AIR CHINA LIMITED (a joint stock limited company incorporated in the People s Republic of China with limited liability) (Stock Code: 00753)

Transcription

1 THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION If you are in doubt as to any aspect of this circular, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser. If you have sold or transferred all your shares in Air China Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee. Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular. AIR CHINA LIMITED (a joint stock limited company incorporated in the People s Republic of China with limited liability) (Stock Code: 00753) NON-EXEMPT CONNECTED TRANSACTION: ESTABLISHMENT OF CARGO AIRLINE JOINT VENTURE SUPPLEMENTAL NOTICE OF EXTRAORDINARY GENERAL MEETING Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders A letter from the Board is set out on pages 5 to 13 of this circular. A letter from the Independent Board Committee, containing its advice to the Independent Shareholders, is set out on pages 14 to 15 of this circular. A letter from China Merchants Securities, the independent financial adviser, containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 16 to 25 of this circular. A notice dated 15 March 2010 convening the Extraordinary General Meeting ( EGM ) of the Company to be held on 29 April 2010 has been published on the HKSE website and on the Company s website. The purpose of this circular is to give you information on an additional proposal to be approved by the Shareholders at the EGM. A supplemental notice of the EGM is set out on page III-1 to III-3 of this circular. A Revised Proxy Form is enclosed with this supplemental notice. The Original Proxy Form dispatched together with the EGM Notice is superseded by this Revised Proxy Form. Whether or not you intend to attend the EGM, you are requested to complete and return the enclosed Revised Proxy Form in accordance with the instructions printed thereon not less than 24 hours before the time fixed for holding the EGM or any adjournment thereof (as the case may be). Completion and return of the Original Proxy Form and/or the Revised Proxy Form will not preclude you from attending the EGM and voting in person if you so wish. 8 April 2010

2 CONTENTS Page DEFINITIONS LETTER FROM THE BOARD I. Introduction II. Description of the Transaction III. The Continuing Connected Transactions IV. EGM V. Revised Proxy Form VI. Recommendation of the Board VII. Additional Information LETTER FROM THE INDEPENDENT BOARD COMMITTEE LETTER FROM CHINA MERCHANTS SECURITIES APPENDIX I VALUATION REPORT WITH RESPECT TO THE FREIGHTER EQUIPMENT I-1 APPENDIX II GENERAL INFORMATION II-1 APPENDIX III SUPPLEMENTAL NOTICE OF THE EXTRAORDINARY GENERAL MEETING III-1 i

3 DEFINITIONS In this circular, the following terms have the meanings set out below, unless the context requires otherwise: ACC Articles the articles of association of Air China Cargo entered into by and between Air China, Cathay Pacific China Cargo Holdings, and Fine Star on 25 February 2010 that will take effect as of the completion of the Transaction ACC JVA the joint venture agreement of Air China Cargo entered into by and between Air China, Cathay Pacific China Cargo Holdings, and Fine Star on 25 February 2010 AFL Advent Fortune Limited, a company incorporated in Cayman Islands for the purpose of acquiring Fine Star and held by a charitable trust Air China Cargo Air China Cargo Co., Ltd., a company with limited liability incorporated in the PRC and a subsidiary of the Company. The principal activity of Air China Cargo is the operation of cargo airline services Aircraft SPA the aircraft sale and purchase agreement entered into by and between Air China Cargo, Cathay Pacific, Dragonair and Air China Import and Export Co. Ltd. on 25 February 2010 Board the board of Directors of the Company Cathay Pacific Cathay Pacific Airways Limited, a company incorporated in Hong Kong and listed on the Hong Kong Stock Exchange, the principal activity of which is the operation of scheduled airline services Cathay Pacific China Cargo Holdings Cathay Pacific China Cargo Holdings Limited, a company incorporated in Hong Kong and wholly owned by Cathay Pacific and the principal activity of which is investment holding Cathay Pacific Directors the directors of Cathay Pacific Cathay Pacific EGM an extraordinary general meeting of Cathay Pacific to be convened to approve the Transaction. Cathay Pacific Group Cathay Pacific and its subsidiaries 1

4 DEFINITIONS China Merchants Securities China Merchants Securities (HK) Co., Limited, the independent financial adviser to the Independent Board Committee and the Independent Shareholders and a corporation licensed to conduct Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) of the regulated activities under the Securities and Futures Ordinance (Cap. 571) CNAC China National Aviation Company Limited, a company incorporated in Hong Kong and a subsidiary of the Company and the principal activity of which is investment holding Company means (Air China Limited), a joint stock limited company incorporated in the PRC with limited liability, whose H shares are listed on the Hong Kong Stock Exchange as its primary listing venue and on the Official List of the UK Listing Authority as its secondary listing venue, and whose A shares are listed on the Shanghai Stock Exchange, and whose principal business is the operation of scheduled airline services connected person Directors has the meaning ascribed thereto under the Listing Rules the directors of the Company Dragonair Hong Kong Dragon Airlines Limited, a company incorporated in Hong Kong and wholly owned by Cathay Pacific and the principal activity of which is the operation of scheduled airline services EGM EGM Notice an extraordinary general meeting of the Company to be convened on 29 April 2010 to approve the matters set out in the EGM Notice and the Transaction notice of the EGM dated 15 March 2010 which sets out the resolutions to be considered by shareholders at the EGM 2

5 DEFINITIONS Fine Star Fine Star Enterprises Corporation, a company incorporated in the British Virgin Islands and wholly owned by CNAC, which holds 25% equity interest in the registered capital of Air China Cargo as at the date of the Framework Agreement Fine Star SPA Framework Agreement the sale and purchase agreement in respect of the sale and purchase of the entire issued share capital and shareholder s loan of Fine Star entered into by and between CNAC and AFL on 25 February 2010 the framework agreement entered into by and between the Company, Cathay Pacific, Cathay Pacific China Cargo Holdings, Fine Star, Air China Cargo and Dragonair on 25 February 2010 Freighter Equipment the four Boeing BCF converted freighters powered by PW engines and two spare engines to be sold by Cathay Pacific and Dragonair to Air China Cargo under the Transaction Group Hong Kong Stock Exchange the Company and its subsidiaries The Stock Exchange of Hong Kong Limited Hong Kong Hong Kong Special Administrative Region of the People s Republic of China Independent Board Committee an independent committee of the Directors of the Company comprising Hu Hung Lick Henry, Zhang Ke, Jia Kang and Fu Yang all of whom are independent non-executive Directors Independent Financial Adviser Independent Shareholders Latest Practicable Date Letter of Guarantee China Merchants Securities (HK) Co., Limited Shareholders of the Company apart from Cathay Pacific 29 March 2010, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein the letter of guarantee in favour of the Company (for itself and on behalf of Air China Cargo) executed by Cathay Pacific on 25 February

6 DEFINITIONS Listing Rules Original Proxy Form Operating Agreement Percentage Ratios PRC or China The Rules Governing the Listing of Securities on the Hong Kong Stock Exchange the form of proxy dispatched together with the EGM Notice dated 15 March 2010, which is superseded by the Revised Proxy Form enclosed with this circular the operating agreement dated 8 June 2006 between the Company and Cathay Pacific pursuant to which the Company and Cathay Pacific have agreed to co-operate in various operational areas the percentage ratios set out in Rule of the Listing Rules, i.e. assets ratio, profits ratio, revenue ratio, consideration ratio and equity capital ratio the People s Republic of China, excluding, for the purpose of this circular only, Hong Kong, Macau and Taiwan PRC Valuer Beijing China Enterprise Appraisals Co., Ltd. ( ) Relevant Agreements Revised Proxy Form Shareholders Subscription Agreement Transaction Undertaking Letter the Subscription Agreement, the Fine Star SPA, the Aircraft SPA, the ACC JVA, the ACC Articles, the Letter of Guarantee, the Undertaking Letter and the relevant ancillary agreements the revised form of proxy enclosed with this circular, which supersedes the Original Proxy Form shareholders of the Company the subscription agreement entered into by and between the Company, Air China Cargo, Cathay Pacific China Cargo Holdings and Fine Star on 25 February 2010 the transactions as described under II. Description of the Transaction (1) Transaction of this circular the letter of undertaking in favour of the Company executed by Cathay Pacific on 25 February 2010 In this circular, for the avoidance of doubt, references to not less than a figure and not more than a figure shall include the figure mentioned. 4

7 LETTER FROM THE BOARD AIR CHINA LIMITED (a joint stock limited company incorporated in the People s Republic of China with limited liability) (Stock Code: 00753) Non-executive Directors: Mr. Kong Dong Ms. Wang Yinxiang Mr. Wang Shixiang Mr. Cao Jianxiong Mr. Christopher Dale Pratt Mr. Chen Nan Lok, Philip Executive Directors: Mr. Cai Jianjiang Mr. Fan Cheng Independent non-executive Directors: Mr. Hu Hung Lick, Henry Mr. Zhang Ke Mr. Jia Kang Mr. Fu Yang Registered office: 9th Floor, Blue Sky Mansion 28 Tianzhu Road Zone A Tianzhu Airport Industrial Zone Shunyi District Beijing PRC Principal place of business in Hong Kong: 5th Floor, CNAC House 12 Tung Fai Road Hong Kong International Airport Hong Kong 8 April 2010 To the Shareholders CONNECTED TRANSACTION: ESTABLISHMENT OF CARGO AIRLINE JOINT VENTURE I. INTRODUCTION Reference is made to the joint announcement dated 25 February 2010 issued by the Company and Cathay Pacific in respect of the Framework Agreement and the Relevant Agreements. On 25 February 2010, the Company entered into the Framework Agreement and the Relevant Agreements with, among others, Cathay Pacific, pursuant to which they have agreed to establish a jointly owned cargo airline by way of subscription for a 25% equity interest in Air China Cargo by Cathay Pacific China Cargo Holdings and other related arrangements as set out in the announcement. 5

8 LETTER FROM THE BOARD Air China Cargo will form the platform for the joint venture and its principal operating bases will remain in Beijing and Shanghai. Air China Cargo is a subsidiary owned by the Company as at the date of this circular and its registered capital is directly held 75% by the Company and 25% by Fine Star. Fine Star is wholly owned by CNAC which itself is a subsidiary owned by the Company as at the date of this circular. Air China Cargo currently handles all of the Company s cargo capacity and Air China Cargo currently operates 7 Boeing 747 freighters itself and also procures and sells the cargo bellyhold space provided by the Company s extensive passenger flights. As Cathay Pacific, by virtue of its 18.1% shareholding in the Company, is a substantial shareholder and therefore a connected person of the Company under the Listing Rules, the Transaction constitutes a connected transaction for the Company under Rule 14A.13 of the Listing Rules. As the highest of the relevant percentage ratios as defined under Rule of the Listing Rules (other than the profits ratio) in respect of the Transaction is more than 2.5%, the Company has to comply with the announcement, reporting and independent shareholders approval requirements under Rule 14A.17 of the Listing Rules. The Independent Board Committee has been established to consider and advise the Independent Shareholders in respect of the Transaction contemplated under the Framework Agreement and the Relevant Agreements. Pursuant to the Listing Rules, China Merchant Securities has been appointed as the Independent Financial Adviser to make recommendations to the Independent Board Committee and the Independent Shareholders as to whether or not the terms of the Transaction contemplated thereunder are fair and reasonable so far as the Independent Shareholders of the Company are concerned and are in the interests of the Company and the Shareholders as a whole. The purpose of this circular is to provide you with information, among other matters, (a) further details of the Transaction; (b) the views from the Directors and the Independent Board Committee with regard to the Transaction; (c) the letter of advice from China Merchant Securities to the Independent Board Committee and the Independent Shareholders in relation to the terms of the Transaction; and (d) a supplemental notice of the EGM to seek approval from the Independent Shareholders on the Transaction and the related matters. 6

9 LETTER FROM THE BOARD II. DESCRIPTION OF THE TRANSACTION (1) Transaction The Framework Agreement entered into by the Company and Cathay Pacific, among others, provides for entry into the Relevant Agreements on the even date. Under the Relevant Agreements, the following transactions will take place: (a) Cathay Pacific China Cargo Holdings will subscribe for a 25% equity interest in Air China Cargo for a consideration of RMB851,621,140 (comprising RMB808,823,530 as contribution to the registered capital and RMB42,797,610 as premium contribution) and Fine Star will make a further capital contribution of RMB238,453,919 (comprising RMB226,470,588 as contribution to the registered capital and RMB11,983,331 as premium contribution) in cash to Air China Cargo. Following the completion of such equity subscription and capital contribution, the equity interests of the Company, Fine Star and Cathay Pacific China Cargo Holdings in Air China Cargo will be 51%, 24% and 25%, respectively as set out below (with premium contribution credited as capital reserve fund of Air China Cargo): Contribution to the registered capital of Air China Cargo Before completion of Transaction After completion of Transaction Amount Percentage Amount Percentage RMB RMB Air China 1,650,000,000 75% 1,650,000,000 51% Fine Star 550,000,000 25% 776,470,588 24% Cathay Pacific China Cargo Holdings 808,823,530 25% Total: 2,200,000, % 3,235,294, % (b) AFL will acquire CNAC s entire equity interest in Fine Star. AFL will obtain a loan of approximately RMB817 million from Cathay Pacific, among which (i) approximately RMB627 million will be applied towards AFL s payment obligations under the Fine Star SPA (among which approximately RMB48 million is consideration for the assignment of a shareholder s loan granted by CNAC to Fine Star for the purpose of making 20% of its capital contribution to Air China Cargo as described in (a) above), and (ii) approximately RMB190 million will be used to provide a shareholder loan to Fine Star for it to make the capital contribution towards Air China Cargo as required under the Subscription Agreement. In return, AFL will pledge its equity interest in Fine Star to Cathay Pacific and Cathy Pacific s returns on the loan will be equal to the dividend returns on the 24% effective shareholding in Air China Cargo; (c) Air China Cargo will use the capital contributions referred to in (a) above and cash generated from its business operations or commercial bank loans to purchase from 7

10 LETTER FROM THE BOARD Cathay Pacific and Dragonair the Freighter Equipment for a consideration of approximately RMB1,924 million; and (d) Cathay Pacific provided a guarantee in favour of the Company in respect of Cathay Pacific China Cargo Holdings obligations under the Relevant Agreements and undertakes to exercise its contractual rights under the loan agreement with respect to the loan referred to in (b) above and other related agreements to procure Fine Star to perform its obligations under the ACC JVA. The transactions described above are inter-conditional, i.e. the completion of one transaction shall be conditional upon the completion of all of the other transactions except that if the transaction involving the purchase of Freighter Equipment described under (c) above does not complete simultaneously or immediately following the completion of all of the other transactions described above, the completion of the latter shall not be affected. Following the completion of the Transaction, Air China Cargo will continue to be a subsidiary of the Company. (2) Conditions The completion of the Transaction under the Framework Agreement and the Relevant Agreements are conditional upon satisfaction of, among others, the following conditions: (a) the Company and Cathay Pacific having obtained all necessary approvals of relevant regulatory bodies in the PRC and the other relevant competent jurisdictions; (b) the Independent Shareholders in general meeting having passed resolutions approving the Transaction as a connected transaction in accordance with the Listing Rules; and (c) the independent shareholders of Cathay Pacific in general meeting having passed resolutions approving the Transaction as a connected transaction in accordance with the provisions of the Listing Rules. (3) Consideration The consideration for the Transaction was determined through arm s length negotiations between the parties with reference to, as the case may be, the net assets value of Air China Cargo and the value of the Freighter Equipment. As at 31 December 2009, the unaudited net asset value of Air China Cargo was approximately RMB2,054 million. For the year ended 31 December 2007, the audited net losses before and after taxation and extraordinary items of Air China Cargo were approximately RMB538 million and approximately RMB522 million respectively. For the year ended 31 December 2008, the audited net profits before and after taxation and extraordinary items of Air China Cargo were approximately RMB10 million and approximately RMB26 million respectively. 8

11 LETTER FROM THE BOARD Under PRC laws, the transfer of state owned assets is subject to a mandatory valuation process. Accordingly, a PRC state approved valuation agency has been appointed and has valued the net assets of Air China Cargo at approximately RMB2,316 million and the Freighter Equipment at approximately RMB1,924 million as of 31 May A valuation report in respect of, among others, the Freighter Equipment prepared by the PRC Valuer as at the reference date of 31 May 2009 is set out in Appendix I of this circular. The Directors are of the opinion that there was no material change in the valuation of the Freighter Equipment from 31 May 2009 up to the Latest Practicable Date. The Company s original purchase cost of the 25% equity interest held by Fine Star in Air China Cargo was approximately RMB857 million. The unaudited carrying value of the Company s 25% equity interest in Air China Cargo as at 31 December 2009 in the consolidated financial statements of Air China Group was approximately RMB631 million (including share of goodwill of RMB87 million). Based on the unaudited carrying value of Air China Cargo as at 31 May 2009 (i.e. approximately RMB1,837 million) and considering the dilution of the Company s equity interest in Air China Cargo to 51% following the completion of the disposal of equity interest and the capital increase in Air China Cargo as described in this circular, Air China Group will record a gain of approximately RMB65 million (subject to adjustment) in the consolidated financial statements on completion of the Transaction. In respect of the Freighter Equipment to be sold by Cathay Pacific and Dragonair to Air China Cargo, the original purchase cost was approximately RMB2,049 million and their carrying value as at 31 December 2009 was approximately RMB1,592 million. Cathay Pacific will record a profit of approximately RMB332 million (subject to adjustment) on completion of the Transaction. (4) Use of proceeds The proceeds received by the Group from the Transaction arising from the disposal of interest in Fine Star will be applied towards the Group s general working capital expenditure and those from the capital contribution to Air China Cargo will be applied towards part of the price for Air China Cargo s acquisition of the Freighter Equipment from Cathay Pacific and Dragonair under the Aircraft SPA. (5) Board composition of Air China Cargo Following completion of the Transaction, the board of directors of Air China Cargo will have seven directors, comprising four directors (including the chairman) appointed by Air China and three directors (including the vice-chairman) appointed by Cathay Pacific China Cargo Holdings. 9

12 LETTER FROM THE BOARD (6) Support to future business of Air China Cargo To support the future business expansion of Air China Cargo, each of Air China and Cathay Pacific China Cargo Holdings has undertaken that following completion of the Transaction and to the extent it remains a shareholder of Air China Cargo, it shall not, and shall procure that its group members shall not, directly or indirectly establish, acquire or otherwise invest by way of equity into any general cargo airline (i.e. except for express freight airline) registered in the PRC or Hong Kong that is engaged in business substantially the same as the business of Air China Cargo. (7) Sale of bellyhold space As an ancillary agreement in relation to the Transaction, the Company, Cathay Pacific and Air China Cargo agree that during the term of operation of Air China Cargo as a joint venture under the ACC JVA, Air China Cargo will be exclusively responsible for the sale of bellyhold space of the Company s passenger aircraft and the Company and Air China Cargo will enter into an exclusive sale agreement accordingly with respect to the relevant year at a reasonable price and on the terms agreed by them based on arm s length negotiation. (8) Further agreements Subject to further negotiation and mutual agreement, Cathay Pacific and Air China Cargo will enter into further agreement(s), including but not limited to a block space agreement, in respect of freighter operations between Hong Kong and mainland China not later than four years after completion of the Transaction. The Company and Cathay Pacific will comply with the relevant requirements of the Listing Rules upon entry into any such further agreement(s). (9) Reasons for and benefits of the Transaction The Directors believe that the terms of the Transaction are fair and reasonable and it is in the best interest of the Company to enter into above transaction with Cathay Pacific because: The establishment of the cargo airline joint venture based in Shanghai will enable Air China Cargo to capture the air cargo business opportunities of the important and competitive Yangtze River Delta region, and will enable Air China Cargo to deliver better services to satisfy the increasing demand for cargo services in mainland China. The increase of freighter capacity will enable Air China Cargo to provide its customers with a wider range of services of better quality so as to make its competitive strengths stronger and more effective. The Transaction will also improve Air China Cargo s competitive position vis-à-vis foreign airlines which offer similar cargo services from and to mainland China. In addition, the investment by Cathay Pacific in Air China Cargo will enable Air China Cargo to provide greater resources and improved service availability to the market. These improvements will allow Air China Cargo s customers to benefit from greater choice and better access to air cargo services within and to and from mainland China. 10

13 LETTER FROM THE BOARD (10) Approval by Independent Shareholders As the highest of the relevant percentage ratios as defined under Rule of the Listing Rules (other than the profits ratio) in respect of the Transaction is more than 2.5%, the Company has to comply with the announcement, reporting and independent shareholders approval requirements under Rule 14A.17 of the Listing Rules. Pursuant to the Listing Rules, Cathay Pacific, being a substantial shareholder of the Company, will abstain from voting on the Transaction at the EGM. The Independent Board Committee has been formed to advise the Independent Shareholders on the Transaction. China Merchants Securities has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders on the Transaction. III. THE CONTINUING CONNECTED TRANSACTIONS Currently there are certain continuing transactions between Air China, its subsidiaries on the one hand and Air China Cargo on the other hand, which mainly comprise the following: 1. Air China Cargo is engaged in the sale of bellyhold space of the Company s passenger aircraft. During its ordinary course of business, Air China Cargo leases a number of properties from the Company, and use some of the Company s simulation training, spare engines and flight equipment and SITA system. The Company also provides welfare logistics service for retired employees to Air China Cargo; 2. Air China Import and Export Co., Ltd. ( ), acting as agent for third parties, leases aircraft and engines to Air China Cargo and also provides Air China Cargo with repair and maintenance services for the aircraft and engines leased to Air China Cargo; 3. Aircraft Maintenance and Engineering Corporation (Beijing) ( ) provides Air China Cargo with repair and maintenance services for its aircraft and engines and other flight equipment and warehouse management for its flight equipment; 4. Air China Cargo provides air cargo services to Shanghai Air China Aviation Service Co., Ltd. ( ); and 5. Golden Phoenix Recruitment Service Ltd. ( ) provides agency services for the secondees of Air China Cargo. Upon completion of the Transaction, the abovementioned transactions will become continuing connected transactions under the Listing Rules, as Air China Cargo will become a connected person of the Company by virtue of being a non-wholly owned subsidiary of the Company in which Cathay Pacific, as a substantial shareholder of the Company, holds more 11

14 LETTER FROM THE BOARD than 10% of the voting rights. The Company will comply with the relevant reporting, announcement and independent shareholders approval requirements as set out in the Listing Rules for the continuing connected transactions where applicable. IV. EGM Reference is made to the EGM Notice. Set out on pages III-1 to III-3 of this circular is a supplemental notice of the EGM. At the EGM, which will be held as originally scheduled, ordinary resolutions will be proposed to consider and, if thought fit, to approve, the matters in connection with the Transaction described under part II of this circular in addition to other resolutions set out in the EGM Notice. The resolutions will be voted by poll. Pursuant to Rule 14A.54 of the Listing Rules, any connected person and any Shareholder and their associates with a material interest in the connected transaction are required to abstain from voting on the relevant resolution at the EGM. As at the date of this circular, being a substantial shareholder of the Company, Cathay Pacific is required to abstain from voting on the resolutions in respect of the Transaction. Please refer to the EGM Notice for details in respect of the other resolutions to be passed at the EGM, eligibility for attending the EGM, registration procedures, closure of register of members and other relevant matters. V. REVISED PROXY FORM As a result of the additional proposed resolutions subsequent to the dispatch of the EGM Notice, the Original Proxy Form sent together with the EGM Notice does not contain the proposed resolutions in respect of the Transaction as set out in this circular. In this connection, a Revised Proxy Form is enclosed with this circular. The Original Proxy Form is superseded by this Revised Proxy Form. You are requested to complete and return the Revised Proxy Form in accordance with the instructions printed thereon. A Shareholder who has not lodged the Original Proxy Form dispatched together with the EGM Notice in accordance with the instructions printed thereon is requested to lodge the Revised Proxy Form if he or she wishes to appoint proxies to attend the EGM on his or her behalf. In this case, the Original Proxy Form should not be lodged. A Shareholder who has already lodged the Original Proxy Form in accordance with the instructions printed thereon should note that: (i) (ii) if no Revised Proxy Form is lodged in accordance with the instructions printed thereon, the Original Proxy Form, if correctly completed, will be treated as a valid proxy form lodged by him or her; if the Revised Proxy Form is lodged in accordance with the instructions printed thereon, the Revised Proxy Form, if correctly completed, will be treated as a valid proxy form lodged by the Shareholder and will revoke and supersede the Original Proxy Form previously lodged by him or her; 12

15 LETTER FROM THE BOARD (iii) if the Revised Proxy Form is lodged after the closing time set out in the EGM Notice and in the Revised Proxy Form enclosed with this circular, the Revised Proxy Form will be invalid. However, it will revoke the Original Proxy Form previously lodged by the Shareholder, and any vote that may be cast by the purported proxy (whether appointed under the Original Proxy Form or the Revised Proxy Form) will not be counted in any poll which may be taken on a proposed resolution. Accordingly, Shareholders are advised not to lodge the Revised Proxy Form after the specified closing time. If such Shareholders wish to vote at the EGM, they will have to attend in person and vote at the EGM themselves. VI. RECOMMENDATION OF THE BOARD The Board (including the independent non-executive Directors) considers that the Transaction is on normal commercial terms, and its terms are fair and reasonable and in the interests of the Company and its shareholders (including the Independent Shareholders) as a whole.the Board recommends the Shareholders to vote in favour of the resolutions regarding the Transaction which will be proposed at the EGM. VII. ADDITIONAL INFORMATION Your attention is drawn to the letter from the Independent Board Committee set out on pages 14 to 15 of this circular which contains its recommendation to the Independent Shareholders of the Company as to the voting at the EGM regarding the Transaction. Your attention is also drawn to the letter from China Merchants Securities set out on pages 16 to 25 of this circular, which contains, among others, its advice to the Independent Board Committee and the Independent Shareholders in relation to the Transaction as well as the principal factors and reasons considered by it in concluding its advice and the additional information set out in the appendices to this circular. By Order of the Board Kong Dong Chairman Beijing, the PRC 13

16 LETTER FROM THE INDEPENDENT BOARD COMMITTEE AIR CHINA LIMITED (a joint stock limited company incorporated in the People s Republic of China with limited liability) (Stock Code: 00753) Independent Board Committee: Mr. Hu Hung Lick, Henry Mr. Zhang Ke Mr. Jia Kang Mr. Fu Yang 8 April 2010 To the Independent Shareholders of the Company Dear Sirs or Madams, NON-EXEMPT CONNECTED TRANSACTION We refer to the circular of the Company dated 8 April 2010 (the Circular ) issued to its shareholders of which this letter forms a part. Terms defined in the Circular shall have the same meanings when used in this letter, unless the context otherwise requires. On 25 February 2010, the Company and Cathay Pacific, among others, entered into the Framework Agreement and the Relevant Agreements, which set out the terms of the Transaction. The Transaction, being a connected transaction of the Company, as set out in the Circular is subject to the reporting, announcement and independent shareholders approval requirements under Chapter 14A of the Listing Rules. The Circular describes such connected transaction that the Company entered into subject to the approval by the Independent Shareholders to be sought at the EGM. The Independent Board Committee was formed to make a recommendation to the Independent Shareholders as to whether, in its view, the terms of the Transaction are fair and reasonable so far as the Independent Shareholders are concerned. China Merchants Securities has been appointed as independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on the fairness and reasonableness of the Transaction. 14

17 LETTER FROM THE INDEPENDENT BOARD COMMITTEE As your Independent Board Committee, we have discussed with the management of the Company the reasons for the Transaction and the terms and basis upon which its terms have been determined. We have also considered the key factors taken into account by China Merchants Securities in arriving at its opinion regarding the Transaction as set out in the letter from China Merchants Securities on pages 16 to 25 of the Circular, which we urge you to read carefully. The Independent Board Committee, after taking into account, amongst other things, the advice of China Merchants Securities, considers that the Transaction is fair and reasonable and is in the best interest of the Company and the Shareholders (including the Independent Shareholders) as a whole. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favor of the relevant ordinary resolutions regarding the Transaction set out in the supplemental notice of the EGM. Yours faithfully, Independent Board Committee Mr. Hu Hung Lick, Henry Independent non-executive director Mr. Zhang Ke Independent non-executive director Mr. Jia Kang Independent non-executive director Mr. Fu Yang Independent non-executive director 15

18 LETTER FROM CHINA MERCHANTS SECURITIES The following is the text of a letter from China Merchants Securities for the purpose of incorporation in the circular in connection with its advice to the Independent Board Committee and the Independent Shareholders in respect of the Air China Cargo Transactions (as defined below). 48th Floor One Exchange Square Central Hong Kong 8 April 2010 To: The Independent Board Committee and the Independent Shareholders Dear Sirs, INTRODUCTION NON-EXEMPT CONNECTED TRANSACTIONS We refer to our engagement as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in relation to (i) the subscription by Cathay Pacific China Cargo Holdings of a 25% equity interest in Air China Cargo (the Cathay Subscription ) as enlarged by (a) the Cathay Subscription for a consideration of RMB851.6 million and (b) a further capital contribution of RMB238.5 million made by Fine Star in cash to Air China Cargo (the Fine Star Subscription ); (ii) the disposal of entire equity interest in Fine Star by CNAC to AFL for a consideration of RMB627 million (the Disposal ); and (iii) the acquisition of four Boeing BCF converted freighters powered by PW engines and two spare engines by Air China Cargo from Cathay Pacific and Dragonair for a consideration of RMB1,924 million (the Freighter Equipment Acquisition ) contemplated under the Transaction (collectively the Air China Cargo Transactions ), details of which are set out in the Letter from the Board (the Letter from the Board ) contained in the circular dated 8 April 2010 (the Circular ), of which this letter forms part. Unless otherwise stated, terms used herein shall have the same meanings as those defined in the Circular. On 25 February 2010, the Company and Cathay Pacific, among other things, entered into the Framework Agreement and the Relevant Agreements, pursuant to which they have agreed to establish a jointly owned cargo airline by way of the Cathay Subscription and other related arrangements as set out in the section headed the Description of the Transaction in the Letter from the Board. Under the Framework Agreement and the Relevant Agreements, a series of transactions will take place, including (i) the Cathay Subscription; (ii) the Fine Star Subscription; (iii) the Disposal; and (iv) the Freighter Equipment Acquisition. Upon completion of the Transaction, the Company s interests in Air China Cargo will be reduced from 100% to 51%, and Cathay Pacific and AFL will be interested in 25% and 24% equity 16

19 LETTER FROM CHINA MERCHANTS SECURITIES interest in Air China Cargo respectively. As at the Latest Practicable Date, Air China Cargo, CNAC and Fine Star are wholly-owned subsidiaries of the Company. The Company is a substantial shareholder of Cathay Pacific holding approximately 29.99% shareholding in Cathay Pacific. Cathay Pacific China Cargo Holdings is a wholly-owned subsidiary of Cathay Pacific, the substantial Shareholder holding approximately 18.1% shareholding in the Company as at the Latest Practicable Date. Given that Cathay Pacific is a substantial Shareholder and therefore a connected person of the Company under the Listing Rules, the Air China Cargo Transactions will constitute connected transactions for the Company under Chapter 14A of the Listing Rules and subject to the announcement, reporting and independent shareholders approval requirements. As at the Latest Practicable Date, Cathay Pacific and its respective associates held 2,217,617,455 Shares, representing approximately 18.1% of the issued share capital of the Company, Cathay Pacific and its respective associates will abstain from voting in relation to the resolutions to approve the Transaction at the EGM. An Independent Board Committee comprising all the Company s independent nonexecutive Directors, namely Mr. Hu Hung Lick, Henry, Mr. Zhang Ke, Mr. Jia Kang and Mr. Fu Yang, has been formed to consider and advise the Independent Shareholders whether the Air China Cargo Transactions are on normal commercial terms, in ordinary and usual course of business of the Company, fair and reasonable so far as the Company and the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole. We, China Merchants Securities, have been appointed as the independent financial adviser to advise the Independent Board Committee in these respects. BASIS OF OUR OPINION In formulating our advice and opinion, we have relied on the accuracy of the information and representations contained in the Circular which have been considered to be complete and relevant and the information obtained from the public domain. We have assumed that all statements, information and representations made or referred to in the Circular, for which the Directors are solely responsible, were true, accurate and complete in all material respects at the time when they were made and will continue to be so as at the date of the Circular. We have also assumed that all statements of belief, opinion and intention made by the Directors in the Circular were reasonably made after due and careful enquiry and were based on honestly held opinions. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and the management of the Company and we have been advised by the Directors and the management of the Company that no material fact has been omitted from the information and representations provided in and referred to in the Circular. We have no reason to suspect that any material information has been withheld by the Directors or the management of the Company. We have not, however, carried out any independent verification of the information provided to us by the Directors and the management of the Company and the information obtained from the public domain, nor have we conducted any independent investigation into the affairs, the business and financial position and the future prospects of each member of the Group, Air China Cargo, the Cathay Pacific Group, AFL and their respective shareholders and associates. Our opinion is based on the information and representations available to us as of the date of this letter. We have no 17

20 LETTER FROM CHINA MERCHANTS SECURITIES obligation to update our advice and opinion to take into account circumstances and events occurring after the date of this letter. As a result, circumstances and events could occur prior to the approval of the Air China Cargo Transactions that, if known to us at the time when we had rendered our advice and opinion, would have altered our advice and opinion. BACKGROUND FOR THE AIR CHINA CARGO TRANSACTIONS On 8 June 2006, the Company and Cathay Pacific entered into the Operating Agreement. Pursuant to such agreement, the Company and Cathay Pacific stated their intention to establish a jointly owned cargo airline. Accordingly, the Company and Cathay Pacific, among other things, entered into the Framework Agreement and the Relevant Agreements on 25 February 2010, which set out the terms to establish a jointly owned cargo airline by way of the Cathay Subscription and other related arrangements. The Framework Agreement and the Relevant Agreements The Framework Agreement provides an entry for the relevant parties to enter into the Relevant Agreements. Under the Relevant Agreements, a series of transactions will take place, including: 1. the Cathay Subscription; 2. the Fine Star Subscription; 3. the Disposal; and 4. the Freighter Equipment Acquisition. The transactions described above are inter-conditional, i.e. the completion of one transaction shall be conditional upon the completion of all of the other transactions except that if the Freighter Equipment Acquisition does not complete simultaneously or immediately following the completion of all of the other transactions described above, the completion of the latter shall not be affected. Upon completion of the Transaction, Air China Cargo will be owned as to 51%, 24% and 25% respectively by the Company, AFL through its direct interest in Fine Star and Cathay Pacific China Cargo Holdings. Details of the Framework Agreement and the Relevant Agreements are set out in the section headed Description of the Transaction in the Letter from the Board. INFORMATION OF AIR CHINA CARGO Air China Cargo is a company established in the PRC and principally engaged in the operation of cargo airline services. As at the Latest Practicable Date, Air China Cargo is a subsidiary owned by the Company and its registered share capital is directly held 75% by the Company and 25% by Fine Star. Fine Star is wholly owned by CNAC which is in turn a wholly-owned subsidiary of the Company as at the Latest Practicable Date. 18

21 LETTER FROM CHINA MERCHANTS SECURITIES Air China Cargo will form the platform for the jointly owned cargo airline. It currently operates seven Boeing 747 freighters and handles all of the cargo business of the Group, procures and sells cargo belly space provided by the Group s extensive passenger flight network. Set out below is a summary of Air China Cargo s financial information for the each of the three years ended 31 December 2009: For the year ended 31 December In RMB million (Unaudited) (Audited) (Audited) Turnover 5, , ,989.8 Profit/(Loss) before taxation (537.9) Profit/(Loss) after taxation (522.4) As at 31 December In RMB million (Unaudited) (Audited) (Audited) Total assets 5, , ,486.0 Total liabilities 3, , ,575.4 Net assets 2, , ,910.6 The turnover of Air China Cargo increased slightly from approximately RMB6,989.8 million for the financial year ended 31 December 2007 ( FY2007 ) to approximately RMB7,070.7 million for the financial year ended 31 December 2008 ( FY2008 ), representing an increase of approximately RMB80.9 million or 1.2%. The slight increase in turnover was mainly attributable to the increase in its cargo and mail load factor and the service charges. Air China Cargo recorded loss before and after taxation of approximately RMB537.9 million and RMB522.4 million respectively for FY2007. For FY2008, profit before and after taxation of Air China Cargo were approximately RMB10.4 million and RMB26.2 million respectively, representing a substantial increase compared with losses recorded in FY2007. The improvement in Air China Cargo s result in FY2008 was mainly due to (i) the positive effect from the Beijing 2008 Olympic Games on demand for air cargo services; and (ii) recognition of a subsidy income. For the financial year ended 31 December 2009 ( FY2009 ), the unaudited revenue of Air China Cargo was approximately RMB5,620.8 million, representing a decrease of approximately RMB1,449.9 million or 20.5% from the revenue in FY2008. The decrease in turnover of Air China Cargo was mainly attributable to the decrease in the cargo and mail load factor and the service charges affected by the adverse impact of the global financial crisis since Notwithstanding the decrease in turnover of Air China Cargo in FY2009, profit before and after taxation of Air China Cargo were both approximately RMB117.7 million in FY2009. The substantial increases in profit before and after taxation of approximately tenfold and 19

22 LETTER FROM CHINA MERCHANTS SECURITIES 349.2% respectively for FY2009 were mainly contributed by the plunge in international fuel price and implementation of cost-saving measures by Air China Cargo. Net assets of Air China Cargo increased slightly from approximately RMB1,910.6 million as at 31 December 2007 to approximately RMB1,936.3 million as at 31 December 2008 and further to approximately RMB2,054.0 million as at 31 December As at 31 December 2009, total assets of Air China Cargo comprised principally fixed assets including aircrafts and flight equipment, buildings and machineries, whereas total liabilities of Air China Cargo comprised principally notes payable, accounts payable and long-term borrowings. PRINCIPAL FACTORS CONSIDERED FOR AIR CHINA CARGO TRANSACTIONS In arriving at our opinion and recommendation in respect of the terms of the Air China Cargo Transactions, we have considered the following principal factors: I. Reasons for the Air China Cargo Transactions We have considered the reasons for and the benefits of the Transaction as highlighted in the Letter from the Board. As stated in the Letter from the Board, the Directors consider that the establishment of a cargo airline joint venture between the Group and the Cathay Pacific Group based in Shanghai will enable Air China Cargo to (i) capture the air cargo business opportunities of the important and competitive Yangtze River Delta region and (ii) deliver better services to satisfy the increasing demand for cargo services in the PRC. According to the information obtained from the official website of Civil Aviation Administration of China, in 2009, Shanghai airports ranked the top in terms of their air cargo and mail handling capacity in the PRC. The air cargo and mail handling volume handled by Shanghai airports increased from approximately 2.22 million tons in 2005 to approximately 2.98 million tons in 2009, representing a cumulative compound annual growth rate of approximately 7.64%. In view of Shanghai s position in the air cargo and mail handling capacity in China, we concur with the Directors view that the establishment of the cargo airline joint venture based in Shanghai will enable Air China Cargo to capture the air cargo business opportunities and deliver better services to satisfy the increasing demand for cargo services in the PRC, in particular in the Yangtze River Delta region. We also understand from the Directors that the air cargo market in the PRC is highly competitive and currently foreign air cargo companies have been dominating the air cargo market in the PRC. In the recent years, major PRC airlines have intended to form joint venture air cargo companies with foreign airlines with a view to increasing their competitiveness in the growing air cargo market of the PRC. We share the Directors belief that the investment by Cathay Pacific in Air China Cargo through the Cathay Subscription will enable Air China Cargo to provide more resources and improve its service availability to the market which will allow its customers to benefit from more choice and better access to air cargo services within the PRC and inbound/outbound services in the PRC. Based on the above reasons, we are of the view that forming a joint venture air cargo company with Cathay Pacific based in Shanghai through the Cathay Subscription is in the interests of the Company and the Shareholders as a whole. 20