SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 山东航空股份有限公司 2010 年半年度报告 SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT August,2010 Jinan, P.R.C.SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 1 Contents SECTION I. COMPANY PROFILE----------------------------------------------------------------------------------2 SECTION II. CHANGES IN SHARE CAPITAL AND SHAREHOLDING BY MAJOR SHARHOLDERS--------------------------------------------------------------------------------------------------------4 SECTION III. DIRECTORS, SUPERVISORS AND SENIOR EXECUTIVES------------------------------- 5 SECTION IV. REPORT OF BOARD OF DIRECTORS-------------------------------------------------------- 5 SECTION V. SIGNIFICANT EVENTS----------------------------------------------------------------------------- 9 SECTION VI. FINANCIAL REPORT------------------------------------------------------------------------------12 SECTION VII. DOCUMENTS FOR REFERENCE--------------------------------------------------------------80 Important Notes: The Board of Directors and the Supervisory Committee of Shandong Airlines Co., Ltd. (hereinafter referred to as the Company) together with its directors, supervisors and senior executives hereby confirm that there are no any fictitious statements,misleading statements or material omissions carried in this report, and may take responsibilities, individually and/or jointly, for the reality, accuracy and completion of the whole contents. Director Mr. Wang Mingyuan was absent to vote in the Board Meeting and authorized Director Director Mr. Xu Guojian as her representative. Other Directors attended the Meeting. Chairman of the Board Mr. Zhang Xingfu, General Manager Mr. Zeng Guoqiang, and Chief Accountant Mr. Xu Guojian hereby confirm that the Financial Report of the Interim Report 2010 is true and complete. The Financial Report and accounting data illustrated in the Report has not been audited yet. Paraphrases: The Company, Company: Shandong Airlines Co., Ltd. SDA: Shandong Aviation Group; the 1st largest shareholder of the Company Air China: Air China Limited, the actual controller of the CompanySHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 2 Section I. Company Profile I.Company Profile (I) 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. (II) Stock Exchange for Company’s stock listing: Shenzhen Stock Exchange Shortened Form of the Stock: SHANHANG B Stock Code: 200152 (III) Registered Address: Yaoqiang International Airport, Jinan, Shandong Office Address: SDA Building, No. 5746, Er Huan East Road, Jinan, Shandong Post Code: 250014 Internet Web Site: http://www.shandongair.com.cn E-mail: zqb@shandongair.com.cn (IV) Legal Representative: Zhang Xingfu (V) Secretary of Board of Directors of Company: Dong Qiantang Contact Address: SDA Building, No. 5746, Er Huan East Road, Jinan, Shandong E-mail: dongqt@shandongair.com.cn Tel.: (86)531-85698229 Authorized Representative: Fan Peng E-mail: fanp@shandongair.com.cn Tel.: (86) 0531-85698678 Fax: (86) 0531-85698679 (VI) Newspaper designated for informationa disclosure: Domestic: China Securities Jourrnal and Securities Times Overseas: Hongkong Commercial Daily Internet Web Site for Publishing Semi-annual Report: http://www.cninfo.com.cn Place for reserving Semi-Annual Report: Office of Board (Room 1920, SDA Building) Tel: (86) 0531-85698678 (VII)Other Relevant Information Registered number of corporate business license: 370000400002351 Registered number for taxation: 370112720721201 Date of latest change in registration: 16 September 2009 Registry: Administration of Industry and Commerce of Shandong Province II. Major financial data and indicators (I) Major accounting data and financial indicators Unit: RMB At the end of this report period At the period-end of last year Increase/decrease at the end of this report period compared with that in period-end ofSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 3 last year (%) Total assets (RMB) 8,514,625,733.52 8,096,403,730.75 5.17% Owners’ equiy ( or Shareholders’ equity) (RMB) 977,865,345.31 852,294,621.98 14.73% Net assets per share attributable to shareholders of listed company (RMB) 2.44 2.13 14.55% This report period The same period of last year Increase/decrease in this report period year-on-year (%) Operation profit (RMB) 270,675,793.11 36,485,643.45 641.87% Total profit (RMB) 274,130,932.38 150,074,661.90 82.66% Net profit attributable to shareholders of listed company (RMB) 205,570,723.33 112,509,856.54 82.71% Net profit attributable to shareholders of listed company after deducting non-recurring gains and losses (RMB) 203,190,509.86 30,381,048.36 568.81% Basic earnings per share (RMB) 0.51 0.28 82.14% Diluted earnings per share (RMB) 0.51 0.28 82.14% Return on equity (%) 21.02% 16.98% Up 4.04 percentage point Net cash flow from operation activities (RMB) 481,613,574.90 566,738,602.82 -15.02% Net cash flow per share from operation activities (RMB) 1.20 1.42 -15.02% (II) Items of non-recurring gains and losses and the relevant amount: Unit: RMB Items of non-recurring gains and losses Amount Loss/gain from disposal of non-current assets -2,840,057.86 Governmental subsidy reckoned into current loss/gain 5,805,916.00 Held transaction financial asset, gains/loses of changes of fair values from transaction financial liabilities, and investment gains from disposal of transaction financial asset, transaction financial liabilities and financial asset available for sales, exclude the effective hedging business relevant to normal operations of the Company -281,521.31 Other non-operating income and expense excluded the aforementioned items 489,281.13 Subtotal 3,173,617.96 Impact on income tax -793,404.49 Total 2,380,213.47 (III) There is no difference between the CAS and the IAS.SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 4 Section II. Changes in Share Capital and Shareholding by Major Shareholders I. Particulars about Share structure In the report period, the Company’s total shares and its structure remained unchanged. II. Ending at 30 June 2010, particulars about shares held by the top ten shareholders and top ten circulating shareholders: Total shareholders at Period-end 19743 Particulars about shares held by the top ten shareholders Full name of Shareholder Increase / decrease in Period Number of shares held at the period-end (Share) Proporti on (%) Type of shares Number of share frozen or pledged Nature of shareholder SHANDONG AVIATION GROUP 0 168,004,000 42 Uncirculated share 0 State-owned shareholder AIR CHINA LIMITED 0 91,200,000 22.8 Uncirculated share 0 State-owned shareholder CHEN TIAN MING 207,000 1,976,072 0.49% Circulated Unknown Foreign shareholder CHEN CHUN PENG -40,000 1,390,000 0.35% Circulated Unknown Foreign shareholder CHEN JING JIAN 48,000 1,352,200 0.34% Circulated Unknown Foreign shareholder WU HAO YUAN 0 1,062,700 0.27% Circulated Unknown Foreign shareholder LIU LI YA 0 904,217 0.23% Circulated Unknown Foreign shareholder JOHN POSS 25,400 725,400 0.18% Circulated Unknown Foreign shareholder THE BOEING COMPANY EMPLOYEES RETIREMENT PLAN MASTER TRUST 697,248 697,248 0.17% Circulated Unknown Foreign shareholder DENG HONG WEI 0 650,609 0.16% Circulated Unknown Foreign shareholder Particulars about shares held by the top ten shareholders of circulation share Shareholder’s name Circulation share held at the period-end Type CHEN TIAN MING 1,976,072 B-share CHEN CHUN PENG 1,390,000 B-share CHEN JING JIAN 1,352,200 B-share WU HAO YUAN 1,062,700 B-share LIU LI YA 904,217 B-share JOHN POSS 725,400 B-share THE BOEING COMPANY EMPLOYEES RETIREMENT PLAN MASTER TRUST 697,248 B-share DENG HONG WEI 650,609 B-share XU ZHAO HUAN 623,400 B-share CHEN ZI XIANG 610,700 B-share Explanation on the associated relationship or consistent action among the top ten shareholders Air China Limited is the first largest shareholder of Shandong Aviation Group; there exists no associated relationship between SDA and Air China and the other top ten shareholders; the Company is not aware of their associatedSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 5 relationship among the other shareholders of circulation share. III. Change of controlling shareholder and actual controller There is no change in the controlling shareholders and actual controllers of the Company in the Period. Section III. Particulars about Directors, Supervisors and Senior Executives I. In the report period, directors, supervisors and senior executives of the Company did not hold the Company’s shares; the holding amount in the report period remained unchanged. II. Changes in Directors, supervisors and senior executives in Period 1. On 26 January 2010, Mr. Xiao Feng presented his resignation from the Deputy General Manager and General Accountant; and on 29 January 2010, Mr. Xu Guojian was appointed as the Deputy General Manager and General Accountant by the Board. 2. On12 April 2010, Mr. Feng Gang presented his resignation from the Director and Deputy Chairman of the Board; and on 22 April 2010, Mr. Ma Chongxian was elected as the Director by the 2009 Annual General Shareholders’ Meeting, and meanwhile as the Deputy Chairman by 3rd Temporary Meeting of 4th Board of Directors 2010. Section IV. Report of Board of Directors I. Main operations in Period (I) Scope and operation status of main business The Company is the civil air transportation enterprise, which mainly operates business of domestic and international passenger & freight air transportation, and also operates hotels (only by branches), maintenance of aircraft, civil aviation staff training, agent business among the airlines company, and ground services relevant to main operations. 1. The Year 2010 witnessed the Company’s important starting period into the historical transition. The whole body of staff continuously implements deeply the scientific development view, sticks to the development concept of safety, innovation, harmony, and people-oriented, work down-to-earth, promotes actively the Year-beginning work plan, maintains a sound development trend in all work as safety, efficiency, serviceable, and comprehensive management, and obtains an excellent operation performance. In the Period, the Company accomplished 80041.5 hours flying time – a 14.4% year-on-year increase and 44173 on-and-off flights – a 8.9% year-on-year increase; transport of passenger of 4.15 million man-time – a 18.2% year-on-year increase; the freight and mail volume of 45700 tons – a 24.7% year-on-year decrease; total transportation turnover of 527 million tons/km – a 19.7% year-on-year increase. In the first half year, the operation income accomplished RMB 3.13 billion – a 33.82% year-on-year decrease, among that, the passenger aviation income RMB 2.99 billion– accounting for 95.28% of the total income; income of aviation freight and mail transportation of RMB 99 million– accounting for 3.16% of the total income; and other income of RMB 49 million, accounting for 1.56% of the total income. 2. Constitution of main business (1) Main business in different industriesSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 6 Unit: RMB Industries Operation income Operation cost Year-on-year increase/decre ase in operation income (%) Year-on-year increase/decr ease in operation cost (%) Aviation transportation service 3,084,521,679.18 2,395,348,014.45 33.81% 29.80% Logistics transportation service 3,341,785.85 1,238,224.39 -1.06% 27.67% Hotel and food service 12,991,318.48 10,397,011.21 7.96% 18.44% Training service 436,900.00 171,317.92 - - Other 32,371,411.07 429,620.32 53.98% -2.16% (2) Main business in different areas Unit: RMB Domestic International Industries Operation income Year-on-year increase/decrease Operation income Year-on-year increase/decrease Aviation transportation service 2,965,657,235.79 31.61% 118,864,443.39 129.66% Logistics transportation service 3,341,785.85 -1.06% - - Hotel and food service 12,991,318.48 7.96% - - Training service 436,900.00 - - - Other 32,371,411.07 53.98% - - (3) Particulars about main asset and analysis to financial index in the report period Item 30 June 2010 31 December 2009 Increase/decrease (%) Note payable 33,226,885.33 182,124,331.32 -81.76% Account paid in advance 38,722,913.95 22,504,262.48 72.07% Item Jan.-Jun. 2010 Jan.-Jun. 2009 Increase/decrease (%) Sales expense 208,998,341.78 143,786,115.87 45.35% Investment income 645,329.07 4,829,849.65 -86.64% Non-operating income 6,438,539.47 115,765,523.38 -94.44% Income tax expense 68,488,541.33 37,393,723.46 83.16% Reasons for changes of increase/decreaseSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 7 Item Explanation Note payable Mainly due to the bank acceptance bill paid at maturity Account paid in advance Mainly due to the expansion of fleet scale results in the greatly account of air materials paid in advance in this period Sales expense Mainly due to the increase of personnel, the expansion of fleet and marketing network, the soaring charge of computer reservation and agent commission Investment income Mainly due to the decrease of investment income of actually delivery in the period of holding transactional financial assts Non-operating income Mainly due to the construction fund of civil aviation at same period of last year have been returned Income tax expense Mainly due to the increase of total profit in this period 2. In Period, the management continuously promotes the management reform, with phase progress in all constructions. (1) In the Period, there is no unsafe incidence above the symptom of corporation-caused transportation accidence, with continuous 0-accidence in air defense and surface safety. The construction in safety management system has been of the phase result, and is awarded the standard safety management system to become the first aviation corporation of the standard SMS operation, which marks a new step in safety management level. (2) Severely enforce the regular flights work, make efforts to improve control and management level of operation, continuously launch the specific renovation in the flight regularity, strengthen the AOC construction and the application of the new technology, and improve the control and management level of operation. (3) Aggressively seize the market opportunity, strengthen the organization in operation, realise surplus profit, take the maximum contribution margin as the goal, improve the resources efficiency and match ability, strengthen the airline network planning, and improve the airline network value wholly. (4) Promote the construction of full-flow service system, continuously upgrade the service quality. Take the customer experience as the orientation, promote the construction of full-flow service system, strengthen the spot management, improve the service support capability, strengthen the quality supervision of the service system, and perfect the alarm mechanism of the service risk. (5)Promote orderly the organization innovation; carry out the control and management system stably. Optimize the control and management system, solidify refining management basis, and promote the preparation and the basic construction of the “Twelfth-five” Planning. (6) Strengthen the Party construction and the political and ideological work, and enforce the inside control and the construction of a clean and honest government. (II) There is no material change in the constitution of profit, main business or its constitution in the Period. (III) There are no other operating activities of the significant influence upon the profit in the Period.SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 8 (IV) There is no investment return from a single controlling company or joint company, of 10% above influence on the net profit in the Period. (V)There is no material change in the operation and production environment and policies in the Period. (VI) Problems and difficulties in operation Concering the external environment presently, the favorable and positive factors are dominant but the rather stronger instability still exists. The indication to the economy warming is evident; the domestic economy is also in the upward period of the recovering growth; and the increase in the aviation transportation demand is continual; all the above trends are in the hope of continuity. However, the basis of the global economy warming is still fragile; the trend of the domestic macro economy may be repetitious; to some extent, the fluctuation of the aviation oil price is to impact the operation cost; the replacing of the mid-short transportation by the express railway is gradually evident; all the above effect larger pressure upon the Company’s future production and operation. II. Investments of the Company (I) There is no appropriation of the raised funds in the Period or previous appropriation continual into the Period. (II) Actual progress and investment of substantive projects of non-raised funds. 1. Qingdao International Aviation Logistic Center Co., Ltd., the controlling corporation, accomplished the operation income of RMB 3.34 million, total profit of RMB0.32million, from Jan. to Jun. 2010. 2. Sichuan Airlines Co., Ltd., a joint-share corporation, accomplished the operation income of RMB 4.17 billion total profit of RMB52.29 million, from Jan. to Jun. 2010. 3. Shandong Airlines Rainbow Public Affair Jet Co., Ltd., a joint-share corporation, accomplished the operation income of RMB5.14 million total profit of RMB1.73 million, from Jan. to Jun. 2010. 4. The operation data of Jinan International Airport Co., Ltd., a joint-share corporation, in the first half, are not available now. 5. The operation data of TravelSky Technology Limited, a joint-share corporation, in the first half, has not been released. III. Forecast of operation performance in the past three quarters in 2010 Performance estimation Greatly soaring in same direction Item This period Same period of last year Change of increase /decrease (%) 2010.1.1.— 2010.9.30 2010.7.1.— 2010.9.30 2009.1.1- 2009.9.30 2009.7.1- 2009.9.30 First three quarters 3rd quarter Net profit (Hundred million) 4.8—5.7 2.7—3.6 2.7 1.6 Increase78% -111% Increase69 %-125% Basic earnings per share(RMB/Share) 1.2-1.4 0.68-0.9 0.68 0.4 Increase78% -111% Increase69 %-125% Explanation on performance estimation 1. Domestic economy have a steady rebound and gradually recover, the demand for domestically air transportation shows a rapidly growth. 2. Marketing sale has a good condition, the Company actively dealing with the market situation which has becoming moderate at the same time. AppropriatedSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 9 adjusting focus of investment, realized a steady upgrade on business performance. Section V. Significant Events I. Corporate governance In the Period, the Company strictly obeyed the requirments in Company Law, Security Law and Code of Corporate Governance for Listed Companies in China, stuck to the standard operation, and continually perfected the governance structure and management level. The Company worked out and strictly implemented the management rule of information disclosure, identified the person responsible for the information disclosure, made out the procedures of report, handover, check, and disclosure, of the significant incidence, which can make sure the true, accurate, completely, timely, and fair disclosure of information; the Company gave full play to the role of all special committees of the Board, in decision-making, auditory and assessment, ensure the fulfillment to provide necessary and convenient requirements for the supervision; as the Company made elaborate efforts to perfect the internal control system and improve the internal management, accouding to basic norms and specific regulations on corporate internal control issued by related departments, the Company’s governance structure and operation mechanism are gradually perfect, and the shareholders’ equity is fully proceted. II. Implementation of 2009 annual profit distribution plan The Company’s 2009 annual dividend distribution plan was approved by the 2009 Annual General Shareholders’ Meeting on 22 April 2010, which took the existing total share capital of 400 million shares as the basic and distribute to all shareholders RMB 2.00 (tax included) in cash per 10 shares; the total dividend was RMB 80 million and the distribution was accomplished on 18 June 2010. III. Profit distribution plan in middle of 2010 There was neither profit distribution nor transfer of reserves to shares in the middle of 2010. IV. The Company had no significant lawsuits or arbitrations in the report period, nor did it have any lawsuits or arbitrations that happened in previous periods and lasted into the report period V. There was substantive acquisition, sale or restructuring of assets in the Period, or previous one continual into the Period. SDA Group sold its 100% shareholding in Qingdao Feisheng International Aviation Technology Development and Training Co., Ltd. (hereafter referred as “Qingdao Feisheng”) in Shanghai United Assets and Equity Exchange on 21 December 2009, with the listing price of RMB 50,740,053. The Company presented the transfer application to Shanghai United Assets and Equity Exchange on 13 January 2010, for the biding for the 100% shareholding in Qingdao Feisheng. On 2 February 2010, the Company received the confirmation document of qualification of the transfer intention party that the Company was qualified for the biding and became the final transfer party, with the transfer price of RMB 50,740,053. On 1 March 2010, the Company signed the Assets and Equity Transaction Contract with SAD Group, which was approved by Shanghai United Assets and Equity Exchange on 3 November 2010. VI. Substantive related transaction (I) Substantive related transaction for commodity purchase or labor supply 1. In the Period, there were aircraft maintenance expenses of RMB 33.01million between TaikooSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 10 (Shandong) Aircraft Engineering Co., Ltd. and the Company, accounting for 14.88%of the total in the same transaction. The Company has paid in cash for the transaction at the market price. 2. The Company continuously strengthened the cooperations with the actual controller Air China in markets and airlines, with, the settlement sum of RMB 11.99 million between the two parties in the Period. 3. Implementation of daily related transaction in Period Type of related transaction Related party Amount of transaction (RMB’0000) Proportion in same transaction Taikoo (Shandong) Aircraft Engineering Co., Ltd 1. Maintenance of aircrafts 3,301 14.88% and parts Shandong Hnayu Aviation Technology Service Co., Ltd. 1,618 7.29% 2. Rent for office land and daily boarding SDA Group Co., Ltd.( Rent for office land and daily boarding ) 585 30.13% 3.Traning business Qingdao Feisheng International Aviation Technology Development Training Co., Ltd. 212 4.00% China International Aviation Co., Ltd. (Airplane lease) 31,047 100% China International Aviation Co., Ltd. (Airline affiliation) 1,199 100% 4. Airplane lease and market cooperation China International Aviation Co., Ltd. (Labor service) 510 48.35% (II) Other substantive related transactions There were no other significant related transactions. VII. Substantivet contracts and their implementation (I) There was no new trust, contract or lease of assets in the Period. (II) There was no external guarantee in the Period. (III) There was no trust financing in the Period. (IV) Other substantive contracts As ending at the Period-end, the total of the long-term/short-term borrowing is RMB 4.48 billion. There were no other substantive contracts un-disclosed. VIII. Commitment in Period or previous one continual into Period by corporation or shareholders, of 5% (including 5%) above shareholding, of significant influence upon the Company’s operation achievements or financial status As the Company bided100% shareholding in Qingdao Feisheng, SDA Group commited for compensation for the profit eatimation according to Appraisal Report and envisioned the net profit of RMB 4.8049 million of Qingdao Feisheng in 2010. If Qingdao Feisheng does not accomplish the estimative profit in operation performance on the continual appraisal basis, which causes the Company’s profit loss, SDA Group committed for the cash compensation for the difference. The commitment needs comparison upon the auditory of the 2010 annual profit of Qingdao Feisheng. IX. There is no punishment from the regulatory department on the Company or its directors, supervisors or senior management in the Period X. Analysis and explanation on other significant events, their influences, and solutions (I) The Company holds 8,697,000 shares of Chinese Information Network Incorporation of CivilSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 11 Aviation which is listed in Hong Kong Exchanges and Clearing Limited. The nature of these shares is non-tradable domestic shares. There was no shareholding in the financial corporation as the other listed company, joint commercial bank, Securities Corporation, Insurance Corporation, Trust Corporation and Futures Corporation. (II) Specific explanation and independent opinion of independent directors on capital appropriation by controlling shareholders or other related parties and external guarantee, in Period or previous one continual into Period As ending at 30 June 2010, there is no capital appropriation by controlling shareholders or other related parties in the Period or previous one continual into the Period. In the Period, there ws no external guarantee. XI. Internal control and fulfillment of social responsibilities Taking the opportunity of special corporate governance activities, the Company strengthened internal control and perfected governance structure. In the Period, the Company continued to perfect the setting organization of the special committees of the Board. During the preparation of 2009 Annual Report, independent directors and the Audit Committee actively made negotiation and communication with the audit accountants, made inspection on the financial statements of the Company which advanced the standardization of work for preparing annual report and assured reality and accuracy of financial data according to the requirements of relevant laws and regulations. In the report period, the internal control system of the Company has already covered every operation level and tache of the Company. The Company strictly and effectively executed the internal control system, which met the demands required by CSRC and Shenzhen Stock Exchange for listed companies in work of internal control. Moreover, the Company further perfected the safeguard system, established the systems of corporate training and control over the safeguard quality, did well the safeguard for Shanghai Exposition, and secured the “Exposition” Flight 660. The Company urgently allocated the transportation capacity, accomplished the materials transportation for for the earthquake relieve in Yushu, and drought relief in Southwest, with the total of 12 flights for the safeguard and disaster relieve, disaster relieve epuipment and matrials of 38.5 tonnage, and a futher check on the urgent disaster relief capability . XII. Reception of study & investigation, communication and interview in Period In the Period, there were activities of reception of specific objects (institutional and individual investors) by answering and replying to investors’ call and is no incidence of the selective or privatel disclosure, reveal, or leak of non-pulic significant information to specific objects (institutional investor or fund). Date Place Way The received parties Contents discussed and materials supplied Jan.-June 2010 Jinan Telephone communication Individual investor Operations of the Company; material not supplied. 22 April 2010 Jinan Face-to-face interview Securities media, institutional shareholder, private investor Operations of the Company; Annual Report of the Company supplied. XIII. Other significant events All significant events and announcements were published in China Securities Journal, Securities Times, Hongkong Commercial Daily (Hongkong) and the Juchao Zixun website (http: //www.cninfo.com.cn). Details may be refered to in the above relevant media.SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 12 Section VI. Financial Report Balance Sheet Prepared by Shandong Airlines Co., Ltd. June 30, 2010 Unit: RMB Items ConsolAidmatoiounn t at pePriaorde-netn Cd ompany ConsolAidmatoiounn t at yePara-rbeengt iCn ompany Current assets: Monetary funds 243,229,056.16 230,016,518.61 194,065,742.69 179,813,989.83 Settlement provisions Capital lent Transaction finance asset 11,580,394.10 11,580,394.10 11,341,846.48 11,341,846.48 Notes receivable Accounts receivable 207,884,032.55 203,256,597.56 142,545,895.96 140,731,572.47 Accounts paid in advance 38,722,913.95 38,602,033.58 22,504,262.48 22,370,882.70 Insurance receivable Reinsurance receivables Contract reserve of reinsurance receivable Interest receivable Dividend receivable 1,165,398.00 1,165,398.00 1,617,642.00 1,617,642.00 Other receivables 205,870,710.36 205,725,322.87 160,552,013.99 160,483,475.47 Purchase restituted finance asset Inventories 69,431,800.28 69,431,800.28 65,267,781.10 65,267,781.10 Non-current asset due within one year Other current assets Total current assets 777,884,305.40 759,778,065.00 597,895,184.70 581,627,190.05 Non-current assets: Granted loans and advances Finance asset available for sales Held-to-maturity investment Long-term account receivable Long-term equity investment 88,352,100.00 112,165,305.97 88,352,100.00 112,165,305.97 Investment property Fixed assets 6,703,637,530.35 6,691,540,601.63 6,631,600,764.96 6,619,089,545.44 Construction in progress 565,082,653.78 565,082,653.78 422,277,445.58 422,277,445.58 Engineering material Disposal of fixed asset Productive biological asset Oil and gas asset Intangible assets 47,502,621.28 32,638,438.30 47,895,073.21 33,013,562.26 Expense on Research and Development Goodwill Long-term expenses to be apportioned 214,355,808.42 214,126,123.12 216,546,250.96 216,370,254.46SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 13 Deferred income tax asset 117,810,714.29 117,785,939.79 91,836,911.34 91,812,136.84 Other non-current asset Total non-current asset 7,736,741,428.12 7,733,339,062.59 7,498,508,546.05 7,494,728,250.55 Total assets 8,514,625,733.52 8,493,117,127.59 8,096,403,730.75 8,076,355,440.60 Current liabilities: Short-term loans 1,012,102,017.03 1,012,102,017.03 739,819,020.88 739,819,020.88 Loan from central bank Absorbing deposit and interbank deposit Capital borrowed Transaction financial liabilities Notes payable 33,226,885.33 33,226,885.33 182,124,331.32 182,124,331.32 Accounts payable 965,875,874.52 963,219,547.33 812,032,950.07 810,639,584.15 Accounts received in advance 152,563,822.72 152,563,822.72 117,956,240.43 117,467,352.04 Selling financial asset of repurchase Commission charge and commission payable Wage payable 102,768,188.10 102,732,617.26 135,033,537.40 135,018,545.42 Taxes payable 169,330,267.85 169,064,286.44 177,564,425.49 177,319,512.46 Interest payable 4,077,760.66 4,077,760.66 4,001,134.66 4,001,134.66 Dividend payable 11,940.00 11,940.00 11,940.00 11,940.00 Other accounts payable 142,313,994.69 142,026,787.36 124,930,463.59 124,872,192.44 Reinsurance payables Insurance contract reserve Security trading of agency Security sales of agency Non-current liabilities due within 1 year 515,410,729.46 515,410,729.46 535,108,457.71 535,108,457.71 Other current liabilities Total current liabilities 3,097,681,480.36 3,094,436,393.59 2,828,582,501.55 2,826,382,071.08 Non-current liabilities: Long-term loans 3,471,793,648.36 3,471,793,648.36 3,402,752,588.39 3,402,752,588.39 Bonds payable Long-term account payable 917,226,481.96 917,226,481.96 968,968,451.94 968,968,451.94 Special accounts payable Projected liabilities Deferred income tax liabilities 2,895,098.53 2,895,098.53 2,835,461.62 2,835,461.62 Other non-current liabilities 33,840,479.00 33,840,479.00 27,718,573.00 27,718,573.00 Total non-current liabilities 4,425,755,707.85 4,425,755,707.85 4,402,275,074.95 4,402,275,074.95 Total liabilities 7,523,437,188.21 7,520,192,101.44 7,230,857,576.50 7,228,657,146.03 Owner’s equity (or shareholders’ equity): Paid-in capital (or share capital) 400,000,000.00 400,000,000.00 400,000,000.00 400,000,000.00 Capital public reserve 84,050,162.84 84,050,162.84 84,050,162.84 84,050,162.84 Less: Inventory sharesSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 14 Reasonable reserve Surplus public reserve 59,576,069.03 58,915,364.50 59,576,069.03 58,915,364.50 Provision of general risk Retained profit 434,239,113.44 429,959,498.81 308,668,390.11 304,732,767.23 Balance difference of foreign currency translation Total owner’s equity attributable to parent company 977,865,345.31 852,294,621.98 Minority interests 13,323,200.00 13,251,532.27 Total owner’s equity 991,188,545.31 972,925,026.15 865,546,154.25 847,698,294.57 Total liabilities and owner’s equity 8,514,625,733.52 8,493,117,127.59 8,096,403,730.75 8,076,355,440.60 Profit Statement Prepared by Shandong Airlines Co., Ltd. January-June, 2010 Unit: RMB Amount in this period Amount in last period Items Consolidation Parent Company Consolidation Parent Company I. Total operating income 3,133,663,094.58 3,130,557,084.43 2,341,628,166.43 2,338,250,642.97 Including: Operating income 3,133,663,094.58 3,130,557,084.43 2,341,628,166.43 2,338,250,642.97 Interest income Insurance gained Commission charge and commission income II. Total operating cost 2,863,871,178.16 2,861,260,458.31 2,305,916,180.00 2,303,368,120.60 Including: Operating cost 2,407,584,188.29 2,406,587,181.10 1,855,661,886.60 1,854,692,032.25 Interest expense Commission charge and commission expense Cash surrender value Net amount of expense of compensation Net amount of withdrawal of insurance contract reserve Bonus expense of guarantee slip Reinsurance expense Operating tax and extras 87,411,121.39 87,244,032.10 69,042,767.26 68,873,891.08 Sales expenses 208,998,341.78 208,998,341.78 143,786,115.87 143,786,115.87 Administration expenses 61,598,497.67 59,897,863.18 105,357,851.54 103,808,136.48 Financial expenses 97,703,103.83 97,957,114.95 131,687,423.69 131,827,809.88 Losses of devaluation of asset 575,925.20 575,925.20 380,135.04 380,135.04 Add: Changing income of fair value(Loss is listed with “-”) 238,547.62 238,547.62 -4,056,192.64 -4,056,192.64 Investment income (Loss is listed with “-”) 645,329.07 645,329.07 4,829,849.65 4,829,849.65 Including: Investment income on affiliated company and joint venture Exchange income (LossSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 15 is listed with “-”) III. Operating profit (Loss is listed with “-”) 270,675,793.11 270,180,502.81 36,485,643.44 35,656,179.39 Add: Non-operating income 6,438,539.47 6,438,539.47 115,765,523.38 115,765,523.38 Less: Non-operating expense 2,983,400.20 2,983,400.20 2,176,504.92 2,176,504.92 Including: Disposal loss of non-current asset 2,860,149.01 2,860,149.01 2,169,256.17 2,169,256.17 IV. Total Profit (Loss is listed with “-”) 274,130,932.38 273,635,642.08 150,074,661.90 149,245,197.85 Less: Income tax expense 68,488,541.33 68,408,910.51 37,393,723.46 37,311,299.45 V. Net profit (Net loss is listed with “-”) 205,642,391.05 205,226,731.58 112,680,938.44 111,933,898.40 Net profit attributable to owner’s of parent company 205,570,723.33 112,509,856.54 Minority shareholders’ gains and losses 71,667.72 171,081.90 VI. Earnings per share i. Basic earnings per share 0.51 0.28 ii. Diluted earnings per share 0.51 0.28 VII. Other comprehensive income VIII. Total consolidated income 205,642,391.05 205,226,731.58 112,680,938.44 111,933,898.40 Total consolidated income attributable to owners of parent company 205,570,723.33 112,509,856.54 Total consolidated income attributable to minority shareholders 71,667.72 171,081.90 Cash Flow Statement Prepared by Shandong Airlines Co., Ltd. January-June, 2010 Unit: RMB Amount i Items Consolidation n thiPsa preenrito Cd ompany ConsolAidmatoiounn t in lasPta preenrito Cd o mpany I. Cash flows arising from operating activities: Cash received from selling commodities and providing labor services 3,103,986,764.56 3,102,782,754.30 2,336,429,221.15 2,334,446,557.00 Net increase of customer deposit and interbank deposit Net increase of loan from central bank Net increase of capital borrowed from other financial institution Cash received from original insurance contract fee Net cash received from reinsurance business Net increase of insuredSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 16 savings and investment Net increase of disposal of transaction financial asset Cash received from interest, commission charge and commission Net increase of capital borrowed Net increase of returned business capital Write-back of tax received Other cash received concerning operating activities 12,474,129.71 12,219,005.89 93,215,476.76 93,075,090.57 Subtotal of cash inflow arising from operating activities 3,116,460,894.27 3,115,001,760.19 2,429,644,697.91 2,427,521,647.57 Cash paid for purchasing commodities and receiving labor service 1,976,453,214.03 1,976,441,336.34 1,338,317,681.18 1,338,332,467.49 Net increase of customer loans and advances Net increase of deposits in central bank and interbank Cash paid for original insurance contract compensation Cash paid for interest, commission charge and commission Cash paid for bonus of guarantee slip Cash paid to/for staff and workers 353,667,841.00 352,019,777.48 299,050,769.59 297,851,797.47 Taxes paid 250,766,690.79 250,270,593.38 158,632,335.13 158,622,333.14 Other cash paid concerning operating activities 53,959,573.55 53,713,743.78 66,905,309.19 66,514,013.02 Subtotal of cash outflow arising from operating activities 2,634,847,319.37 2,632,445,450.98 1,862,906,095.09 1,861,320,611.12 Net cash flows arising from operating activities 481,613,574.90 482,556,309.21 566,738,602.82 566,201,036.45 II. Cash flows arising from investing activities: Cash received from recovering investment Cash received from investment income 1,097,573.07 1,097,573.07 3,212,207.65 3,212,207.65 Net cash received from disposal of fixed, intangible and other long-term assets 9,380.00 9,380.00 317,139,020.01 317,139,020.01 Net cash received from disposal of subsidiaries and other unitsSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 17 Other cash received concerning investing activities Subtotal of cash inflow from investing activities 1,106,953.07 1,106,953.07 320,351,227.66 320,351,227.66 Cash paid for purchasing fixed, intangible and other long-term assets 465,535,817.20 465,439,336.20 456,905,808.57 456,847,808.57 Cash paid for investment Net increase of mortgaged loans Net cash received from subsidiaries and other units Other cash paid concerning investing activities 25,800,000.00 25,800,000.00 Subtotal of cash outflow from investing activities 465,535,817.20 465,439,336.20 482,705,808.57 482,647,808.57 Net cash flows arising from investing activities -464,428,864.13 -464,332,383.13 -162,354,580.91 -162,296,580.91 III. Cash flows arising from financing activities Cash received from absorbing investment Including: Cash received from absorbing minority shareholders’ investment by subsidiaries Cash received from loans 859,816,241.77 859,816,241.77 1,118,132,976.67 1,118,132,976.67 Cash received from issuing bonds Other cash received concerning financing activities Subtotal of cash inflow from financing activities 859,816,241.77 859,816,241.77 1,118,132,976.67 1,118,132,976.67 Cash paid for settling debts 568,804,717.16 568,804,717.16 1,268,237,935.34 1,268,237,935.34 Cash paid for dividend and profit distributing or interest paying 154,943,882.25 154,943,882.25 109,218,730.63 109,218,730.63 Including: Dividend and profit of minority shareholder paid by subsidiaries Other cash paid concerning financing activities 108,107,155.39 108,107,155.39 105,176,772.22 105,176,772.22 Subtotal of cash outflow from financing activities 831,855,754.80 831,855,754.80 1,482,633,438.19 1,482,633,438.19 Net cash flows arising from financing activities 27,960,486.97 27,960,486.97 -364,500,461.52 -364,500,461.52 IV. Influence on cash and cash equivalents due to -30,532.87 -30,532.87 -95,955.40 -95,955.40SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 18 fluctuation in exchange rate V. Net increase of cash and cash equivalents 45,114,664.87 46,153,880.18 39,787,604.99 39,308,038.62 Add: Balance of cash and cash equivalents at the period -begin 49,333,429.81 35,081,676.95 44,937,058.88 30,712,242.02 VI. Balance of cash and cash equivalents at the period -end 94,448,094.68 81,235,557.13 84,724,663.87 70,020,280.64SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 19 Consolidated Statement on Changes of Owners’ Equity Prepared by Shandong Airlines Co., Ltd. Semi-Annual of 2010 Unit: RMB Amount in this report period Amount in last year Owners' equity attributable to the parent company Owners' equity attributable to the parent company Items Paid-up capital (Share capital) Capital reserve s Less: Treasur y Stock Reaso nable reserv e Surplu s reserv es Gener al risk provis ion Retain ed profit Others Minor ity’s equity Total owner s’ equity Paid-up capital (Share capital) Capital reserve s Less: Treasur y Stock Reaso nable reserv e Surplu s reserv es Gener al risk provis ion Retain ed profit Others Minor ity’s equity Total owner s’ equity I. Balance at the end of last year 400,0 00,00 0.00 84,05 0,162. 84 59,57 6,069. 03 308,6 68,39 0.11 13,25 1,532. 27 865,5 46,15 4.25 400,0 00,00 0.00 84,05 0,162. 84 29,49 0,727. 77 36,47 1,405. 69 12,79 0,655. 55 562,8 02,95 1.85 Add: Changes of accounting policy Error correction of the last period Others II. Balance at the beginning of this year 400,0 00,00 0.00 84,05 0,162. 84 59,57 6,069. 03 308,6 68,39 0.11 13,25 1,532. 27 865,5 46,15 4.25 400,0 00,00 0.00 84,05 0,162. 84 29,49 0,727. 77 36,47 1,405. 69 12,79 0,655. 55 562,8 02,95 1.85 III. Increase/ Decrease in this year (Decrease is listed with "-") 125,5 70,72 3.33 71,66 7.72 125,6 42,39 1.05 30,08 5,341. 26 272,1 96,98 4.42 460,8 76.72 302,7 43,20 2.40 (I) Net profit 205,5 70,72 3.33 71,66 7.72 205,6 42,39 1.05 302,2 82,32 5.68 460,8 76.72 302,7 43,20 2.40 (II) Other consolidated income Subtotal of (I) and (II) 205,5 71,66 205,6 302,2 460,8 302,7SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 20 70,72 3.33 7.72 42,39 1.05 82,32 5.68 76.72 43,20 2.40 (III) Owners' devoted and decreased capital 1. Owners' devoted capital 2. Amount calculated into owners' equity paid in shares 3. Others (IV) Profit distribution -80,00 0,000. 00 30,08 5,341. 26 -30,08 5,341. 26 1. Withdrawal of surplus reserves 30,08 5,341. 26 -30,08 5,341. 26 2. Withdrawal of general risk provisions 3. Distribution for owners (shareholders) -80,00 0,000. 00 4. Others (V) Carrying forward internal owners' equity 1. Capital reserves conversed to capital (share capital) 2. Surplus reserves conversed to capital (share capital) 3. Remedying loss with surplus reserveSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 21 4. Others (VI) Reasonable reserve 1. Withdraw in this period 2. Usage in this period IV. Balance at the end of the report period 400,0 00,00 0.00 84,05 0,162. 84 59,57 6,069. 03 434,2 39,11 3.44 13,32 3,200. 00 991,1 88,54 5.30 400,0 00,00 0.00 84,05 0,162. 84 59,57 6,069. 03 308,6 68,39 0.11 13,25 1,532. 27 865,5 46,15 4.25 Statement on Changes of Owners' Equity of Parent Company Prepared by Shandong Airlines Co., Ltd. Semi-Annual of 2010 Unit: RMB Amount in this report period Amount in last year Item Paid-up capital (Share capital) Capital reserves Less: Treasury Stock Reasona ble reserve Surplus reserves General risk reserve Retaine d profit Total owners’ equity Paid-up capital (Share capital) Capital reserves Less: Treasury Stock Reasona ble reserve Surplus reserves General risk reserve Retaine d profit Total owners’ equity I. Balance at the end of last year 400,000 ,000.00 84,050, 162.84 58,915, 364.50 304,732 ,767.23 847,698 ,294.57 400,000 ,000.00 84,050, 162.84 28,830, 023.24 33,964, 695.93 546,844 ,882.01 Add: Changes of accounting policy Error correction of the last period Others II. Balance at the beginning of this year 400,000 ,000.00 84,050, 162.84 58,915, 364.50 304,732 ,767.23 847,698 ,294.57 400,000 ,000.00 84,050, 162.84 28,830, 023.24 33,964, 695.93 546,844 ,882.01 III. Increase/ Decrease in this year (Decrease is 125,226 ,731.58 125,226 ,731.58 30,085, 341.26 270,768 ,071.30 300,853 ,412.56SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 22 listed with "-") (I) Net profit 205,226 ,731.58 205,226 ,731.58 300,853 ,412.56 300,853 ,412.56 (II) Other consolidated income Subtotal of (I) and (II) 205,226 ,731.58 205,226 ,731.58 300,853 ,412.56 300,853 ,412.56 (III) Owners' devoted and decreased capital 1. Owners' devoted capital 2. Amount calculated into owners' equity paid in shares 3. Others (IV) Profit distribution -80,000, 000.00 30,085, 341.26 -30,085, 341.26 1. Withdrawal of surplus reserves 30,085, 341.26 -30,085, 341.26 2. Withdrawal of general risk provisions 3. Distribution for owners (shareholders) -80,000, 000.00 4. Others (V) Carrying forward internal owners' equity 1. Capital reserves conversed to capital (share capital) 2. Surplus reserves conversed to capital (share capital)SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 23 3. Remedying loss with surplus reserve 4. Others (VI) Reasonable reserve 1. Withdraw in this period 2. Usage in this period IV. Balance at the end of the report period 400,000 ,000.00 84,050, 162.84 58,915, 364.50 429,959 ,498.81 972,925 ,026.15 400,000 ,000.00 84,050, 162.84 58,915, 364.50 304,732 ,767.23 847,698 ,294.57SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 2 4 Shandong Airlines Co., Ltd. Notes to the financial statements As at 30st June 2010 (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). 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 netSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 2 5 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 for 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 itsSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 2 6 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 the 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 cashSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 2 7 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). 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 asSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 2 8 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. 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 forSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 2 9 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. 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 inSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 3 0 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 allowance 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 relevantSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 3 1 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 significance 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 non- significant 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 estimatedSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 3 2 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 firm 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 to 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 initiallySHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 3 3 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 asset 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.SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 3 4 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. (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;SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 3 5 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. 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 recognisedSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 3 6 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. (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 reductionSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 3 7 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 capitalised 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 forSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 3 8 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; 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 areSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 3 9 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. 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 2010 INTERIM REPORT 4 0 (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. 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 deferredSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 4 1 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; and 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:SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 4 2 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 through 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; theSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 4 3 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. 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. 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 warehousingSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 4 4 Subsidiary name Qingdao International Air Logistics Centre Co., Ltd 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 23,813,205.97 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 13,323,200.00 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 30 Jun. 2010 31 Dec. 2009 Currency Exchange Presentation Exchange Presentation Original currency rate currency Original currency rate currency Cash on hand CNY 882,739.86 1.00 882,739.86 262,286.69 1.00 262,286.69 HKD 4,386.60 0.8724 3,826.87 386.60 0.8805 340.40 USD 27,525.19 6.7909 186,920.81 1,057.92 6.8282 7,223.69 GBP 1,737.80 10.2135 17,749.02 362.80 10.978 3,982.82 CAD 10.00 6.4310 64.31 10.00 6.5171 65.17 JPY 582,000.00 0.0767 44,639.40 0.00 0.0738 0.00 EUR 45,990.00 8.2710 380,383.29 6,870.00 9.7971 67,306.08 Subtotal 1,516,323.56 341,204.85 Bank CNY 86,229,452.76 1.00 86,229,452.76 47,952,878.72 1.00 47,952,878.72 USD 955,083.08 6.7909 6,485,873.69 126,124.43 6.8282 861,202.83 KRW 38,160,202.31 0.005672 216,444.67 30,317,123.00 0.005876 178,143.41 Subtotal 92,931,771.12 48,992,224.96 Other monetary funds CNY 148,780,961.48 1.00 148,780,961.48 144,732,312.88 1.00 144,732,312.88 Subtotal 148,780,961.48 144,732,312.88 Total 243,229,056.16 194,065,742.69 Note:The other limited monetary funds of CNY 148,780,961.48 as at 30st June 2010 is guarantee for letters of guarantee for aircrafts and aircraft engines, for bank draft acceptance and for short-term borrowings. 2. Held for trading financial assets Item Fair value as at 10.06.30 (CNY) Fair value as at 09.12.31(CNY) Derivative financial assets 11,580,394.10 11,341,846.48 Total 11,580,394.10 11,341,846.48 Note:The immature interest swaps held by the Company as at 30st June 2010 have a fair value as at acquisition of USD 183,849,061.20, of which the fair value as at 30st June 2010 quoted by banks is CNY 11,580,394.10 (USD 1,705,281.20). 3. Accounts receivablesSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 4 5 (1) Disclosure by classification 30 Jun. 2010 31 Dec.2009 Types ABmoooukn tvalue Provision for bad debts Book value Provision for bad debts (CNY) Proportion (%) Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Individual significant amounts 180,392,305.29 86.37 0.00 0.00 130,379,296.86 91.06 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 13,860.97 0.01 0.00 0.00 9,502.08 0.01 60.93 0.01 Other non-significant receivables 28,463,989.38 13.62 986,123.09 100.00 12,797,444.39 8.93 640,286.44 99.99 Total 208,870,155.64 100.00 986,123.09 100.00 143,186,243.33 100.00 640,347.37 100.00 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: Details Book value (CNY) Bad and doubtful debt (CNY) Proportion (%) Comment BSP 93,130,426.78 0.00 0.00 Amount not due received prior to the statement date. China Civil Aviation Clearing Centre 30,533,575.86 0.00 0.00 Amount not due received prior to the statement date. Air China Co., Ltd. 56,728,302.65 0.00 0.00 Amount not due received prior to the statement date. Total 180,392,305.29 0.00 0.00 Amount not due received prior to the statement date. (3) Aging analysis 30 Jun. 2010 31.Dec.2009 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 207,066,607.41 99.14 913,862.09 142,119,187.40 99.25 593,424.08 1 – 2 years 1,205,326.54 0.58 49,293.41 754,989.67 0.53 32,009.09 2 – 3 years 584,360.72 0.28 22,873.76 302,564.18 0.21 14,853.27 3 – 4 years 13,860.97 0.00 93.83 9,502.08 0.01 60.93 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 208,870,155.64 100.00 986,123.09 143,186,243.33 100.00 640,347.37 (4) Accounts receivables owed by shareholders with 5% or more voting right during the reporting period 30 Jun. 2010 31.Dec.2009 Shareholder Amount (CNY) Provision for bad debts (CNY) Amount (CNY) Provision for bad debts (CNY) Air China Co., Ltd. 56,728,302.65 0.00 53,828,640.46 0.00 Total 56,728,302.65 0.00 53,828,640.46 0.00 (5) The top five account receivablesSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 4 6 Name of company Relationship with the Company Amount (CNY) Age % of total accounts receivables BSP Non-related parties 93,130,426.78 Within 1 year 44.59 Air China Co., Ltd. Related parties 56,728,302.65 Within 1 year 27.16 China Civil Aviation Clearing Centre Non-related parties 30,533,575.86 Within 1 year 14.62 Personal e-ticket Non-related parties 5,651,838.44 Within 1 year 2.71 Jinan Post Office Non-related parties 1,620,315.66 Within 1 year 0.78 Total 187,664,459.39 89.86 (6) Accounts receivables owed by related parties Name Relationship with the Company Amount (CNY) % of total accounts receivables Air China Co., Ltd. Parent 56,728,302.65 27.16 Total 56,728,302.65 27.16 4. Advances to suppliers (1) Presentation by age Age Amount (C3N0 YJu)n. 2010 Proportion (%) Amount (C3N1.YD)e c.2009 Proportion (%) Within 1 year 38,657,419.95 99.83 21,184,884.28 94.13 1 – 2 years 55,494.00 0.14 1,304,378.20 5.80 2 – 3 years 10,000.00 0.03 15,000.00 0.07 Total 38,722,913.95 100.00 22,504,262.48 100.00 (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 China Airlines Non-related parties 4,859,094.40 Within 1 year Outstanding payments Beijing FuLaiTe Technology Development Co., Ltd. Non-related parties 4,382,512.27 Within 1 year Deposit for clearing Asiana Airlines, Inc Non-related parties 2,802,799.43 Within 1 year Outstanding payments Japan Airlines International Non-related parties 1.146.164.26 Within 1 year Outstanding payments Shandong Boolean Technology Co., Ltd. Non-related parties 1,145,000.00 Within 1 year Advanced rental Total 14,335,570.36 (3) The closing balance of the advanced payments has been increased 72.07% in comparison with the opening balance,this mainly caused by significant increasing in prepaid payment of the aviation materials for added aircrafts.. (4) There is no Advance to supplier balance due from shareholders who own five or over five percent voting rights as at June 30, 2010. 5. Dividend receivables Item Balance brought forward (CNY) Increase r (CNY) Decrease (CNY) Balance carried forward (CNY) Collection after balance sheet date Impairment Dividends receivable within 1 year China TravelSky Co., Ltd. 1,617,642.00 1,165,398.00 1,617,642.00 1,165,398.00 NoSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 4 7 Total 1,617,642.00 1,165,398.00 1,617,642.00 1,165,398.00 6. Other accounts receivables (1) Disclosure by classification 30 Jun. 2010 31.Dec.2009 Types AmBoooukn tvalue Provision for bad debts Book value Provision for bad debts (CNY) Proportion (%) Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Individual significant amounts 199,827,336.19 62.99 109,051,717.65 97.94 209,239,407.19 77.02 109,051,717.65 98.14 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 117,390,333.25 37.01 2,295,241.43 2.06 62,429,416.40 22.98 2,065,091.95 1.86 Total 317,217,669.44 100.00 111,346,959.08 100.00 271,668,823.59 100.00 111,116,809.60 100.00 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. Air China Co., Ltd. 30,406,535.26 0.00 0.00 In accordance with accounting policies for bad and doubtful debt provision. Singapore Aircraft Leasing Enterprise 19,014,520.00 0.00 0.00 In accordance with accounting policies for bad and doubtful debt provision. Total 199,827,336.19 109,051,717.65 (3) Aging analysis 30 Jun. 2010 31.Dec.2009 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 96,748,951.29 30.50 1,270,294.72 51,941,469.78 19.12 1,142,919.16 1 – 2 years 23,868,336.86 7.52 905,135.06 14,220,621.28 5.23 842,507.38 2 – 3 years 19,862,512.46 6.26 905,282.15 25,446,259.18 9.37 872,347.11 3 – 4 years 17,487,633.50 5.51 10,674,088.76 16,492,449.22 6.07 10,674,554.07 4 – 5 years 129,507,678.60 40.83 80,329,951.06 133,038,338.06 48.97 80,329,246.11 Over 5 years 29,742,556.73 9.38 17,262,207.32 30,529,686.07 11.24 17,255,235.77 Total 317,217,669.44 100.00% 111,346,959.08 271,668,823.59 100.00 111,116,809.60 (4) Other accounts receivables owed by shareholders with 5% or more voting right during the reporting period 30 Jun. 2010 31 Dec. 2009 Shareholder Amount (CNY) Provision for bad debts (CNY) Amount (CNY) Provision for bad debts (CNY)SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 4 8 Air China Co., Ltd. 30,406,535.26 0.00 23,382,955.26 0.00 Total 30,406,535.26 0.00 23,382,955.26 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 – 7 years 34.38 CDB Leasing Co., Ltd. Non-related parties 41,354,563.28 4 – 5 years 13.04 Air China Co., Ltd Related parties 30,406,535.26 Within 1 year 9.59 Singapore Aircraft Leasing Enterprise Non-related parties 19,014,520.00 2 – 4 years 5.99 Shanghai United Assets and Equity Exchange Non-related parties 15,222,000.00 Within 1 year 4.80 Total 215,049,336.19 67.80 (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 30,406,535.26 9.59 Shandong XiangYu Air Technology Co., Ltd. Under common control 9,543.24 0.00 Qingdao FeiSheng International Air Training Co., Ltd. Under common control 462,041.30 0.15 Shandong Rainbow Commercial Jet Co., Ltd. Under common control 109,051,717.65 34.38 Total 139,929,837.45 44.12 7. Inventories (1) Classification 30 Jun. 2010 31 Dec 2009 Types Cost (CNY) Impairment provision (CNY) Carrying value (CNY) Cost (CNY) Impairment provision (CNY) Carrying value (CNY) Consumable air equipments 66,057,237.53 353,539.79 65,703,697.74 63,025,085.14 353,539.79 62,671,545.35 Low-value consumables 2,969,423.28 - 2,969,423.28 1,814,143.03 - 1,814,143.03 Materials 417,299.78 - 417,299.78 270,642.83 - 270,642.83 Others 341,379.48 - 341,379.48 511,449.89 - 511,449.89 Total 69,785,340.07 353,539.79 69,431,800.28 65,621,320.89 353,539.79 65,267,781.10 (2) Impairment Decrease Type 31 Dec 2009 (CNY) Provision (CNY) Reversal (CNY) Write off (CNY) 30 Jun. 2010 (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 ZHAO, HongSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 4 9 Associate Shandong Rainbow Commercial Jet Co., Ltd. Nature of business Air transportation Register capital CNY 50,000,000.00 Shareholding 45.00% Voting right 45.00% Total assets carried forward CNY 86,252,725.51 Total liabilities carried forward CNY 202,622,810.65 Net assets carried forward CNY -116,370,085.14 Total operating income for the reporting period CNY5,142,776.25 Net profits for the reporting period CNY 1,729,451.74 9. Long-term equity investments (1) Disclosure Name of investee 31 Dec 2009 (CNY) Changes (CNY) 30 Jun. 2010 (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 0.00 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 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 (CNY) Ⅰ. Long-term equity investments measured at cost method 6,690,000.00 0.45% 0.45% n/a 1,165,398.00 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 1,165,398.00 Ⅱ. Long-term equity investments measured by the equity methodSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 5 0 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 (2) Long-term equity investments held as at 30st June 2010 have no limitation on disposal imposed. 10. Fixed assets and accumulated depreciation (1) Classification Types 31 Dec.2009 (CNY) Increased (CNY) Decreased (CNY) 30 Jun 2010 (CNY) ① Total historical cost 8,884,896,758.01 351,807,751.31 15,161,507.57 9,221,543,001.75 Houses and buildings 223,592,323.30 223,592,323.30 Aircrafts and aircraft engine 8,090,415,052.13 327,335,658.10 9,720,000.00 8,408,030,710.23 High-value rotables 431,124,374.06 17,750,164.80 3,691,180.42 445,183,358.44 Transportation vehicles 38,197,107.13 672,073.24 486,500.00 38,382,680.37 Machinery, equipments and others 101,567,901.39 6,049,855.17 1,263,827.15 106,353,929.41 ② Total accumulated depreciation 2,253,295,993.05 276,910,836.91 12,301,358.56 2,517,905,471.40 Houses and buildings 26,694,789.94 2,967,407.61 29,662,197.55 Aircrafts and aircraft engine 2,014,255,500.72 254,659,061.05 9,720,000.00 2,259,194,561.77 High-value rotables 143,082,492.05 13,207,400.85 1,010,199.88 155,279,693.02 Transportation vehicles 18,673,551.96 1,071,931.44 - 19,745,483.40 Machinery, equipments and others 50,589,658.38 5,005,035.96 1,571,158.68 54,023,535.66 ③ Total carrying value 6,631,600,764.96 - - 6,703,637,530.35 Houses and buildings 196,897,533.36 193,930,125.75 Aircrafts and aircraft engine 6,076,159,551.41 6,148,836,148.46 High-value rotables 288,041,882.01 289,903,665.42 Transportation vehicles 19,523,555.17 18,637,196.97 Machinery, equipments and others 50,978,243.01 52,330,393.75 Note: ①Depreciation increase in year totals CNY 276,910,836.91. The total value of construction projects completed and recognised as non-current assets in year is CNY 319,373,205.68. ②Total value of non-current assets pledged as security for borrowings and leased aircraft engines with limitation imposed is CNY 4,284,037,179.46 (2) Leased fixed assets under financial leases Type Historical cost (CNY) Accumulated depreciation (CNY) Impairment (CNY) Balance (CNY) Aircrafts and aircraft engines 2,325,787,591.46 825,377,182.73 0.00 1,500,410,408.73 Replacement parts for aircraft fuselage 26,250,000.00 20,157,595.11 0.00 6,092,404.89 replacement parts for engines 164,384,362.66 116,959,511.95 0.00 47,424,850.71 Total 2,516,421,954.12 962,494,289.79 0.00 1,553,927,664.33 (3) No impairment provision was provided as at 30st June 2010 as no evidence suggests assets has impaired. 11. Construction in progress (1) Details of construction in progress Types 30 Jun 2010 31 Dec 2009SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 5 1 Book value (CNY) Impairment provision (CNY) Carrying value (CNY) Book value (CNY) Impairment provision (CNY) Carrying value (CNY) B737-800 aircrafts 446,235,614.32 0.00 446,235,614.32 340,589,155.31 0.00 340,589,155.31 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 56,549,280.48 0.00 56,549,280.48 19,435,867.69 0.00 19,435,867.69 Maintenance workshops, terminal buildings and arrival and departure warehouses 0.00 0.00 0.00 0.00 0.00 0.00 Other construction projects 1,519,563.98 0.00 1,519,563.98 1,474,227.58 0.00 1,474,227.58 Total 565,082,653.78 0.00 565,082,653.78 422,277,445.58 0.00 422,277,445.58 (2) Changes of significant construction in progress Types 31 Dec 2009 (CNY) Increase (CNY) Transferred to fixed assets (CNY) Other decreased (CNY) 30 Jun 2010 (CNY) B737-800 aircrafts 340,589,155.31 424,804,064.52 319,157,605.51 446,235,614.32 ARJ21-700 aircrafts 60,778,195.00 0.00 0.00 60,778,195.00 B737NG simulated aircrafts 19,435,867.69 37,113,412.79 0.00 56,549,280.48 Maintenance workshops, terminal buildings and arrival and departure warehouses - - Other construction projects 1,474,227.58 260,936.57 215,600.17 1,519,563.98 Total 422,277,445.58 462,178,413.88 319,373,205.68 565,082,653.78 (3) Capitalisation of construction progress Projects 31 Dec 2009 (CNY) Increase (CNY) Transferred to fixed assets (CNY) Other decrease (CNY) 30 Jun 2010 (CNY) Source of finance B737-800 aircrafts 4,857,721.01 2,893,146.62 5,484,932.73 2,265,934.90 Loans from financial institutions ARJ21-700 aircrafts 487,587.70 487,587.70 Total 5,345,308.71 2,893,146.62 5,484,932.73 - 2,753,522.60 (4) Assets pledged as security The corresponding carrying value of aircraft purchase rights pledged as security for borrowings in construction in progress as at 30st June 2010 is 446,235,614.32. (5) Impairment No impairment provision is provided as at 30st June 2010 as no evidence suggests construction project impairment. 12. Intangible assets (1) Details of intangible assets Types 31 Dec 2009 (CNY) Increase in year (CNY) Decrease in year (CNY) 30 Jun 2010 (CNY) A. Total historical cost 50,808,133.13 0.00 0.00 50,808,133.13SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 5 2 Types 31 Dec 2009 (CNY) Increase in year (CNY) Decrease in year (CNY) 30 Jun 2010 (CNY) Land use rights 50,808,133.13 0.00 0.00 50,808,133.13 B. Total accumulated amortization 2,913,059.92 392,451.93 0.00 3,305,511.85 Land use rights 2,913,059.92 392,451.93 0.00 3,305,511.85 C. Total net value 47,895,073.21 0.00 0.00 47,502,621.28 Land use rights 47,895,073.21 0.00 0.00 47,502,621.28 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 47,895,073.21 0.00 0.00 47,502,621.28 Land use rights 47,895,073.21 0.00 0.00 47,502,621.28 (2) Impairment No impairment provision was provided as at 30st Juner 2010 as no evidence suggests intangible asset has impaired. 13. Long-term deferred assets Type 31 Dec 2009 (CNY) Increase (CNY) Amortisation (CNY) Other decreased (CNY) 30 Jun 2010 (CNY) Pilot recruitment and training expenditure 216,546,250.96 19,577,915.97 21,768,358.51 0.00 214,355,808.42 Total 216,546,250.96 19,577,915.97 21,768,358.51 0.00 214,355,808.42 14. Deferred income tax assets and deferred income tax liabilities (1) Recognised deferred income tax assets and deferred income tax liabilities Types 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) Deferred income tax assets Deductable temporary difference resulting from impairment provision 28,083,270.55 27,939,289.24 Impairment provision for inventories 88,384.95 88,384.95 Provision for asset substantial repair 84,952,488.32 60,683,229.57 Provision for wages and salaries due 4,686,570.47 3,126,007.58 Amortisation of pre-incorporation expenses 0.00 0.00 Total 117,810,714.29 91,836,911.34 Deferred income tax liabilities Fair value changes of tradable financial assets 2,895,098.53 2,835,461.62 Unrealised exchange surplus 0.00 0.00 Total 2,895,098.53 2,835,461.62 (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 112,333,082.20 Impairment provision for inventories 353,539.80 Provision for substantial asset repair 339,809,953.28 Provision for wages and salaries due 18,746,281.88 Total 471,242,857.16 Corresponding temporary differences to liabilities causing temporary differences Fair value changes of tradable financial assets 11,580,394.10 Total 11,580,394.10SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 5 3 15. Impairment provisions Decrease in year Types 31 Dec 2009 (CNY) Increase (CNY) Reversal (CNY) Write off (CNY) 30 Jun 2010 (CNY) (1) Impairment provision for accounts receivables 640,347.37 345,775.72 - 986,123.09 (2) Impairment provision for other accounts receivables 111,116,809.60 230,149.48 - 111,346,959.08 (3) Impairment provision for inventories 353.539.79 353,539.79 (4) Impairment provision for long-term equity investments 22,500,000.00 - 22,500,000.00 Total 134,610,696.76 575,925.20 - - 135,186,621.96 16. Short-term loans Types 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) Hypothecated loans 84,042,612.11 71,537,020.88 Credits 100,000,000.00 0.00 Collaterals 0.00 0.00 Guaranteed loans 828,059,404.92 668,282,000.00 Total 1,012,102,017.03 739,819,020.88 17. Notes payables (1) Details of notes payables Types 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) Trade acceptances 0.00 0.00 Bank acceptances 33,226,885.33 182,124,331.32 Total 33,226,885.33 182,124,331.32 (2) The closing balance of the notes payable has decreased 81.76% in comparison with the opening balannce,this mainly caused by the payment to the maturity bank acceptance. 18. Accounts payable (1) Aging analysis Age 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) Within 1 year 953,742,424.80 804,837,986.14 Over 1 year 12,133,449.72 7,194,963.93 Total 965,875,874.52 812,032,950.07SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 5 4 (2) Accounts payables owed to shareholders or related parties with 5% or more voting right as at 30 June 2010 Companies Nature of liability 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) Shandong International Air Training Co., Ltd. Taining fees 5,281,973.82 5,281,973.82 Qingdao FeiSheng International air training Co., Ltd. Taining fees 5,869,505.00 3,750,453.00 Air China Co., Ltd. Ground services, delay and claim for lossed baggage 2,465,659.11 3,962,987.26 Shandong TaiGu Aircraft Projecting Co., Ltd. Maintenance expense and air route subscription 21,773,893.20 13,641,513.24 Total 35,391,031.13 26,636,927.32 (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 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) Within 1 year 152,563,822.72 117,859,114.71 Over 1 year 0.00 97,125.72 Total 152,563,822.72 117,956,240.43 (2) Up to30 June 2010,there are no advanced payments received from shareholders who own 5% or over 5%of voting rights. 20. Payroll payables Types 31 Dec 2009 (CNY) Increase (CNY) Payments (CNY) 30 Jun 2010 (CNY) (1) Wages and salaries, bonuses, subsidies and allowances 122,517,360.85 224,132,251.54 262,531,979.10 84,117,633.29 (2) Employee benefits 0.00 12,175,243.72 12,175,243.72 0.00 (3) Social insurance fee 0.00 35,560,887.32 35,560,887.32 0.00 Within: ① Medical insurance 0.00 83,508.15 83,508.15 0.00 ②Basic retirement insurance 0.00 22,307,595.02 22,307,595.02 0.00 ③Annuity fee 0.00 10,274,680.11 10,274,680.11 0.00 ④Unemployment fee 0.00 1,461,796.99 1,461,796.99 0.00SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 5 5 Types 31 Dec 2009 (CNY) Increase (CNY) Payments (CNY) 30 Jun 2010 (CNY) ⑤ Work injury insurance 0.00 736,792.59 736,792.59 0.00 ⑥Pregnancy insurance 0.00 696,514.46 696,514.46 0.00 (4) Housing accumulation fund 12,146.24 40,399,633.80 40,396,505.80 15,274.24 (5) Labor union fee and employee education fee 12,504,030.31 9,134,475.32 3,003,225.06 18,635,280.57 (6) Non-monetary benefits 0.00 0.00 0.00 0.00 (7) Redemption of termination of labor contract 0.00 0.00 0.00 0.00 (8) Others 0.00 0.00 0.00 0.00 Within: Share-based payments settled by cash 0.00 0.00 0.00 0.00 Total 135,033,537.40 321,402,491.70 353,667,841.00 102,768,188.10 Note: There is no payroll in arrears within payroll payables. 21. Tax payables Types of Tax 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) VAT and customs 1,240.39 0.00 Business Tax 15,322,002.90 13,493,990.29 Enterprise income tax 64,243,479.62 102,676,537.26 Property tax 1,082,338.37 1,818,917.29 Tenure tax 114,656.28 114,655.77 Personal income tax 10,236,745.95 1,594,343.92 Stamp duty 3,567,551.64 3,567,551.64 Infrastructure fund for civil aviation 12,023,255.77 11,478,774.38 Construction fund for civil airports 39,670,742.00 34,178,042.00 Withholding income tax 16,943,914.33 8,641,320.63 Withholding business Tax 6,113,377.21 0.00 Others 10,963.39 292.31 Total 169,330,267.85 177,564,425.49 22. Interest payablesSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 5 6 Type 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) Interest on borrowings 4,077,760.66 4,001,134.66 Total 4,077,760.66 4,001,134.66 23. Other accounts payable (1) Aging analysis Age 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) Within 1 year 100,912,898.42 78,664,291.44 Over 1 year 41,401,096.27 46,266,172.15 Total 142,313,994.69 124,930,463.59 (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 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) Shandong Airlines Group Co., Ltd. Account balance 6,715,484.83 4,051,799.74 Air China Co., Ltd. Quality margin 20,000,000.00 20,000,000.00 Shandong TaiGu Aircraft Projecting Co., Ltd. Account balance 245,400.00 0.00 Total 26,960,884.83 24,051,799.74 (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 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) Long-term borrowings due within 1 year 392,266,768.06 393,832,752.98 Long-term accounts payables due with 1 year 186,408,288.91 209,832,453.69 Subtotal 578,675,056.97 603,665,206.67 Less: Unrecognised financial lease expenditure 63,264,327.51 68,556,748.96 Total 515,410,729.46 535,108,457.71 (2) Long-term borrowings due within one year ① TypesSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 5 7 Types 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) Collaterals 392,266,768.06 393,832,752.98 Guaranteed loans 0.00 0.00 Total 392,266,768.06 393,832,752.98 ② Details of the top five balances of long-term borrowings due within one year 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) 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 Installment repayment USD $12,000,000.00 81,490,800.00 $12,000,000.00 81,938,400.00 USD account, Shandong Branch China Development Bank 2008-7-1 Installment repayment USD $10,600,000.00 71,983,540.00 $7,481,350.00 51,084,154.07 CNY account, Jinan Branch China Minsheng Banking Corp., Ltd. 2004-6-29 Installment repayment CNY 50,000,000.00 50,000,000.00 50,000,000.00 50,000,000.00 USD account, Jinan Branch Bank of China 2005-7-15 Installment repayment USD $11,200,000.00 76,058,080.00 $6,461,066.40 44,117,453.59 USD account, DongJiao Branch Industrial and Commercial Bank of China 2009-6-30 Installment repayment USD $4,000,000.00 27,163,600.00 $4,000,000.00 27,312,800.00 Total 306,696,020.00 254,452,807.66 Note: The interest rates applicable to the above long-term borrowings as at 30st June 2010 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 30st June 2010. (4) Long-term accounts payables due within one year Companies Credit term Original amount (CNY) Interest rate (%) Interest accrued (CNY) 30 Jun 2010 (CNY) Conditions of borrowing New York Branch, Commerzbank Twelve months 21,368,454.66 6.01%-6.025% 627,005.84 20,741,448.82 Financial lease for aircraft CDB Leasing Co., Ltd. Twelve months 165,039,834.25 6.2964% 62,637,321.66 102,402,512.59 Financial lease for aircraft 25. Long-term borrowings (1) TypesSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 5 8 Type 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) Hypothecated loans 439,843,740.82 162,717,904.24 Collaterals 1,878,990,385.61 2,024,291,990.60 Guaranteed loans 1,152,959,521.93 1,215,742,693.55 Total 3,471,793,648.36 3,402,752,588.39 (2) Details of the top five balances of long-term borrowings 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) 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. 2004-6-29 Installment repayment CNY ¥200,000,000.00 200,000,000.00 ¥227,000,000.00 227,000,000.00 USD account, DongJiao Branch Industrial and Commercial Bank of China 2009-6-30 Installment repayment USD $32,491,654.64 220,647,577.49 $34,491,654.64 235,515,916.21 USD account, Jinan Branch Bank of China 2005-12-21 Installment repayment USD $26,213,260.00 178,011,627.33 $26,213,260.00 178,989,381.93 USD account, Jinan Branch Bank of China 2005-10-19 Installment repayment USD $26,071,798.00 177,050,973.04 $26,071,798.00 178,023,451.10 USD account, Shandong Branch China Development Bank 2009-8-18 Installment repayment USD $20,000,000.00 135,818,000.00 0.00 0.00 Total 911,528,177.86 819,528,749.24 Note: The interest rates applicable to the above long-term borrowings as at 30st June 2010 are between 1.7825% and 5.9400%. 26. Long-term accounts payables (1) The top five balances of long-term accounts payables Company Credit term Original amount (CNY) Interest rate (%) Interest accrued (CNY) 30 Jun 2010 (CNY) Conditions of borrowing CDB Leasing Co., Ltd. 108 months 1,213,072,532.59 6.2964% 295,846,050.63 917,226,481.96 Financial lease Total 108 months 1,213,072,532.59 295,846,050.63 917,226,481.96 (2) Details of financial lease payables within long-term accounts payables Companies 30 Jun 2010 (CNY) 31 Dec 2009 (CNY)SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 5 9 Amount in original currency Currency Amount in reporting currency (CNY) Amount in original currency Currency Amount in reporting currency (CNY) CDB Leasing Co., Ltd 917,226,481.96 RMB 917,226,481.96 968,968,451.94 CNY 968,968,451.94 New York Branch, Commerzbank 0.00 USD 0.00 0.00 USD 0.00 Total 917,226,481.96 968,968,451.94 27. Other non-current liabilities Items 30 Jun 2010 (CNY) 31 Dec 2009 (CNY) Gains from CRJ post-sale buy-back 1,391,618.11 2,087,462.11 Gains from reward points 26,891,652.55 19,891,652.55 Subsidy exclusively for post-disaster rehabitation 4,557,208.34 4,739,458.34 SMS fund 1,000,000.00 1,000,000.00 Total 33,840,479.00 27,718,573.00 (1) Asset-connected government grants Items 31 Dec 2009 (CNY) Increase in year (CNY) Decrease in year (CNY) 30 Jun 2010 (CNY Subsidy exclusively for post-disaster rehabitation 4,739,458.34 0.00 182,250.00 4,557,208.34 SMS fund 1,000,000.00 0 0 1,000,000.00 Total 5,739,458.34 0.00 182,250.00 5,557,208.34 28. Share capital Change of number of shares in year (+/–) Items 31 Dec 2009 (Unit:Shares) Share allotment Bonus issue Shares converted from accumulated fund Others Subtotal 30 Jun 2010 (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 0.00SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 6 0 Change of number of shares in year (+/–) Items 31 Dec 2009 (Unit:Shares) Share allotment Bonus issue Shares converted from accumulated fund Others Subtotal 30 Jun 2010 (Unit:Shares) 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 0.00 0.00 0.00 0.00 0.00 0.00 0.00 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 reserve Type 31 Dec 2009 (CNY) Increase in year (CNY) Decrease in year (CNY) 30 Jun 2010 (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 31 Dec 2009 (CNY) Increase in year (CNY) Decrease in year (CNY) 30 Jun 2010 (CNY) Statutory surplus reserve 59,576,069.03 0.00 0.00 59,576,069.03 Total 59,576,069.03 0.00 0.00 59,576,069.03 31. Undistributed profits Type 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009 (CNY) Balance brought forward 308,668,390.11 36,471,405.69 Add: Profits for the year 205,570,723.33 112,509,856.54SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 6 1 Type 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009 (CNY) Add: Other transfers 0.00 0.00 Less: Statutory surplus reserve 0.00 0.00 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 80,000,000.00 0.00 Less: Ordinary dividends converted to capital 0.00 0.00 Balance carried forward 434,239,113.44 148,981,262.23 32. Operating income and operating costs (1) Operating income and operating costs Items 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Income from principal activities 3,101,291,683.51 2,320,604,814.36 Income from other activities 32,371,411.07 21,023,352.07 Total operating income 3,133,663,094.58 2,341,628,166.43 Principal activity costs 2,407,154,567.97 1,855,222,802.06 Other activity costs 429,620.32 439,084.54 Total operating costs 2,407,584,188.29 1,855,661,886.60 (2) Operating income and operating costs by segment 1.Jan-30.Jun2010.. (CNY) 1.Jan-30.Jun2009. (CNY) Segment Operating income (CNY) Operating costs (CNY) Operating income (CNY) Operating costs (CNY) Air transportation 3,084,521,679.18 2,395,348,014.45 2,305,193,594.13 1,845,474,482.25 Cargos and logistics 3,341,785.85 1,238,224.39 3,377,523.46 969,854.35 Hospitality 12,991,318.48 10,397,011.21 12,033,696.77 8,778,465.46 Rental services 0.00 0.00 0.00 0.00SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 6 2 1.Jan-30.Jun2010.. (CNY) 1.Jan-30.Jun2009. (CNY) Segment Operating income (CNY) Operating costs (CNY) Operating income (CNY) Operating costs (CNY) Training Services 436,900.00 171,317.92 0.00 0.00 Others 32,371,411.07 429,620.32 21,023,352.07 439,084.54 Total 3,133,663,094.58 2,407,584,188.29 2,341,628,166.43 1,855,661,886.60 (3) Details of operating revenues from top five clients Clients Operating income(CNY) % of total operating income Air China Co., Ltd. 322,459,956.03 10.29 Shenzhen Karen Way Logistics Co., Ltd. 2,383,750.00 0.08 SHARP.INC 1,172,676.60 0.04 Ningbo Haishu new loop-through Cargo Co., Ltd. 1,089,585.00 0.03 Guangzhou ultimate Transport Co., Ltd. 903,400.00 0.03 Total 328,009,367.63 10.47 33. Business tax and surtax Item 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Rate Business tax 87,411,121.39 69,042,767.26 3%、5% Total 87,411,121.39 69,042,767.26 34. Selling expense The increase of 45.35% 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 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Interest expenses 106,432,475.70 130,028,226.50 Less: Interest income 1,259,265.11 412,863.03 Exchange differences -10,569,658.99 -417,127.63 Bank charges and others 3,099,552.23 2,489,187.85 Total 97,703,103.83 131,687,423.69 36. Impairment loss Item 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Bad and doubtful debt expenses 575,925.20 380,135.04 Total 575,925.20 380,135.04 37. Gains from fair value changesSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 6 3 Source of fair value changes 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Tradable financial assets 238,547.62 -4,056,192.64 Total 238,547.62 -4,056,192.64 38. Investment income (1) Details of investment income Items 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Income from long-term equity investments measured at cost 1,165,398.00 1,617,642.00 Income from long-term equity investments measured by the equity method 0.00 0.00 Gains from disposals of long-term equity investments 0.00 0.00 Gains from possession of tradable financial assets -520,068.93 3,212,207.65 Others 00.00 0.00 Total 645,329.07 4,829,849.65 (2) Income from long-term equity investments measured at cost Investee 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Reasons for change China TravelSky Co., Ltd. 1,165,398.00 1,617,642.00 Decrease in cash dividends Total 1,165,398.00 1,617,642.00 (3) As at 30st June 2010, there is no investment of which income remittance is imposed with limitation. (4) The 86.64% 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 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Gains from disposals of non-current assets 20,091.15 84,287.74 Including: Gains from disposals of non-current assets 20,091.15 84,287.74 Government grants 5,805,916.00 115,134,743.17 Others 612,532.32 546,492.47 Total 6,438,539.47 115,765,523.38 (2) Government grants Items 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) CommentSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 6 4 Repayment of infrastructure fund for civil aviation 0.00 114,651,145.51 CaiJian[2009]No.4 issued by Others 5,805,916.00 483,597.66 Air route subsidies granted by local governments Total 5,805,916.00 115,134,743.17 (3) The 94.44% decrease of non-operating income from last reporting period principally results from the increased gains from repayment of infrastructure fund for civil aviation for the same period last year. 40. Non-operating expenses Items 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Total losses from disposals of non-current assets 2,860,149.01 2,169,256.17 Within: Losses from disposals of non-current assets 2,860,149.01 2,169,256.17 Others 123,251.19 7,248.75 Total 2,983,400.20 2,176,504.92 41. Income tax expenses Items 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Income tax for current period computed in accordance with tax laws and regulations 94,402,707.39 65,671,754.63 Adjustments of deferred income tax -25,914,166.04 -28,278,031.17 Total 68,488,541.33 37,393,723.46 Note: The 83.16% 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 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (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 0.51 0.51 0.28 0.28 Net profits attributable to ordinary shareholders after deducting extraordinary gains or losses 0.51 0.51 0.08 0.08 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 issuesSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 6 5 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 contraction 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 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Government grants 5,805,916.00 56,453,459.02 Interest income from bank deposits 1,259,265.11 412,863.03 Cash received from non-operating activities 612,532.32 67,810.00 Cash received from accounts balances 4,796,416.28 36,281,344.71 Total 12,474,129.71 93,215,476.76 (2) Cash paid related to other operating activities Items 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Bank charges 4,489,465.26 2,489,187.85 Cash paid from non-operating activities 123,251.19 7,248.75 Cash paid from accounts balances 35,481,268.53 22,738,140.16 Cash paid from selling expenses and administrative expenses 13,865,588.57 41,670,732.43 Total 53,959,573.55 66,905,309.19 (3) Cash paid related to other financing activities Items 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Cash paid to guarantee bank acceptance 4,048,648.60 0.00 Cash paid for financial leases of aircrafts 104,058,506.79 105,176,772.22SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 6 6 Total 108,107,155.39 105,176,772.22 44. Supplements to the consolidated cash flow statement (1) Supplements to the consolidated cash flow statement (1) Cash flows adjusted from net profits 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Net profits 205,642,391.05 112,680,938.44 Add: Impairment losses 575,925.20 380,135.04 Add: Depreciation of non-current assets and productive biological assets and losses of fuel 276,910,836.91 251,990,542.17 Add: Amortisation of intangible assets 392,451.93 370,587.51 Add: Amortisation of long-term deferred assets 21,768,358.51 7,697,044.01 Add: Losses on disposals of non-current assets, intangible assets and long-term assets (minus sign representing gains) 2,840,057.86 2,084,968.43 Add: Losses arising from scrapping non-current assets (minus sign representing gains) 0.00 0.00 Add: Losses arising from fair value changes (minus sign representing gains) -238,547.62 4,056,192.64 Add: Financial costs (minus sign representing income) 94,116,034.06 129,557,207.07 Add: Investment losses (minus sign representing income) -645,329.07 -4,829,849.65 Add: Decrease of deferred income tax assets (minus sign representing increase) -25,973,802.95 -26,462,956.80 Add: Increase of deferred income tax liabilities (minus sign representing decrease) 59,636.90 -1,815,074.37 Add: Decrease of inventories (minus sign representing increase) -4,164,019.18 8,378,283.51 Add: Decrease of operating accounts receivables (minus sign representing increase) -112,229,409.63 -90,139,094.28 Add: Increase of operating accounts payables (minus sign representing decrease) 22,558,990.93 172,789,679.10 Add: Others 0.00 0.00 Net cash flows from operating activities 481,613,574.90 566,738,602.82 (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 0.00 Non-current assets under financial leases 0.00 0.00 (3) Net change of cash and cash equivalents Cash carried forward 94,448,094.68 84,724,663.87 Less: Cash brought forward 49,333,429.81 44,937,058.88 Add: Cash equivalents carried forward 0.00 0.00SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 6 7 (1) Cash flows adjusted from net profits 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Less: Cash equivalents brought forward 0.00 0.00 Net increase of cash and cash equivalents 45,114,664.87 39,787,604.99 (2) Composition of cash and cash equivalents Items 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Ⅰ. Cash 94,448,094.68 84,724,663.87 Including: Cash on hand 1,516,323.56 924,840.03 Bank deposit capable of immediate payments 92,931,771.12 83,799,823.84 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 94,448,094.68 84,724,663.87 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 Machongxian 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 61407164-7 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%SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 6 8 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 ZHAO, Hong Nature of business Air transportation Registered capital CNY 50,000,000.00 Shareholding 45.00% Voting right 45.00% Total assets carried forward CNY86,252,725.51 Total liabilities carried forward CNY 202,622,810.65 Net assets carried forward CNY -116,370,085.14 Total operating income for the reporting period CNY 5,142,776.25 Net profits for the reporting period CNY 1,729,451.74 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 Rainbow Commercial Jet Co., Ltd. Associate 72497146 5. Transactions with related parties (1) Acceptance of goods and service 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) 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 33,011,989.96 14.88 42,505,687.11 19.23 Shandong Airlines Group Co., Ltd. Receipt of service Rental fees and food and accommodation fees Market price 5,848,250.05 30.13 5,080,672.95 29.53 Qingdao FeiSheng International Air Training Co., Ltd. Receipt of service Training fees Market price 2,119,052.00 4.00 2,609,828.00 5.67 Shandong International Air Training Co., Ltd. Receipt of service Training fees Market price 0.00 0.00 3,624,260.00 7.87 Shandong XiangYu Air Technology Co., Ltd. Receipt of service Repair expenditure Market price 16,179,314.44 7.29 9,542,930.41 4.32SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 6 9 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) 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 Total 57,158,606.45 63,363,378.47 (2) Supply of goods and service 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) 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 5,100,000.00 48.35 5,100,000.00 77.31 Total 5,100,000.00 48.35 5,100,000.00 77.31 (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 2009-7-7 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 80,000,000.00 2010-1-21 2011-1-20 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 120,000,000.00 2010-1-27 2011-7-26 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 40,000,000.00 2010-2-22 2010-8-20 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 40,000,000.00 2009-11-2 2010-11-1 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 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 50,000,000.00 2010-6-21 2010-6-20 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 50,000,000.00 2010-6-28 2011-6-27 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 6,790,900.00 2009-9-1 2010-8-31 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 8,149,080.00 2009-9-8 2010-8-31 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 27,163,600.00 2009-9-22 2010-8-31 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 25,805,420.00 2009-10-12 2010-8-31 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 27,661,033.43 2009-11-2 2010-11-1 NoSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 7 0 Name of Guarantor Secured party Secured amount (CNY) Start date Expiry date Completion of guarantee Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 12,615,711.63 2010-1-28 2011-1-27 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 49,873,659.87 2010-6-1 2011-5-31 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 52,300,000.00 2008-6-2 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 17,200,000.00 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 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 Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 57,987,495.10 2007-3-29 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 8,488,625.00 2007-4-30 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 45,944,648.86 2007-5-31 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 121,929,387.14 2007-7-2 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 25,464,516.82 2007-8-1 2022-3-28 No Shandong Airlines Group Co., Ltd. Shandong Airlines Co., Ltd 101,244,849.01 2007-9-28 2022-3-28 No Total 1,981,018,926.85 (4) Other transactions with related parties 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Related parties Transaction description Pricing policy Amount (CNY) % of transaction within same type Amount (CNY) % of transaction within same type Air China Co., Ltd. Wet lease Agreed price 310,474,477.00 100.00 307,987,065.37 100SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 7 1 Shandong Rainbow Commercial Jet Co., Ltd Debt compensation 115,769.84 0.00 27,748.25 0.00 Air China Co., Ltd. Route sharing Agreed price 11,985,479.03 100.00 13,017,976.72 100.00 Total 322,575,725.87 321,032,790.34 6. The balance of accounts payables and receivables among related parties: Items Related party 30 Jun. 2010 31.Dec.2009 Accounts receivable Air China Co., Ltd. 56,728,302.65 53,828,640.46 Total 56,728,302.65 53,828,640.46 Other accounts receivable Air China Co., Ltd. 30,406,535.26 23,382,955.26 Qingdao FeiSheng International Air Training Co., Ltd. 462,041.30 1,405,287.30 Shandong XiangYu Air Technology Co., Ltd. 9,543.24 2,966,545.86 Shandong Rainbow Commercial Jet Co., Ltd 109,051,717.65 109,051,717.65 Total 139,929,837.45 136,806,506.07 Accounts payable Shandong International Air Training Co., Ltd. 5,281,973.82 5,281,973.82 Qingdao FeiSheng International Air Training Co., Ltd. 5,869,505.00 3,750,453.00 Air China Co., Ltd. 2,465,659.11 3,962,987.26 Shandong TaiGu Aircraft Projecting Co., Ltd. 21,773,893.20 13,641,513.24 Total 35,391,031.13 26,636,927.32 Other accounts payable Air China Co., Ltd. 20,000,000.00 20,000,000.00 Shandong Airlines Group Co., Ltd. 6,715,484.83 4,051,799.74 Shandong TaiGu Aircraft Projecting Co., Ltd. 245,400.00 0.00 Total 26,960,884.83 24,051,799.74 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. 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 30st June 2010 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 578,401.08 574,245.38 522,163.94 2,697,356.02 4,372,166.42SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 7 2 Capital 877,621.53 1,907,691.89 1,169,268.03 578,773.89 4,533,355.34 Total 1,456,022.61 2,481,937.27 1,691,431.97 3,276,129.91 8,905,521.76 Ⅸ Post balance sheet date events No 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 receivables (1) Disclosure by classification 30 Jun 2010 31 Dec 2009 Types Book value Provision for bad debts Book value Provision for bad debts Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Amount (CNY) Proportion (%) Amount (CNY) Proporti on (%) Individual significant amounts 180,392,305.29 88.36 0.00 0.00 130,379,296.86 92.29 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 13,860.97 0.01 0.00 0.00 9,502.08 0.01 60.93 0.01 Other non-significant receivables 23,741,063.68 11.63 890,632.38 100.00 10,887,630.19 7.70 544,795.73 99.99 Total 204,147,229.94 100.00 890,632.38 100.00 141,276,429.13 100.00 544,856.66 100.00 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 93,130,426.78 0.00 0.00 Amount not due received prior to the statement date. China Civil Aviation Clearing Centre 30,533,575.86 0.00 0.00 Amount not due received prior to the statement date. Air China Co., Ltd. 56,728,302.65 0.00 0.00 Amount not due received prior to the statement date. Total 180,392,305.29 0.00 0.00 Amount not due received prior to the statement date. (3) Aging analysis 30 Jun 2010 31 Dec 2009 Book value Proportion Provision for bad debts Book value Proportion Provision for bad debts Age Amount (CNY) % Amount (CNY) Amount (CNY) % Amount (CNY)SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 7 3 30 Jun 2010 31 Dec 2009 Book value Proportion Provision for bad debts Book value Proportion Provision for bad debts Age Amount (CNY) % Amount (CNY) Amount (CNY) % Amount (CNY) Within 1 year 203,058,415.11 99.47 856,669.49 140,732,293.60 99.61 524,079.39 1 – 2 years 490,593.14 0.24 9,583.88 232,069.27 0.16 5,863.07 2 – 3 years 584,360.72 0.29 24,279.42 302,564.18 0.22 14,853.27 3 – 4 years 13,860.97 0.00 99.60 9,502.08 0.01 60.93 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 204,147,229.94 100.00 890,632.38 141,276,429.13 100.00 544,856.66 (3) Accounts receivable owed by shareholders with 5% or more voting right during the reporting period 30 Jun 2010 31 Dec 2009 Shareholder Amount (CNY) Provision for bad debts (CNY) Amount (CNY) Provision for bad debts (CNY) Air China Co., Ltd. 56,728,302.65 0.00 53,828,640.46 0.00 Total 56,728,302.65 0.00 53,828,640.46 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 BSP Non-related parties 93,130,426.78 Within 1 year Air ticket 45.62 Air China Co., Ltd. Related parties 56,728,302.65 Within 1 year Settlement of wet lease 27.79 China Civil Aviation Clearing Centre Non-related parties 30,533,575.86 Within 1 year Air ticket 14.96 Personal e-ticket Non-related parties 5,651,838.44 Within 1 year Air ticket 2.77 Jinan Post Office Non-related parties 1,620,315.66 Within 1 year Aircraft charter fees 0.79 Total 187,664,459.39 91.93 (6) Accounts receivables owed by related parties Name Relationship with the Company Amount (CNY) % of total accounts receivables Air China Co., Ltd. Parent 56,728,302.65 27.79 Total 56,728,302.65 27.79 2. Other accounts receivablesSHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 7 4 (1) Disclosure by classification 30 Jun 2010 31 Dec 2009 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 199,827,336.19 63.02 109,051,717.65 97.94 209,239,407.19 77.04 109,051,717.65 98.14 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 117,241,338.47 36.98 2,291,634.14 2.06 62,357,270.59 22.96 2,061,484.66 1.86 Total 317,068,674.66 100.00 111,343,351.79 100.00 271,596,677.78 100.00 111,113,202.31 100.00 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. Air China Co., Ltd. 30,406,535.26 0.00 0.00 In accordance with accounting policies for bad and doubtful debt provision. Singapore Aircraft Leasing Enterprise 19,014,520.00 0.00 0.00 In accordance with accounting policies for bad and doubtful debt provision. Total 199,827,336.19 109,051,717.65 (3) Aging analysis 30 Jun 2010 31 Dec 2009 Age Book value Proportion Provision for bad debts Book value Proportion Provision for bad debts Amount (CNY) % Amount (CNY) Amount (CNY) % Amount (CNY) Within 1 year 96,668,763.32 30.49 1,267,042.44 51,876,423.97 19.11 1,139,666.87 1 – 2 years 23,799,530.05 7.51 904,780.06 14,213,521.28 5.23 842,152.38 2 – 3 years 19,862,512.46 6.26 905,282.15 25,446,259.18 9.37 872,347.11 3 – 4 years 17,487,633.50 5.52 10,674,088.76 16,492,449.22 6.07 10,674,554.07 4 – 5 years 129,507,678.60 40.85 80,329,951.06 133,038,338.06 48.98 80,329,246.11SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 7 5 30 Jun 2010 31 Dec 2009 Age Book value Proportion Provision for bad debts Book value Proportion Provision for bad debts Amount (CNY) % Amount (CNY) Amount (CNY) % Amount (CNY) Over 5 years 29,742,556.73 9.38 17,262,207.32 30,529,686.07 11.24 17,255,235.77 Total 317,068,674.66 100.00 111,343,351.79 271,596,677.78 100.00 111,113,202.31 (4) Other accounts receivables owed by shareholders with 5% or more voting right during the reporting period 30 Jun 2010 31 Dec 2009 Shareholder Amount (CNY) Bad and doubtful debt provision (CNY) Amount (CNY) Bad and doubtful debt provision (CNY) Air China Co., Ltd. 30,406,535.26 0.00 23,382,955.26 0.00 Total 30,406,535.26 0.00 23,382,955.26 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 parties 109,051,717.65 Account balance 2 –7 years 34.39 CDB Leasing Co., Ltd. Non-related parties 41,354,563.28 Guarantee 4 – 5 years 13.04 Air China Co., Ltd Related parties 30,406,535.26 Guarantee Within 1 year 9.59 Singapore Aircraft Leasing Enterprise Non-related parties 19,014,520.00 Guarantee 2 – 4 years 6.00 Shanghai United Assets and Equity Exchange Non-related parties 15,222,000.00 Within 1 year 4.80 Total 215,049,336.19 67.82 (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 30,406,535.26 9.59 Shandong XiangYu Air Technology Co., Ltd. Under common control 9,543.24 0.00 Qingdao FeiSheng International Air Training Co., Ltd. Under common control 462,041.30 0.15 Shandong Rainbow Commercial Jet Co., Ltd. Under common control 109,051,717.65 34.39 Total 139,929,837.45 44.13 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)SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 7 6 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 1,165,398.00 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 112,165,305.97 1,165,398.00 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 1,165,398.00 4. Operating income and operating costs (1) Operating income and operating costs Items 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Income from principal activities 3,098,191,114.86 2,317,227,290.90 Income from other activities 32,365,969.57 21,023,352.07 Total operating income 3,130,557,084.43 2,338,250,642.97 Principal activity costs 2,406,157,560.78 1,854,252,947.71SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 7 7 Other activity costs 429,620.32 439,084.54 Total operating costs 2,406,587,181.10 1,854,692,032.25 (2) Operating income and operating costs by segment 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Segment Operating income (CNY) Operating costs (CNY) Operating income (CNY) Operating costs (CNY) Air transportation 3,084,762,896.38 2,395,589,231.65 2,305,193,594.13 1,845,474,482.25 Hospitality 12,991,318.48 10,397,011.21 12,033,696.77 8,778,465.46 Rental services 0.00 0.00 0.00 0.00 Training Services 436,900.00 171,317.92 0.00 0.00 Others 32,365,969.57 429,620.32 21,023,352.07 439,084.54 Total 3,130,557,084.43 2,406,587,181.10 2,338,250,642.97 1,854,692,032.25 (3) Details of operating revenues from top five clients Clients Operating income (CNY) % of total operating income Air China Co., Ltd. 322,459,956.03 10.30 Shenzhen Karen Way Logistics Co., Ltd. 2,383,750.00 0.08 SHARP.INC 1,172,676.60 0.04 Ningbo Haishu new loop-through Cargo Co., Ltd. 1,089,585.00 0.03 Guangzhou ultimate Transport Co., Ltd. 903,400.00 0.03 Total 328,009,367.63 10.48 5. Investment income (1) Details of investment income Items 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Income from long-term equity investments measured at cost 1,165,398.00 1,617,642.00 Gains from disposals of long-term equity investments 0.00 0.00 Gains from possession of tradable financial assets -520,068.93 3,212,207.65 Total 645,329.07 4,829,849.65 (2) Income from long-term equity investments measured at cost Investee 1.Jan-30.Jun2010. (CNY) 1.Jan-30.Jun2009. (CNY) Reasons for change China TravelSky Co., Ltd. 1,165,398.00 1,617,642.00 Decrease in cash dividends (3) As at 30st June 2010, there is no investment of which income remittance is imposed with limitation.SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 7 8 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 -2,840,057.86 Disposals of non-current assets and so on 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 5,805,916.00 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 0.00 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 -281,521.31 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 489,281.13 Other gains or losses satisfying the definition of extraordinary gains or losses 0.00 Subtotal 3,173,617.96 Less: Impact of income tax 793,404.49 Less: Impact on non-controling interest 0.00SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 7 9 Items Amount (CNY) Comment Total 2,380,213.47 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 (%) Net profits attributable to ordinary shareholders 22.14 0.51 0.51 Net profits attributable to ordinary shareholders after deducting extraordinary gains or losses 21.92 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 205,570,723.33 CNY 203,190,509.86 CNY 112,509,856.54 CNY 30,381,048.36 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 0.51 CNY 0.51 CNY 0.28 CNY 0.08 (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 205,570,723.33 CNY203,190,509.86 CNY 112,509,856.54 CNY 30,381,048.36 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%SHANDONG AIRLINES CO., LTD 2010 INTERIM REPORT 8 0 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 after adjustment (5)=(1)+[(2)-(3)] ×[1-(4)] CNY 205,570,723.33 CNY 203,190,509.86 CNY 112,509,856.54 CNY 30,381,048.36 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 0.51 CNY 0.51 CNY 0.28 CNY 0.08 ⅩⅢ Approval of financial statements This financial statement is approved and authorized for issuance by the Board of Directors on August 28, 2010. Section VII. Documents for Reference 1. Financial Statements with the signatures and seals of the Chairman of the Board, the Chief Accountant and the Person in Charge of Finance; 2. Texts of all documents and originals of public notices disclosed in the newspapers designated by CSRC in the report period. The Company shall provide these documents in time at the requirements of the CSRC or the Stock Exchange, or at the requests by shareholders according to the regulations or the Articles of Association. Chairman of Board: Zhang Xingfu Board of the Directors of Shandong Airlines Co., Ltd. August 28, 2010