; 03/2009-01/2010, Deputy General Manager of the Company; 04/2005 till now, Director of the Company. Wang Mingyuan 01/2004-06/2005, Deputy General Manager of Sales & Marketing Department of Air China; 06/2005-07/2008, Commissary of Commerce Commission, General Manager of Network Proceedings Department of Air China ; 07/2008 till now, Director of Commerce Commission Air China; 03/2006, Director of the Company.Shandong Airlines Co., Ltd. 2009 Annual Report 15 Kou Zunxian 01/2004-03/2007, Director of Asset Management Department of Shandong Economic Development and Investment Company; 03/2007 till now, Deputy General Manager of Shandong Economic Development and Investment Company; 04/2005 till now, Director of the Company. Wang Jieming 01/2004 till now, Director of Planning Financial Department of Shandong Economic Development and Investment Company; 03/2006 till now, Director of the Company. Wei Jincai 01/2004-10/2008, Party Secretary of Civil Aviation Management Institute of China; 10/2008 till now, President of Civil Aviation Management Institute of China; 03/2006 till now, Independent Director of the Company. President of Civil Aviation Management Institute of China Li Chun Now he is Chairman of Shenzhen Lawyers Association, Vice-director of Development Strategy Committee of Chinese National Lawyers Association, Finance and Securities Committee of National Counsel Association, Chief Researcher of Venture Investment Law Research Center and Managing Partner of Grandall Legal Group. 06/2009 till now, Independent Director of the Company. Qu Wenzhou Once served as Manager of Investment Bank Department of Xiamen Jianfa Investment Trust Corporation, Post doctor of Tsinghua University, bonds researcher of Shenzhen Stock Exchange Workstation. Now he is in Xiamen University taking the positions of PhD Student Supervisor in School of Management, Deputy Dean of Department of Finance, chairman of China Capital Market Research Center; 06/2009 till now, Independent Director of the Company. Concurrently serves as Independent Director of Xiamen International Airport Co.,Ltd, Meihua Umbrella Co., Ltd., Fujian Zhonghe Co., Ltd. Wang Fuzhu 01/2004-04/2005, Director of the Company; 01/2004 till now, Chief Accountant of SDA; 05/2005 till now, Chairman of Supervisory Committee of the Company. Xue Ruitao 2004-03/2009, Minister of the Finance Department of the Company;Shandong Airlines Co., Ltd. 2009 Annual Report 16 03/2009 till now, General Manager of Finance Department of Shandong Aviation Group. 06/2009 till now, Supervisor of the Company. Zhang Kai 07/2004-12/2005, Enterprise Management Department of Air China Limited; 01/2006 till now, Senior Manager of Assets Management Department of Air China Limited; 06/2009 till now, Employee Supervisor of the Company. Miao Liubin 04/2004-08/2007, Captain of the First Flying Brigade; 08/2007 till now, General Manager of the Flight Department of the Company; 06/2009 till now, Employee Supervisor of the Company. Zhou Qiaoyan 01/2004 till now, Deputy Head of Cabin Service Department of the Company; 03/2006 till now, Employee Supervisor of the Company. Yu Haitian 01/2004 till now, Deputy General Manager of the Company. Chairman of the Board of Shandong Airlines Rainbow Jets Co., Ltd. Song Yuxia 01/2004-04/2005, Director of the Company; 01/2004-05/2005, General Manager of Qingdao Branch of the Company; 01/2004 till now, Deputy General Manager of the Company. Chairwoman of the Board of Shandong International Aero Training Co., Ltd., Chairwoman of the Board of Qingdao Feisheng International Aero Technical Training Co., Ltd. Li Qing’en 01/2004-08/2005, Chief Accountant of the Company; 01/2005-03/2009, Secretary of Board of Directors of the Company; 01/2005 till now, Deputy General Manager of the Company. Qiu Feng 07/2005-03/2009, Deputy GM of Network Proceedings Department of Air China; 03/2009 till now, Deputy GM of the Company. Zhang Qingshe 01/2004 till now, Chief Pilot of the Company. Xiong Jianbo 01/2004-05/2008, Minister of Aircraft Engineering Department; 05/2008-12/2009, General Manager of Engineering Technology Company of the Company; 12/2009 till now, Chief Engineer of the Company.Shandong Airlines Co., Ltd. 2009 Annual Report 17 Dong Qiantang 01/2003-02/2009, Minister of Enterprise Planning and Developmnet Department of Shandong Aviation Group; 02/2009 till now, General Manager of Enterprise Management of the Company; 06/2009 till now, Secretary of the Board of Directors. (II) Particulars about annual payment The payments of the directors, supervisors and senior executives of the Company were determined according to the performances and results salary system. The allowance for each independent director was RMB 50,000 per year as the basic number plus an extra allowance of RMB 600 for every working day. Name Title Total amount of annual remuneration in 2009 (RMB’0000, before tax) Zeng Guoqiang Director, General Manager 65.65 Su Zhongmin Director, Standing Deputy General Manager 56.41 Xiao Feng Director, Deputy General Manager, Chief Accountant 46.83 Wei Jincai Independent Director 5.90 Li Chun Independent Director 2.98 Qu Wenzhou Independent Director 2.98 Miao Liubin Employee Supervisor, GM of Flight Department 30.79 Zhou Qiaoyan Employee Supervisor, Deputy Head of Cabin Service Department 19.27 Yu Haitian Deputy General Manager 54.82 Song Yuxia Deputy General Manager 56.97 Li Qing’en Deputy General Manager 53.70 Qiu Feng Deputy General Manager 33.28 Zhang Qingshe Chief Pilot 54.85 Xiong Jianbo General Engineer 31.50 Dong Qiantang Secretary of Board of Directors 23.21 Total 539.14 1. Director Mr. Zhang Xingfu and Director Mr. Feng Gang, together with Supervisor Mr. Wang Fuzhu and Supervisor Mr. Xue Ruitao drew their remunerations from SDA, the controlling shareholder, not from the Company; Director Mr. Wang Mingyuan, and Supervisor Mr. Zhang Kai drew their remunerations from Air China, not from the Company; Director Mr. Kou Zunxian and Director Ms. Wang Jieming drew their remunerations from Shandong Economic Development and Investment Company, notShandong Airlines Co., Ltd. 2009 Annual Report 18 from the Company. 2. Independent Directors Mr. Li Chun and Mr. Qu Wenzhou were elected as Independent Directors of the Company on June 26, 2009, thus, the remuneration for second half of 2009 was delivered. 3. Mr. Qiu Feng did not withdraw remuneration from the Company since May 2009; Mr. Dong Qiantang withdrew remuneration from the Company since March 2009. (III) Particulars about changes of directors, supervisors and senior executive 1. On March 6, 2009, due to work change, Mr. Bai Weisan brought forward to resign his posts of Director and Deputy General Manager of the Company; Deputy General Manager Mr. Li Qing’en did not concurrently take the post of Secretary of the Board due to work arrangement; at the same time, Mr. Xiao Feng was engaged as the Deputy General Manager and Chief Accountant of the Company, Mr. Qiu Feng was engaged as Deputy General Manager of the Company. 2. On June 26, 20009, the 2008 Annual Shareholders’ General Meeting of the Company elected Mr. Zhang Xingfu, Mr. Feng Gang, Mr. Zeng Guoqiang, Mr. Su Zhongmin, Mr. Kou Zunxian, Ms. Wang Jieming, Mr. Xiaofeng and Mr. Wang Mingyuan as the directors of the 4th board; elected Mr. Wei Jincai, Mr. Li Chun and Mr. Qu Wenzhou as the independent director of the 4th board; elected Mr. Wang Fuzhu, Mr. Xue Ruitao and Mr. Zhang Kai as the supervisors of the 4th supervisory committee, they formed the 4th Supervisory Committee of the Company with 2 employee supervisors Mr. Miao Liubin and Ms. Zhou Qiaoyan elected in Employee Representative Conference. On the same day, the 1st meeting of the 4th board of the Company elected Mr. Zhang Xingfu as Chairman of the Company, Mr. Feng Gang as Vice-chairman of the Company; engaged Mr. Zeng Guoqiang as the General Manager of the Company, Mr. Su Zhongmin as the Standing Deputy General Manager; engaged Mr. Yu Haitian, Ms. Song Yuxia, Mr. Li Qing’en, Mr. Xiao Feng. Mr. Qiu Feng as General Managers of the Company; engaged Mr. Zhang Qingshe as Chief Pilot, Mr. Xiao Feng as Chief Accountant(concurrently-taking), Mr. Dong Qiantang as Secretary of the Board. On the same day, the 1st meeting of the 4th board of the Company elected Mr. Wang Fuzhu as the Chairman of the Supervisory Committee. 3. In Dec. 2009, the 2nd Extraordinary Meeting of the 4th board of the Company engaged Mr. Xiong Jianbo as the Chief Pilot of the Company. 4. On Jan. 26, 2010, Mr. Xiao Feng put forward to resign his posts of Deputy General Manager and Chief Accountant of the Company; on Jan. 29, 2010, the board engaged Mr. Xu Guo Jian as the Deputy General Manager and Chief Accountant of the Company. (IV) About staff By the end of the report period, the Company had 4,115 employees in total, including 38 postgraduates (Master Degree and Doctor Degree) or above, 2,056 persons graduated from 3-years regular college or above. The staff structure is as follows:Shandong Airlines Co., Ltd. 2009 Annual Report 19 Type of employee Number Proportion to the total employees Flight personnel 475 11.5% Aircraft crew and maintenance personnel 654 15.9% Marketing personnel (market and freight) 824 20% Air host and hostess 940 22.8% Ground attendant 313 7.6% Financial personnel 143 3.5% Others 766 18.6% By the end of the report period, there were 31 retirees in the Company. V. Administration Structure of the Company (I) Particulars about Company Administration 1. Particulars about the Company Administration in the report period In 2009, strictly according to Company Law, Securities Law and relevant laws and regulations promulgated by CSRC, the Company continuously perfected the Company’s corporate governance structure and standardized its operation. In the report period, the election on changes and appointment of the fourth board, supervisory committee and senior executives was accomplished; a series of internal control system and management system were modified and perfected, thus assuring orderly operation of the Company. Professional committees of the board of directors carried their work step by step, and the scientific decision-making level was further enhanced. On the basis of Articles of Association, Working System of Independent Directors and other regulations and systems, independent directors of the Company took an active part in board meetings and shareholders’ general meetings, deepened to know the development and operation status of the Company and expressed independent opinions on the significant events in a diligent and responsible way. Compared with the standard documents issued by CSRC on governance for listed companies, the Board of Directors thinks the actual administration of the Company was basically in accordance with regulations of Code of Corporate Governance for Listed Companies. The Company further fined and perfected the Company’s system construction, regulated governance and information disclosure of the Company, operated strictly in accordance with the laws and regulations and the rules of the Company, promoted regulated operation level, and advanced the sustainable, healthy and steady development of the Company. (II) Performance of Independent Directors Since the Independent Directors of the Company, Mr. Wei Jincai, Mr. Li Chun and Mr.Shandong Airlines Co., Ltd. 2009 Annual Report 20 Qu Wenzhou took their posts, they fulfilled their duties in an honest, diligent and responsible way, attended various meetings of the Board and Shareholders’ General Meeting on time and attended Supervisory Committee meetings as non-voting delegates; researched and studies actively the operation, business development and financial status of the Company, supervised stictly over and guided the normative operation of the Company, participated actively in the decision-making of the Board of Directors, and expressed independent and objective opinions on the nomination of Director, suggestion and engagement of certified public accountants and significant related transactions of the Company; during the process of preparing the periodical report, the management team of the Company had sufficient communication with accountants, earnestly fulfilled its duties of supervision and inspection, making tremendous contributions to the scientification and standardization of decisions, enhanced the gradual perfection of the administration structure, and defended corporate interest as well as legitimate interest of all the investors. 1. Particulars about Independent Directors’ Attending the Board of Directors Name Present times for the Board of Directors this year Presenting in person (Times) Entrusted presence (Times) Absent (Times) Wei Jincai 8 8 0 0 Li Chun 4 4 0 0 Qu Wenzhou 4 4 0 0 2. Objections on the related terms of the Company offered by the independent directors: In the report period, there was no objection made by independent directors on related matters. (III) Separation of the Company and holding shareholder in business, personal, assets, organization and finance. The Company and SDA, the controlling shareholder, have been made “Five Seperations” in business, personal, assets, organization and finance. The Company possesses the independent and complete business and operates independently. (IV) Evaluation and encouragement mechanism of senior executives According to the internal Regulation on the Integrated Evaluation and Management of Executives, the Company conducted the annual comprehensive evaluation on the senior executives and implemented the wage system where payment was linked with performances. (V) Particulars about establishment and perfection of the Company’s internal control systemShandong Airlines Co., Ltd. 2009 Annual Report 21 1. Self-assessment summary on implementation effectiveness of internal control system of the Company in this year from the board of directors: The Company had developed and effectively enforced a set of internal control system that is comparatively complete combining with self-operation characteristics, therefore, ensured the operational normality and order of the Company, protected the security and intactness of corporate assets and guaranteed the truthfulness, legality, accuracy and wholeness of information including accounting data. The inner control system on a whole has characteristic of entirety, reasonableness and validity. Taking Basic Standards for Internal Control of Business Enterprise and Guideline of Internal Control for the Listed Companies of Shenzhen Stock Exchange as the yardstick, the inner control of the Company was normative, strict, adequate and effective in the aspects of inner environment, goal-setting, event recognition, risk assessment and solution, controlling activities, information and communication and supervision and inspection, etc, which was in general in accordance with the relevant requirements of CSRC and SZSE. The Board of Directors of the Company made self-assessment on the aforesaid aspects of internal control of this year; no significant faults in internal control design or implementation were discovered. The Board of Directors of the Company thought the internal control system of the Company was integrated and implemented effectively from Jan. 1st of this year to the end of the report period. For details, please refer the Bord of Directors’ Self Assessment Report on Internal Control of Shandong Airlines Co., Ltd. (Year 2009) 2. Opinions given by Supervisory Committee on S Self-assessment for The Company Internal Control According to Basic Standard for Enterprise Internal Control and the Guideline of Internal Control for the Listed Companies of Shenzhen Stock Exchange, The Company earnestly checked the internal control system of the Company in 2009, and drew conclusions that: (1) Complying with the relevant regulations promulgated by CSRC and SZSE, following the basic principles for internal control, and basing on the actual status of the Company, the Company had built a sound internal control system covering a wide range of link which maintained the normal operation and protected corporate properties. (2) Adequate and effective enforcement and supervision of major activities on internal-control was secured by the complete internal control mechanism. In 2009, the Company has no such status case which violated the Guideline of Internal Control for the Listed Companies of Shenzhen Stock Exchange or the internal control system of the Company. 3. Independent Opinion given by Independent Board of Directors on Self-assessment for The Company Internal control In 2009, According to Basic Standard for Enterprise Internal Control and the Guideline of Internal Control for the Listed Companies of Shenzhen Stock Exchange,Shandong Airlines Co., Ltd. 2009 Annual Report 22 the Company checked the internal control system wholly and deeply; on the basis of independent judgment, independent directors made careful checkings on internal control of the Company in 2009 and made the following independent opinions: (1) In 2009, the Company further revised and improved a series of internal control and management systems, the internal control system was further improved, which comformed to the national laws and rules, requirements of supervisory organization and demands of the current production operations of the Company. (2) Important activities on internal control were carried out in compliance with the regulations regarding control systems; internal control exercised over subsidiaries, related transactions, external guarantee, significant investment and information disclosure was strict, full and effective, which played a satisfactory role in taking charging of each managerial processes and links and ensured normal operation of the Company, and presented qualities of rationality, entirety and effectiveness. VI. Brief introduction to the Shareholders’ General Meeting In the report period, the Company held one Shareholders’ General Meeting, which was the Annual Shareholders’ General Meeting of 2008. 1. Notification, convening and holding of the Shareholders’ General Meeting On June 26, 2009, at time of 9:00, the Company held its 2008 Annual Shareholders’ General Meeting on 31/F conference room of SDA Building. The Company notified the shareholders of the meeting by means of Public Notice, and the notification of the meeting was published in China Securities Journal, Securities Times and Hong Kong Wen Wei Po dated June 3, 2009. Totally 6 shareholders and shareholder’s proxies with authorization from shareholders representing 259,851,000 shares of the Company presented at the meeting, and Shandong Hualu Group Co., Ltd. entrusted the office of board to vote on its own voting will representing 199,000 shares of the Company, which totaled 260,050,000 shares taking 65.0125% in the total amount of shares with voting rights of the Company: including 259,801,000 state-owned legal person’s shares, taking 64.95% of total shares of the Company; 199,000 domestic legal person’s shares, taking 0.05% of total shares; 50,000 domestically listed foreign share (B share), taking 0.0125% of total shares of the Company. Chairman of the Board, Mr. Zhang Xingfu presided the meeting. The directors, supervisors and senior executives of the Company attended the meeting. The convening and holding of the Meeting accorded with the regulations of Company Law, Standardizing Opinions on Shareholders’ General Meeting of Listed Company and Articles of Association of the Company. 2. The resolutions passed by the Shareholders’ General Meeting and the disclosure of public notice on resolutions Following proposals were examined item-by-item and approved by means of roll callShandong Airlines Co., Ltd. 2009 Annual Report 23 vote in the meeting: (1) Work Report 2008 of the Board of Directors of Shandong Airlines Co., Ltd.; (2) Work Report 2008 of the Supervisory Committee of Shandong Airlines Co., Ltd.; (3) Annual Report 2008 of Shandong Airlines Co., Ltd.; (4) Financial Settlement Report 2008 of Shandong Airlines Co., Ltd.; (5) Profit Distribution Plan 2008 of Shandong Airlines Co., Ltd.; (6) Proposal on Election of Changing Office Term of Board of Directors; (7) Proposal on Election of Changing Office Term of Supervisory Committee; (8) Proposal on Increasing Business Scope of Shandong Airlines Co., Ltd.; (9) Proposal on Revising Articles of Association of Shandong Airlines Co., Ltd.; (10) Proposal on Routine Related Transaction in 2009; (11) Proposal on Re-engaging Certified Public Accountants and its Remunerations. The resolutions of the meeting were published in China Securities Journal, Securities Times and Hong Kong Wen Wei Po dated June 27, 2009. VII. Report of the Board of Directors (I) Discussion and analysis to the operation Confronted with severe impact posed by international financial crisis, the Company thoroughly applied the Scientific Development Thought and implemented Crisis-Passing strategy actively under the right leadership of Shandong Provincial Party Committee, Shandong Provincial Government, and Civil Aviation Administration of China. The Company scientifically and practically adapted itself to the changing environment to turn crisis into opportunities; made coordinated arrangement for works involving reform, innovation and development; achieved the stable development of safe production; realized historic breakthrough in profit; had prominent improvement in service, positive change in overall management levels, a harmonious and stable staff; and successfully realized safe flights for 15 years. 1. Safety: The Company kept zero human error-caused flying accident for two consecutive years and zero record of ground accident. The safety management level and safety control ability were reinforced further and the general security trend remained steady. 2. Transportation index: In 2009, the Company totally had 151,000 hours for safety flights and 87,000 sorties, respectively 18.5% and 13.9% up compared to those of the same period of last year; overall transportation amounting to 971 million ton*kilometer was accomplished by the Company, 21.3% up compared to those of the same period of last year; and totally 7,817,000 passengers were safely conveyed, 19.2% up compared to those of the same period of last year. 3. Benefit: In 2009, the operating income realized by the Company totaled RMB 5.302 billion,6.34 % up compared to that of the same period of the last year; total profit amounted to RMB403 million , increasing by RMB295 million compared to that of the same period of last year; ratio of debts to assets was reduces to below 90%. The Company received some promotions in its capabilities of profit-making, development and debts repayment.Shandong Airlines Co., Ltd. 2009 Annual Report 24 4. Service: The punctuality rate for the scheduled flight in the whole year of 2009 was 83.4%, ranking second among the national civil aviation; only 0.82 time complaints were received from every 10,000 passengers, 0.48 time/10,000 passenger down compared to that of the same period of last year; the satisfaction rate from passengers was 89.82%, 0.62 percentage points up compared to that of the same period of last year; and the dilapidation error rate for baggage was 0.0238%, 0.0044% down compared to that of the same period of the last year. As the flight service partner for the Eleventh National Games, the Company successfully finished the service and assurance task during the session and was thus rewarded as “Advanced Collective for Preparing the Eleventh National Games” and “Award for Special Contributions for the Eleventh National Games” by Provincial Party Committee of Shandong, Shandong Provincial Government, and Organization Committee for National Games. (II) Operation in the report period 1. Scope of main operations and their status The Company is mainly engaged in business of passenger and cargo civil aviation transportation and air traffic from home to its surrounding nations and districts, hotel and food service, air machine reparation, agency business for inter airlines, ground services related to main operation. 2. Constitution of main business of the Company (1)Main business classified by industries Unit: RMB Industry Operation income Operation cost Operation income increased or decreased compared to last year (%) Operation cost increased or decreased compared to last year (%) Aviation transportation industry 5,274,362,420.93 4,085,895,627.76 6.49% -0.38% Logistics transportation industry 7,015,287.38 1,910,437.19 16.52% 45.48% Hotel and food industry 22,984,060.08 19,179,045.59 1.98% 22.83% (2)Main business classified by areas Unit: RMB Domestic International Industry Operation income Increased or decreased compared to last year Operation income Increased or decreased compared to last year Aviation transportation industry 5,129,904,072.85 7.41% 144,458,348.08 -18.33% Logistics transportation industry 7,015,287.38 16.52% - -Shandong Airlines Co., Ltd. 2009 Annual Report 25 Hotel and food industry 22,984,060.08 1.98% - - 3. Operations and achievements of holding and share-join companies (1) Qingdao International Airlines Logistics Center Co., Ltd. Qingdao International Airlines Logistics Center Co., Ltd., whose shares are held by the Company, is mainly engaged in air cargo storage, ground dispatching, e-commerce, the 3rd party logistics design and implementation, logistics business consultation and other related services, with registered capital amounting to RMB 30 million. In the report period, the company realized net profit amounting to RMB 1,536,300. Till the end of the report period, the total assets were RMB 45,776,600 and RMB 43,439,400 for net assets. (2) Shandong Airlines Rainbow Jets Co., Ltd. Shandong Airlines Rainbow Jet Co., Ltd., which the Company joined shares in, realized net profit of RMB 585,000 by audited in the report period. Till the end of the report period, the total assets were RMB 89,010,000. (3)Sichuan Airlines Co., Ltd. Sichuan Airlines Co., Ltd., which the Company joined shares in, has not finished the 2009 audit work till now. (4) Travelsky Technology Limited Travelsky Technology Limited, which the Company joined shares in, has not finished the 2009 audit work till now. (5) Jinan International Airport Co., Ltd. Jinan International Airport Co., Ltd., which the Company joined shares in, has not finished the 2009 audit work till now. 4. Main suppliers and customers The total amount of purchase to the top five suppliers took up 43% of the total annual amount of purchases of the Company (mainly purchases of aviation fuel, aircraft materials, and machine offerings); the total amount of sales to the top five customers took up 13.08% of the total annual amount of sales of the Company. (III)Investment of the Company 1. In the report period, there was no proceeds raised or application of proceeds raised in the previous period but lasted to this report period in the Company. 2. In the report period, the Company had no investment with non-raised proceeds. (IV) Financial status of the Company in the report period 1. Change of accounting policy and accounting estimation, and correction ofShandong Airlines Co., Ltd. 2009 Annual Report 26 accounting error With the changes on recent market condition and pilot mobility, the Company re-examined the beneficial years in accordance with the service years and resignations of the pilots. The 2010 First Extraordinary Meeting of the 4th Board of the Company examined and approved the Proposal on Changes to Accounting Estimation of Shandong Airlines Co., Ltd., which decided to adopt new accounting estimations since Oct. 1, 2009, and change the amortization periods of training expense on pilots from 20 years to 10 year. Thus, the changes of accounting estimation made the current net profit decrease amounting to RMB 24,159,590.99. The influences on net profit of 2009 by the aforementioned as follows: (Unit: RMB) 2009 Adjustment Item Amount Changes of the amortization periods Operating cost 32,212,787.99 of training expense on pilots Income tax expense -8,053,197.00 Total 24,159,590.99 2. Assets constitution and reasons for the changes (1) Significant change in assets constitution of the Company compared to that of the same period of last year during the report period Unit: RMB Dec. 31st of 2009 Dec. 31st of 2008 Items Amount Proportio n Amount Proportion Increase or decrease scope in amount compared to that of last year (%) Scope of change in proportion Transaction financial assets 11,341,846.48 0.14% 23,460,812.11 0.30% -52% Down 0.16 percentage points Construction in progress 422,277,445.58 5.22% 1,277,744,153.3 2 16.29% -66.95% Down 11.07 percentage points Notes payable 182,124,331.32 2.25% 10,000,000.00 0.13% 1721% Up 2.12 percentage points Accounts receivable in advance 117,956,240.43 1.46% 87,735,493.54 1.12% 34.45% Up 0.34 percentage points Tax payable 177,564,425.49 2.19% 111,337,241.37 1.42% 59.48% Up 0.77 percentage pointsShandong Airlines Co., Ltd. 2009 Annual Report 27 Interest payable 4,001,134.66 0.05% 9,634,990.00 0.12% -58.47% Down 0.07 percentage points Deferred income tax assets 91,836,911.34 1.13% 68,774,158.11 0.88% 33.53% Up 0.25 percentage points Deferred income tax liabilities 2,835,461.62 0.04% 19,816,576.46 0.25% -86% Down 0.21 percentage points (2)Reason for change Item Explanations Transaction financial assets Fair value of interest rate swap decreased. Construction in progress Purchased airplanes which were transferred into fixed assets. Notes payable Adopting notes financing method increased. Accounts receivable in advance The freight capacity of the Company was consolidated. Tax payable Tax payable in year-end increased. Interest payable Loan rate of foreign currency in year-end decreased. Deferred income tax assets Withdrawal in advance of heavy maintenance expense of assets increased. Deferred income tax liabilities Due to the decrease of fair values of transaction financial assets and adjustment of tax of exchange gains/losses. 3. Changes on the main financial data of the Company occurred in the report period Unit: RMB Item 2009 2008 Increase or decrease scope (%) Explanations for change reasons Investment income 3,715,867.94 11,175,753.02 -67% Due to decrease in investment income which was actually delivered during holding the transaction financial assets in the report period. Sales expense 346,387,720.51 236,554,096.88 46% Due to expansion in scales of Company’s fleet and marketing network, and increases in computer reservation fees and agent commission fees. Non-operating 155,122,260.87 43,893,809.88 253% Due to the returns ofShandong Airlines Co., Ltd. 2009 Annual Report 28 income Construction Fund of Civil Aviation. Income tax expense 100,618,103.42 26,622,215.36 278% Due to increase in total profit of this report year. 4. Measurement attributes adopted for the main assets The Company started to implement the new Accounting Standard for Enterprise since Jan. 1st of 2007. In the report period, no significant change had happened to the measurement attributes adopted for the main assets of the Company. Details of the measurement attributes are available in Notes to Financial Report. 5. Constitution of cash flow of the Company, and particulars about the items which received significant changes compared to those of last year and reasons for the changes (1) Constitution of the cash flow Unit: RMB Item 2009 2008 Increase or decrease occurred in this year compared to that of last year (%) Net cash flow arising from operating activities 1,317,347,150.42 1,059,833,106.56 24% Net cash flow arising from investment activities -672,532,927.01 -1,285,932,710.29 -48% Net cash flow arising from financing activities -640,382,266.73 229,614,517.64 -379% Influence on cash and cash equivalents from change of exchange rate -35,585.75 -709,703.85 -95% Net increase in cash and cash equivalents 4,396,370.93 2,805,210.06 57% (2) Particulars about the significant changes in cash flow compared to that of last year and reasons for the changes during the report period Unit: RMB Item 2009 2008 Increase or decrease occurred in this year compared to that of last year (%) Explanations for change reasons Other cash received concerning operating activities 144,094,051.53 79,525,658.45 81.19% Due to return of infrastructure fund of Civil Aviation in the report period. Cash received from investment income 2,098,225.94 11,211,668.70 -81.29% Due to decrease in investment income whichShandong Airlines Co., Ltd. 2009 Annual Report 29 was actually delivered during holding the transaction financial assets in the report period. Net cash received from disposal of fixed, intangible and other long-term assets 327,572,914.09 23,995.00 1365071.55% Due to transfer the rights of purchasing airplanes. Net cash received from disposal of subsidiaries and other units 0 912,019.23 -100.00% Due to liquidate the Shandong Aviation Union Express Co., Ltd. Cash paid for dividend and profit distributing or interest paying 195,890,585.87 262,317,177.48 -25.32% Due to decrease in loan rate of foreign currency. Influence on cash and cash equivalents due to fluctuation in exchange rate -35,585.75 -709,703.85 -94.99% Influenced comprehensively by the changes in deposit structure of foreign currency and exchange rate in the report period. (V) Influence on the Company brought by change in operation environment, macro-policy and laws and regulations 1. Owing to the smooth and rapid growth of national economy, there will be an increase in the demand for civil aviation, especially for domestic civil aviation. The state will intensify adjustment on the economic structure, enlarge civil consumption demands, stabilize foreign trade, and implement the programs for adjusting and revitalizing key industries, fostered strategic and newly-emerging industries and promoted modern services industry, which will give a forceful push to the development of civil aviation. 2. The impact of financial crisis has not yet been eliminated; the outside environment might change in a more complicated way and the economic trend seems obscure and unpredictable; the international aviation oil price is likely to be shocked to go up, he fluctuation on dollar exchange rate could be aggravated; the influences on civil aviation affected by the high-speed train is uncertain; and the operation cost of aviation company would be probably added by the low-carbon economy. (VI) Explanation of the Board of Directors on interpretative explanatory paragraph in the auditors’ report Reanda Certified Public Accountants audited Financial Report 2009 of the Company and presented standard unqualified Auditor’s Report. (VII) Prospects of the future development of the Company and work plan of theShandong Airlines Co., Ltd. 2009 Annual Report 30 Board of Directors for year 2010 2010 is a crucial year for the comprehensive implementation of “the Eleventh Five-Year Plan” and the design for the “Twelfth Five-Year Plan”, while the period from 2010 to the “Twelfth Five-Year” will be a period of important strategic opportunities for the rapid progress of the Company. At this momentous turning point connecting the past and the future, the Company will stay sober-minded constantly to take into full consideration of both the current and the long-term, get hold of every opportunity and challenge, and integrate innovation with development, lay a solid foundation for the realization of new leap forward in scientific development by means of steady and effective endeavors. 1. Continue to perfect corporate governance structure and strengthen the construction of internal control system Fully exert the functions of decide-making, audit and examination of each special committee of the Board of Directors; further ensure that independent directors, each special committee and supervisory committee fulfill their duties and actually provide necessary and convenient conditions for supervisory work; according to basic criterion and specific criterion of enterprises’ internal control issued by relevant department, continue to complete and perfect internal control system and improve management level of internal control. 2. Several works will be focused on: (1) Strengthen the capability of safe management and control, ensure the lasting safety. (2) Enhance resources integration and the utilization efficiency guarantee sustainable profit-making. (3) Keep in line with the international standards for service, upgrade the service quality persistently (4) Promote managerial innovation in an all-round manner, shape the core competition strength. (5) Exert the advantages of political work, reinforce the rallying and combat spirit of the team. (VIII) Capital needs in realizing operation plan, using plan and capital source In 2010, the existed financial structure and loans arrangement from bank could satisfy capital need in normal operations of the Company. (IX) Routine work of the Board of Directors 1. The Board of Directors of the Company totally held 8 meetings in 2009. (1) On Mar. 6, 2009, the Company held the 2009 1st Extraordinary Meeting of the 3rd Board of Director voting in communication. The public notice of the resolutions of the Meeting was published on China Securities Journal, Securities Times and Hong Kong Wen Wei Po dated Mar. 7, 2009. (2) On Mar. 27, 2009, the Company held the 14th meeting of the 3rd Board ofShandong Airlines Co., Ltd. 2009 Annual Report 31 Directors. The public notice of the resolutions of the Meeting was published on China Securities Journal, Securities Times and Hong Kong Wen Wei Po dated Mar. 31, 2009. (3) On April 28, 2009, the Company held the 15th meeting of the 3rd Board of Directors. The public notice of the resolutions of the Meeting was published on China Securities Journal, Securities Times and Hong Kong Wen Wei Po dated April 30, 2009. (4) On June 2, 2009, the Company held the 16th meeting of the 3rd Board of Directors voting in communication. The public notice of the resolutions of the Meeting was published on China Securities Journal, Securities Times and Hong Kong Wen Wei Po dated June 3, 2009. (5) On June 26, 2009, the Company held the 1st meeting of the 4th Board of Directors. The public notice of the resolutions of the Meeting was published on China Securities Journal Securities Times and Hong Kong Wen Wei Po dated June 27, 2009. (6) On Aug. 21, 2009, the Company held the 2nd meeting of the 4th Board of Directors voting in communication. The public notice of the resolutions of the Meeting was published on China Securities Journal, Securities Times and Hong Kong Wen Wei Po dated Aug. 25, 2009. (7) On Oct. 29, 2009, the Company held the 3rd meeting of the 4th Board of Directors voting in communication. The public notice of the resolutions of the Meeting was published on China Securities Journal Securities Times and Hong Kong Wen Wei Po dated Oct. 30, 2009. (8) On Dec. 1, 2009, the Company held the 2009 2nd Extraordinary Meeting of the 4th Board of Directors voting in communication. The public notice of the resolutions of the Meeting was published on China Securities Journal, Securities Times and Hong Kong Wen Wei Po dated Dec. 2, 2009. 2. The implementation of the resolutions of Shareholders’ General Meeting by the Board of Directors In the report period, according to the requirements of the relevant laws and regulations of Company Law, Securities Law and Articles of Association, the Board of Directors of the Company seriously implemented various resolutions approved by Shareholders’ General Meeting strictly in compliance with the resolutions and authorization of Shareholders’ General Meeting. (1) The implementation of profit distribution of the Company of 2008 The main business of the Company was still in losses, in order to meet the demands of daily production operations, the Company didn’t carry out profit distribution in 2008. Particulars about the cash bonus of the Company in previous three years Unit: RMB Amount of cash bonus (tax included) Net profit attributable to shareholders of listed company in consolidated statement Ratio of net profit attributable to shareholders of listed company in consolidated statementShandong Airlines Co., Ltd. 2009 Annual Report 32 (2) The Board of Directors of the Company strictly implemented other various resolutions approved by Shareholders’ General Meeting, actively arranged the production and operation, investment disposal and fundamental construction etc.. (X) Profit Distribution Preplan or Preplan on Converting Capital Public Reserve into Share Capital Audited by Reanda Certified Public Accountants, the Company realized net profit RMB300.8534 million in 2009. The undistributed profits of the beginning of the year was 33,9647 million,And the profit available for distribution of parent company till Dec. 31, 2009 was RMB334.8181 million. In order to return the shareholder’s supports for many years, and meanwhile, consider the long-term development of the Company, the Board plans to submit the 2009 profit distribution plan to the shareholders’ general meeting, as follows: 1. Withdrawal of current statutory surplus reserve amounts to RMB30.0853 million. 2. Plans to distribute cash bonus amounting to RMB80 million, taking the total shares 400,000,000 of the Company ended as Dec. 31, 2009 as the base, the cash bonus for each 10 share is RMB2(Tax included). (XI) Duty implementation of the Audit Committee of the Board of Directors In the report period, the Audit Committee of the Board of Directors issued opinions on the various periodic reports and event about the reengagement of certified public accountant. The Audit Committee of the Board of Directors has done lots of work during the 2009 auditing period of the Company. According to the requirements of Articles of Association, Work System of Annual Report for Independent Directors of Shandong Airlines Co., Ltd. and Work Rules of Audit Committee of Shandong Airlines Co., Ltd., the Audit Committee makes the following summary on the 2009 auditing work: 1. Ensured the general audit plan and examined the financial statements of the Company With negotiation among the independent directors of the Company, the Audit Committee and Reanda Certified Public Accountants, the audit work arrangement for 2009 of the Company was confirmed. At the same time, the independent directors and the Audit Committee examined the 2009 financial statements formed by the Company and considered that: the Company made financial calculation in compliance with the regulation of the new accounting standards and no significant untrue contents was of bonus year 2008 0.00 80,981,442.68 0.00% 2007 0.00 68,171,958.24 0.00% 2006 0.00 10,025,635.45 0.00%Shandong Airlines Co., Ltd. 2009 Annual Report 33 carried in the annual report materials; the 2009 financial statements preprared by the Company basically reflected the assets, liabilities and production and operation achievements of the Company till Dec. 31, 2009 and it was agreed to take this financial statement as the basis to carry out the 2009 financial audit work. 2. Kept normal negotiations with the Certified Public Accountants and paid attention to the progress of auditing During the audit period, the Audit Committee consistently kept negotiations with the financial department and the Certified Public Accountants. Meanwhile, the Committee took close eyes to the progress of auditing and examines the financial reports. 3. Called in the Audit Committee to examine and approve the proposals related to Annual Report Reanda Certified Public Accountants finished its auditing work in scheduled time and issued standard unqualified Auditor’s Report. The Audit Committee held meeting to examine and approve the following proposals: the 2009 Financial Settlement Report, the 2009 Profit Distribution Preplan, the 2009 Annual Report, and Reengagement of Certified Public Accountant. (XII) Duty implementation of the Remuneration Committee of the Board of Directors The Remuneration Committee made examination on the remuneration of the directors, supervisors and senior executives of the Company disclosed in the 2009 Annual Report and offered the following opinions: the present remuneration system of the Company was made according to the regulated decision-making procedure; the remuneration of the directors, supervisors and senior executives of the Company was in compliance with relevant regulations; the remuneration of relevant personnel disclosed in the 2009 Annual Report of the Company was real and accurate. VIII. Report of the Supervisory Committee (I) Particulars about the work of Supervisory Committee In 2009, the Supervisory Committee exerted the duties authorized by Company Law of the P.R.C. and the Articles of Association of the Company according to laws with assiduity and responsibility, actively implemented supervision functions on the Company’s operating decision-making, financial status, the responsibility and behaviors of directors and senior managers in the period and tried to safeguard the rights and interests of the shareholders. The Supervisory Committee had hold four meetings of the Supervisory Committee and attended all Shareholders’ General Meetings and meetings of the Board in 2009. In the report period, the Supervisory Committee totally held the following meetings: 1. On Mar. 27th of 2009, the 9th Meeting of the 3rd Supervisory Committee was held inShandong Airlines Co., Ltd. 2009 Annual Report 34 the conference room of SDA Building. The meeting examined and approved the following proposals: (1) The 2008 Annual Report and Summary of Shandong Airlines Co., Ltd; (2) The 2008 Working Report of Shandong Airlines Co., Ltd.; (3) Proposal on Accounting Treatment of Errors Correction of Interest Rate Swap. The public notice of the resolutions was published on China Securities Journal, Securities Times and Hong Kong Wen Wei Po dated Mar. 31st of 2009. 2. On April 28th of 2009, the 10th Meeting of the 3rd Supervisory Committee was held in the conference room of SDA Building. The meeting examined and approved the Proposal on Election of Changing Term of Supervisory Committee of Shandong Airlines Co., Ltd. The public notice of the resolutions was published on China Securities Journal, Securities Times and Hong Kong Wen Wei Po dated April 30th of 2009. 3. On June 26th of 2009, the 1st Meeting of the 4th Supervisory Committee was held in the conference room of SDA Building. The meeting examined and approved Proposal on Election of Chairman of Supervisory Committee of Shandong Airlines Co., Ltd. The public notice of the resolutions was published on China Securities Journal, Securities Times and Hong Kong Wen Wei Po dated June 27th of 2009. 4. On Aug. 21st of 2009, the Meeting of the Supervisory Committee was held in the conference room of SDA Building. The meeting examined and approved the 2009 Semi-annual Report and its Summary of Shandong Airlines Co., Ltd. (II) Independent Opinions of the Supervisory Committee on relevant events in 2009 The Supervisory Committee conducted serious inspection and supervision on such conditions as the Company’s finance, implementing resolutions of Shareholders’ General Meeting, operating decision-making, operation according to laws, operating behaviors of directors, managers and senior executives and related transactions, etc; and believed that the operation management of the Company was in accordance with the relevant laws and regulations and the Articles of Association of the Company. 1. Operation according to laws In the report period, the Company conducted regulated operation complying with Company Law, Securities Law, Articles of Association of the Company, and Rules for Shares Listed with Shenzhen Stock Exchange and other national relevant laws and regulations. It implemented effective internal control system inside the Company. Following the regulations and laws and being honest with faith and diligence, directors and senior executives of the Company carefully implemented every resolutions approved in Shareholders’ General Meeting with a view to protect the shareholders’ interests. There was no behaviors found that directors or senior executives broke the laws, regulations, or Articles of Association or harmed the interests of the Company in their office terms.Shandong Airlines Co., Ltd. 2009 Annual Report 35 2. Finance management of the Company The Supervisory Committee carefully examined the financing situation of the Company. In the opinion of the Supervisory Committee, 2009 Financial Report of the Company reflected the financial situation and operation results of the Company truthfully and fairly. The accounting vouchers, books and statements, and other accounting materials were genuine and standard. 3. Related transaction The related transactions of the Company are done in accordance with the market principle, so they are of equality and reasonable price, and also maintain the interests of shareholders’ equity and the listed companies. IX. Significant Events (I) The Company has not been involved in significant lawsuits or arbitrations in the report period. (II) The Company has no bankruptcy and reforming in the report period. (III) 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 non-circulating domestic shares. The Company holds no share equity of other listed companies, or equity of financial enterprises such as joint stock commercial banks, securities companies, insurance companies, trust companies and futures companies. (IV) No purchase and sale of assets and merger of the Company in the report period. (V) The implementation of stock option incentive plan in the report period There is no implementation of stock option incentive plan of the Company in the report period. (VI) Significant related transaction The Company has some related transactions with its holding shareholders and their subordinate companies at present. These related transactions are necessity for the Company and are unavoidable. Before the transactions, the Company has already fully considered the quality, price and efficiency of the services and goods provided by the related parties and also made analysis and comparison on the market environment. The independent directors of the Company presented opinions on the related transactions which believed that the Company and the related parties made the deals with market principles of open, equality and justice, the transaction price was fair and there was no behaviour hurting profit of other shareholders.Shandong Airlines Co., Ltd. 2009 Annual Report 36 1. Purchasing and selling merchandise, providing and accepting service (1) In the report period, airplane maintaining fee of RMB 83.347 million has occurred between the Company and Taikoo (Shandong) Aircraft Engineering Co., Ltd. This transaction amount took proportion of 22.19% in the same kind transactions. The Company paid for this transaction in cash according to the market price. (2) The occurring amount on cooperation of the scheduled flights between Air China Limited and the Company was RMB 19.2 million, the transaction was collected based on the negotiated price by the two concerned parties. (3) The related transactions about the routine operations in 2009 Unit: RMB’0000 Classification of the related transactions Related parties Anticipated amount Actual amount Taikoo (Shandong) Aircraft Engineering Co., Ltd 8,151 8,334 Shandong Xiangyu Aero Technical Services Co., Ltd. 1,200 1,935 1. Maintenance of aircraft and fittings Subtotal 9,351 10,269 Qingdao Feisheng International Aero Technical Training Co., Ltd. 703 410 Shandong International Aero Training Co., Ltd. 1,172 793 2. Training expense Subtotal 1,875 1,203 Shandong Aviation Group(Rent for office land and daily accommodation) 1,220 1,129 3.Rent for office land, and daily accommodation Subtotal 1,220 1,129 Air China Limited (aircraft lease) 57,184 62,323 Air China Limited (joint owned operation) 1,000 1,920 Air China Limited (labour service support) 1,074 1,020 4. Aircraft lease and market cooperation Subtotal 59,258 65,263 2. The Company and its controlling shareholder’s cooperative investment The Company had no cooperative investment with its controlling shareholders in the report period. 3. Credits and liabilities between the Company and related parties There are no newly increased credits and liabilities between the Company and related parties in the report period. (VII) Significant contracts and implementation 1. There are no assets entrustment, contract and lease in the report period. 2. In the report period, the Company had no external significant guarantee. 3. In the report period, the Company had no entrusted financing.Shandong Airlines Co., Ltd. 2009 Annual Report 37 4. Other significant contracts Up to the end of the report period, the accumulated amount of long-term and short-term borrowings of the Company amounted to RMB 4,142,571,600. The Company had no other significant contracts which were not disclosed. (VIII) The Company had not entrusted anyone to manage its cash assets in the report period. (IX) In the report period, there is no significant commitment. (X) Engagement of Certified Public Accountants In the report period, the Company continued to engage Reanda Certified Public Accountants as Auditing Organization of the Company. 2008 Annual Shareholders’ General Meeting examined and approved the Proposal on Renewal of Engaging CPA and its Remunerations, the Company engaged Reanda Certified Public Accountants as 2009 Auditing Organization of the Company. In the report period, the Company should pay the annual auditing fee of RMB 600,000. The aforesaid auditing organization has provided auditing services to the Company for the 6th year. (XI) In the report period, the Company and the Board of Directors have not received check, administrative punishment and notice of criticism from the CSRC, and public criticism from the securities exchange. (XII) In the report period, the received research and interview of the Company. In accordance with the principles of just, fair and publicity, further regulate the behaviors of information disclosure for the listed companies, the Company received the research and media interviews in standardized way according to the regulations of Guideline on Fair Information Disclosure for Listed Companies promulgated by Shenzhen Stock Exchange. In the report period, the Company received organization investors, analysts, investors of B-stock, and the research, visits and telephone communication from specialized media many times; the Company received them and replies strictly in accordance with relevant regulations; there occurred no such situations as selectively and privately reveal or leak non-public significant information to specific parties; and all these assure the fairness of information disclosure of the Company. Activities Form of Receiving Research, Communication and Interview in the Report Period The received date The received place The received way The received parties Contents discussed and materials supplied June 2009 Jinan Spot research News media, organization Financial status and operations planShandong Airlines Co., Ltd. 2009 Annual Report 38 investors and investors of B-share in 2009, provide the 2008 Annual Report of the Company Jan.-Dec., 2009 Jinan Telephone interview, communication Organization investors and investors of B-share Operating situations and significant events of the Company X. Financial ReportShandong Airlines Co., Ltd. 2009 Annual Report 39 Auditors' Report REANDA SHEN ZI [2010] No. 1141 To the Shareholders of Shandong Airlines Co., Ltd We have audited the accompanying financial statements of Shandong Airlines Co., Ltd. (“The Company”), which comprise the balance sheet and the consolidated balance sheet as at December 31, 2009, the income statement and the consolidated income statement, the statement of changes in equity and the consolidated statement of changes in equity and the cash flow statement and the consolidated cash flow statement for the year then ended, as well as a summary of significant accounting policies and other explanatory notes. Management’s Responsibility for the Financial Statements The Company’s management is responsible for the preparation of these financial statements in accordance with the Enterprises Accounting Standards of China. This responsibility includes: (1) designing, implementing and maintaining internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error; (2) selecting and applying appropriate accounting policies; (3) making accounting estimates that are reasonable in the circumstances. Auditor’s Responsibility our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Chinese Certified Public Accountants' Auditing Standards. These standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amount and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditorShandong Airlines Co., Ltd. 2009 Annual Report 40 considers internal control relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Auditing opinion In our opinion, the financial statements have been prepared in accordance with the requirements of the Enterprises Accounting Standards promulgated by the People’s Republic of China, and present fairly, in all material respects, the financial position of Shandong Airlines Co., Ltd as at December 31, 2009, and the results of its operations and its cash flows for the year then ended. Reanda Certified Public Accountants Co., Ltd. Certified Public Accountant Certified Public Accountant Beijing, China March 24, 2010Shandong Airlines Co., Ltd. 2009 Annual Report 41 Consolidated Balance Sheet For the year ended December 31, 2009 Name of the company: Shandong Airlines Co.,Ltd Monetary unit : ( RMB) Yuan Assets Notes 31/12/2009 31/12/2008 Liabilities and Shareholders' equity Notes 31/12/2009 31/12/2008 Current Assets: Current liabilities: Monetary funds Ⅴ.1 194,065,742.69 71,872,933.88 Short-term loans Ⅴ.16 739,819,020.88 1,006,887,514.55 Held for trading financial assets Ⅴ.2 11,341,846.48 23,460,812.11 Held for trading financial liabilities Notes receivable Notes payables Ⅴ.17 182,124,331.32 10,000,000.00 Accounts receivable Ⅴ.3 142,545,895.96 126,118,032.09 Account payables Ⅴ.18 812,032,950.07 875,319,060.11 Advances to suppliers Ⅴ.4 22,504,262.48 29,124,244.97 Advances from customers Ⅴ.19 117,956,240.43 87,735,493.54 Interests receivable Payroll payables Ⅴ.20 135,033,537.40 91,119,967.07 Dividend receivable Ⅴ.5 1,617,642.00 Tax payable Ⅴ.21 177,564,425.49 111,337,241.37 Other accounts receivable Ⅴ.6 160,552,013.99 144,978,136.24 Interest payables Ⅴ.22 4,001,134.66 9,634,990.00 Inventories Ⅴ.7 Dividend payablesShandong Airlines Co., Ltd. 2009 Annual Report 42 65,267,781.10 74,347,529.57 11,940.00 11,940.00 Non-current assets due within one year Other account payables Ⅴ.23 124,930,463.59 161,736,748.70 Other current assets Non-current liabilities due within one year Ⅴ.24 535,108,457.71 615,589,677.22 Total Current Assets 597,895,184.70 469,901,688.86 Other current liabilities Non-current assets: Total current liabilities 2,828,582,501.55 2,969,372,632.56 Available-for-sale financial assets Non-current liabilities: Held-to-maturity investments Long-term borrowings Ⅴ.25 3,402,752,588.39 3,159,333,277.39 Long-term account receivables Bonds payable Long-term equity investments Ⅴ.9 88,352,100.00 88,352,100.00 Long-term account payable Ⅴ.26 968,968,451.94 1,114,459,905.38 Investment properties Grants&Subsidies received Fixed assets Ⅴ.10 6,631,600,764.96 5,684,074,945.46 Accrued liabilities Construction in progress Ⅴ.11 422,277,445.58 1,277,744,153.32 Deferred income tax liabilities Ⅴ.14 2,835,461.62 19,816,576.46 Construction materials Other non-current liabilities Ⅴ.27 27,718,573.00 18,319,557.83 Liquidation of fixed assets Total non-current liabilities 4,402,275,074.95 4,311,929,317.06 Production biology assets Total liabilities 7,230,857,576.50 7,281,301,949.62 Oil and gas assets Shareholders' equity: Intangible assets Ⅴ.12 47,895,073.21 46,945,074.17 Share capital Ⅴ.28 400,000,000.00 400,000,000.00 Development expenses Capital reserve Ⅴ.29Shandong Airlines Co., Ltd. 2009 Annual Report 43 84,050,162.84 84,050,162.84 Goodwill Less: inventory shares Long-term deferred assets Ⅴ.13 216,546,250.96 208,312,781.55 Appropriation of reserve fund Deferred income tax assets Ⅴ.14 91,836,911.34 68,774,158.11 Surplus reserve Ⅴ.30 59,576,069.03 29,490,727.77 Other non-current assets Appropriation of normal risk provision Total non-current assets 7,498,508,546.05 7,374,203,212.61 Undistributed profits Ⅴ.31 308,668,390.11 36,471,405.69 Exchange difference of foreign currency financial statements translation Equity attributable to the shareholders of parent company 852,294,621.98 550,012,296.30 Minority interests 13,251,532.27 12,790,655.55 Total shareholders’ equity 865,546,154.25 562,802,951.85 Total assets 8,096,403,730.75 7,844,104,901.47 Total liabilities and shareholders’ equity 8,096,403,730.75 7,844,104,901.47 Legal Representative: Zhang Xingfu Person in charge of accounting work: Xu Guojian Person in charge of accounting department:Wang WupingShandong Airlines Co., Ltd. 2009 Annual Report 44 Consolidated Income Statement For the year ended December 31, 2009 Name of the company: Shandong Airlines Co.,Ltd Monetary unit : ( RMB) Yuan Items Notes For the year 2009 For the year 2008 I. Total operating income Ⅴ.32 5,366,113,363.68 5,049,391,116.47 Less: Operating costs Ⅴ.32 4,110,033,275.19 4,156,123,366.72 Operating tax and surcharge Ⅴ.33 158,797,763.77 132,823,862.65 Selling expenses Ⅴ.34 346,387,720.51 236,554,096.88 Administrative expenses 228,619,847.42 187,022,654.78 Financial costs Ⅴ.35 251,871,219.83 253,541,156.57 Impairment loss of assets Ⅴ.36 239,449.15 -551,458.89 Add: gains from the fair value changes (The loss is listed beginning with “-“) Ⅴ.37 -12,118,965.63 -19,293,822.87 Investment income (The loss is listed beginning with “-“) Ⅴ.38 3,715,867.94 11,175,753.02 Including: the investment income from associated and joint ventures enterprises Exchange gains(The loss is listed beginning with “-“)Shandong Airlines Co., Ltd. 2009 Annual Report 45 II. Operating profit(The loss is listed beginning with “-“) 261,760,990.12 75,759,367.91 Add: non-operating income Ⅴ.39 155,122,260.87 43,893,809.88 Less: non-operating expense Ⅴ.40 13,521,945.17 11,392,350.23 Including: loss from disposal of non-current assets 13,495,868.42 10,915,236.47 III. Total profits (The loss is listed beginning with “-“) 403,361,305.82 108,260,827.56 Less: income tax expense Ⅴ.41 100,618,103.42 26,622,215.36 IV. Net profits (the net loss is listed beginning with “-”) 302,743,202.40 81,638,612.20 Net profits attributable to shareholders of the parent company 302,282,325.68 80,981,442.68 Minority interests 460,876.72 657,169.52 V. Earnings per share (Ⅰ) Basic earnings per share 0.76 0.20 (Ⅱ) Diluted earnings per share 0.76 0.20 VI . Other comprehensive gains VII. Total comprehensive gains 302,743,202.40 81,638,612.20Shandong Airlines Co., Ltd. 2009 Annual Report 46 Total comprehensive gains attributable to shareholders of the parent company 302,282,325.68 80,981,442.68 Total comprehensive gains attributable to minority shareholders 460,876.72 657,169.52 Legal Representative: Zhang Xingfu Person in charge of accounting work: Xu Guojian Person in charge of accounting department:Wang Wuping Consolidated Cash Flow Statement For the year ended December 31, 2009 Name of the company: Shandong Airlines Co.,Ltd Monetary unit : ( RMB) Yuan Items Notes For the year 2009 For the year 2008 I. Cash flows from operating activities: Cash received from sales of goods or rendering of services 5,372,538,176.19 5,142,461,900.44 Refund of taxes and levies Cash received related to other operating activities Ⅴ.43(1) 144,094,051.53 79,525,658.45 Subtotal of cash inflow from operating activities 5,516,632,227.72 5,221,987,558.89 Cash paid for goods and services 3,288,589,954.21 3,362,644,381.56 Cash paid to and on behalf of employees 614,147,622.35 543,461,203.22 Payments of taxes and leviesShandong Airlines Co., Ltd. 2009 Annual Report 47 199,428,230.46 176,555,377.04 Cash paid related to other operating activities Ⅴ.43(2) 97,119,270.28 79,493,490.51 Subtotal of cash outflow from operating activities 4,199,285,077.30 4,162,154,452.33 Net cash flow arising from operating activities 1,317,347,150.42 1,059,833,106.56 II. Cash flow from investment activities: Cash received from investments Cash dividends received from investment 2,098,225.94 11,211,668.70 Net cash received from disposal of fixed assets, intangible assets and other long-term assets 327,572,914.09 23,995.00 Net cash received from disposal of subsidiaries and other business units 912,019.23 Cash received related to other investing activities Subtotal of cash inflow from investing activities 329,671,140.03 12,147,682.93 Cash paid to acquire and construct fixed assets, intangible assets and other long-term assets 1,002,204,067.04 1,298,080,393.22 Cash paid to acquire investments Net cash paid to acquire subsidiaries and other business units Cash paid related to other investing activities Subtotal of Cash outflow from investing activities 1,002,204,067.04 1,298,080,393.22 Net cash flow arising from investing activitiesShandong Airlines Co., Ltd. 2009 Annual Report 48 -672,532,927.01 -1,285,932,710.29 III. Cash flow from financing activities: Cash received from investments Including: Cash received from investment in subsidiaries from minority shareholders Cash received from loans 2,228,373,619.53 2,578,478,035.95 Cash received from issuance of bonds Cash received related to other financing activities Subtotal of cash inflow from financing activities 2,228,373,619.53 2,578,478,035.95 Repayment of loans or debts 2,345,081,757.10 1,812,750,241.19 Cash payments for interest expenses and distribution of dividends or profits 195,890,585.87 262,317,177.48 Including: Dividends and profits paid from subsidiary to minority shareholders Cash paid related to other financing activities Ⅴ.43(3) 327,783,543.29 273,796,099.64 Subtotal of cash outflow from financing activities 2,868,755,886.26 2,348,863,518.31 Net cash flow arising from finacing activities -640,382,266.73 229,614,517.64 IV. Effects on cash and cash equivalents for the change of foreign exchange rates -35,585.75 -709,703.85 V. Net increase in cash and cash equivalents 4,396,370.93 2,805,210.06Shandong Airlines Co., Ltd. 2009 Annual Report 49 Add: beginning balance of cash and cash equivalents 44,937,058.88 42,131,848.82 VI .Ending balance of cash and cash equivalents Ⅴ.44(2) 49,333,429.81 44,937,058.88 Legal Representative: Zhang Xingfu Person in charge of accounting work: Xu Guojian Person in charge of accounting department:Wang Wuping Consolidated Statement of Changes in Shareholders'Equity For the year ended December 31, 2009 Name of the company: Shandong Airlines Co.,Ltd Monetary unit : ( RMB) Yuan For the year 2009 Equity attributable to the shareholders of parent company Items Share capital Capital reserve minus: Inventory shares Reserve Funds Surplus reserve Normal risk provision Undistributed profits Others Minority interests Total shareholders’ 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 Add: Changes of accounting policies Correction of errors in prior years OthersShandong Airlines Co., Ltd. 2009 Annual Report 50 II. Balance at the beginning of the 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. Changes in equity in the year 30,085,341.26 272,196,984.42 460,876.72 302,743,202.40 (I)Net profit for the year 302,282,325.68 460,876.72 302,743,202.40 (II)Other comprehensive gains Sub-total of above (I) and (II) 302,282,325.68 460,876.72 302,743,202.40 (III) Capital investment by the shareholders 1.Capital investment by shareholders in the year 2. Amount calculated into equity paid in shares 3. Others (IV) Profit distribution in the year 30,085,341.26 -30,085,341.26 1.Appropriation of surplus reserve 30,085,341.26 -30,085,341.26 2.Appropriation of normal risk provision 3.Distribution to shareholders 4.Others (V) Internal settlement and transfer of shareholders' equityShandong Airlines Co., Ltd. 2009 Annual Report 51 1. Transfer of capital reserve to capital 2. Transfer of surplus reserve to capital 3. Surplus reserve makes up for the loss 4. Others (VI) Reserve Funds 1.Appropriated in current year 2.Used in current year IV. Balance at the end of this period 400,000,000.00 84,050,162.84 59,576,069.03 308,668,390.11 13,251,532.27 865,546,154.25 Consolidated Statement of Changes in Shareholders'Equity For the year ended December 31, 2008 Name of the company: Shandong Airlines Co.,Ltd Monetary unit : ( RMB) Yuan For the year 2008 Equity attributable to the shareholders of parent company Items Share capital Capital reserve minus: Inventory shares Reserve Funds Surplus reserve Normal risk provision Undistributed profits Others Minority interests Total shareholders’ 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 Add: Changes of accounting policies Correction of errors in priorShandong Airlines Co., Ltd. 2009 Annual Report 52 years Others II. Balance at the beginning of the 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. Changes in equity in the year (the decrease is listed beginning with “-”) 4,571,141.06 76,410,301.62 657,169.52 81,638,612.20 (I)Net profit for the year 80,981,442.68 657,169.52 81,638,612.20 (II)Other comprehensive gains Sub-total of above (I) and (II) 80,981,442.68 657,169.52 81,638,612.20 (III) Capital investment by the shareholders 1.Capital investment by shareholders in the year 2. Amount calculated into equity paid in shares 3. Others (IV) Profit distribution in the year 4,571,141.06 -4,571,141.06 1.Appropriation of surplus reserve 4,571,141.06 -4,571,141.06 2.Appropriation of normal risk provision 3.Distribution to shareholdersShandong Airlines Co., Ltd. 2009 Annual Report 53 4.Others (V) Internal settlement and transfer of shareholders' 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 (VI) Reserve Funds 1.Appropriated in current year 2.Used in current year IV. Balance at the end of this period 400,000,000.00 84,050,162.84 29,490,727.77 36,471,405.69 12,790,655.55 562,802,951.85 Legal Representative: Zhang Xingfu Person in charge of accounting work: Xu Guojian Person in charge of accounting department:Wang WupingShandong Airlines Co., Ltd. 2009 Annual Report 54 Balance Sheet December 31st, 2009 Name of the company : Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan Asset Note 31/12/2009 31/12/2008 Liabilities and Shareholders' equities Note 31/12/2009 31/12/2008 Current assets: Current liability: Monetary funds 179,813,989.83 57,648,117.02 Short-term loan 739,819,020.88 1,006,887,514.55 Tradable financial assets 11,341,846.48 23,460,812.11 Tradable financial liabilities Note receivable Notes payable 182,124,331.32 10,000,000.00 Accounts receivable Ⅺ.1 140,731,572.47 125,105,495.35 Accounts payable 810,639,584.15 873,297,361.73 Advance to suppliers 22,370,882.70 28,986,600.63 Advance from customers 117,467,352.04 86,115,566.69 Interests receivable Payroll payable 135,018,545.42 91,114,079.09 Dividend receivable 1,617,642.00 Tax payable 177,319,512.46 111,270,281.82 Other accounts receivables Ⅺ.2 160,483,475.47 145,198,107.29 Interests payable 4,001,134.66 9,634,990.00 Inventories 65,267,781.10 74,347,529.57 Dividend payable 11,940.00 11,940.00Shandong Airlines Co., Ltd. 2009 Annual Report 55 Non-current assets due within one year Other accounts payable 124,872,192.44 161,909,084.49 Other current assets Non-current liabilities due within one year 535,108,457.71 615,589,677.22 Total current assets 581,627,190.05 454,746,661.97 Other current liabilities Non-current assets: Total current liabilities 2,826,382,071.08 2,965,830,495.59 Available-for-sale financial assets Non-current liabilities: Held-to-maturity investment Long-term borrowings 3,402,752,588.39 3,159,333,277.39 Long-term accounts receivable Bonds payable Long-term equity investment Ⅺ.3 112,165,305.97 112,165,305.97 Long-term accounts payable 968,968,451.94 1,114,459,905.38 Investment property Grants&Subsidies received Fixed assets 6,619,089,545.44 5,670,839,727.85 Accrued liabilties Construction in process 422,277,445.58 1,277,744,153.32 Deferred income tax liabilities 2,835,461.62 19,816,576.46 Construction materials Other non-current liabilities 27,718,573.00 18,319,557.83Shandong Airlines Co., Ltd. 2009 Annual Report 56 Liquidation of fixed assets Total non-current liabilities 4,402,275,074.95 4,311,929,317.06 Production biology assets Total liabilities 7,228,657,146.03 7,277,759,812.65 Oil and gas assets Shareholders' equity: Intangible assets 33,013,562.26 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 216,370,254.46 208,312,781.55 Appropriation of reserve fund Deferred income tax assets 91,812,136.84 68,767,156.73 Surplus reserve 58,915,364.50 28,830,023.24 Other non-current assets Appropriation of normal risk provision Total non-current assets 7,494,728,250.55 7,369,858,032.69 Undistributed profits 304,732,767.23 33,964,695.93 Total shareholders’ equity 847,698,294.57 546,844,882.01 Total assets 8,076,355,440.60 7,824,604,694.66 Total liabilities and shareholders’ equity 8,076,355,440.60 7,824,604,694.66 Legal Representative: Zhang Xingfu Person in charge of accounting work: Xu Guojian Person in charge of accounting department:Wang WupingShandong Airlines Co., Ltd. 2009 Annual Report 57 Income Statement For the year 2009 Name of the company : Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan Items Notes For the year 2009 For the year 2008 I.Total operating income Ⅺ.4 5,362,673,481.18 5,043,370,423.20 Less: operating cost Ⅺ.4 4,111,698,242.88 4,154,810,196.93 Business taxes and surtax 158,446,999.40 132,521,572.99 Selling expense 346,387,720.51 236,554,096.88 Administration expense 225,696,583.77 185,216,685.46 Financial expenses 252,180,082.66 253,847,227.41 Impairment loss of assets 196,362.15 -607,469.89 Add: profits from the fair value changes (The loss is listed beginning with “-“) -12,118,965.63 -19,293,822.87 Investment income (The loss is listed beginning with “-“) Ⅺ.5 3,715,867.94 11,632,849.93 Including: the investment income from associated and joint ventures enterprises II. Operating profit(The loss is listed beginning with “-“) 259,664,392.12 73,367,140.48Shandong Airlines Co., Ltd. 2009 Annual Report 58 Add: non-operating income 155,122,260.87 43,886,369.82 Less: non-operating expense 13,520,445.27 11,392,350.23 Including: loss from disposal of non-current assets 13,494,368.52 10,915,236.47 III. Total profits (The loss is listed beginning with “-“) 401,266,207.72 105,861,160.07 Less: income tax expense 100,412,795.16 26,309,550.15 IV. Net profits (The net loss is listed beginning with “-”) 300,853,412.56 79,551,609.92 V. Earnings per share 1.Basic earnings per share 2.Diluted earnings per share Ⅵ.Other comprehensive gains Ⅶ.Total comprehensive gains 300,853,412.56 79,551,609.92 Legal Representative: Zhang Xingfu Person in charge of accounting work: Xu Guojian Person in charge of accounting department:Wang WupingShandong Airlines Co., Ltd. 2009 Annual Report 59 Cash Flow Statement For the year 2009 Name of the company : Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan Items Notes For the year 2009 For the year 2008 I. Cash flows from operating activities: Cash received from sales of goods or rendering of services 5,371,074,050.51 5,136,425,151.76 Refund of taxes and levies Cash received related to other operating activities 143,549,876.83 79,162,652.85 Subtotal of cash inflow from operating activities 5,514,623,927.34 5,215,587,804.61 Cash paid for goods and services 3,290,761,891.91 3,362,102,687.66 Cash paid to and on behalf of employees 612,051,079.62 542,037,899.11 Payments of taxes and levies 198,501,653.16 174,869,903.11 Cash paid related to other operating activities 96,311,963.23 79,146,006.44 Subtotal of cash outflow from operating activities 4,197,626,587.92 4,158,156,496.32 Net cash flow arising from operating activities 1,316,997,339.42 1,057,431,308.29Shandong Airlines Co., Ltd. 2009 Annual Report 60 II. Cash flow from investment activities: Cash received from investments Cash dividends received from investment 2,098,225.94 11,211,668.70 Net cash received from disposal of fixed assets, intangible assets and other long-term assets 327,572,914.09 19,095.00 Net cash received from disposal of subsidiaries and other business units 912,019.23 Cash received related to other investing activities Subtotal of cash inflow from investing activities 329,671,140.03 12,142,782.93 Cash paid to acquire and construct fixed assets, intangible assets and other long-term assets 1,001,881,192.04 1,297,866,611.22 Cash paid to acquire investments Net cash paid to acquire subsidiaries and other business units Cash paid related to other investing activities Subtotal of Cash outflow from investing activities 1,001,881,192.04 1,297,866,611.22 Net cash flow arising from investing activities -672,210,052.01 -1,285,723,828.29 III. Cash flow from financing activities: Cash received from investments Cash received from loans 2,228,373,619.53 2,578,478,035.95Shandong Airlines Co., Ltd. 2009 Annual Report 61 Cash received related to other financing activities Subtotal of cash inflow from financing activities 2,228,373,619.53 2,578,478,035.95 Repayment of loans or debts 2,345,081,757.10 1,812,750,241.19 Cash payments for interest expenses and distribution of dividends or profits 195,890,585.87 262,317,177.48 Cash paid related to other financing activities 327,783,543.29 273,796,099.64 Subtotal of cash outflow from financing activities 2,868,755,886.26 2,348,863,518.31 Net cash flow arising from finacing activities -640,382,266.73 229,614,517.64 IV. Effects on cash and cash equivalents for the change of foreign exchange rates -35,585.75 -706,709.41 V. Net increase in cash and cash equivalents 4,369,434.93 615,288.23 Add: beginning balance of cash and cash equivalents 30,712,242.02 30,096,953.79 VI .Ending balance of cash and cash equivalents 35,081,676.95 30,712,242.02 Legal Representative: Zhang Xingfu Person in charge of accounting work: Xu Guojian Person in charge of accounting department:Wang WupingShandong Airlines Co., Ltd. 2009 Annual Report 62 Statement of changes in the shareholders' equity For the year 2009 Name of the company : Shandong Airlines Co., Ltd Monetary unit : ( RMB) Yuan For the year 2009 Items Notes Share capital Capital reserve minus: Inventory shares Reserve Funds Surplus reserve Normal risk provision Undistributed profits Total shareholders’ 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 Add: 1.Changes of accounting policies 2.Correction of errors in prior years 3.Others II. Balance at the beginning of the year 400,000,000.00 84,050,162.84 28,830,023.24 33,964,695.93 546,844,882.01 III. Changes in equity in the year (the decrease is listed beginning with “-”) 30,085,341.26 270,768,071.30 300,853,412.56 (I)Net profit for the year 300,853,412.56 300,853,412.56 (II)Other comprehensive gains Sub-total of above (I) and (II) 300,853,412.56 300,853,412.56 (III) Capital investment by the shareholdersShandong Airlines Co., Ltd. 2009 Annual Report 63 1.Capital investment by shareholders in the year 2. Amount calculated into equity paid in shares 3. Others (IV) Profit distribution in the year 30,085,341.26 -30,085,341.26 1.Appropriation of surplus reserve 30,085,341.26 -30,085,341.26 2.Appropriation of normal risk provision 3.Distribution to shareholders 4.Others (V) Internal settlement and transfer of shareholders' 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 (VI) Reserve Funds 1.Appropriated in current year 2.Used in current year IV. Balance at the end of current period 400,000,000.00 84,050,162.84 58,915,364.50 304,732,767.23 847,698,294.57Shandong Airlines Co., Ltd. 2009 Annual Report 64 Statement of changes in the shareholders' equity Name of the company : Shandong Airlines Co., Ltd For the year 2008 Monetary unit : ( RMB) Yuan For the year 2008 Items Notes Share capital Capital reserve minus: Inventory shares Reserve Funds Surplus reserve Normal risk provision Undistributed profits Total shareholders’ 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 Add: 1.Changes of accounting policies 2.Correction of errors in prior years 3.Others II. Balance at the beginning of the year 400,000,000.00 84,050,162.84 24,442,948.14 -41,199,838.89 467,293,272.09 III. Changes in equity in the year (the decrease is listed beginning with “-”) 4,387,075.10 75,164,534.82 79,551,609.92 (I)Net profit for the year 79,551,609.92 79,551,609.92 (II)Other comprehensive gains Sub-total of above (I) and (II) 79,551,609.92 79,551,609.92 (III) Capital investment by the shareholders 1.Capital investment by shareholders in the yearShandong Airlines Co., Ltd. 2009 Annual Report 65 2. Amount calculated into equity paid in shares 3. Others (IV) Profit distribution in the year 4,387,075.10 -4,387,075.10 1.Appropriation of surplus reserve 4,387,075.10 -4,387,075.10 2.Appropriation of normal risk provision 3.Distribution to shareholders 4.Others (V) Internal settlement and transfer of shareholders' 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 (VI) Reserve Funds 1.Appropriated in current year 2.Used in current year IV. Balance at the end of current period 400,000,000.00 84,050,162.84 28,830,023.24 33,964,695.93 546,844,882.01 Legal Representative: Zhang Xingfu Person in charge of accounting work: Xu Guojian Person in charge of accounting department:Wang WupingShandong Airlines Co., Ltd. 2009 Annual Report 66 Shandong Airlines Co., Ltd. Notes to the financial statements As at 31st December 2009 (All amounts are expressed in RMB Yuan unless otherwise stated) Ⅰ General Shandong Airlines Co., Ltd. (hereafter, the Company) is a foreign investment limited liability company incorporated in the People’s Republic of China (hereafter, the PRC) on 29th July 1999 as part of the reorganization of Shandong Airlines Group Co., Ltd., the holding company of the Company. The operation of the Company is subject to the supervision and regulation of the Civil Aviation Administration of China (hereafter, the CAAC), a regulatory body of the civil aviation industry in the PRC. The 140,000,000 B-shares of the Company have been listed the Shenzhen Stock Exchange (hereafter, the Stock Exchange) since 12th September 2000. The approved operating scope of the Company is the operation of international、domestic air services for the carriage of passengers and freight; hotel restaurants (Just limited to branch); aircraft repair and maintenance; civil aviation aircrew training; the agency business between airlines; ground services that relevant to the Company’s main business. Ⅱ Summary of significant accounting policies and estimates, and correction of errors 1. Bases for preparation of the financial statements The (consolidated) financial statements of the Company (and the Group) have been prepared on the going concern basis with reference to the actual occurrence of transactions and events and in accordance with the China Enterprise Accounting Standards (CAS) issued by the Ministry of Finance on 15th February 2006 and the significant accounting policies and estimates as set out in Part Ⅱ. 2. Declaration of Compliance with the Enterprise Accounting Standards The (consolidated) financial statements of the Company (and the Group) have been prepared in accordance with the Enterprise Accounting Standards to present truly and completely the financial position, result of operation and cash flow and the relevant information of the Company (and the Group). 3. Accounting year The Company adopts the accounting year ending 31st December. 4. Presentation (functional) currency The presentation (functional) currency of the Company is Renminbi (hereafter, CNY).Shandong Airlines Co., Ltd. 2009 Annual Report 67 5. Business acquisitions (1) Acquiring business under common control The Company measures the identifiable assets acquired and liabilities assumed at their acquisition-date book values in the accounts of the acquiree. The excess of the consideration transferred in the form of book value or shares issued over the acquisition-date book values in the acquiree’s accounts of the identifiable net assets acquired is debited to Capital reserves, and to Undistributed profits where the total value of Capital reserves is insufficient. (2) Acquiring business not under common control The Company measures the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. Goodwill as of the acquisition date measured as the excess of the amount of the total consideration paid for the acquisition measured in accordance with s11, Ch. 3, CAS 20 over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with s14, Ch.3, CAS 20 is recognised by the Company, if the later exceeds the former (ie. negative excess), the Company recognises the resulting gain in profit or loss on the acquisition date after reviewing their fair values and confirming the negative excess. 6. Consolidated financial statements (1) Scope of consolidated financial statements Consolidated financial statements are prepared on the basis of control existence in accordance with CAS 33 issued by the Ministry of Finance in February 2006. The consolidated financial statements of the Company include all subsidiaries and the entities, which are established for specified purposes, either directly or indirectly controlled by the Company and the Company itself. The Company has control over an entity where the Company has the power to govern the financial and operating policies of the entity under a statute or an agreement and is able to obtain economic benefit from the entity’s operation by virtue of that power. Where it is clearly demonstrated that the Company’s investment in an entity does not constitute control over the entity, the Company excludes the entity from consolidation. (2) Purchase and sales of ordinary shares of subsidiaries The Company determines the date of purchase and sales of the ordinary shares of subsidiaries on the basis of the actual occurance of transfer of the risks attached to and proceeds associated with the shares respectively. The respective post- or pre-transaction-date operation results and cash flows of the subsidiary acquired or disposed in the course of the combination of businesses not under common control are accounted for in the consolidated income statement and cash flow statement. The operation results and cash flows of the subsidiary, which occur after the start date of the accounting period in which the subsidiary is acquired and prior to the disposal date, acquired in the course of the combination of businesses under common control are accounted forShandong Airlines Co., Ltd. 2009 Annual Report 68 and separately presented in the consolidated income statement and cash flow statement with comparables adjusted accordingly. The excess of the value of a long-term equity investment, recognised and measured in accordance with CAS 2, in a subsidiary arising from the purchase of small amount of the ordinary shares of the subsidiary over the Company’s share of the net fair value of the subsidiary’s identifiable assets and liabilities as from the purchase date is debited to Capital reserves, and to Undistributed profits where the total value of Capital reserves is insufficient. (3) Uniform accounting policies If a subsidiary uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in preparing the consolidated financial statements; the adjustments are conducted also with reference to the acquisition-date fair values of the identifiable assets acquired and the liabilities assumed from the subsidiary measured in accordance with s14, Ch.3, CAS 20 where the subsidiary is acquired in the course of the combination of businesses not under common control. (4) Consolidation procedures Intragroup balances and transactions are eliminated in full in the preparation of consolidated financial statements. Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Company’s ownership interests in them. Non-controlling interests are debited by the excess, if any, of the loss attributable to non-controlling shareholders over their share of the net fair value of the subsidiary’s identifiable assets and liabilities where they are able and obliged to contribute to the excess; the excess is otherwise attributable to the Company. 7. Cash equivalents Cash equivalents are short-term (usually with a maturity date within three months from the date of acquisition), highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. 8. Foreign currency transactions and foreign currency translation (1) Foreign currency transactions The Company’s foreign currency transactions are recorded, on initial recognition in the reporting (functional) currency, by applying to the foreign currency amount the middle exchange rate quoted by the People’s Bank of China (hereafter, the (spot) exchange rate) between the reporting (functional) currency and the foreign currency at the date of the transaction. Foreign currency monetary items as at the balance sheet date are translated using the balance-sheet-date spot exchange rate; non-monetary items as at the balance sheet date that are measured in terms of historical cost in foreign currencies are translated using the transaction-date exchange rates with no adjustment made to the recorded amounts on initial recognition in theShandong Airlines Co., Ltd. 2009 Annual Report 69 reporting (functional) currency; non-monetary items as at the balance sheet date that are measured at fair value in foreign currencies are translated using the exchange rates at the dates when the fair values were determined. Exchange differences arising on translating monetary or non-monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements are recognised directly or as fair value adjustments in profit or loss in the period in which they arise except for monetary items that satisfy the criteria for borrowing costs capitalisation. (2) Foreign currency translation ① Assets, liabilities and all Shareholders’ equity items as at the balance sheet date except Undistributed profits are translated using the balance-sheet-date spot exchange rates. ② Income and expenses are translated using the transaction-date exchange rates. Exchange differences arising from the translation methods specified in paragraph 8(2)① and ② are separately presented in Shareholders’ equity. ③ The cash flows of a foreign subsidiary are translated at the exchange rates at the dates of the cash flows. The effect of exchange rate changes on cash and cash equivalents held or due in foreign currencies is reported in the cash flow statement by presenting separately the amount of the unrealised exchange differences arising from changes in foreign currency exchange rates 9. Financial instruments (1) Categorisation of financial assets and financial liabilities The Company categorises its financial assets and financial liabilities, with reference to their objectives of investments and economic nature, as financial assets or financial liabilities at fair value through profit or loss, held-to-maturity investments, loans and receivables, available-for-sale financial assets, and other financial liabilities. ① Financial assets or financial liabilities at fair value through profit or loss include the financial assets or financial liabilities classified as held for trading and the financial assets or financial liabilities designated by the Company as at fair value through profit or loss on their initial recognition. A financial asset or financial liability is classified as held for trading if it meets either of the following conditions: a. it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term; b. on initial recognition it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or c. it is a derivative (except for a derivative that is a designated and effective hedging instrument, a financial guarantee contract, or linked to and only settled by delivery of an equity instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured).Shandong Airlines Co., Ltd. 2009 Annual Report 70 A financial asset or financial liability is designated by the Company as at fair value through profit or loss if it meets either of the following conditions: a. the designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or b. a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with an officially documented risk management or investment strategy, and information about the group is provided internally on that basis to the Company’s key management personnel. ② Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Company has the positive intention and ability to hold to maturity, which include principally fixed-rate treasury bonds and floating-rate corporate bonds that the Company has the positive intention and ability to hold to maturity. ③ Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, which include principally accounts receivables arising from sales of products and provisions of services by the Company and other receivables. ④ Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale on their initial recognition or are not categorised as either loans and receivables, held-to-maturity investments or financial assets at fair value through profit or loss. ⑤ Other financial liabilities are financial liabilities that are not categorised as financial liabilities at fair value through profit or loss. (2) Measurement of financial assets and financial liabilities When a financial asset or financial liability is recognised initially, the Company measures it at its fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability; transaction costs attributable to the acquisition or issue of the financial asset or financial liability at fair value through profit or loss are accounted for through profit or loss for the current period. The Company subsequently measures financial assets and financial liabilities according to the following procedures: ① Financial assets or financial liabilities are subsequently measured at fair value through profit or loss at their fair value, with gains or losses arising from changes in fair value or de-recognistion accounted for through profit or loss for the current period. ② Held-to-maturity investments are subsequently measured at amortised cost using the effective interest method, with gains or losses arising from de-recognistion, impairment or amortisation accounted for through profit or loss for the current period. ③ Receivables are subsequently measured at amortised cost using the effective interest method, with gains or losses arising from de-recognistion, impairment or amortisation accounted for through profit or loss for the current period.Shandong Airlines Co., Ltd. 2009 Annual Report 71 ④ Available-for-sale financial assets are subsequently measured at their fair value, with gains or losses arising from changes in fair value recognised in Capital reserves. The difference between the disposal proceeds and carrying value of an available-for-sale financial asset on its disposal is recognised as investment gain or loss, with the cumulative gains or losses recognised in Capital reserves de-recognised from Capital reserves and re-recognised as investment gains or losses. Impairment losses and exchange differences of available-for-sale financial assets, if any, are accounted for through profit or loss for the current period. Interests and dividends arising from the possession of available-for-sale financial assets, if any, are recognised as investment gains. ⑤ Other financial liabilities and a instrument that is linked to and only settled by delivery of an equity instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured are subsequently measured at cost. A financial guarantee contract or a loan that bears an off-market interest rate, which are not designated by the Company as at fair value through profit or loss, are subsequently measured at the higher of: a. the value specified by CAS 13 Contingencies; and b. the residual value after deducting the cumulative amortisation determined in accordance with CAS 14 Revenue from the value recognised on its initial recognition. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with gains or losses arising from de-recognistion, impairment or amortisation accounted for through profit or loss for the current period. ⑥ Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction. The parties to an arm’s length transaction shall be going concerns, not subject to or intended to enter the procedures of liquidation or significant reduction in operating capacity, or forced to enter the transaction. The fair value of a financial asset or financial liability for which there is an active market shall be measured at the quoted market price in the active market; the fair value of a financial asset or financial liability for which there is not an active market shall be established by the Company using a valuation technique. The Company measures initially and subsequently the fair value of an interest rate swap at the value of a competitor’s interest rate swap quoted by a recognised financial institution as at the Company’s balance sheet date in accordance with the principle of consistency. ⑦ The residual cost of a financial asset is the residual value after deducting the sum of impairment losses and the principal amount that has been repaid from the sum of its value measured on its initial recognition and the cumulative amortisation of the difference between its value measured on its initial recognition and its value on its maturity determined using the effective interest method. The residual cost of a financial liability is the residual value after deducting the sum of the principal amount that has been repaid and the cumulative amortisation of the difference between its value measured on its initial recognition and its value on its maturity determined using the effective interest method from its value measured on its initial recognition.Shandong Airlines Co., Ltd. 2009 Annual Report 72 ⑧ The effective interest rate method is a valuation method for determining the residual value and interest income or/and expense of a financial instrument (or a group of financial instruments) using the effective interest rate. An effective interest rate is the interest rate used to discount the cash flows of a financial instrument (or a group of financial instruments) over its expected life, or a shorter period if it is relevant, to determine its current carrying value. The effective interest rate applicable to a financial intrument (or a group of financial instruments) shall be determined with reference to its future cash flows estimated by taking into account the whole of its contract terms (including but not limited to early repayment rights, call options and option equivalents, but excluding future credit losses). (3) Transfer and de-recognition of financial assets ① The Company de-recognises a financial asset if it meets either of the following conditions: a. the contractual rights to the cash flows from the financial asset expire; b. the financial asset has been transferred and all the risks and rewards of ownership of the financial asset have been substantially transferred to the transferee; or c. the financial asset has been transferred and the Company has neither transferred nor retained substantially all the risks and rewards of ownership of the financial asset and not retained control of the financial asset. ② Where the transfer of the whole of a financial asset satisfies the conditions for de-recognition set out in paragraph 9(3)①, the Company recognises through profit or loss for the current period the difference between: a. the carrying value of the financial asset; and b. the sum of the proceeds from the transfer and the cumulative gains or losses recognised in Shareholders’ equity. ③ Where the transfer of a part of a financial asset satisfies the conditions for de-recognition set out in paragraph 9(3)①, the fair value of the whole of the financial asset is apportioned accordingly to the transferred part and the part not transferred; and, the Company recognizes through profit or loss for the current period the difference between: a. the carrying value of the transferred part of the financial asset; and b. the sum of the proceeds from the transfer and the cumulative gains or losses attributable to the transferred part of the financial asset recognised in Shareholders’ equity. ④ If a transfer of a financial asset does not satisfy the conditions for de-recognition set out in paragraph 9(3)①, the Company continues to recognise the transferred asset in its entirety and recognises a financial liability for the consideration received. Where the Company is in continuing involvement in a transferred financial asset, the Company continues to recognise the financial asset to the extent of its continuing involvement, and recognises an associated financial liability. (4) Impairment assessment and impairment allowanceShandong Airlines Co., Ltd. 2009 Annual Report 73 ① The company recognises impairment of a financial asset if either of the following is objectively evidential: a. significant financial difficulty of the issuer or obligor; b. a breach of contract, such as a default or delinquency in interest or principal payments, by the obligor; c. the lender, for economic or legal reasons relating to the obligor’s financial difficulty, granting to the obligor a concession that the lender would not otherwise consider; d. it becoming probable that the obligor will enter bankruptcy or other financial reorganization; e. the disappearance of an active market for that financial asset because of significant financial difficulty of the issuer; f. observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group; g. significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in which the obligor operates, and indicates that the cost of the investment in the equity instrument may not be recovered; h. a significant or prolonged decline in the fair value of an investment in an equity instrument; or i. other events of impairment. ② The Company assesses the occurrence of impairment of different categories of financial assets and recognises and measures impairment on the balance sheet date using different criteria. a. If there is objective evidence that an impairment loss on a held-to-maturity investments has been incurred as at the balance sheet date, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of its estimated future cash flows. b. If there is objective evidence that the fair value of an available-for-sale financial asset has experienced a significant decline and the decline is not temporary after considering all relevant information as at the balance sheet date, impairment loss on the available-for-sale financial asset is recognised and the cumulative loss recognised in Shareholders’ equity is reclassified from equity to profit or loss as impairment loss. 10. Account receivables (1) Method of provision for bad debts for individual accounts receivable with significant amounts: The Company classifies receivables, other than intragroup receivables, of which the carrying values are individually not less than 5 per cent of the carrying value of total receivables as at the balance sheet date as receivables of individual significance. Receivables of individual significanceShandong Airlines Co., Ltd. 2009 Annual Report 74 are individually assessed for impairment loss. If there is objective evidence that a receivable of individual significance has been impaired as at the balance sheet date, the excess of the present value of its estimated future cash flows over its carrying value as at the balance sheet date is recognised as impairment loss through profit or loss for the current period and in Bad and doubtful debts. (2) Method of provision for bad debts for individual accounts receivable with nonsignificant amounts, but in according to the characteristics of credit risk portfolio, the risk of the portfolio is high: The Company classifies receivables of individual insignificance and non-impaired receivables of individual significance of which the ages are individually over three years as a group of receivables of significant credit risk. The Company recognises as bad and doubtful debt expense through profit or loss for the current period and in Bad and doubtful debts the higher of the following: ① 5 per cent of the carrying value of total receivables as at the balance sheet date; and ② the excess of the carrying value of receivables of individual insignificance over the amount estimated by analyses of age and the financial positions and cash flows of the obligors. (3) For other account receivable (including Notes receivable、Advances to suppliers、 Interest receivables etc), the provision for bad debts recognized based on the difference of the book values higher than the present value of future cash flows. 11. Inventories (1) Categorisation of inventories The Company’s inventories include materials or supplies to be consumed by the Company in the rendering of services during the Company’s ordinary operating activities. The Company categorises its inventories as air materials and low-value consumables. (2) Cost of inventories The cost of inventories at their acquisition is measured at their actual cost of purchase. The cost of inventories at their issue is determined using the first-in, first-out (FIFO) cost formula. (3) Net realisable value and impairment of inventories ① Determination of net realisable value of inventories The net realisable value of finished goods, products and sellable materials is measured as the residual value after deducting the estimated sales expense and related taxes and fees from the estimated selling price. The net realisable value of an item of inventories subject to further processing is measured as the residual value after deducting the sum of the estimated costs of completion, sales expense and related taxes and fees from the estimated selling price of the sellable item. The net realisable value of the quantity of inventories held to satisfy firmShandong Airlines Co., Ltd. 2009 Annual Report 75 sales or service contracts is based on the contract price. If the sales contracts are for less than the inventory quantities held, the net realisable value of the excess is based on general selling prices. ② Impairment of inventories The Company measures inventories at the lower of historical costs and net realisable values as at the balance sheet date. If the net realisable value is lower than the historical cost of an item of inventories as at the balance sheet date, an impairment allowance is recognised. An impairment allowance, if any, is generally individually recognised for each type of inventories except: a. an individual impairment allowance, if any, is recognised for the whole category of inventories of low value and large quantities; and b. an individual impairment allowance, if any, is recognised for a group of inventories, which are held for the production and sales of products of a single territory and for identical or similar usages or purposes, and which are indistinguishable from other types of inventories within the group. When the circumstances that previously caused inventories to be written down below cost no longer exist, the amount of the write-down is reversed and the associated impairment allowance de-recognised and re-recognised through profit or loss for the period in which the reversal occurs. (4) Stocktaking The Company adopts the perpetual stocktaking system. (5) Amortisation of low-value consumables and packaging materials The Company amortises consumables in full when they are issued for use. 12. Long-term equity investments The Company’s long-term equity investments include the Company’s equity investments in an investee which constitute the Company’s control, joint control or significant influence over the investee and the Company’s equity investments in an investee which do not constitute the Company’s control, joint control or significant influence over the investee and of which the fair value is not quoted in an active market. (1) Initial measurement of long-term equity investments ① Initial measurement of long-term equity investments acquired through business combination a. The cost of a business under common control acquired by the Company by payment in cash, non-monetary asset transfer, or assuming the acquiree’s liabilities is initially measured at the carrying value of the equity instruments acquired as at the acquisition date, with the excess of the (carrying) value of cash paid, assets transferred, or liabilities assumed over the initially measured cost debited to Capital reserves, and toShandong Airlines Co., Ltd. 2009 Annual Report 76 Undistributed profits where the total value of Capital reserves is insufficient. The cost of a business under common control acquired by the Company by share issues is initially measured at the carrying value of the equity instruments acquired as at the acquisition date, with the excess of the total value at par of shares issued over the initially measured cost debited to Capital reserves, and to Undistributed profits where the total value of Capital reserves is insufficient. Expenses incurred directly for the acquisition, including but not limited to audit fees, valuation fees and legal fees, are recognised through profit or loss for the period in which the expenses are incurred. b. The cost of a business not under common control acquired by the Company is initially measured at the fair value of assets transferred, liabilities incurred or assumed, or shares issued for the acquisition as at the transaction date. The excess of the initially measured cost over the net of the carrying values of the identifiable assets acquired and the liabilities assumed as at the acquisition date is recognised as goodwill. The excess of the net of the carrying values of the identifiable assets acquired and the liabilities assumed as at the acquisition date over the initially measured cost is recognised through profit or loss for the current period in Non-operating revenue. Expenses incurred directly for the acquisition (excluding the expenses for bond issues and share issues) are recognised as part of the acquisition cost. ② Initial measurement of long-term equity investments acquired not through business combination a. The cost of a long-term equity investment acquired by the Company by payments in cash is initially measured at the sum of the consideration transferred and the fees, taxes and necessary expenses directly attributable to the acquisition, with the value of declared-but-unpaid cash dividends included in the consideration separately recognised as receivables. b. The cost of a long-term equity investment acquired by the Company by share issues is initially measured at the fair value of shares issued for the acquisition as at the issuance date. c. The cost of a long-term equity investment acquired by the Company by direct shareholder contribution is initially measured at the value agreed upon the investment contract or agreement, excluding a contract value or agreement value that is inconsistent with the definition of fair value. d. The cost of a long-term equity investment acquired by the Company by non-monetary asset transfer is initially measured at the sum of the fair values of the assets transferred to the transferee and the taxes directly attributable to the asset transfer, with the difference between the fair values of the assets transferred to the transferee and their carrying values as at the transaction date recognised through profit or loss for the current period, where the exchange of non-monetary assets for equity instruments is transacted on a commercial basis and the fair values of the assets transferred and equity instruments acquired can be reliably measured; or, at the sum of the carrying values of the assets transferred to the transferee and the taxes directly attributable to the assetShandong Airlines Co., Ltd. 2009 Annual Report 77 transfer, where the exchange of non-monetary assets for equity is not on a commercial basis or the fair values of the assets transferred or equity instruments acquired can not be reliably measured. e. The cost of a long-term equity investment acquired by the Company through the investee’s debt restructuring is initially measured at the fair values of the equity instruments acquired, with the difference between the initially measured cost and the carrying value of the original loans to the investee as at the restructuring date recognised through profit or loss for the current period. (2) Subsequent measurement and recognition and measurement of gains or losses Long-term equity investments in subsidiaries are subsequently measured at cost. In preparing consolidated financial statements, the long-term equity investments in subsidiaries are adjusted using the equity method. Long-term equity investments which do not constitute the Company’s joint control or significant influence over the investee, of which the fair value of equity instruments is not quoted in an active market and can not be measured reliably, are subsequently measured at cost. Long-term equity investments which constitute the Company’s joint control or significant influence over the investee are subsequently measured by the equity method. a. If a long-term equity investment is subsequently measured at cost, further acquisition or disposal of the investment increases or reduces the cost of the investment accordingly; dividends or share of profits, except those included in the consideration which has been declared but not received, are recognised through profit or loss for the current period. b. If a long-term equity investment is subsequently measured by the equity method, its carrying value is adjusted by the share of the investee’s net profit or loss. Gain or loss for the current period is measured at the share of the net profit or loss of the investee for the current period. When determining the net profit or loss of the investee, where the investee adopts different accounting policies, the net profit or loss reported by the investee is adjusted by the depreciation or amortisation calculated on the basis of the fair value of the investee’s fixed assets or intangible assets as at acquisition and the impairment provisions determined on the basis of the fair value of the relevant assets of the investee as at acquisition; transactions between the Company and associates or joint ventures are also eliminated. The losses arising from transactions between the Company and associates or joint ventures are wholly recognised as asset impairment if the losses meet the conditions set by CAS 9 – Asset Impairment. Losses of a long-term equity investment reduce the carrying value of the investment to zero as the furthest. If the cumulative value of subsequent profits of the investee becomes higher than the cumulative value of unrecognised losses, the excess of the cumulative profits over the cumulative unrecognised losses is recognised in the carrying value of the investment. Where a long-term equity investment existed prior to the first adoption of CAS, the excess of consideration over acquired net assets of the investee as at the adoption date, if any, is amortised over the remaining life determined at the acquisition using the straight line method; the amortisation is recognised through profit or loss for the current period.Shandong Airlines Co., Ltd. 2009 Annual Report 78 (3) Joint control and significant influence ① The Company has joint control over an investee if the investment meets one of the following conditions: a. neither of the investors can individually influence the operation of the investee; b. decisions of the investee’s must be approved by the general consensus of the investors; or c. an individual investor is authorised by an agreement of contract signed by each investor to manage the investee’s operation in accordance with the accounting and operation policies agreed by each investor. Investors may lose joint controls over an investee where the investee is in the procedures of legal administration or bankruptcy, or where the investee’s ability to transfer economic resource to investors is severely limited for a substantial length of time; however, if it is objectively evidential that the joint control exists, the investors shall continue to recognise and measure the investment using the equity method. ② The Company has significant influence over an investee if: a. the Company has delegates in the investee’s Board of Directors or similar body; b. the Company participates in the investee’s policy making process, including the policy making process for declaration of dividends; c. the Company has significant transactions with the investee; d. the Company has delegated personnel to the investee’s management; or e. the Company has provided key technology to the investee. (4) Impairment of long-term equity investments The Company assesses the operation policies, legal environment, market and industry conditions, and profitability each long-term equity investment individually on the balance sheet date to determine whether an investment is subject to impairment. If the net recoverable value of an investment is lower than its carrying value as at the balance sheet date, an impairment provision is recognised at the excess of its carrying value over te net recoverable value as at the balance sheet date. A recognised impairment loss of an investment is not recoverable in subsequent periods. 13. Fixed Assets (1) Recognition A fixed asset is a tangible asset the Company holds for the purpose of production, service rendering, leasing and operation, of which the useful life is longer than one year and which has a relatively higher value. A fixed asset is measured at the cost of acquisition if it meets both of the following conditions: ① it is probable that the economic benefits associated with the asset will flow to the Company; and ② the cost of the asset can be measured reliably.Shandong Airlines Co., Ltd. 2009 Annual Report 79 Subsequent expense associated with the asset, which meets the above conditions, is recognised as parts of its cost; otherwise, through profit or loss for the period in which the expense is accrued. (2) Depreciation Fixed assets are depreciated using the straight line method. The useful life, residual value percentage and annual depreciation are listed below. Types Residual value percentage(%) Expected useful life(years) Annual depreciation rate(%) Houses and building 5.00 27-33 2.88-3.52 Key components and power supports of aircraft engine 5.00 15-20 4.75-6.33 Replacement parts of aircraft body 0.00 6-8 12.5-16.67 Replacement parts of engine 0.00 3-5 20-33.33 Equipments, electronic devices and furniture 0-5.00 4-10 9.5-23.75 High value rotables 0.00 15-18 5.56-6.67 Transportation vehicles 5.00 5-10 9.5-19.00 (3) Impairment The Company assesses each non-current asset for impairment on the balance sheet date. If it is objectively evidential that the net recoverable value of a non-current asset is lower than its carrying value as at the balance sheet date, its carrying value is reduced to the net recoverable value and the reduction accounted for through profit for the current period and recognised as impairment provision. A recognised impairment loss of a non-current asset is not recoverable in subsequent periods. A non-current asset is impaired if one of the following is evidential: ① its fair value decreased significantly during the current period with a decrease rate significantly higher than the rate estimated on the basis of time or normal usage; ② the economic, technological or legal environment, in which the Company operates or in which the asset is located, changed during the current period or is going to change in the near future; and, e the change caused or is going to cause significant disadvantage to the Company; ③ the rate for discounting future cash flows, which has been affected by the increased interest rate or investment return rate, has led to a significant decrease of the asset’s recoverable value; ④ the asset is either obsolete or physically damaged; ⑤ the asset has been or is going to be retired, terminated for usage or disposed prior to the end of its use life; ⑥ the Company recognised internally that the asset’s associated economic benefit has been or is going to be below expectation, eg. the net cash flows or net profit or loss significantly lower than the expected value; or ⑦ there is other evidence which suggests the asset has been impaired.Shandong Airlines Co., Ltd. 2009 Annual Report 80 (4) Leased fixed assets If the Company acquired substantially the risks attached to and the economic benefits associated with a leased non-current asset, the asset is recognised. The asset is measured at the lower of the asset’s fair value as at the lease-commence date and the net present value of the minimum lease payment. The depreciation policies for owned non-current assets are applicable to leased non-current assets. The expected useful life of a leased asset, of which the ownership is reasonably transferrable to the Company after the expiry of the lease, is the asset’s own expected useful life; the expected useful life of a leased asset, of which the ownership is not reasonably transferrable to the Company, is the shorter of the lease life and the asset’s own expected useful life. 14. Construction-in-progress (1) Categorisation The Company categorises construction-in-progress on the basis of project approval. (2) Conversion of construction -in-progress to fixed assets A construction-in-progress is recognised as a fixed asset when it satisfied the predetermined usable state. A converted construction-in-progress is initially measured at its full construction cost. A converted construction-in-progress of which the construction cost is not fully recognised is initially measured at a reasonable estimate; and, the initial measured cost is adjusted to its full construction cost when the construction is fully recognised; but, its recognised depreciation as at the full recognition is not adjusted. (3) Impairment The Company assesses each construction-in-progress for impairment on the balance sheet date. If it is objectively evidential that the net recoverable value of a construction-in-progress is lower than its carrying value as at the balance sheet date, its carrying value is reduced to the net recoverable value and the reduction accounted for through profit for the current period and recognised as impairment provision. A recognised impairment loss of a construction-in-progress is not recoverable in subsequent periods. A construction-in-progress is impaired if one or more of the following are evidential: ① the project has been suspended for a substantially long period of time and of which the construction is not to be re-activated within three years; ② either the capability or the technology of the project is obsolete and the economic benefit associated with the project is highly indeterminable; or ③ there is other evidence which suggests the project has been impaired. 15. Borrowing costs (1) Capitalisation of borrowing costs The borrowing costs directly attributable to asset construction or production are capitalisedShandong Airlines Co., Ltd. 2009 Annual Report 81 into cost of asset when they meet the following conditions: ① the asset construction or production expense has been incurred; ② the borrowing costs have been incurred; and ③ the construction or production which directly contributes to the usable state of the asset has been activated. Other borrowing costs, discounts, premiums and exchange differences are accounted for through profit or loss of the period in which they are incurred. If the construction or production of an asset eligible for capitalisation has suspended not in accordance with schedule, where the suspension has lasted continuously for a period longer than three months, the capitalisation of relevant borrowing costs is suspended. The capitalisation of relevant borrowing costs is terminated when a constructed or produced asset reaches its usable or sellable state. Any subsequent borrowing cost associated with the asset is accounted for through profit or loss for the period in which it is incurred. (2) Measurement of capitalised borrowing costs The capitalised borrowing costs of a finance specifically raised for an asset construction or production are measured at the excess of the borrowing costs over the interests arising from the deposit of the unused part of the finance or the gains arising from the investment using the unused part of the finance for the relevant period. Where the value of an asset construction or product is higher than the finance specifically raised for the construction or production, the capitalised borrowing costs of the part of general finance used by the construction or production are measured by multiplying the weighted average of the excess of the asset value over the specific-raised finance with the capitalisation rate of general finance. 16. Intangible assets (1) Measurement Intangible assets are initially measured at cost. (2) Useful life and amortization The period during which an intangible asset is reasonably capable of generating economic benefits for the Company with reference to its contractual rights and other legal rights, industry practice, historical experience, and professional evidence is determined as the asset’s useful life. If a period during which an intangible asset is reasonably capable of generating economic benefits for the Company is not determinable, the asset is categorised as with undeterminable useful life. ① The useful life of an intangible asset with useful life is determined on the basis of: a. the general useful life of products produced by the asset and the obtainable information in relation to the useful life of a similar asset; b. the current condition and estimated future trends of technology and techniques; c. the market demand for products produced or service rendered by the asset;Shandong Airlines Co., Ltd. 2009 Annual Report 82 d. the expected reaction of existing and potential competitors; e. the estimated maintenance expense for the continuance of the asset’s ability in generating economic benefits and the Company's estimated ability in maintaining the expense; f. the relevant law and regulation which regulate the ownership period of the asset, eg. chartered usage rights and lease rights; and g. the connection between the useful life of the asset and the useful life of the Company’s other assets. ② An intangible asset with undeterminable useful life is amortised using a reasonable method determined by the realisation process of the asset’s expected economic benefit. Where a reasonable amortisation method is undeterminable, the asset is amortised using the straight line method. (3) Impairment of intangible assets with undeterminable useful life ① The Company assesses the useful life of each intangible asset with undeterminable useful life on the balance sheet date. If the useful life of an asset remains undeterminable, the asset is assessed for impairment on the balance sheet date. If it is objectively evidential that the net recoverable value of an intangible asset with undeterminable useful life is lower than its carrying value as at the balance sheet date, its carrying value is reduced to the net recoverable value and the reduction accounted for through profit for the current period and recognised as impairment provision. A recognised impairment loss of an intangible asset with undeterminable useful life is not recoverable in subsequent periods. An intangible asset with undeterminable useful life is assessed for impairment if one or more of the following are evidential: a. the asset has been replaced by another new technology which renders its ability to generate economic benefit for the Company being significantly devastated; b. the asset’s fair value has decreased significantly during the period and it may not increase during the remaining life of the asset; or c. there is there is other evidence which suggests the asset has been impaired. (4) Research and development Research expenses associated with an internal development project are accounted for through profit or loss for the period in which they are incurred. Development expenses associated with an internal development project are recognised as intangible assets if the project meets all of the following: ① assets arising from the project are either for sale or for internal use and it is technically viable to complete the project; ② the Company has clear intention to complete the intangible asset and to use or sell the asset; ③ it is objectively evidential that products produced by the intangible or the intangible asset itself are marketable or that the intangible asset is employable if used internally; ④ it is practical, in terms of technology, finance and other resources, to complete the development of the intangible asset and to use or sell the intangible asset; and ⑤ development expenses of the development of the intangible asset can be measured reliably.Shandong Airlines Co., Ltd. 2009 Annual Report 83 17. Regular repair and substantial repair Regular repair expenditure of own aircrafts and aircrafts acquired under a financial lease is accounted for through profit or loss for the period in which it is incurred. Substantial repair expenditure eligible for capitalisation is capitalised when incurred and recognised as replacement cost of non-current assets and depreciated over a reasonable length of time. Substantial repair expenditure of aircrafts under an operating lease incurred before the lease expiry date is amortised using the straight line method or on the basis of air hours over the lease period. 18. Long-term deferred assets The Company’s long-term deferred assets refer to expense which has been incurred but which generates economic benefit for the Company for a period of longer than one year, such as expenses for pilots’ initial trainings. Those expenses are amortized at 10 years according to their benefit period respectively. When a pilot is transferred from the Company, the cost of transfer is the unamortized part of the original expenditure. 19. Accrued liabilities (1) Recognition of accrued liabilities The obligations related to some items that meet the following conditions at the same time will be confirmed as the liabilities: ①This obligation is the current obligation of the company; ②The performance of this obligation will probably cause the economic benefits to flow out of the company; ③The amount of this obligation can be reliably calculated. The Company should recognize accrued liabilities, when the Company’s loss contract and restructuring liabilities undertaken satisfied above conditions. (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;Shandong Airlines Co., Ltd. 2009 Annual Report 84 (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 20. Revenue (1) Service rendering ① The Company recognise revenue from rendering of air service for carriage of passengers when the service is rendered or when an unused ticket expires. The sale of a ticket does not constitute revenue. An unused ticket expires on the annual anniversary of its sale. Tickets sold but of which the service is not yet rendered are recognised in current liabilities as Advances from customers. If service is rendered through code sharing, revenue arising from the service provision is apportioned amongst parties to the code sharing agreement. The revenue arising from code sharing is also recognised when the service is rendered. ② If the service is rendered in conjunction with reward points, the amount arising from ticket sales and of receivables shall be apportioned between revenue and reward points. The amount apportioned to reward points is initially recognised as deferred income and subsequently accounted for through profit or loss for the period in which the reward points expire or are exchanged. ③ Revenue arising from other air service rendering is recognised when the service rendering is completed. (2) Transfer of asset use rights Revenue is recognised when the inflow of the economic benefit associated with the transfer is probable and when the amount of the inflow can be measured reliably. Revenue arising from transfer of asset use rights is recognised according to the income category: ① interest income is recognised on the basis of the length of time for which the Company’s monetary asset is used by other parties using the effective interest rates; ② use right income is recognised in accordance with the payment schedules and means agreed in the relevant contracts or agreements. 21. Government grants (1) Recognition The Company meets the conditions attached to the grant; and the Company is probable to receive the grant. (2) Types of government grants and accounting for government grants ① A grant associated with an asset is recognised as deferred income when the grant is received.Shandong Airlines Co., Ltd. 2009 Annual Report 85 The grant is subsequently averaged over the useful life of the asset and the average is accounted for through profit or loss for subsequent periods during the asset’s useful life after the asset reaches its usable state. If the asset is disposed, transferred, scrapped or damaged prior to the end of its useful life, the whole of the remaining deferred income is accounted for through profit or loss for the period in which the asset is disposed, transferred, scrapped or damaged. ② A grant compensating expenditure or loss in subsequent periods is initially recognised as deferred income and subsequently accounted for through profit or loss for the period in which the relevant expenditure of loss is incurred. A grant compensating expenditure or loss already incurred is accounted for through profit or loss for the period in which the grant is received. (3) Measurement A grant that is in the form of monetary asset is measured at the amount of actual receipt or actual receivable. A grant that is in the form of non-monetary asset is measured at fair value, or at notional value if fair value can not be obtained. (4) Repayment of government grants ① If there is deferred income associated with the grant, the carrying value of the deferred income is reduced by the repayment. The excess of the repayment over the carrying value of the deferred income is accounted for through profit or loss for the period in which the repayment is incurred. ② If there is not deferred income associated with the grant, the repayment is accounted for through profit or loss for the period in which the repayment is incurred. 22. Deferred income tax assets and deferred income tax liabilities The Company accounts for income taxes by the balance sheet approach. The Company calculates the value of a deferred income tax asset or deferred income tax liability on the basis of the difference between the carrying value of an asset or liability and its tax base and the income tax rates applicable to the period through which the asset or liability is recovered or settled. (1) Recognition of deferred income tax assets ① A deferred income tax asset is recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised, unless the deferred income tax asset arises from the initial recognition of an asset or liability in a transaction that: a. is not a business combination; and b. at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). ② A deferred income tax asset is recognised for all deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint ventures, to the extent that, and only to the extent that, it is probable that: a. the temporary difference will reverse in the foreseeable future; andShandong Airlines Co., Ltd. 2009 Annual Report 86 b. taxable profit will be available against which the temporary difference can be utilised. ③ A deferred income tax asset is recognised for all tax losses and tax credits eligible for being carried forward to the extent that it is probable that taxable profit will be available against which the tax losses and tax credits can be utilised. (2) Recognition of deferred income tax liabilities A deferred income tax liability is recognised for all taxable temporary differences, except to the extent that the deferred income tax liability arises from: ① the initial recognition of goodwill; or ② the initial recognition of an asset or liability in a transaction which: a. is not a business combination; and b. at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). ③ A deferred income tax liability is recognised for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, except to the extent that both of the following conditions are satisfied: a. the parent, investor or venturer is able to control the timing of the reversal of the temporary difference; and b. it is probable that the temporary difference will not reverse in the foreseeable future. (3) The carrying value of a deferred income tax asset is assessed on the balance sheet date. It is probable that there is not enough taxable profit in the future against which the deferred income tax asset can be utilised, the carrying value of the deferred income tax asset is written off; when it becomes probable again that there is enough taxable profit in the future against which the deferred income tax asset can be utilised, the write-off is reversed. 23. Financial leases and operating leases (1) Operating leases ① When the Company is the leasee to a operating lease, the total lease expenditure is apportioned over the lease life using the straight line method or on the basis of the leased asset usage. The apportioned amount is recognised through profit or loss for the relevant period. Initial expenditure directly attributable to the acquisition of the lease is recognised in administrative expenses for the period in which the expenditure is incurred or recognised through profit of loss for the period in which the first lease payment is incurred. If a rent holiday is offered by the leasor, the total expenditure is apportioned over the whole life of the lease using the straight line method or on a reasonable basis; the lease expense during the rent holiday is accounted for through profit or loss for the relevant period and recognised as a liability on the balance sheet. If a part of the total lease expenditure is compensated by the leasor, the residual amount after deducting the compensation from the total lease expenditure is apportioned over the lease life. ② When the Company is the leasor to a operating lease, the total lease revenue is apportioned over the lease life. The apportioned amount is recognised through profit or loss for each year of the lease life. Initial expenditure directly attributable to the grant of the lease is recognised throughShandong Airlines Co., Ltd. 2009 Annual Report 87 profit or loss for the period in which it is incurred. If the initial expenditure is of significant value, it is capitalised and apportioned over the lease life using the same method adopted for the apportionment of lease revenue; the apportioned amount is recognised through profit or loss for each year of the lease life. The initial expenditure of significant value is recognised in full through profit or loss for the period in which the first lease income is accrued if the recognition is so provided by an agreement. If a rent holiday is offered, the total lease revenue is apportioned over the whole life of the lease using the straight line method or on a reasonable basis. The apportioned amount is recognised as lease income for each year of the lease life, including the years within the rent holiday. If a part the total lease expenditure is compensated by the leasor, the residual amount after deducting the compensation from the total lease revenue is apportioned over the lease life. (2) Financial leases ① When the Company is the leasee to a financial lease, the Company recognises on the lease start date the leased asset at the lower of its fair value as at the lease start date and the minimum total lease payments; the minimum total lease payments is recognised as long-term payables; and, the excess of the minimum total lease payments over the leased asset’s fair value as at the lease start date is accounted for as unrecognised financing cost and amortised over the life of the lease using the effective interest rate method with the amortised amount recognised in financial costs for the relevant period. Initial expenditure directly attributable to the acquisition of the lease is recognised as a part of the leased asset’s carrying value. The depreciation policies for owned depreciatable assets are applicable to an asset leased under a financial lease. The expected useful life of a leased asset, of which the ownership is reasonably transferrable to the Company after the expiry of the lease, is the asset’s own expected useful life; the expected useful life of a leased asset, of which the ownership is not reasonably transferrable to the Company, is the shorter of the lease life and the asset’s own expected useful life. ② When the Company the leasor to a financial lease, the Company recognises on the lease start date the sum of initial expenditure directly attributable to the grant of the lease and the minimum total lease revenue as long-term receivables; and, the unguaranteed residual value is recorded. The excess of the sum of the minimum total lease revenue, initial expenditure directly attributable to the grant of the lease and unguaranteed residual value over the leased asset’s fair value as at the least start date is accounted for as unrealised financing income and amortised over the lease life using the effective interest rate method with the amortised amount recognised as rental income for the relevant period. 24. Significant changes of accounting policies and accounting estimates Resulting from changed market conditions and pilot mobility, the Company reviewed the benefit periods by considering pilot service length and pilot resignation, the first meeting of the 4th term of the Board of Directors held in 2010 publish a resolution which authorises the adoption of a new accounting estimate with effect from 1st October, 2009 which changes the length of amortisation period for pilot training fees from 20 years to 10 years. The change of accounting estimate reducesShandong Airlines Co., Ltd. 2009 Annual Report 88 the net profit for 2009 by CNY 24,159,590.00. The impact of the above change of accounting estimate on the net profit for 2009 is presented below: 2009 Change of accounting estimate Financial statement items Amount (CNY) Change of the length of amortisation period Operating costs 32,212,787.99 for pilot training fees Income tax expense -8,053,197.00 Total 24,159,590.99 Ⅲ Taxation 1. Major taxes and tax rates The major taxes and tax rates applicable to the Company are listed below: Tax Tax base Tax rate Operating tax Revenue from air service for carriage of goods and passengers and from commission or rental service 3% / 5% Enterprise income tax Taxable profit 25% Other taxes applicable to the Company are calculated in accordance with the relevant law and regulation. 2. Infrastructure fund for civil aviation Infrastructure fund for civil aviation is calculated in accordance with the guidelines set out in the document (CaiZong[2004] No.38) issued by the Ministry of Finance. As authorised by the document (CaiJian[2009] No.4) jointly issued by the Ministry of Finance and Civil Aviation Administration of China, infrastructure funds for civil aviation payable by domestic air companies during the period from 1st July 2008 to 30th June 2009 are subsequently repaid to the tax payers after the tax collection. 3. Tax incentives As authorised by the document (CaiShui[2008] No.178) jointly issued by the Ministry of Finance and State Administration of Taxation, fuel surcharges collected by air companies during the period from 1st January 2008 to 31st December 2010 are exempted from operating tax. Ⅳ Business combination and consolidated financial statements Subsidiaries acquired through incorporation or investment Subsidiary name Qingdao International Air Logistics Centre Co., Ltd Type of subsidiary Holding subsidiary Place of registration Qingdao Nature of business Transportation warehousing Registered capital CNY 30,000,000.00 Business scope Warehousing and distribution of air cargo, E-commerce, etc Actual investment value as at December 31,2009 CNY 23,813,205.97Shandong Airlines Co., Ltd. 2009 Annual Report 89 Subsidiary name Qingdao International Air Logistics Centre Co., Ltd Ending balances of projects constituting net investment in the subsidiary CNY 0.00 Shareholding 70% Voting right 70% Financial statement consolidation Yes Minority interest CNY 13,251,532.27 Value of minority interest that utilized to write off the profits or losses attributed to minority shareholders CNY 0.00 The balance of parent company’s equity, that is equal to the parent shareholders’ equity less the subsidiary’s current loss undertaken by the minority shareholders according their share quotient at the beginning of the period CNY 0.00 Ⅴ Main items of the consolidated financial statements 1. Monetary fund Balance carried forward Balance brought forward Exchange Presentation Currency Original Exchange Presentation currency rate currency Original currency rate currency Cash on hand CNY 262,286.69 1.00 262,286.69 168,989.78 1.00 168,989.78 HKD 386.60 0.8805 340.40 1,559.60 0.8819 1,375.43 USD 1,057.92 6.8282 7,223.69 1,520.92 6.8346 10,394.89 GBP 362.80 10.978 3,982.82 82.80 9.8798 818.04 CAD 10.00 6.5171 65.17 10.00 5.6146 56.15 JPY 0.00 0.0738 0.00 135,000.00 0.0757 10,219.50 EUR 6,870.00 9.7971 67,306.08 2,970.00 9.659 28,687.23 Subtotal 341,204.85 220,541.02 Bank CNY 47,952,878.72 1.00 47,952,878.72 44,483,350.50 1.00 44,483,350.50 USD 126,124.43 6.8282 861,202.83 34,115.73 6.8346 233,167.36 KRW 30,317,123.00 0.005876 178,143.41 0.00 0.005446 0.00 Subtotal 48,992,224.96 44,716,517.86 Other monetary funds CNY 144,732,312.88 1.00 144,732,312.88 26,935,875.00 1.00 26,935,875.00 Subtotal 144,732,312.88 26,935,875.00 Total 194,065,742.69 71,872,933.88 (1) The other limited monetary funds of CNY 144,732,312.99 as at 31st December 2009 is guarantee for letters of guarantee for aircrafts and aircraft engines, for bank draft acceptance and for short-term borrowings. (2) The increase of monetary funds of 1.7 times from the ending balance to the opening balance reflects the increased level of guarantee resulting from the increased usage of notes and increased amount of finance.Shandong Airlines Co., Ltd. 2009 Annual Report 90 2. Held for trading financial assets Item Fair value as at 09.12.31 (CNY) Fair value as at 09.01.01 (CNY) Derivative financial assets 11,341,846.48 23,460,812.11 Total 11,341,846.48 23,460,812.11 (1) The immature interest swaps held by the Company as at 31st December 2009 have a fair value as at acquisition of USD 196,386,577.11, within which the swaps containing redemption clauses have a fair value as at acquisition of USD 2,990,345.11, of which the fair value as at 31st December 2009 quoted by banks is CNY 11,341,846.48 (USD 1,661,030.21). (2) The decrease of tradable financial assets from the opening balance principally results from the decrease in fair value. 3. Accounts receivables (1) Disclosure by classification Balance carried forward Balance brought forward Book value Provision for bad debts Book value Provision for bad debts Types Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Individual significant amounts 130,379,296.86 91.06 0.00 0.00 115,826,770.70 91.46 0.00 0.00 Non-significant in amount but in accordance with the characteristics of credit risk portfolio, the risk of the portfolio is high 9,502.08 0.01 60.93 0.01 23,802.42 0.02 1,190.12 0.23 Other non-significant receivables 12,797,444.39 8.93 640,286.44 99.99 10,789,191.00 8.52 520,541.91 99.77 Total 143,186,243.33 100.00 640,347.37 100.00 126,639,764.12 100.00 521,732.03 100.00 Note: See paragraph Ⅱ10 for criteria for categorising individual significance and individual insignificance but significant portfolio credit risk. (2) Bad and doubtful debt provisions for account receivables that classified as individual significance amount or non-significant in amount but in accordance with the characteristics of credit risk portfolio, the risk of the portfolio is high:Shandong Airlines Co., Ltd. 2009 Annual Report 91 Details Book value (CNY) Bad and doubtful debt (CNY) Proportion (%) Comment BSP 48,494,454.43 0.00 0.00 Amount not due received prior to the statement date. China Civil Aviation Clearing Centre 28,056,201.97 0.00 0.00 Amount not due received prior to the statement date. Air China Co., Ltd. 53,828,640.46 0.00 0.00 Amount not due received prior to the statement date. Total 130,379,296.86 0.00 0.00 Amount not due received prior to the statement date. (3) Aging analysis Balance carried forward Balance brought forward Book value Provision for bad debts Book value Provision for bad Age debts Amount (CNY) Proportion (%) Amount (CNY) Amount (CNY) Proportion (%) Amount (CNY) Within 1 year 142,119,187.40 99.25 593,424.08 125,431,572.82 99.05 445,258.73 1 – 2 years 754,989.67 0.53 32,009.09 1,157,864.08 0.91 75,222.25 2 – 3 years 302,564.18 0.21 14,853.27 26,524.80 0.02 60.93 3 – 4 years 9,502.08 0.01 60.93 23,802.42 0.02 1,190.12 4 – 5 years 0.00 0.00 0.00 0.00 0.00 0.00 Over 5 years 0.00 0.00 0.00 0.00 0.00 0.00 Total 143,186,243.33 100.00 640,347.37 126,639,764.12 100.00 521,732.03 (4) Accounts receivables owed by shareholders with 5% or more voting right during the reporting period Balance carried forward Balance brought forward Shareholder Amount (CNY) Provision for bad debts (CNY) Amount (CNY) Provision for bad debts (CNY) Air China Co., Ltd. 53,828,640.46 0.00 55,089,147.43 0.00 Total 53,828,640.46 0.00 55,089,147.43 0.00 (5) The top five account receivables Name of company Relationship with the Company Amount (CNY) Age % of total accounts receivables Air China Co., Ltd. Related parties 53,828,640.46 Within 1 year 37.59 BSP Non-related parties 48,494,454.43 Within 1 year 33.87 China Civil Aviation Clearing Centre Non-related parties 28,056,201.97 Within 1 year 19.59 Yantai Post Office Non-related parties 618,272.41 Within 1 year 0.43 Linyi Civil Aviation Administration Non-related parties 554,599.95 Within 1 year 0.39 Total 131,552,169.22 91.87 (6) Accounts receivables owed by related parties Name Relationship with the Company Amount (CNY) % of total accounts receivables Air China Co., Ltd. Parent 53,828,640.46 37.59Shandong Airlines Co., Ltd. 2009 Annual Report 92 Total 53,828,640.46 37.59 4. Advances to suppliers (1) Presentation by age Balance carried forward Balance brought forward Age Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Within 1 year 21,184,884.28 94.13 28,449,390.88 97.68 1 – 2 years 1,304,378.20 5.80 674,854.09 2.32 2 – 3 years 15,000.00 0.07 0.00 0.00 Total 22,504,262.48 100.00 29,124,244.97 100.00 (2) List the top five balance of advance to supplier Name of company Relationship with the Company Balance carried forward (CNY) Age Reasons for unsettlement RBS Aerospace Ltd. Non-related parties 6,542,090.17 Within 1 year Advanced rental Singapore Aircraft Leasing Enterprise Non-related parties 4,781,000.00 Within 1 year Advanced rental Beijing FuLaiTe Technology Development Co., Ltd. Non-related parties 3,015,019.31 Within 1 year Deposit for clearing Rainier Aircraft Leasing Ltd. Non-related parties 2,480,190.48 Within 1 year Advanced rental Pacific Brihar Corporation Ltd. Non-related parties 1,201,992.00 Within 1 year Advanced rental Total 18,020,291.96 (3) There is no Advance to supplier balance due from shareholders who own five or over five percent voting rights as at December 31, 2009. 5. Dividend receivables Item Balance brought forward (CNY) Increase in year (CNY) Decrease in year (CNY) Balance carried forward (CNY) Collection after balance sheet date Impairment Dividends receivable within 1 year China TravelSky Co., Ltd. 0.00 1,617,642.00 0.00 1,617,642.00 Yes No Total 0.00 1,617,642.00 0.00 1,617,642.00 6. Other accounts receivables (1) Disclosure by classification Balance carried forward Balance brought forward Book value Provision for bad debts Book value Provision for bad debts Types Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Amount (CNY) Proportion (%)Shandong Airlines Co., Ltd. 2009 Annual Report 93 Individual significant amounts 209,239,407.19 77.02 109,051,717.65 98.14 203,908,540.13 79.66 109,051,717.65 98.25 Non-significant in amount but in accordance with the characteristics of credit risk portfolio, the risk of the portfolio is high 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Other non-significant receivables 62,429,416.40 22.98 2,065,091.95 1.86 52,065,571.90 20.34 1,944,258.14 1.75 Total 271,668,823.59 100.00 111,116,809.60 100.00 255,974,112.03 100.00 110,995,975.79 100.00 Note: See paragraph Ⅱ10 for criteria for categorising individual significance and individual insignificance but significant portfolio credit risk. (2) Provision for bad debts of other account receivables that belong to individual significant amounts on the balance sheet date: Accounts receivables Book value (CNY) Bad and doubtful debt (CNY) Proportion (%) Comment Shandong Rainbow Commercial Jet Co., Ltd. 109,051,717.65 109,051,717.65 100.00 Significantly overdue debt resulting from deteriorated financial condition. CDB Leasing Co., Ltd. 41,354,563.28 0.00 0.00 In accordance with accounting policies for bad and doubtful debt provision. Singapore Aircraft Leasing Enterprise 19,118,960.00 0.00 0.00 In accordance with accounting policies for bad and doubtful debt provision. Rainier Aircraft Leasing (Ireland) Ltd. 16,331,211.00 0.00 0.00 In accordance with accounting policies for bad and doubtful debt provision. Air China Co., Ltd. 23,382,955.26 0.00 0.00 In accordance with accounting policies for bad and doubtful debt provision. Total 209,239,407.19 109,051,717.65 (3) Aging analysis Balance carried forward Balance brought forward Book value Proportion Provision for bad debts Book value Proportion Provision for bad Age debts Amount (CNY) % Amount (CNY) Amount (CNY) % Amount (CNY) Within 1 year 51,941,469.78 19.12 1,142,919.16 42,992,690.15 16.80 2,038,542.29 1 – 2 years 14,220,621.28 5.23 842,507.38 31,169,427.89 12.18 669,245.45 2 – 3 years 25,446,259.18 9.37 872,347.11 17,263,584.49 6.74 10,698,669.47 3 – 4 years 16,492,449.22 6.07 10,674,554.07 133,052,336.46 51.98 80,329,246.11 4 – 5 years 133,038,338.06 48.97 80,329,246.11 23,398,644.42 9.14 17,195,422.39 Over 5 years 30,529,686.07 11.24 17,255,235.77 8,097,428.62 3.16 64,850.08Shandong Airlines Co., Ltd. 2009 Annual Report 94 Total 271,668,823.59 100.00 111,116,809.60 255,974,112.03 100.00 110,995,975.79 (4) Other accounts receivables owed by shareholders with 5% or more voting right during the reporting period Balance carried forward Balance brought forward Shareholder Amount (CNY) Provision for bad debts (CNY) Amount (CNY) Provision for bad debts (CNY) Air China Co., Ltd. 23,382,955.26 0.00 1,100.00 0.00 Total 23,382,955.26 0.00 1,100.00 0.00 (5) List the amount of top five other accounts receivable Name of company Relationship with the Company Amount (CNY) Age % of total accounts receivables Shandong Rainbow Commercial Jet Co., Ltd. Related parties 109,051,717.65 2 – 6 years 40.14 CDB Leasing Co., Ltd. Non-related parties 41,354,563.28 4 – 5 years 15.22 Air China Co., Ltd Related parties 23,382,955.26 Within 1 year 8.61 Singapore Aircraft Leasing Enterprise Non-related parties 19,118,960.00 2 – 4 years 7.04 Rainier Aircraft Leasing (Ireland) Ltd. Non-related parties 16,331,211.00 Over 4 years 6.01 Total 209,239,407.19 77.02 (6) Other accounts receivables owed by related parties Name of company Relationship with the Company Amount (CNY) % of total accounts receivables Air China Co., Ltd. Parent company 23,382,955.26 8.61 Shandong XiangYu Air Technology Co., Ltd. Under common control 2,966,545.86 1.09 Qingdao FeiSheng International Air Training Co., Ltd. Under common control 1,405,287.30 0.52 Shandong Rainbow Commercial Jet Co., Ltd. Under common control 109,051,717.65 40.14 Total 136,806,506.07 50.36 7. Inventories (1) Classification Types Balance carried forward Balance brought forwardShandong Airlines Co., Ltd. 2009 Annual Report 95 Cost (CNY) Impairment provision (CNY) Carrying value (CNY) Cost (CNY) Impairment provision (CNY) Carrying value (CNY) Consumable air equipments 63,025,085.14 353,539.79 62,671,545.35 73,263,438.33 353,539.79 72,909,898.54 Low-value consumables 1,814,143.03 0.00 1,814,143.03 762,731.56 0.00 762,731.56 Materials 270,642.83 0.00 270,642.83 605,146.87 0.00 605,146.87 Others 511,449.89 0.00 511,449.89 69,752.60 0.00 69,752.60 Total 65,621,320.89 353,539.79 65,267,781.10 74,701,069.36 353,539.79 74,347,529.57 (2) Impairment Decrease in year Type Balance brought forward (CNY) Provision in year (CNY) Reversal (CNY) Write off (CNY) Balance carried forward (CNY) Consumable air equipments 353,539.79 0.00 0.00 0.00 353,539.79 Total 353,539.79 0.00 0.00 0.00 353,539.79 8. Investment in associates Associate Shandong Rainbow Commercial Jet Co., Ltd. Type of registration Limited liability company Place of registration Jinan, Shandong Legal representative YU, Haitian Nature of business Air transportation Register capital CNY 50,000,000.00 Shareholding 45.00% Voting right 45.00% Total assets carried forward CNY 89,014,514.23 Total liabilities carried forward CNY 207,114,051.11 Net assets carried forward CNY -118,099,536.88 Total operating income for the reporting period CNY 9,951,954.75 Net profits for the reporting period CNY 584,983.70 9. Long-term equity investments (1) Disclosure Name of investee Balance brought forward (CNY) Changes in year (CNY) Balance carried forward (CNY) Accumulated impairment provision (CNY) Impairment provision in year (CNY) Ⅰ. Long-term equity investments measured at cost method China TravelSky Co., Ltd. 6,690,000.00 0.00 6,690,000.00 0.00 0.00Shandong Airlines Co., Ltd. 2009 Annual Report 96 Name of investee Balance brought forward (CNY) Changes in year (CNY) Balance carried forward (CNY) Accumulated impairment provision (CNY) Impairment provision in year (CNY) Sichuan Airlines Co., Ltd. 35,000,000.00 0.00 35,000,000.00 0.00 0.00 Jinan Yaoqiang International Airport Co., Ltd 46,662,100.00 0.00 46,662,100.00 0.00 0.00 Subtotal 88,352,100.00 0.00 88,352,100.00 0.00 0.00 Ⅱ. Long-term equity investments measured by the equity method Shandong Rainbow Commercial Jet Co., Ltd 22,500,000.00 0.00 22,500,000.00 22,500,000.00 0.00 Subtotal 22,500,000.00 0.00 22,500,000.00 22,500,000.00 0.00 Total 110,852,100.00 0.00 110,852,100.00 22,500,000.00 0.00 Continued: Name of investee Initial investment cost (CNY) Shareholding Voting right Reasons for discrepancy between shareholding and voting right Cash dividends in year (CNY) Ⅰ. Long-term equity investments measured at cost method 6,690,000.00 0.45% 0.45% n/a 1,617,642.00 Sichuan Airlines Co., Ltd. 35,000,000.00 10.00% 10.00% n/a 0.00 Jinan Yaoqiang International Airport Co., Ltd 46,662,100.00 14.00% 14.00% n/a 0.00 Subtotal 88,352,100.00 1,617,642.00 Ⅱ. Long-term equity investments measured by the equity method Shandong Rainbow Commercial Jet Co., Ltd 22,500,000.00 45.00% 45.00% n/a 0.00 Subtotal 22,500,000.00 0.00 Total 110,852,100.00 1,617,642.00 (2) Long-term equity investments held as at 31st December 2009 have no limitation on disposal imposed. 10. Fixed assets and accumulated depreciation (1) ClassificationShandong Airlines Co., Ltd. 2009 Annual Report 97 Types Balance brought forward (CNY) Increased (CNY) Decreased (CNY) Balance carried forward (CNY) ① Total historical cost 7,472,780,209.13 1,469,494,704.84 57,378,155.96 8,884,896,758.01 Houses and buildings 141,400,628.79 82,191,694.51 0.00 223,592,323.30 Aircrafts and aircraft engine 6,801,818,456.15 1,336,146,595.98 47,550,000.00 8,090,415,052.13 High-value rotables 401,057,334.04 34,208,785.91 4,141,745.89 431,124,374.06 Transportation vehicles 34,555,729.63 6,452,025.61 2,810,648.11 38,197,107.13 Machinery, equipments and others 93,948,060.52 10,495,602.83 2,875,761.96 101,567,901.39 ② Total accumulated depreciation 1,788,705,263.67 517,592,568.89 53,001,839.51 2,253,295,993.05 Houses and buildings 22,393,646.58 4,301,143.36 0.00 26,694,789.94 Aircrafts and aircraft engine 1,584,732,713.81 476,608,312.35 47,085,525.44 2,014,255,500.72 High-value rotables 119,773,454.99 24,274,952.37 965,915.31 143,082,492.05 Transportation vehicles 18,294,678.86 2,787,131.42 2,408,258.32 18,673,551.96 Machinery, equipments and others 43,510,769.43 9,621,029.39 2,542,140.44 50,589,658.38 ③ Total carrying value 5,684,074,945.46 6,631,600,764.96 Houses and buildings 119,006,982.21 196,897,533.36 Aircrafts and aircraft engine 5,217,085,742.34 6,076,159,551.41 High-value rotables 281,283,879.05 288,041,882.01 Transportation vehicles 16,261,050.77 19,523,555.17 Machinery, equipments and others 50,437,291.09 50,978,243.01 Note: ①Depreciation increase in year totals CNY 517,592,568.89. The total value of construction projects completed and recognised as non-current assets in year is CNY 1,348,817,938.64. ② Total value of non-current assets pledged as security for borrowings and leased aircraft engines with limitation imposed is CNY 5,615,349,974.29. (2) Leased fixed assets under financial leases Type Historical cost (CNY) Accumulated depreciation (CNY) Impairment (CNY) Balance as at 2009.12.31 (CNY) Aircrafts and aircraft engines 2,512,216,335.42 891,592,319.11 0.00 1,620,624,016.31 Total 2,512,216,335.42 891,592,319.11 0.00 1,620,624,016.31 (3) Fixed assets pending ownership registration Types Balance as at 2009.12.31 (CNY) Reasons for pending ownership registration Jinan cargo arrival and departure warehouses 18,901,312.01 Land rented from Jinan Air Control, not eligible for ownership registration Qingdao aircraft maintenance workshops 42,181,000.00 Construction completed in December 2009, ownership registration in process Yantai terminal building 20,345,000.00 Construction completed in December 2009, ownership registration in process Total 81,427,312.01 (4) Impairment No impairment provision was provided as at 31st December 2009 as no evidence suggestsShandong Airlines Co., Ltd. 2009 Annual Report 98 assets has impaired. 11. Construction in progress (1) Details of construction in progress Balance carried forward Balance brought forward Types Book value (CNY) Impairment provision (CNY) Carrying value (CNY) Book value (CNY) Impairment provision (CNY) Carrying value (CNY) B737-800 aircrafts 340,589,155.31 0.00 340,589,155.31 1,174,964,394.73 0.00 1,174,964,394.73 ARJ21-700 aircrafts 60,778,195.00 0.00 60,778,195.00 60,778,195.00 0.00 60,778,195.00 B737NG simulated aircrafts 19,435,867.69 0.00 19,435,867.69 0.00 0.00 0.00 Maintenance workshops, terminal buildings and arrival and departure warehouses 0.00 0.00 0.00 39,287,553.61 0.00 39,287,553.61 Other construction projects 1,474,227.58 0.00 1,474,227.58 2,714,009.98 0.00 2,714,009.98 Total 422,277,445.58 0.00 422,277,445.58 1,277,744,153.32 0.00 1,277,744,153.32 (2) Changes of significant construction in progress Types Balance brought forward (CNY) Increase in year (CNY) Transferred to fixed assets (CNY) Other decreased (CNY) Balance carried forward (CNY) B737-800 aircrafts 1,174,964,394.73 749,667,802.22 1,266,904,021.63 317,139,020.01 340,589,155.31 ARJ21-700 aircrafts 60,778,195.00 0.00 0.00 0.00 60,778,195.00 B737NG simulated aircrafts 0.00 19,435,867.69 0.00 0.00 19,435,867.69 Maintenance workshops, terminal buildings and arrival and departure warehouses 39,287,553.61 42,139,758.40 81,427,312.01 0.00 0.00 Other construction projects 2,714,009.98 461,696.00 486,605.00 1,214,873.40 1,474,227.58 Total 1,277,744,153.32 811,705,124.31 1,348,817,938.64 318,353,893.41 422,277,445.58 (3) Capitalisation of construction progress Projects Balance brought forward (CNY) Increase in year (CNY) Transferred to fixed assets (CNY) Other decrease (CNY) Balance carried forward (CNY) Source of finance B737-800 10,435,598.27 19,782,529.30 24,501,059.43 859,347.13 4,857,721.01 Loans from financialShandong Airlines Co., Ltd. 2009 Annual Report 99 aircrafts institutions ARJ21-700 aircrafts 487,587.70 0.00 0.00 0.00 487,587.70 Total 10,923,185.97 19,782,529.30 24,501,059.43 859,347.13 5,345,308.71 (4) Assets pledged as security The corresponding carrying value of aircraft purchase rights pledged as security for borrowings in construction in progress as at 31st December 2009 is 340,822,347.97. (5) Impairment No impairment provision is provided as at 31st December 2009 as no evidence suggests construction project impairment. (6) Value decrease of construction in progress The 66.95% decrease from the balance brought forward to the balance carried forward principally results from the conversion of purchased aircrafts to non-current assets. 12. Intangible assets (1) Details of intangible assets Types Balance brought forward (CNY) Increase in year (CNY) Decrease in year (CNY) Balance carried forward (CNY) A. Total historical cost 49,044,696.49 1,763,436.64 0.00 50,808,133.13 Land use rights 49,044,696.49 1,763,436.64 0.00 50,808,133.13 B. Total accumulated amortization 2,099,622.32 813,437.60 0.00 2,913,059.92 Land use rights 2,099,622.32 813,437.60 0.00 2,913,059.92 C. Total net value 46,945,074.17 0.00 0.00 47,895,073.21 Land use rights 46,945,074.17 0.00 0.00 47,895,073.21 D. Total accumulated impairment loss 0.00 0.00 0.00 0.00 Land use rights 0.00 0.00 0.00 0.00 E. Total carrying value 46,945,074.17 0.00 0.00 47,895,073.21 Land use rights 46,945,074.17 0.00 0.00 47,895,073.21 (2) Impairment No impairment provision was provided as at 31st December 2009 as no evidence suggests intangible asset has impaired. 13. Long-term deferred assets Type Balance Brought forward Increase in year (CNY) Amortisation in year (CNY) Other decreased (CNY) Balance carried forward (CNY) Reasons for other decreaseShandong Airlines Co., Ltd. 2009 Annual Report 100 (CNY) Pilot recruitment and training expenditure 208,312,781.55 65,708,936.20 48,353,314.82 9,122,151.97 216,546,250.96 Training fee loss resulting from closure of CAPT Pilot Academy Total 208,312,781.55 65,708,936.20 48,353,314.82 9,122,151.97 216,546,250.96 14. Deferred income tax assets and deferred income tax liabilities (1) Recognised deferred income tax assets and deferred income tax liabilities Types Balance carried forward (CNY) Balance brought forward (CNY) Deferred income tax assets Deductable temporary difference resulting from impairment provision 27,939,289.24 27,865,424.20 Impairment provision for inventories 88,384.95 88,384.95 Provision for asset substantial repair 60,683,229.57 39,207,218.58 Provision for wages and salaries due 3,126,007.58 1,606,129.00 Amortisation of pre-incorporation expenses 0.00 7,001.38 Total 91,836,911.34 68,774,158.11 Deferred income tax liabilities Fair value changes of tradable financial assets 2,835,461.62 5,865,203.03 Unrealised exchange surplus 0.00 13,951,373.43 Total 2,835,461.62 19,816,576.46 (2) Corresponding temporary differences to assets and liabilities causing temporary differences Types Temporary difference balance carried forward( CNY) Corresponding temporary differences to assets causing temporary differences Deductable temporary difference resulting from impairment provision 111,757,156.97 Impairment provision for inventories 353,539.79 Provision for substantial asset repair 242,732,918.26 Provision for wages and salaries due 12,504,030.31 Total 367,347,645.33 Corresponding temporary differences to liabilities causing temporary differences Fair value changes of tradable financial assets 11,341,846.48 Total 11,341,846.48 (3) Increase of deferred income tax assets in year and decrease of deferred income tax liabilities in year Deferred income tax assets increase in year of 33.53% principally results from the in-year increase of provision for substantial asset repair; deferred income tax liabilities decrease in year of 85.69%Shandong Airlines Co., Ltd. 2009 Annual Report 101 principally results from tax adjustments for fair value changes of tradable financial assets and unrealised exchange difference. 15. Impairment provisions Decrease in year Types Balance brought forward (CNY) Increase in year (CNY) Reversal (CNY) Write off (CNY) Balance carried forward (CNY) (1) Impairment provision for accounts receivables 521,732.03 118,615.34 0.00 0.00 640,347.37 (2) Impairment provision for other accounts receivables 110,995,975.79 120,833.81 0.00 0.00 111,116,809.60 (3) Impairment provision for inventories 353,539.79 0.00 0.00 0.00 353,539.79 (4) Impairment provision for long-term equity investments 22,500,000.00 0.00 0.00 0.00 22,500,000.00 Total 134,371,247.61 239,449.15 0.00 0.00 134,610,696.76 16. Short-term loans Types Balance carried forward (CNY) Balance brought forward (CNY) Hypothecated loans 71,537,020.88 0.00 Credits 0.00 70,503,800.00 Collaterals 0.00 126,383,714.55 Guaranteed loans 668,282,000.00 810,000,000.00 Total 739,819,020.88 1,006,887,514.55 17. Notes payables (1) Details of notes payables Types Balance carried forward (CNY) Balance brought forward (CNY) Trade acceptances 0.00 10,000,000.00 Bank acceptances 182,124,331.32 0.00 Total 182,124,331.32 10,000,000.00 (2) The 17.21 times in-year increase of notes payables from the balance brought forward principally results from the increased usage of bill financing in the period.Shandong Airlines Co., Ltd. 2009 Annual Report 102 18. Accounts payable (1) Aging analysis Age Balance carried forward (CNY) Balance brought forward (CNY) Within 1 year 804,837,986.14 866,216,091.36 Over 1 year 7,194,963.93 9,102,968.75 Total 812,032,950.07 875,319,060.11 (2) Accounts payables owed to shareholders or related parties with 5% or more voting right as at 31st December 2009 Companies Nature of liability Balance carried forward (CNY) Balance brought forward (CNY) Shandong International Air Training Co., Ltd. Taining fees 1,816,020.00 0.00 Qingdao FeiSheng International air training Co., Ltd. Taining fees 3,750,453.00 0.00 Air China Co., Ltd. Ground services, delay and claim for lossed baggage 3,962,987.26 0.00 Shandong TaiGu Aircraft Projecting Co., Ltd. Maintenance expense and air route subscription 13,641,513.24 717,414.49 Total 23,170,973.50 717,414.49 (3) There is no accounts payable of significant value of which the age is over 1 year. 19. Advances from customers (1) Aging analysis Type Balance carried forward (CNY) Balance brought forward (CNY) Within 1 year 117,859,114.71 87,709,493.54 Over 1 year 97,125.72 26,000.00 Total 117,956,240.43 87,735,493.54 (2) The 34.45% in-year increase of advances from customers from the balance brought forward principally results from the increased transportation capacity. 20. Payroll payablesShandong Airlines Co., Ltd. 2009 Annual Report 103 Types Balance brought forward (CNY) Increase in year (CNY) Payments in year (CNY) Balance carried forward (CNY) (1) Wages and salaries, bonuses, subsidies and allowances 84,396,042.97 482,451,434.17 444,310,116.29 122,537,360.85 (2) Employee benefits 0.00 25,631,021.22 25,631,021.22 0.00 (3) Social insurance fee 251.24 63,616,490.48 63,616,741.72 0.00 Within: ① Medical insurance 0.00 222,504.55 222,504.55 0.00 ②Basic retirement insurance 251.24 34,254,984.51 34,255,235.75 0.00 ③Annuity fee 0.00 23,584,727.98 23,584,727.98 0.00 ④Unemployment fee 0.00 3,455,154.75 3,455,154.75 0.00 ⑤ Work injury insurance 0.00 885,837.83 885,837.83 0.00 ⑥Pregnancy insurance 0.00 1,213,280.86 1,213,280.86 0.00 (4) Housing accumulation fund 3,042.24 74,802,210.61 74,793,106.61 12,146.24 (5) Labor union fee and employee education fee 6,720,630.62 10,497,256.42 4,713,856.73 12,504,030.31 (6) Non-monetary benefits 0.00 0.00 0.00 0.00 (7) Redemption of termination of labor contract 0.00 62,358.00 62,358.00 0.00 (8) Others 0.00 1,020,421.78 1,020,421.78 0.00 Within: Share-based payments settled by cash 0.00 0.00 0.00 0.00 Total 91,119,967.07 658,081,192.68 614,147,622.35 135,033,537.40 Note: (1) There is no payroll in arrears within payroll payables. (2) The 48.19% in-year increase of payroll payables from the balance brought forward principally results from the increased number of employees and effectiveness of the Company’s operation.Shandong Airlines Co., Ltd. 2009 Annual Report 104 21. Tax payables Types of Tax Balance carried forward (CNY) Balance brought forward (CNY) VAT and customs 0.00 42,093,679.29 Business Tax 13,493,990.29 4,783,260.78 Enterprise income tax 102,676,537.26 7,878,180.11 Property tax 1,818,917.29 1,174,020.58 Tenure tax 114,655.77 3,468.00 Personal income tax 1,594,343.92 1,846,373.79 Stamp duty 3,567,551.64 3,099,249.32 Infrastructure fund for civil aviation 11,478,774.38 9,223,996.01 Construction fund for civil airports 34,178,042.00 26,114,804.00 Withholding income tax 8,641,320.63 15,119,191.76 Others 292.31 1,017.73 Total 177,564,425.49 111,337,241.37 Note: The 59.48% in-year increase of tax payables from the balance brought forward principally results from the increased income tax payables at the year end. 22. Interest payables Type Balance carried forward (CNY) Balance brought forward (CNY) Interest on borrowings 4,001,134.66 9,634,990.00 Total 4,001,134.66 9,634,990.00 Note: The 58.47% in-year decrease of interest payables from the balance brought forward principally results from the decreased interest rates on foreign currency borrowings at the year end. 23. Other accounts payable (1) Aging analysis Age Balance carried forward (CNY) Balance brought forward (CNY) Within 1 year 78,664,291.44 117,844,706.36 Over 1 year 46,266,172.15 43,892,042.34 Total 124,930,463.59 161,736,748.70 (2) Other accounts payables owed to shareholders or related parties with 5% or more voting right as at 31st December 2009 Companies Nature of liability Balance carried forward (CNY) Balance brought forward (CNY)Shandong Airlines Co., Ltd. 2009 Annual Report 105 Shandong Airlines Group Co., Ltd. Account balance 4,051,799.74 5,551,323.91 Air China Co., Ltd. Quality margin 20,000,000.00 20,000,000.00 Shandong International Air Training Co., Ltd. Account balance 3,465,953.82 0.00 Total 27,517,753.56 25,551,323.91 (3) Other accounts payables of significant value due for more than one year Company Balance (CNY) Age Reasons for unsettlement Air China Co., Ltd. 20,000,000.00 2 – 3 years Wet lease not yet expired, guarantee unsettled Total 20,000,000.00 24. Non-current liabilities due within one year (1) Types Types Balance carried forward (CNY) Balance brought forward (CNY) Long-term borrowings due within 1 year 393,832,752.98 487,168,908.19 Long-term accounts payables due with 1 year 209,832,453.69 227,593,094.74 Subtotal 603,665,206.67 714,762,002.93 Less: Unrecognised financial lease expenditure 68,556,748.96 99,172,325.71 Total 535,108,457.71 615,589,677.22 (2) Long-term borrowings due within one year ① Types Types Balance carried forward (CNY) Balance brought forward (CNY) Collaterals 393,832,752.98 415,084,540.74 Guaranteed loans 0.00 72,084,367.45 Total 393,832,752.98 487,168,908.19 ② Details of the top five balances of long-term borrowings due within one year Balance carried forward Balance brought forward Companies Start date Due date Currency Amount in foreign currency Amount in reporting currency (CNY) Amount in foreign currency Amount in reporting currency (CNY)Shandong Airlines Co., Ltd. 2009 Annual Report 106 Balance carried forward Balance brought forward Companies Start date Due date Currency Amount in foreign currency Amount in reporting currency (CNY) Amount in foreign currency Amount in reporting currency (CNY) USD account, Jinan ShiZhong Branch China Construction Bank 2007-8-29 2010-8-28 USD $12,000,000.00 81,938,400.00 $0.00 0.00 USD account, Shandong Branch China Development Bank 2008-9-2 Installment repayment USD $7,481,350.00 51,084,154.07 $0.00 0.00 CNY account, Jinan Branch China Minsheng Banking Corp., Ltd. 2005-4-7 Installment repayment CNY 50,000,000.00 50,000,000.00 0.00 0.00 USD account, Jinan Branch Bank of China 2005-7-15 Installment repayment USD $6,461,066.40 44,117,453.59 $0.00 0.00 USD account, DongJiao Branch Industrial and Commercial Bank of China 2009-6-30 Installment repayment USD $4,000,000.00 27,312,800.00 $0.00 0.00 Total 254,452,807.66 0.00 Note: The interest rates applicable to the above long-term borrowings as at 31st December 2009 are between 1.7825% and 5.9400%. (3) Borrowings remained unsettled after the due dates There is no borrowing remained unsettled after the due date as at 31st December 2009. (4) Long-term accounts payables due within one year Companies Credit term Original amount (CNY) Interest rate (%) Interest accrued (CNY) Balance carried forward (CNY) Conditions of borrowing New York Branch, Commerzbank Twelve months 43,039,462.58 6.01%-6.025 734,518.35 42,304,944.23 Financial lease for aircraft CDB Leasing Co., Ltd. Twelve months 166,792,991.11 6.4872 67,822,230.61 98,970,760.50 Financial lease for aircraft 25. Long-term borrowingsShandong Airlines Co., Ltd. 2009 Annual Report 107 (1) Types Type Balance carried forward (CNY) Balance brought forward (CNY) Hypothecated loans 162,717,904.24 0.00 Collaterals 2,024,291,990.60 1,157,489,900.59 Guaranteed loans 1,215,742,693.55 2,001,843,376.80 Total 3,402,752,588.39 3,159,333,277.39 (2) Details of the top five balances of long-term borrowings Balance carried forward Balance brought forward Company Start date Due date Currency Amount in foreign currency Amount in reporting currency (CNY) Amount in foreign currency Amount in reporting currency (CNY) CNY account, Jinan Branch China Minsheng Banking Corp., Ltd. 2005-4-7 Installment repayment CNY 227,000,000.00 227,000,000.00 270,000,000.00 270,000,000.00 USD account, DongJiao Branch Industrial and Commercial Bank of China 2009-6-30 Installment repayment USD $34,491,654.64 235,515,916.21 0.00 0.00 USD account, Jinan Branch Bank of China 2005-12-21 Installment repayment USD $26,213,260.00 178,989,381.93 $26,213,260.00 179,157,146.80 USD account, Jinan Branch Bank of China 2005-10-19 Installment repayment USD $26,071,798.00 178,023,451.10 $26,071,798.00 178,190,310.61 USD account, Jinan Branch Bank of China 2005-7-15 Installment repayment USD $19,195,533.60 131,070,942.53 $25,656,600.00 175,352,598.36 Total 950,599,691.77 802,700,055.77 Note: The interest rates applicable to the above long-term borrowings as at 31st December 2009 are between 1.7825% and 5.9400%. 26. Long-term accounts payables (1) The top five balances of long-term accounts payablesShandong Airlines Co., Ltd. 2009 Annual Report 108 Company Credit term Original amount (CNY) Interest rate (%) Interest accrued (CNY) Balance carried forward (CNY) Conditions of borrowing CDB Leasing Co., Ltd. 114 months 1,300,175,375.58 6.4872 331,206,923.64 968,968,451.94 Financial lease Total 1,300,175,375.58 331,206,923.64 968,968,451.94 (2) Details of financial lease payables within long-term accounts payables Balance carried forward Balance brought forward Companies Amount in original currency Currency Amount in reporting currency (CNY) Amount in original currency Currency Amount in reporting currency (CNY) CDB Leasing Co., Ltd 968,968,451.94 CNY 968,968,451.94 1,071,020,669.93 CNY 1,071,020,669.93 New York Branch, Commerzbank 0.00 USD 0.00 $6,355,783.14 USD 43,439,235.45 Total 968,968,451.94 1,114,459,905.38 27. Other non-current liabilities Items Balance carried forward (CNY) Balance brought forward (CNY) Gains from CRJ post-sale buy-back 2,087,462.11 3,479,150.11 Gains from reward points 19,891,652.55 9,840,407.72 Subsidy exclusively for post-disaster rehabitation 4,739,458.34 5,000,000.00 SMS fund 1,000,000.00 0.00 Total 27,718,573.00 18,319,557.83 (1) Asset-connected government grants Items Balance brought forward (CNY) Increase in year (CNY) Decrease in year (CNY) Balance carried forward (CNY) Subsidy exclusively for post-disaster rehabitation 5,000,000.00 0.00 260,541.66 4,739,458.34 SMS fund 0.00 1,000,000.00 0.00 1,000,000.00 Total 5,000,000.00 1,000,000.00 260,541.66 5,739,458.34 (2) The 51.31% in-year increase of other non-current liabilities from the balance brought forward principally results from the increased reward points.Shandong Airlines Co., Ltd. 2009 Annual Report 109 28. Share capital Change of number of shares in year (+/–) Items Balance brought forward (Unit:Shares) Share allotment Bonus issue Shares converted from accumulated fund Others Subtotal Balance carried forward (Unit:Shares) (1) Unlisted floating shares ① Promoter’s shares 260,000,000.00 0.00 0.00 0.00 0.00 0.00 260,000,000.00 Including: State-owned shares 259,801,000.00 0.00 0.00 0.00 0.00 0.00 259,801,000.00 Shares held by domestic legal persons 199,000.00 0.00 0.00 0.00 0.00 0.00 199,000.00 Shares held by foreign 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 Private placement of legal person’s shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 ③ Staff shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 ④ Preferred shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Within: Transferred allotted shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total unlisted floating shares 260,000,000.00 0.00 0.00 0.00 0.00 0.00 260,000,000.00 (2) Listed floating shares ① Domestic shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Within: shares held by the management 0.00 0.00 0.00 0.00 0.00 0.00 0.00 ② Domestic shares in foreign currency 140,000,000.00 0.00 0.00 0.00 0.00 0.00 140,000,000.00 Total listed floating shares 140,000,000.00 0.00 0.00 0.00 0.00 0.00 140,000,000.00 (3) Floating shares with imposed limitation on sales 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (4) Total 400,000,000.00 0.00 0.00 0.00 0.00 0.00 400,000,000.00 Note: ① The par value of the above shares is CNY 1.00. ② The above shares have been verified by the Report on the Verification of Capital (YanQianZi[2000]NO.27) issued by Shandong Yantai QianJu Certified Public Accountants Co., Ltd. 29. Capital reserveShandong Airlines Co., Ltd. 2009 Annual Report 110 Type Balance brought forward (CNY) Increase in year (CNY) Decrease in year (CNY) Balance carried forward (CNY) Share premium 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 Type Balance brought forward (CNY) Increase in year (CNY) Decrease in year (CNY) Balance carried forward (CNY) Statutory surplus reserve 29,490,727.77 30,085,341.26 0.00 59,576,069.03 Total 29,490,727.77 30,085,341.26 0.00 59,576,069.03 31. Undistributed profits Type Current reporting period (CNY) Last reporting period (CNY) Balance brought forward 36,471,405.69 -39,938,895.93 Add: Profits for the year 302,282,325.68 80,981,442.68 Add: Other transfers 0.00 0.00 Less: Statutory surplus reserve 30,085,341.26 4,571,141.06 Less: Employee bonus and benefit fund 0.00 0.00 Less: Reserve fund 0.00 0.00 Less: Enterprise development fund 0.00 0.00 Less: Repaid investments 0.00 0.00 Less: Preferred dividends 0.00 0.00 Less: Discretionary surplus reserve 0.00 0.00 Less: Ordinary dividends 0.00 0.00 Less: Ordinary dividends converted to capital 0.00 0.00 Balance carried forward 308,668,390.11 36,471,405.69 32. Operating income and operating costs (1) Operating income and operating costsShandong Airlines Co., Ltd. 2009 Annual Report 111 Items Current reporting period (CNY) Last reporting period (CNY) Income from principal activities 5,301,584,923.05 4,985,950,205.16 Income from other activities 64,528,440.63 63,440,911.31 Total operating income 5,366,113,363.68 5,049,391,116.47 Principal activity costs 4,106,686,199.09 4,122,612,353.88 Other activity costs 3,347,076.10 33,511,012.84 Total operating costs 4,110,033,275.19 4,156,123,366.72 (2) Operating income and operating costs by segment Current reporting period Last reporting period Segment Operating income (CNY) Operating costs (CNY) Operating income (CNY) Operating costs (CNY) Air transportation 5,274,362,420.93 4,085,895,627.76 4,953,048,164.35 4,101,665,962.58 Cargos and logistics 7,015,287.38 1,910,437.19 6,020,693.27 1,313,169.79 Hospitality 22,984,060.08 19,179,045.59 22,538,565.66 15,614,100.05 Rental services 854,642.06 30,000.00 31,801,807.87 35,128,834.04 Others 60,896,953.23 3,018,164.65 35,981,885.32 2,401,300.26 Total 5,366,113,363.68 4,110,033,275.19 5,049,391,116.47 4,156,123,366.72 (3) Details of operating revenues from top five clients Clients Operating income(CNY) % of total operating income Air China Co., Ltd. 642,432,367.01 11.97 Beijing DeLong Travel Service Co., Ltd. 30,286,076.69 0.56 Inner-Mongolia Civil Airport Co., Ltd. 16,550,030.87 0.31 WuYiShan LianHang Travel Service Co., Ltd. 10,447,830.50 0.19 Shenzhen HengLu Logistics Co., Ltd. 2,576,000.00 0.05 Total 702,292,305.07 13.08 33. Business tax and surtax Item Current reporting period (CNY) Last reporting period (CNY) Rate Business tax 158,797,763.77 132,823,862.65 3%、5% Total 158,797,763.77 132,823,862.65Shandong Airlines Co., Ltd. 2009 Annual Report 112 34. Selling expense The increase of 46.43% from the previous reporting period to current reporting period mainly due to increased the scale of the Company’s aircraft team and sales, as well as increased the computer ticket reservation fees and agency fees. 35. Financial costs Items Current reporting period (CNY) Last reporting period (CNY) Interest expenses 248,349,435.60 328,596,797.15 Less: Interest income 1,107,957.64 5,839,812.54 Exchange differences -781,979.99 -78,963,306.70 Bank charges and others 5,411,721.86 9,747,478.66 Total 251,871,219.83 253,541,156.57 36. Impairment loss Item Current reporting period (CNY) Last reporting period (CNY) Bad and doubtful debt expenses 239,449.15 -551,458.89 Total 239,449.15 -551,458.89 37. Gains from fair value changes Source of fair value changes Current reporting period (CNY) Last reporting period (CNY) Tradable financial assets -12,118,965.63 -19,293,822.87 Total -12,118,965.63 -19,293,822.87 38. Investment income (1) Details of investment income Items Current reporting period (CNY) Last reporting period (CNY) Income from long-term equity investments measured at cost 1,617,642.00 1,130,610.00 Income from long-term equity investments measured by the equity method 0.00 -35,915.68 Gains from disposals of long-term equity investments 0.00 0.00 Gains from possession of tradable financial assets 2,098,225.94 10,081,058.70 Others 0.00 0.00 Total 3,715,867.94 11,175,753.02Shandong Airlines Co., Ltd. 2009 Annual Report 113 (2) Income from long-term equity investments measured at cost Investee Current reporting period (CNY) Last reporting period (CNY) Reasons for change China TravelSky Co., Ltd. 1,617,642.00 1,130,610.00 Increase in cash dividends Total 1,617,642.00 1,130,610.00 (3) As at 31st December 2009, there is no investment of which income remittance is imposed with limitation. (4) The 66.75% decrease of investment income from last reporting period principally results from the decreased gains from settlement of tradable financial assets. 39. Non-operating income (1) Details of non-operating income Items Current reporting period (CNY) Last reporting period (CNY) Gains from disposals of non-current assets 16,254,369.34 0.00 Including: Gains from disposals of non-current assets 16,254,369.34 0.00 Government grants 135,213,761.47 42,232,215.00 Others 3,654,130.06 1,661,594.88 Total 155,122,260.87 43,893,809.88 (2) Government grants Items Current reporting period (CNY) Last reporting period (CNY) Comment Repayment of infrastructure fund for civil aviation 114,488,319.75 0.00 CaiJian[2009]No.4 issued by Subsidies for branch line aviation 15,910,000.00 37,409,700.00 Subsidies granted by local Civil Aviation Administration Subsidies for earthquake assistance 0.00 3,000,000.00 Civil Aviation Administration of China Others 4,815,441.72 1,822,515.00 Air route subsidies granted by local governments Total 135,213,761.47 42,232,215.00 (3) The 2.53 times increase of non-operating income from last reporting period principally results from the increased gains from repayment of infrastructure fund for civil aviation.Shandong Airlines Co., Ltd. 2009 Annual Report 114 40. Non-operating expenses Items Current reporting period (CNY) Last reporting period (CNY) Total losses from disposals of non-current assets 13,495,868.42 10,915,236.47 Within: Losses from disposals of non-current assets 4,373,716.45 10,915,236.47 Others 26,076.75 477,113.76 Total 13,521,945.17 11,392,350.23 41. Income tax expenses Items Current reporting period (CNY) Last reporting period (CNY) Income tax for current period computed in accordance with tax laws and regulations 140,661,971.49 13,279,231.57 Adjustments of deferred income tax -40,043,868.07 13,342,983.79 Total 100,618,103.42 26,622,215.36 Note: The 2.78 times increase of income tax expenses from last reporting period principally results from the increased total profits. 42. Computation of basic earnings per share and diluted earnings per share Current reporting period (CNY) Last reporting period (CNY) Profits for the reporting period Basic earnings per share Diluted earnings per share Basic earnings per share Diluted earnings per share Net profits attributable to ordinary shareholders 0.76 0.76 0.20 0.20 Net profits attributable to ordinary shareholders after deducting extraordinary gains or losses 0.51 0.51 0.23 0.23 Basic earnings per share = P0 ÷ S S = S0 + S1 + Si × Mi ÷ M0 - Sj × Mj ÷ M0 - Sk P0: net profits attributable to ordinary shareholders or net profits attributable to ordinary shareholders after deducting extraordinary gains or losses S: weighted average of number of listed ordinary shares S0: number of ordinary shares brought forward S1: number of shares increased in the reporting period resulting from conversion of accumulated fund or dividends Si: number of shares increased in the reporting period resulting from share issues or convertible bond issues Sj: number of shares decreased in the reporting period resulting from share buy-backs Sk: number of shares decreased in the reporting period resulting from share contractionShandong Airlines Co., Ltd. 2009 Annual Report 115 M0: number of months in the reporting period Mi: cumulative number of months from the second month of the share number increase month to the last month of the reporting period Mj: cumulative number of months from the second month of the share number decrease month to the last month of the reporting period Diluted earnings per share = P1 / (S0 + S1 + Si × Mi ÷ M0 - Sj × Mj ÷ M0 - Sk + the weighted average of number of ordinary shares increased by share warrants, share options and convertible bonds) P1: net profits attributable to ordinary shareholders or net profits attributable to ordinary shareholders after deducting extraordinary gains or losses adjusted for dilutive impact in accordance with CAS and relevant regulations 43. Notes to the consolidated cash flow statement (1) Cash received related to other operating activities Items Current reporting period (CNY) Last reporting period (CNY) Government grants 135,213,761.47 47,232,215.00 Interest income from bank deposits 1,107,957.64 5,839,812.54 Cash received from non-operating activities 3,654,130.06 1,661,594.88 Cash received from accounts balances 4,118,202.36 24,792,036.03 Total 144,094,051.53 79,525,658.45 (2) Cash paid related to other operating activities Items Current reporting period (CNY) Last reporting period (CNY) Bank charges 10,533,288.71 9,747,478.66 Cash paid from non-operating activities 26,076.75 477,113.76 Cash paid from accounts balances 13,080,052.93 4,898,582.20 Cash paid from selling expenses and administrative expenses 73,479,851.89 64,370,315.89 Total 97,119,270.28 79,493,490.51 (3) Cash paid related to other financing activities Items Current reporting period (CNY) Last reporting period (CNY) Cash paid to guarantee hypothecated loans 71,537,020.88 0.00Shandong Airlines Co., Ltd. 2009 Annual Report 116 Cash paid to guarantee bank acceptance 46,259,417.00 0.00 Cash paid for financial leases of aircrafts 209,987,105.41 273,796,099.64 Total 327,783,543.29 273,796,099.64 44. Supplements to the consolidated cash flow statement (1) Supplements to the consolidated cash flow statement (1) Cash flows adjusted from net profits Current reporting period (CNY) Last reporting period (CNY) Net profits 302,743,202.40 81,638,612.20 Add: Impairment losses 239,449.15 -551,458.89 Add: Depreciation of non-current assets and productive biological assets and losses of fuel 517,592,568.89 436,398,118.13 Add: Amortisation of intangible assets 813,437.60 662,098.25 Add: Amortisation of long-term deferred assets 48,353,314.82 13,699,336.63 Add: Losses on disposals of non-current assets, intangible assets and long-term assets (minus sign representing gains) -6,132,054.93 -19,700.00 Add: Losses arising from scrapping non-current assets (minus sign representing gains) 3,373,554.01 10,915,236.47 Add: Losses arising from fair value changes (minus sign representing gains) 12,118,965.63 19,293,822.87 Add: Financial costs (minus sign representing income) 248,224,796.69 252,838,009.68 Add: Investment losses (minus sign representing income) -3,715,867.94 -11,175,753.02 Add: Decrease of deferred income tax assets (minus sign representing increase) -23,062,753.23 4,215,066.07 Add: Increase of deferred income tax liabilities (minus sign representing decrease) -16,981,114.84 9,127,917.72 Add: Decrease of inventories (minus sign representing increase) 9,079,748.47 -22,109,390.20 Add: Decrease of operating accounts receivables (minus sign representing increase) -18,730,591.77 83,801,585.12 Add: Increase of operating accounts payables (minus sign representing decrease) 243,430,495.47 181,099,605.53 Add: Others 0.00 0.00 Net cash flows from operating activities 1,317,347,150.42 1,059,833,106.56 (2) Non-cash-flow related significant investing and financing activities Conversion of debt to equity 0.00 0.00 Conversion debt instruction of maturity less than 1 year 0.00 0.00Shandong Airlines Co., Ltd. 2009 Annual Report 117 (1) Cash flows adjusted from net profits Current reporting period (CNY) Last reporting period (CNY) Non-current assets under financial leases 0.00 0.00 (3) Net change of cash and cash equivalents Cash carried forward 49,333,429.81 44,937,058.88 Less: Cash brought forward 44,937,058.88 42,131,848.82 Add: Cash equivalents carried forward 0.00 0.00 Less: Cash equivalents brought forward 0.00 0.00 Net increase of cash and cash equivalents 4,396,370.93 2,805,210.06 (2) Composition of cash and cash equivalents Items Current reporting period (CNY) Last reporting period (CNY) Ⅰ. Cash 49,333,429.81 44,937,058.88 Including: Cash on hand 341,204.85 220,541.02 Bank deposit capable of immediate payments 48,992,224.96 44,716,517.86 Other monetary assets capable of immediate payments 0.00 0.00 Ⅱ. Cash equivalents 0.00 0.00 Including: Debt instruments matured with three months 0.00 0.00 Ⅲ. Balance of cash and cash equivalents 49,333,429.81 44,937,058.88 Including: Cash and cash equivalents with imposed usage limitation 0.00 0.00 Ⅵ Related party relationships and transactions 1. Details of the Company’s parent company Name Shandong Airlines Group Co., Ltd. Relationship Parent Type of registration State-owned company Place of registration Jinan, Shandong Legal representative FENG, Gang Nature of business Air transportation Registered capital CNY 580,000,000.00 Shareholding in the Company 42.00% Voting right in the Company 42.00% Ultimate parent of the Company Air China Co., Ltd. Institution code 61407164-7Shandong Airlines Co., Ltd. 2009 Annual Report 118 2. Details of the Company’s subsidiaries Name Qingdao International Air Logistics Centre Co., Ltd. Relationship Subsidiary Type of registration Sino-foreign joint venture Place of registration Qingdao, Shandong Legal representative SU, Zhongmin Nature of business Transportation warehousing Registered capital CNY 30,000,000.00 Shareholding 70.00% Voting right 70.00% Institution code 73349654-1 3. Details of the company’s associated companies Name Shandong Rainbow Commercial Jet Co., Ltd Type of registration Limited liability company Place of registration Jinan, Shandong Legal representative YU, Haitian Nature of business Air transportation Registered capital CNY 50,000,000.00 Shareholding 45.00% Voting right 45.00% Total assets carried forward CNY 89,014,514.23 Total liabilities carried forward CNY 207,114,051.11 Net assets carried forward CNY -118,099,536.88 Total operating income for the reporting period CNY 9,951,954.75 Net profits for the reporting period CNY 584,983.70 Relationship Associate Institution code 72497146 4. Other related parties Name of company Relationships Institution code Shandong TaiGu Aircraft Projecting Co., Ltd. Under common control 70588297-1 Shandong Airlines House Management Co., Ltd. Under common control 77741596-9 Shandong XiangYu Air Technology Co., Ltd. Under common control 720736454 Qingdao FeiSheng International Air Training Co., Ltd. Under common control 72557262-0 Shandong International Air Training Co., Ltd. Under common control 72755322-0 Shandong Rainbow Commercial Jet Co., Ltd. Associate 72497146 5. Transactions with related parties (1) Acceptance of goods and serviceShandong Airlines Co., Ltd. 2009 Annual Report 119 Current reporting period Last reporting period Related parties Type of transaction Transaction description Pricing and decision making process Amount (CNY) % of transaction within Same type Amount (CNY) % of transaction within same type Shandong TaiGu Aircraft Projecting Co., Ltd. Receipt of service Aircraft maintenance fees Market price 83,347,029.89 22.19 61,209,045.29 17.68 Shandong Airlines Group Co., Ltd. Receipt of service Rental fees and food and accommodation fees Market price 11,294,563.03 23.70 10,969,949.61 21.43 Qingdao FeiSheng International Air Training Co., Ltd. Receipt of service Training fees Market price 4,097,421.00 4.64 5,010,748.92 6.17 Shandong International Air Training Co., Ltd. Receipt of service Training fees Market price 7,927,892.00 8.98 10,917,712.53 13.48 Shandong XiangYu Air Technology Co., Ltd. Receipt of service Repair expenditure Market price 19,350,032.57 5.15 11,073,497.62 3.63 Total 126,016,938.49 99,180,953.97 (2) Supply of goods and service Current reporting period Last reporting period Related parties Type of transaction Transaction description Pricing and decision making process Amount (CNY) % of transaction within same type Amount (CNY) % of transaction Within same type Air China Co., Ltd. Supply of service Service fees Agreed price 10,200,000.00 79.01 5,950,000.00 43.44 Total 10,200,000.00 79.01 5,950,000.00 43.44 (3) Guarantee Name of Guarantor Secured party Secured amount (CNY) Start date Expiry date Completion of guarantee Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd. 40,000,000.00 2009-11-2 2010-11-9 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 40,000,000.00 2009-11-10 2010-11-9 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 40,000,000.00 2009-11-17 2010-11-16 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 50,000,000.00 2009-11-24 2010-11-23 NoShandong Airlines Co., Ltd. 2009 Annual Report 120 Name of Guarantor Secured party Secured amount (CNY) Start date Expiry date Completion of guarantee Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 40,000,000.00 2009-1-7 2010-1-6 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 40,000,000.00 2009-1-14 2010-1-13 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 40,000,000.00 2009-1-21 2010-1-20 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 40,000,000.00 2009-7-7 2010-7-6 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 40,000,000.00 2009-7-14 2010-7-13 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 40,000,000.00 2009-7-22 2010-7-21 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 40,000,000.00 2009-7-27 2010-7-26 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 50,000,000.00 2009-2-12 2010-2-11 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 6,828,200.00 2009-9-1 2010-8-31 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 8,193,840.00 2009-9-8 2010-8-31 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 27,312,800.00 2009-9-22 2010-8-31 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 25,947,160.00 2009-10-12 2010-8-31 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 100,000,000.00 2009-6-29 2010-6-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 27,600,000.00 2007-12-3 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 83,000,000.00 2008-1-2 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 54,000,000.00 2008-3-3 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 53,000,000.00 2008-4-1 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 26,500,000.00 2008-4-29 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 52,300,000.00 2008-6-2 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 51,500,000.00 2008-7-1 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 120,000,000.00 2008-7-15 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 114,000,000.00 2009-4-21 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 41,236,865.44 2007-3-29 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 25,604,384.36 2007-4-30 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 46,197,006.48 2007-5-31 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 122,599,101.93 2007-7-2 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 25,604,384.36 2007-8-1 2022-3-28 NoShandong Airlines Co., Ltd. 2009 Annual Report 121 Name of Guarantor Secured party Secured amount (CNY) Start date Expiry date Completion of guarantee Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 101,800,950.98 2007-9-28 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 100,000,000.00 2006-12-18 2018-12-17 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 2,200,000.00 2008-6-5 2018-12-17 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 2,100,000.00 2008-6-18 2018-12-17 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 123,000,000.00 2008-6-19 2018-12-17 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 13,500,000.00 2008-7-1 2018-12-17 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 30,000,000.00 2008-8-19 2018-12-17 No Total 1,884,024,693.55 (4) Reorganisation and assets transfer between related parties Current reporting period Last reporting period Related parties Type of transaction Transaction description Pricing policy Amount (CNY) % of transaction within same type Amount (CNY) % of transaction within same type Air China Co., Ltd. Sales Aircraft purchase right Agreed price 333,393,389.35 100.00 0.00 0.00 Shandong XiangYu Air Technology Co., Ltd. Sales High-value rotables Agreed price 2,871,828.77 100.00 0.00 0.00 Total 336,265,218.12 0.00 (5) Other transactions with related parties Current reporting period Last reporting period Related parties Transaction description Pricing policy Amount (CNY) % of transaction within same type Amount (CNY) % of transaction within same type Shandong Rainbow Commercial Jet Co., Ltd. Wet lease Agreed price 623,229,927.00 100.00 600,186,086.00 94.97 Shandong Rainbow Commercial Jet Co., Ltd Debt compensation 0.00 0.00 84,834.50 0.00 Shandong Airlines Group Co., Ltd. Guarantee fee Agreed price 2,740,500.00 100.00 4,445,800.00 100.00 Air China Co., Ltd. Route sharing Agreed price 19,202,440.01 100.00 96,046,056.93 100.00 Total 645,172,867.01 700,762,777.43 6. The balance of accounts payables and receivables among related parties:Shandong Airlines Co., Ltd. 2009 Annual Report 122 Items Related party Balance carried forward (CNY) Balance brought forward (CNY) Accounts receivable Air China Co., Ltd. 53,828,640.46 55,089,147.43 Total 53,828,640.46 55,089,147.43 Other accounts receivable Air China Co., Ltd. 23,382,955.26 1,100.00 Shandong International Air Training Co., Ltd. 0.00 780,969.77 Qingdao FeiSheng International Air Training Co., Ltd. 1,405,287.30 0.00 Shandong XiangYu Air Technology Co., Ltd. 2,966,545.86 706,431.65 Shandong Rainbow Commercial Jet Co., Ltd 109,051,717.65 109,051,717.70 Total 136,806,506.07 110,540,219.12 Accounts payable Shandong International Air Training Co., Ltd. 1,816,020.00 0.00 Qingdao FeiSheng International Air Training Co., Ltd. 3,750,453.00 0.00 Air China Co., Ltd. 3,962,987.26 0.00 Shandong TaiGu Aircraft Projecting Co., Ltd. 13,641,513.24 717,414.49 Total 23,170,973.50 717,414.49 Other accounts payable Air China Co., Ltd. 20,000,000.00 20,000,000.00 Shandong Airlines Group Co., Ltd. 4,051,799.74 5,551,323.91 Qingdao FeiSheng International Air Training Co., Ltd. 0.00 3,827,607.16 Shandong TaiGu Aircraft Projecting Co., Ltd. 0.00 24,756,728.86 Shandong International Air Training Co., Ltd. 3,465,953.82 0.00 Total 27,517,753.56 54,135,659.93 Ⅶ Contingencies 1. Contingent liabilities resulting from unsettled litigation and arbitration and their financial impact No contingent liabilities resulting from unsettled litigation and arbitration as at the balance sheet date.Shandong Airlines Co., Ltd. 2009 Annual Report 123 2. Contingent liabilities resulting from guarantee provision and their financial impact No contingent liabilities resulting from guarantee provision as at the balance sheet date. 3. Other contingent liabilities and their financial impact No other contingent liabilities as at the balance sheet date. Ⅷ Commitment Signed commitments of which the performance was in process as at 31st December 2009 are listed below: Carrying value carried forward Items Within 1 year (CNY) 1 – 2 years (CNY) 2 – 3 years (CNY) Over 3 years (CNY) Total (CNY) Operating lease 389,429,440.00 461,712,580.00 404,109,640.00 2,124,748,150.00 3,379,999,810.00 Capital 868,160,870,00 1,340,006,700.00 1,755,662,090.00 1,015,688,090.00 4,979,517,750.00 Total 1,257,590,310.00 1,801,719,280.00 2,159,771,730.00 3,140,436,240.00 8,359,517,560.00 Ⅸ Post balance sheet date events 1. Significant post balance sheet date events A share transfer agreement which authorises the transfer of 100% shareholding in Shandong International FeiSheng Air Training Co., Ltd. from Shandong Airlines Group Co., Ltd. to the Company for CNY 50,740,053.00 was sign between Shandong Airlines Group Co., Ltd. and the Company on March 1st, 2010. The agreement has verified by Shanghai United Assets and Equity Exchange on March 11, 2010. 2. Post balance sheet date profit distribution A proposal for a cash dividend of CNY 2.00 per 10 shares for the 40,000 shares as at the year end of 2009 was passed by a resolution of the Fourth term meeting of the Fourth Board of Directors Meeting held on March 24, 2010. 3. Other post balance sheet date events No other post balance sheet date events as at the report date. Ⅹ Other significant events No other significant events as at the balance sheet date. Ⅺ Main notes to financial statements of parent company 1. Accounts receivablesShandong Airlines Co., Ltd. 2009 Annual Report 124 (1) Disclosure by classification Balance carried forward Balance brought forward Book value Provision for bad debts Book value Provision for bad debts Types Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Amount (CNY) Proporti on (%) Individual significant amounts 130,379,296.86 92.29 0.00 0.00 115,826,770.70 92.24 0.00 0.00 Non-significant in amount but in accordance with the characteristics of credit risk portfolio, the risk of the portfolio is high 9,502.08 0.01 60.93 0.01 23,802.42 0.02 1,190.12 0.25 Other non-significant receivables 10,887,630.19 7.70 544,795.73 99.99 9,724,095.16 7.74 467,982.81 99.75 Total 141,276,429.13 100.00 544,856.66 100.00 125,574,668.28 100.00 469,172.93 100.00 Note: See paragraph Ⅱ10 for criteria for categorising individual significance and individual insignificance but significant portfolio credit risk. (2) Provision for bad debts of account receivables which classified as individual significant amount or non-significant in amount but execute impairment loss test individually Items Book value (CNY) Bad and doubtful debt (CNY) Proportion (%) Comment BSP 48,494,454.43 0.00 0.00 Amount not due received prior to the statement date. China Civil Aviation Clearing Centre 28,056,201.97 0.00 0.00 Amount not due received prior to the statement date. Air China Co., Ltd. 53,828,640.46 0.00 0.00 Amount not due received prior to the statement date. Total 130,379,296.86 0.00 0.00 Amount not due received prior to the statement date. (3) Aging analysis Balance carried forward Balance brought forward Book value Proportion Provision for bad debts Book value Proportion Provision for Age bad debts Amount (CNY) % Amount (CNY) Amount (CNY) % Amount (CNY) Within 1 year 140,732,293.60 99.61 524,079.39 124,366,476.98 99.04 392,699.63 1 – 2 years 232,069.27 0.16 5,863.07 1,157,864.08 0.92 75,222.25 2 – 3 years 302,564.18 0.22 14,853.27 26,524.80 0.02 60.93 3 – 4 years 9,502.08 0.01 60.93 23,802.42 0.02 1,190.12Shandong Airlines Co., Ltd. 2009 Annual Report 125 Balance carried forward Balance brought forward Book value Proportion Provision for bad debts Book value Proportion Provision for Age bad debts Amount (CNY) % Amount (CNY) Amount (CNY) % Amount (CNY) 4 – 5 years 0.00 0.00 0.00 0.00 0.00 0.00 Over 5 years 0.00 0.00 0.00 0.00 0.00 0.00 Total 141,276,429.13 100.00 544,856.66 125,574,668.28 100.00 469,172.93 (3) Accounts receivable owed by shareholders with 5% or more voting right during the reporting period Balance carried forward Balance brought forward Shareholder Amount (CNY) Provision for bad debts (CNY) Amount (CNY) Provision for bad debts (CNY) Air China Co., Ltd. 53,828,640.46 0.00 55,089,147.43 0.00 Total 53,828,640.46 0.00 55,089,147.43 0.00 (5) The balance of top five accounts receivable Name of company Relationship with the Company Amount (CNY) Age Nature of accounts receivable % of total accounts receivables Air China Co., Ltd. Related party 53,828,640.46 Within 1 year Settlement of wet lease 38.10 BSP Non-related party 48,494,454.43 Within 1 year Air ticket 34.33 China Civil Aviation Clearing Centre Non-related party 28,056,201.97 Within 1 year Air ticket 19.86 Yantai Post Office Non-related party 618,272.41 Within 1 year Aircraft charter fees 0.44 Linyi Civil Aviation Administration Non-related party 554,599.95 Within 1 year Aircraft charter fees 0.39 Total 131,552,169.22 93.12 (6) Accounts receivables owed by related parties Name Relationship with the Company Amount (CNY) % of total accounts receivables Air China Co., Ltd. Parent 53,828,640.46 38.10Shandong Airlines Co., Ltd. 2009 Annual Report 126 Total 53,828,640.46 38.10 2. Other accounts receivables (1) Disclosure by classification Balance carried forward Balance brought forward Book value Provision for bad debts Book value Provision for bad debts Types Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Individual significant amounts 209,239,407.19 77.04 109,051,717.65 98.14 203,908,540.13 79.59 109,051,717.65 98.25 Non-significant in amount but in accordance with the characteristics of credit risk portfolio, the risk of the portfolio is high 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Other non-significant receivables 62,357,270.59 22.96 2,061,484.66 1.86 52,282,091.05 20.41 1,940,806.24 1.75 Total 271,596,677.78 100.00 111,113,202.31 100.00 256,190,631.18 100.00 110,992,523.89 100.00 Note: See paragraph Ⅱ10 for Criteria for categorising individual significance and individual insignificance but significant portfolio credit risk. (2) Provision for bad debts of other account receivables which classified as individual significant amount or non-significant in amount but execute impairment loss test individually Accounts receivables Book value (CNY) Bad and doubtful debt (CNY) Proportion (%) Comment Shandong Rainbow Commercial Jet Co., Ltd. 109,051,717.65 109,051,717.65 100.00 Significantly overdue debt resulting from deteriorated financial condition. CDB Leasing Co., Ltd. 41,354,563.28 0.00 0.00 In accordance with accounting policies for bad and doubtful debt provision. Singapore Aircraft Leasing Enterprise 19,118,960.00 0.00 0.00 In accordance with accounting policies for bad and doubtful debt provision. Rainier Aircraft Leasing (Ireland) Ltd. 16,331,211.00 0.00 0.00 In accordance with accounting policies for bad and doubtful debt provision. Air China Co., Ltd. 23,382,955.26 0.00 0.00 In accordance with accounting policies for bad and doubtful debt provision. Total 209,239,407.19 109,051,717.65Shandong Airlines Co., Ltd. 2009 Annual Report 127 (3) Aging analysis Balance carried forward Balance brought forward Book value Proportion Provision for bad debts Book value Age Proportion Provision for bad debts Amount (CNY) % Amount (CNY) Amount (CNY) % Amount (CNY) Within 1 year 51,876,423.97 19.11 1,139,666.87 43,209,209.30 16.87 2,035,090.39 1 – 2 years 14,213,521.28 5.23 842,152.38 31,169,427.89 12.17 669,245.45 2 – 3 years 25,446,259.18 9.37 872,347.11 17,263,584.49 6.74 10,698,669.47 3 – 4 years 16,492,449.22 6.07 10,674,554.07 133,052,336.46 51.93 80,329,246.11 4 – 5 years 133,038,338.06 48.98 80,329,246.11 23,398,644.42 9.13 17,195,422.39 Over 5 years 30,529,686.07 11.24 17,255,235.77 8,097,428.62 3.16 64,850.08 Total 271,596,677.78 100.00 111,113,202.31 256,190,631.18 100.00 110,992,523.89 (4) Other accounts receivables owed by shareholders with 5% or more voting right during the reporting period Balance carried forward Balance brought forward Shareholder Amount (CNY) Bad and doubtful debt provision (CNY) Amount (CNY) Bad and doubtful debt provision (CNY) Air China Co., Ltd. 23,382,955.26 0.00 1,100.00 0.00 Total 23,382,955.26 0.00 1,100.00 0.00 (5) List the top five balance of other accounts receivables Name of company Relationship with the Company Amount (CNY) Nature of other accounts receivable Age % of total accounts receivables Shandong Rainbow Commercial Jet Co., Ltd. Related party 109,051,717.65 Account balance 2 – 6 years 40.14 CDB Leasing Co., Ltd. Non-related party 41,354,563.28 Guarantee 4 – 5 years 15.22 Air China Co., Ltd Related party 23,382,955.26 Guarantee Within 1 year 8.61 Singapore Aircraft Leasing Enterprise Non-related party 19,118,960.00 Guarantee 2 – 4 years 7.04 Rainier Aircraft Leasing (Ireland) Ltd. Non-related party 16,331,211.00 Guarantee Over 4 years 6.01 Total 209,239,407.19 77.02 (6) Other accounts receivables owed by related parties Name of company Relationship with the Company Amount (CNY) % of total accounts receivablesShandong Airlines Co., Ltd. 2009 Annual Report 128 Air China Co., Ltd. Parent 23,382,955.26 8.61 Shandong XiangYu Air Technology Co., Ltd. Under common control 2,966,545.86 1.09 Qingdao FeiSheng International Air Training Co., Ltd. Under common control 1,405,287.30 0.52 Shandong Rainbow Commercial Jet Co., Ltd. Associate 109,051,717.65 40.15 Total 136,806,506.07 50.37 3. Long-term equity investments Name of investee Balance brought forward (CNY) Changes in year (CNY) Balance carried forward (CNY) Accumulated impairment provision (CNY) Impairment provision in year (CNY) Long-term equity investments measured at cost: Qingdao International Air Logistics Co., Ltd. 23,813,205.97 0.00 23,813,205.97 0.00 0.00 China TravelSky Co., Ltd. 6,690,000.00 0.00 6,690,000.00 0.00 0.00 Sichuan Airlines Co., Ltd. 35,000,000.00 0.00 35,000,000.00 0.00 0.00 Jinan Yaoqiang International Airport Co., Ltd 46,662,100.00 0.00 46,662,100.00 0.00 0.00 Subtotal 112,165,305.97 0.00 112,165,305.97 0.00 0.00 Long-term equity investments measured by the equity method: Shandong Rainbow Commercial Jet Co., Ltd 22,500,000.00 0.00 22,500,000.00 22,500,000.00 0.00 Subtotal 22,500,000.00 0.00 22,500,000.00 22,500,000.00 0.00 Total 134,665,305.97 0.00 134,665,305.97 22,500,000.00 0.00 Continued: Name of investee Initial investment cost (CNY) Shareholding (%) Voting right (%) Reasons for discrepancy between shareholding and voting right Cash dividends in year (CNY) Long-term equity investments measured at cost: Qingdao International Air Logistics Co., Ltd. 23,813,205.97 70.00 70.00 n/a 0.00 China TravelSky Co., Ltd. 6,690,000.00 0.45 0.45 n/a 1,617,642.00 Sichuan Airlines Co., Ltd. 35,000,000.00 10.00 10.00 n/a 0.00 Jinan Yaoqiang International Airport Co., Ltd 46,662,100.00 14.00 14.00 n/a 0.00Shandong Airlines Co., Ltd. 2009 Annual Report 129 Subtotal 112,165,305.97 1,617,642.00 Long-term equity investments measured by the equity method: Shandong Rainbow Commercial Jet Co., Ltd 22,500,000.00 45.00 45.00 n/a 0.00 Subtotal 22,500,000.00 0.00 Total 134,665,305.97 1,617,642.00 4. Operating income and operating costs (1) Operating income and operating costs Items Current reporting period (CNY) Last reporting period (CNY) Income from principal activities 5,298,145,040.55 4,979,929,511.89 Income from other activities 64,528,440.63 63,440,911.31 Total operating income 5,362,673,481.18 5,043,370,423.20 Principal activity costs 4,108,351,166.78 4,121,299,184.09 Other activity costs 3,347,076.10 33,511,012.84 Total operating costs 4,111,698,242.88 4,154,810,196.93 (2) Operating income and operating costs by segment Current reporting period Last reporting period Segment Operating income (CNY) Operating costs (CNY) Operating income (CNY) Operating costs (CNY) Air transportation 5,277,937,825.81 4,089,471,032.64 4,953,048,164.35 4,101,665,962.58 Hospitality 22,984,060.08 19,179,045.59 22,538,565.66 15,614,100.05 Rental services 854,642.06 30,000.00 31,801,807.87 35,128,834.04 Others 60,896,953.23 3,018,164.65 35,981,885.32 2,401,300.26 Total 5,362,673,481.18 4,111,698,242.88 5,043,370,423.20 4,154,810,196.93 (3) Details of operating revenues from top five clients Clients Operating income (CNY) % of total operating income Air China Co., Ltd. 642,432,367.01 11.98 Beijing DeLong Travel Service Co., Ltd. 30,286,076.69 0.56 Inner-Mongolia Civil Airport Co., Ltd. 16,550,030.87 0.31 WuYiShan LianHang Travel Service Co., Ltd. 10,447,830.50 0.19Shandong Airlines Co., Ltd. 2009 Annual Report 130 Shenzhen HengLu Logistics Co., Ltd. 2,576,000.00 0.05 Total 702,292,305.07 13.09 5. Investment income (1) Details of investment income Items Current reporting period (CNY) Last reporting period (CNY) Income from long-term equity investments measured at cost 1,617,642.00 1,130,610.00 Gains from disposals of long-term equity investments 0.00 421,181.23 Gains from possession of tradable financial assets 2,098,225.94 10,081,058.70 Total 3,715,867.94 11,632,849.93 (2) Income from long-term equity investments measured at cost Investee Current reporting period (CNY) Last reporting period (CNY) Reasons for change China TravelSky Co., Ltd. 1,617,642.00 1,130,610.00 Increase in cash dividends (3) As at 31st December 2009, there is no investment of which income remittance is imposed with limitation. Ⅻ Supplemental information 1. Details of extraordinary gains and losses for the current reporting period Items Amount (CNY) Comment Gains from disposals of non-current assets after expending impairment provisions 2,758,500.92 Disposals of non-current assets and contracts of construction in process; losses resulting from closure of CAPT Pilot School Exceeded-authority approved, non-official approved or accidental tax repayment and relief 0.00 Government grants recognised through profit or loss for the current reporting period, excluding grants which are closely related to the Company’s operating activities and of which the quota or approval is eligible for automatic renewal in accordance with relevant regulations 135,213,761.47 Repayment of infrastructure fund for civil aviation and route subsidies Financial resource usage fees charged on non-financial institution recognised through profit or loss for the current reporting period 0.00 Gains arising from bargain purchase in business combination and investments in associates and joint ventures 0.00Shandong Airlines Co., Ltd. 2009 Annual Report 131 Items Amount (CNY) Comment Non-monetary asset exchange 0.00 Consigned investment and asset management 0.00 Impairment provision resulting from force majeure, eg. natural desasters 0.00 Reorganisation 0.00 Reorganisation expenditure 0.00 Unfair transactions 0.00 Net profits or losses achieved by an acquired under-common-control entity during the period from the start of the period to the acquisition date 0.00 Gains or losses arising from contingent events unconnected with the Company’s daily operating activities 0.00 Fair value changes of tradable financial assets and tradable financial liabilities held and gains or losses arising from disposals of tradable financial assets, tradable financial liabilities and available-for-sale financial assets, excluding hedging contracts relevant to the Company’s daily operating activities -10,020,739.69 Gains or losses arising from settlement of interest swaps and fair value changes Reversal of impairment provision for accounts receivables eligible for individual impairment assessment 0.00 Gains or losses arising from consigned borrowings 0.00 Fair value changes of property investments subsequently measured at fair value 0.00 One-off adjustment of profit or loss for the current reporting period in accordance with tax and accounting laws and regulations 0.00 Consignment income arising from consigned operations 0.00 Income and expenses other than items listed above 3,628,053.31 Other gains or losses satisfying the definition of extraordinary gains or losses 0.00 Subtotal 131,579,576.01 Less: Impact of income tax 32,894,894.00 Less: Impact on non-controling interest -337.48 Total 98,685,019.49 2. Yield rate of net assets and earnings per share Earnings per share Net profits for the current reporting period Weighted average of returns on equity (%) Basic earnings per share (%) Diluted earnings per share (%)Shandong Airlines Co., Ltd. 2009 Annual Report 132 Net profits attributable to ordinary shareholders 43.11 0.76 0.76 Net profits attributable to ordinary shareholders after deducting extraordinary gains or losses 29.04 0.51 0.51 Computation of earnings per share: (1) Basic earnings per share Current reporting period Last reporting period Items Computation Amount After deducting extraordinary gains or losses Amount After deducting extraordinary gains or losses Net profits attributable to ordinary shareholders (1) CNY 302,282,325.68 CNY 203,597,306.19 CNY 80,981,442.68 CNY 92,440,296.87 Number of listed ordinary shares brought forward (2) 400,000,000.00 400,000,000.00 400,000,000.00 400,000,000.00 Number of listed ordinary share equivalents increased in year (3) 0.00 0.00 0.00 0.00 Number of listed ordinary share equivalents decreased in year (4) 0.00 0.00 0.00 0.00 Weighted average of listed ordinary shares (5)=(2)+(3)-(4 ) 400,000,000.00 400,000,000.00 400,000,000.00 400,000,000.00 Basic earnings per share (6)=(1)÷(5) CNY 0.76 CNY 0.51 CNY 0.20 CNY 0.23 (2) Diluted earnings per share Current reporting period Last reporting period Items Computation Amount After deducting extraordinary gains or losses Amount After deducting extraordinary gains or losses Net profits attributable to ordinary shareholders (1) CNY 302,282,325.68 CNY 203,597,306.19 CNY 80,981,442.68 CNY 92,440,296.87 Potential dilutive ordinary dividends recognised as expenses (2) 0.00 0.00 0.00 0.00 Potential dilutive ordinary share conversion expenses (3) 0.00 0.00 0.00 0.00 Income tax rate (4) 25.00% 25.00% 25.00% 25.00% Net profits attributable to ordinary shareholders after adjustment (5)=(1)+[(2)-(3 )]×[1-(4)] CNY 302,282,325.68 CNY 203,597,306.19 CNY 80,981,442.68 CNY 92,440,296.87Shandong Airlines Co., Ltd. 2009 Annual Report 133 Current reporting period Last reporting period Items Computation Amount After deducting extraordinary gains or losses Amount After deducting extraordinary gains or losses Weighted average of ordinary shares for basic earnings per share computation (6) 400,000,000.00 400,000,000.00 400,000,000.00 400,000,000.00 Weighted average of dilutive ordinary share conversion (7) 0.00 0.00 0.00 0.00 Weighted average of ordinary shares for diluted earnings per share (8)=(6)+(7) 400,000,000.00 400,000,000.00 400,000,000.00 400,000,000.00 Diluted earnings per share (9)=(5)÷(8) CNY 0.76 CNY 0.51 CNY 0.20 CNY 0.23 ⅩⅢ Approval of financial statements This financial statement is approved and authorized for issuance by the Board of Directors on March 24, 2010. XI. Documents Available for Reference 1. Financial statements carrying the personal signatures and seals of Chairman of the Board, Chief Accountant and Person in Charge of Accounting Department; 2. Original of Auditors’ Report carrying the seals of Certified Public Accountants as well as personal signatures and seals of certified public accountants; 3. Originals of all documents and notices publicly disclosed on newspapers designated by CSRC in the report period in 2009; 4. The Company will offer above documents for reference timely provided that CSRC or Stock Exchange demands or shareholders requires according to the regulations and Articles of Association. Board of Directors of Shandong Airlines Co., Ltd. March 24, 2010