INDUSTRY OVERVIEW. asthemaindriverofairtrafficgrowth,thechinaeconomyisexpectedtogrowatafasterrate thantheworld saverageinthenext20years;

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1 This section contains statistics, industry data or other information relating to the industry that were prepared from an independent market research report published by Ascend as well as various government or official sources that are publicly available. We believe that the source of such information is appropriate source for such information and have taken reasonable care in extracting and reproducing such information. We have no reasontobelievethatsuchinformationisfalseormisleadingorthatanyfacthasbeenomitted that would render such information false or misleading. The information has not been independently verified by us, the Selling Shareholder, the Joint Sponsors, the Joint Global Coordinators, the Underwriters, any of their respective directors, officers, affiliates, advisers or representatives, and any other party involved in the[redacted] and no representation is given as to its accuracy. Our Directors further confirm that, after taking reasonable care, there is no material adverse change in the market information since the date of the Ascend Report, which may qualify, contradict or have an impact on the information as disclosed in this section. SOURCE OF INFORMATION AND DEFINITIONS We commission Ascend, an independent industry consultant in airline and aircraft leasing industries, to conduct analysis of the airline industry and the aircraft leasing industry in both the global and the China markets. Based on its information and analyses, Ascend has prepared the Ascend Report on the following areas: the global airline industry; the airline industry in China; the global aircraft leasing industry; the aircraft leasing industry in China; and the competitive analysis of aircraft leasing market in China. We understand that the information contained in the Ascend Report is obtained through its primary and secondary research, including the information obtained from various sources. In preparing the Ascend Report, Ascend has used various methodologies, including economic growth projection, air traffic growth projection, and fleet growth projection. Ascend has also relied on certain principal assumptions as set forth below: asthemaindriverofairtrafficgrowth,thechinaeconomyisexpectedtogrowatafasterrate thantheworld saverageinthenext20years; China s civil aviation industry will further evolve to market oriented operation which will promote the growth and development of the whole aviation industry in China; and themarketshareofchineselessorwillcontinuetoriseintheaircraftleasingmarketinchina. 66

2 We have extracted certain information from the Ascend Report for inclusion in this section for the purpose of providing our prospective investors with the information on the airline industry and the aircraft leasing industry, both of which are inter-related, and the factors affecting the airline industry will also affect the aircraft leasing industry. For the purpose of commissioning the preparation of the Ascend Report, we have agreed to pay a fee of approximately HK$700,000 to Ascend. Apart from the engagement of Ascend for the preparation of the Ascend Report, we have also subscribed for, as part of our ordinary course of business, various reports published by Ascend on the airline industry and aircraft leasing industry in China. The analysis mainly focuses on the commercial aircraft market which is composed by passenger and cargo aircraft. These aircraft can be further classified into narrowbody aircraft, widebody aircraft, or regional jets. We have not commissioned Ascend to prepare other reports for the purpose of the Listing. For the purpose of this section, the following terms shall have the following meanings: aircraftlease... meanstheoperatingleasearrangementunderwhichanentity(other than the airline operator) owns and manages a commercial aircraft and leases the commercial aircraft to the airline operator for the use of the aircraft during the lease term. The meanings of aircraft lease and operating lease are different from the accounting classification under the HKFRSs and our accounting policies; aircraft leasing company... meansoperatinglessorwhichisengagedinthebusinessofaircraft leasing; Basevalue... theunderlyingeconomicvalueofanaircraftinanopen,unrestricted, stable market environment with a reasonable balance of supply and demand, and assumes full consideration of its highest and best use ; lessor... meansanaircraftleasingcompany; managerofanaircraft. means(a)anairlineoritsholdingcompanyor(b)anaircraftleasing company, which may have different degree of influence on the operation of the aircraft, including restrictions on the utilisation of aircraft and the region in which the aircraft may operate; majorairlines... the four major airline operators in China include Air China, China Eastern Airlines, China Southern Airlines Company Limited (hereinafter as China Southern Airlines ), and Hainan Airlines; ownerofanaircraft... meanstheregisteredownerofanaircraft,whichcaneitherbean airline or its holding company, an aircraft leasing company, a bank, or their respective SPCs; and regionaljets... passengeraircraftwhichtypicallyhaslessthan100seats. 67

3 GLOBAL AIRLINE INDUSTRY GDP and air traffic The demand for air transportation is driven by the underlying demand for passenger and cargo air traffic, which is closely linked to the global economy. Historically, the growth of global GDP, air traffic, and the number of commercial aircraft were positively correlated. From 2003 to 2013, the average growth rate of global real GDP was 3.8%. During the same period, the global RPK, FTK,andthenumberofcommercialaircraftinservicehasgrownattheCAGRof5.5%,3.2%,and 3.3% respectively. The following table sets forth the growth of the global real GDP, global RPK, FTK and the number of commercial aircraft in service globally from 2003 to GDP, traffic, and fleet size breakdown( ) CAGR (03-13) Average Growth Rate GlobalRPK(inbillion) ,139 3,599 3,883 4,112 4,466 4,509 4,354 4,659 4,833 5,113 5, % GlobalFTK(inbillion) ,258 1,390 1,425 1,519 1,591 1,578 1,438 1,722 1,734 1,713 1, % Number of global commercial aircraft in service ,926 15,665 16,174 16,819 17,675 17,602 18,016 18,605 19,370 19,765 20, % Growth rate GlobalrealGDP % 5.0% 4.6% 5.3% 5.4% 2.8% (0.6%) 5.2% 4.0% 3.2% 2.9% 3.8% GlobalRPKgrowthrate % 14.7% 7.9% 5.9% 8.6% 1.0% (3.4%) 7.0% 3.7% 5.8% 5.2% 5.2% GlobalFTK % 10.6% 2.5% 6.6% 4.7% (0.8%) (8.9%) 19.8% 0.7% (1.2%) 1.0% 3.6% Globalcommercialaircraftinservice % 4.7% 2.6% 3.4% 3.5% 1.2% 1.3% 3.0% 3.6% 2.2% 4.1% 2.9% Ascendforecaststhatfrom2013to2032,theglobalRPKandFTKwillcontinuetogrowatthe CAGR of 5.0% and 4.2% respectively, with a higher growth rate in the emerging markets, including AsiaPacific,China,SouthAmericaandtheMiddleEast,andalowergrowthrateinthedeveloped market, including US and Europe. According to Ascend s forecast, from 2013 to 2032, the RPK in ChinawillgrowattheCAGRof7.7%. Airbus, as one of the two leading commercial aircraft manufacturers, forecasts in its publications that from 2013 to 2032, the global RPK and FTK will grow at the CAGR of 4.7% and 4.8% respectively. Boeing, as the other leading commercial aircraft manufacturer, also forecasts that from2013to2032,boththeglobalrpkandftkwillgrowatthecagrof5.0%. Fleet projections From2003to2013,thenumberofglobalcommercialaircraftinservicehasgrownattheCAGRof 3.3%.Bytheendof2013,therehavebeenatotalof20,572commercialaircraftinserviceglobally. Ascend forecasts that the total member of commercial aircraft in service globally will continue to growatthecagrof3.7%from2013to2032,andbytheendof2032,therewillbeover41,000 commercial aircraft in service globally. To fulfil the growing demand, over 34,900 new commercial aircraft, with an estimated worth of over US$ 4,000 billion, will be delivered during the period from 2013 to In terms of regional allocation, Asia Pacific, North America and Europe is expected to account for 40.5%, 20.8% and 16.3% of the total new commercial aircraft deliveries, respectively. 68

4 Outofthe34,900newcommercialaircrafttobedelivered,59.3%ofthenewaircraftdeliveryareto fulfil the new aircraft demand, while 40.7% are to satisfy the replacement demand and the demand for passenger-to-freighter conversion. Airbus expects that from 2013 to 2032, 29,226 new commercial aircraft will be delivered globally and Boeing expects that from 2013 to 2032, 35,280 new commercial aircraft will be delivered globally. As the global demand for commercial aircraft is expected to have a stable growth, it is also expected that the delivery of the new commercial aircraft will keep pace with the demand growth. From2007to2013,theratioofannualdeliveryofnewcommercialaircrafttothetotalnumberof aircraftinservicewereintherangebetween5.8%to6.7%.thefollowingtablesetsforththeglobal delivery of new commercial aircraft from 2007 to Global new aircraft delivery( ) F* 2015F* 2016F* 2017F* 2018F* Narrowbodyaircraft Widebodyaircraft RegionalJet Totalaircraft(a) ,069 1,066 1,136 1,079 1,146 1,286 1,386 1,466 1,532 1,531 1,538 1,476 Current Commercial aircraft in service(b) ,675 17,602 18,016 18,605 19,370 19,765 20,572 (a)/(b) % 6.1% 6.3% 5.8% 5.9% 6.5% 6.7% AIRLINE INDUSTRY IN CHINA History and development of the civil aviation market in China During the past two decades, China s civil aviation industry has gradually evolved from government control to market oriented operation, which promoted the growth and development of the whole aviation industry in China. The history and development of the Chinese aviation administrative system can be divided into four development stages: Before 1987: Government control and management During this period, China s civil aviation administration system emerged and the civil aviation began to separate from the Air Force. Former stated-owned airline was divided into six major carriers, which, along with all civilian airports, were run by the CAAC as subsidiaries to 2002: Separation of governmental from enterprise functions During this period, the management of the aviation enterprises was separated from the government function. The local governments invested and controlled a few new airports, and also sponsored the establishment of new airlines to 2004: Separation of asset management function During this period, China s airlines are consolidated to Air China, China Southern Airlines, and China Eastern Airlines. But almost all civilian airports were transferred from CAAC to the local governments, and the assets formerly owned by CAAC were transferred to SASAC. 69

5 2004 and forward: Further promotion of a market-based economy in the civil aviation industry During this period, the privatisation of civilian airports was accelerated through initial public offerings or acquisition by domestic and foreign investors. The provincial CAAC bureaus were abolished and the regulation of business approval was simplified. During the same time, the private owned airlines emerged in the Chinese market. China s airline industry has experienced strong growth Driven by China s robust economic development, China s aviation market has experienced strong growthinthepastdecade.astherealgdphasgrownattheaveragerateof10.2%from2003to 2013,China sairpassengershasgrownfrom87.6to354.0million,atthecagrof15.0%.china s RPK has also grown from billion kilometres to billion kilometres, at the CAGR of 16.2%. For the freight traffic, as China s export and import value has increased from US$851.0 million to US$4,160.0millionattheCAGRof17.2%duringthepastdecade,China sftkhasgrownfrom US$5.8 billion to US$16.9 billion, at the CAGR of 11.3%. The following table sets forth the growth of China s real GDP, air traffic passengers, RPK, export and import value, and FTK. China s GDP, air traffic, export and import value, and FTK( ) CAGR ( ) Average Growth Rate ChinarealGDPgrowthrate % 10.1% 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 7.7% 10.2% China air traffic passengers(millions) % ChinaRPK(inbillion) % China export and import value (US$billion) , , , , , , , , , , % China FTK(in billion) % The rapid development of China s tourism is another important factor contributing to the growth of China s airline industry. With increasing citizen income and the easing of overseas travel restrictions, tourism industry has become one of the fastest growing industries in China. From 2002 to 2012, the domestic visitors and the international visitors has increased at the CAGR of 12.9% and 6.5%, respectively. As aviation is the preferred transportation mode for tour visitors, especially international visitors, the further development of China s tourism industry will continue to promote air traffic. The following table sets forth the growth of China s tour visitors from 2002 to China s tour visitors( ) In million CAGR China sdomesticvisitors ,100 1,200 1,390 1,610 1,710 1,900 2,100 2,640 2, % China s international visitors % Inboundvisitors % Outboundvisitors % 70

6 Potential for further development of China s airline industry China s airline industry has experienced significant growth in the past decade. But comparing with theusandglobalmarkets,china sairlineindustryisstillintheemergingstageandhasgreat potential for further development. In 2013, the RPK per capita in China was kilometres, which wasonly11.0%oftherpkpercapitaof3,018.8kilometresintheusand43.8%oftherpkper capitaof764.7kilometresintheworld.bytheendof2013,onemillionchinesepeopleownonly1.5 passengeraircraft,whichwas8.5%ofthe17.2passengeraircraftintheus,and53.9%ofthe2.7 passengeraircraftintheworld.thefollowingtablesetsforththegrowthintherpkandthenumber ofpassengeraircraftinchina,theusandtheworld. RPK and passenger aircraft in service in China, US and the world( ) CAGR RPK(in billion) China % USA % Global , , , , , , , , , , , % RPK per capita(kilometres) China % US , , , , , , , , , , , % Global % Passenger aircraft In Service China ,047 1,146 1,309 1,456 1,611 1,781 1, % USA ,300 5,567 5,501 5,506 5,661 5,429 5,340 5,344 5,368 5,327 5, % Global ,311 14,979 15,362 15,877 16,438 16,629 16,843 17,354 17,973 18,373 19, % Passenger aircraft per million persons China % US (0.6%) Global % AscendforecaststhatChinawillbeoneofthekeygrowthmarketsforairtrafficandaircraftinthe next 20 years. The key drivers of the growth include the strong economic growth, the growing middle class population and the increased desire to travel. The development of new airports will also stimulate the demand of air traffic continuously. Impact of the 12th Five-year Plan on China s civil aviation industry The 12th Five-year Plan, or the Plan, for the Civil Aviation Development is an important policy for the development of China s aviation industry. According to the Plan, from 2010 to 2015, China s air transportturnoverwillgrowatthecagrof13.0%,thenumberofairpassengerwillgrowatthe CAGRof10.9%,andtheairfreightwillgrowattheCAGRof10.0%.Thefollowingtablesetsforth thedetailsoftheplan. 71

7 China s air transport turnover, air passenger and air freight F CAGR Air Transport Turnover(billion ton kilometres) % Airpassengers(million) % AirFreight(milliontons) % Pursuant to the Plan, from 2010 to 2015, China will continue to develop a comprehensive national airnetwork.whileasoftheendof2013,chinahasonly193civilairports,over60newairportswill bebuiltandover100currentairportswillbeexpandedorrebuiltthrough2015.theplanalsoaims at optimizing China s airport system in order to improve operational efficiency, with the major focus on easing capacity constraints at large airports and boosting the development of regional airports. These developments will further increase the air traffic in China. Fleet expansion and projection In line with the development of airline industry, the number of commercial aircraft operated by China sairlineshasgrownsignificantlyfrom635in2003to2,080in2013,atthecagrof12.6%. Thenewdeliveryofcommercialaircrafthasalsogrownfrom59in2003to283in2013,attheCAGR of 17.0%. The table below sets forth the growth of China s commercial aircraft in service and new aircraft deliveries from 2003 to China s commercial aircraft in service and new deliveries( ) CAGR China s commercial aircraft In Service ,109 1,213 1,386 1,544 1,698 1,877 2, % China s new deliveries of commercial aircraft % Ascend forecasts that the number of commercial passenger aircraft operated by China s airlines willreach3,381by2021withthecagrof6.9%from2013to2021andwillreach5,387by2031 withthecagrof5.7%from2013to2031,andnarrowbodyaircraftwillaccountforover70%ofthe total number of commercial passenger aircraft by 2021 and The new aircraft delivery in China is to accommodate the increased air traffic and to replace current aircraft that will retire in the next 20 years. Ascend forecasts that approximately 50% of the current aircraft in service will be replaced by The following table sets forth Ascend s forecast of the growth of commercial passenger aircraft in China from 2013 to 2021 and 2013 to 2031, respectively. 72

8 China s fleet expansion( ) CAGR from CAGR from 2013 Narrowbody(a)... 1,656 2, % 4, % Widebody % % Regionaljet % % Total commercial passenger aircraft(b)... 1,987 3, % 5, % (a)/(b) % 78.9% N/A 77.2% Cargoaircraft N/A N/A N/A Airbusforecaststhatfrom2013to2032,China sdomesticrpkanddomesticftkwillgrowatthe CAGRof7.0%and7.5%respectively.Boeingalsoforecaststhatfrom2013to2032,bothRPKand FTKinChinawillgrowattheCAGRof6.9%,and5,580newcommercialaircraftwillbedelivered during the period, out of which 3,900 will be narrowbody aircraft. GLOBAL AIRCRAFT LEASING INDUSTRY Market size Theownershipstructureoftheglobalfleethaschangedovertime,largelyasaresultofthe emergenceofoperatinglease,whichhasgrowninpopularityoverthepast30years.bytheendof 2013, 36.9% of the commercial aircraft in the world were leased by aircraft leasing companies. Ascend forecasts that the percentage of the leased commercial aircraft will reach 45% by The following table sets forth the growth in the number of leased commercial aircraft from 1981 to Leased commercial aircraft( ) Leased commercial aircraft(a) ,345 2,280 3,475 5,831 7,303 7,601 Total commercial aircraft(b)... 5,793 6,975 8,900 11,322 13,749 16,819 19,370 20,572 (a)/(b) % 7.1% 15.1% 20.1% 25.3% 34.7% 37.7% 36.9% The reason airlines have turned to aircraft leasing is that, comparing with direct ownership, aircraft leasing requires less capital investment and provides more fleet planning flexibility. Other than owning a commercial aircraft for more than 20 years, an airline can lease a narrowbody aircraft for fivetosevenyears,andawidebodyaircraftfor10to12years.aircraftleasingalsoallowsthe airlines that do not have sufficient financial resources to acquire new and more fuel-efficient aircraft. Aircraft leasing also allows airlines to have the better control of their financial performance and to relieve their responsibility on aircraft residual value management. 73

9 Critical success factors for aircraft leasing companies Diversification Aircraft leasing companies typically diversify their portfolios by airline operators in different regions and business models. Usually, a lessor would not have a significant concentration on a single airline. Diversification by lease return date is also a critical part of portfolio management and a lessor will try to spread out the lease return date for aircraft under their aircraft portfolio to ensure stable earnings. Low finance costs and low refinance risk Aircraft leasing companies rely on debt financing for expansion and low cost financing is always important for them. Leased aircraft are usually financed for seven to 12 years and after that the aircraftwillneedtobere-financed.itwillbeachallengeforalessortore-financeinavolatile financial market and the high refinance cost will have the negative impact on a lessor s cash flow and return on equity. Low numbers of aircraft in storage Aircraft companies are aircraft managers and will seek to keep their aircraft flying with airlines as much as possible. For this reason, during the market downturn, a lessor may accept lower rentals for shorter terms in anticipation of better rentals once the market recovers. Rapid action after the defaults of airline operators When an airline operator defaults or ceases operation, aircraft leasing companies need to take rapidactiontorepossesstheaircraftandhavetheiraircraftinthemarketearliertofindnew customers. Ability to manage the aircraft throughout their lives As aircraft age, the lessor may lease the aircraft to smaller airlines with lower credibility. The maintenanceforolderaircraftwillalsobemorecomplicated.alessorneedtobeabletomanage aircraft throughout their full lives to ensure the sustainable lease return in long term. 74

10 Competition of global aircraft leasing markets As of 31 December 2013, there were 167 aircraft leasing companies in the world. The following table sets forth the 20 largest aircraft leasing companies in terms of the number of aircraft: 20 largest aircraft leasing companies in the world Lessor Regional Jets In service fleet Single Aisle Twin Aisle Stored aircraft Total aircraft Firm Orders GECAS , , ILFC , BBAMLLC SMBCAviationCapital AerCap AWAS CITAerospace AviationCapitalGroup BOCAviation BoeingCapitalCorp AirLeaseCorporation AircastleAdvisorLLC Macquarie AirFinance ORIXAviation ICBCLeasingCo Avolon Aerospace Leasing Limited CDBLeasingCompany MC Aviation Partners/Mitsubishi Corporation Standard Chartered Aviation Finance SkyWorksLeasingLLC Note: * anorderwhichisdisclosedbyanaircraftmanufactureronitsorderbookasafirmorder. The market and competitive landscape of the global aircraft leasing market is relatively fragmented, consisting of a large and growing number of aircraft leasing companies. As of 31 December 2013, therewereover50lessorsmanaging25ormoreaircraft.thetwolargestlessorsaregecapital Aviation Services(GECAS) and International Lease Finance Corporation(ILFC), each with a fleet size over 1,000 aircraft, which account for 31.5% of the total number of leased aircraft. Most large lessors target to have a portfolio of 200 to 250 aircraft, with a portfolio value of approximately US$7.0 billion to US$8.0 billion. The average lease period for a typical portfolio is aroundfiveyears,andthelessorsarerequiredtoremarket40to50aircrafteveryyear. Beyondthetop20,thereareanumberofnewlessors.Eachofthemhasbeenabletoraisecapital in the new markets and grow their fleet by acquiring aircraft from other lessors, by direct purchase from manufacturers, and through sale and leaseback transactions with airlines. 75

11 Entry barriers of aircraft leasing industry Aircraftleasingisacompetitivebusinessanditiscommontohavemorethan10lessorsbiddingfor a sale and leaseback transaction proposed by an airline. Unless a lessor has good access to capital at relatively low cost, it will be difficult for it to win a competitive bidding process. Good relationship with the airlines is also important for a lessor to secure lease commitments with the airlines. Aircraft leasing companies monitor lease opportunities and fleet expansion plan of airlines, particularly when there are aircraft on order. They also need to have expertise in aircraft asset management and in aircraft marketing and re-marketing. Profitability of aircraft leasing industry and whole aviation value chain Aircraft leasing companies derive revenue from three primary sources including lease rental, proceeds from the sale of aircraft, and aircraft management fee. Theprofitabilityofalessordependsonitsabilitytomanagetheaircraftassettoensuregood returns on the aircraft assets, which are dependent on the following factors: theabilitytosecureleaserentalsongoodterms; theabilitytosecurefinancingongoodterms;and the disposal of the aircraft where necessary and profitable. It is therefore important for the lessor to understand the value retention of their aircraft under their aircraft portfolio, to manage that aircraft through their full lives and to have access to competitive financing in order to maximise the return. According to International Air Transport Association(IATA), from 2004 to 2011, the return on invested capital(roic) of aircraft leasing industry is about 9%, which is the highest among different industries in the air transportation sector. The following table sets forth IATA s estimates of the average ROIC from 2004 to 2011 of aircraft leasing, aircraft manufacturing, airport, and airline industry. Average return on invested capital Aircraft leasing Aircraft manufacturer Airport Airline AverageannualROIC... 9% 7% 6% 4% TheaircraftleasingindustryhasproventobestableintermsofbothrevenuesandROICamid several highly turbulent airline cycles, principally because of the following reasons: lessors fundamental exposure is the demand for air traffic, which has demonstrated more stable growth. Thus, if the airline defaults, the aircraft assets can be rapidly re-deployable to other airlines; 76

12 lessors returnsaresupportednotjustbythestreamsofleaseincomebutalsothedisposalof the aircraft assets, and the volatility of aircraft residual value is limited; many lessors have proven adept at mitigating risk by acquiring mostly newer, more common or standardised aircraft models, which can be easily re-deployable in the event of scheduled or unscheduled return off-lease; and amatureleaseportfolioshouldtypicallyhavenotmorethan20%ofthefleetreachinglease renewalinanyyear.thisservestomitigatetheeffectofthepeaksandtroughsintheindustry cycle. Aircraft values and lease rates Aircraft value is impacted by various factors including macro-economic factors, industry specific factors and aircraft-type specific factors. Comparing with aircraft values, aircraft lease rates are more volatile as the rates tend to react to market conditions more quickly than aircraft values. Movements in the base value of aircraft We set forth below the aircraft value trend of certain popular aircraft models: Year of value (for aircraft at age) Airbus A Airbus A Airbus A Base value in(us$ million) Airbus A Boeing 737 (NG)-800 Series Boeing 737 (NG)-800 Series Airbus A Airbus A Year Age0 Age5 Age0 Age5 Age0 Age5 Age0 Age Source: Ascend(in US$ millions) 77

13 Airbus A Base Value Movements 50 Airbus A Base Value Movements US$ (million) Airbus A Age 0 Airbus A Age 5 US$ (million) Airbus A Age 0 Airbus A Age Boeing 737(NG)-800 Base Value Movements Airbus A Base Value Movements US$ (million) Boeing 737 (NG)-800 Series Age 0 Boeing 737 (NG)-800 Series Age 5 US$ (million) Airbus A Age 0 Airbus A Age In Ascend s opinion and in accordance with the International Society of Transport Aircraft Trading (ISTAT),thebasevalueoftheaircraftistheunderlyingeconomicvalueofanaircraftinanopen, unrestricted, stable market environment with a reasonable balance of supply and demand, and assumes full consideration of its highest and best use. An aircraft s base value is founded on the historical trend of values and in the projection of value trends and assumes an arm s-length cash transaction between willing, able and knowledgeable parties, acting prudently, with an absence of duress and with a reasonable period of time available for marketing. This base value is the value that most closely reflects the underlying assumption that the current value of an aircraft is a function of its future earning potential. Ascend considers that the historical market values and the performance reflect the future expectation of an aircraft s earning potential and thus, these historical market values need to be incorporated into any analysis of an aircraft s future value. AIRCRAFT LEASING INDUSTRY IN CHINA Market size and forecast By the end of 2013, 2,080 commercial aircraft were operated by the Chinese airlines, and 38.4% of them were under leases. Ascend forecasts that by 2018, 3,027 commercial aircraft will be operated by the Chinese airlines and approximately 40% of them will be under lease. The following table sets forth the growth of China s aircraft leasing market from 2003 to China s aircraft lease( ) CAGR Leased commercial aircraft(a) % Totalcommercialaircraft(b) ,109 1,213 1,386 1,544 1,698 1,877 2, % (a)/(b) % 34.5% 35.2% 40.2% 42.7% 44.4% 41.8% 41.0% 40.6% 38.1% 38.4% 78

14 The following table sets forth Ascend s forecast of the total number of aircraft and aircraft under leasesinchinafrom2014to2018. China s total number of aircraft and aircraft under lease( ) 2014F 2015F 2016F 2017F 2018F CAGR ( ) Leasedcommercialaircraft(a) ,061 1,137 1, % Totalcommercialaircraft(b)... 2,277 2,467 2,652 2,842 3, % (a)/(b) % 40.0% 40.0% 40.0% 40.0% Drivers and entry barriers of China s aircraft leasing industry The aircraft leasing market in China has historically been dominated by foreign lessors. Chinese lessorshaveonlybeenactiveinthemarketduringthepastsixyears,aftercbrcrelaxedits regulations on aircraft leasing. TherapidgrowthofaircraftleasinginChinabeganinJanuary2007,whentheCBRCissuednew regulation policy for the financial leasing companies, which lowered the minimum registered capital from RMB 500 million to RMB 100 million. The policy permits domestic and overseas commercial banks to set up financial leasing companies, provided that their capital adequacy ratio is higher than 8%, total assets are at least RMB8.0 billion, and the institutions are profitable for two consecutive years. To develop the aircraft leasing business in China, Chinese lessors generally tackle some entry barriers better than foreign lessors. Chinese lessors generally have better knowledge of China s aircraft leasing market, the airlines and China s legal system. Moreover, the development of aircraft leasing business has been supported by the establishment of the special purpose companies by Chinese lessors. Cities such as Beijing, Shanghai and Tianjin offer preferential policies to the aircraft leasing companies, such as special tax rebates and simplified foreign currency settlement procedures, which enhance the competitiveness of Chinese lessors. Although foreign lessors can set up a special purpose companies in China, they will encounter more restrictions(such as higher capital requirements) and complicated application procedures as compared with China s aircraft leasing companies. According to Ascend, by 31 December 2013, no special purpose companies have been set up by foreign lessors in China to conduct aircraft leasing business. Comparison between the aircraft leasing markets in China and the world Fewer historical airline bankruptcies Comparing with many airline bankruptcy cases globally, only four airlines have ceased or suspended operations in China during the past years. The fewer bankruptcies was due to the Chinese government s support to the airline industry and their decision to consolidate the China s airlines into three major airlines. The four airlines that have suspended operations in China are all young airlines and two of them are cargo airlines. The fewer ceasing or suspending operation of airlines in China leads to relatively low default risk and re-marketing risk for Chinese lessors. 79

15 Younger fleet The aircraft operated by China s airlines are generally younger than that of the world. The table belowsetsforththeaveragefleetageinchinaandtheworldasof31december2013. Average age of fleet by China s airlines and foreign airlines Ageof all aircraft Age of aircraft under lease AircraftoperatedbyChina sairlines Aircraftoperatedbyforeignairlines Aircraft operated by China s airlines are expected to maintain a relatively young age profile in the medium term as the airlines tend to introduce mainly new aircraft to their fleets, due to government regulations on the importation of aircraft of more than 10 years. Major players and market competition Foreign lessors have traditionally dominated China s aircraft leasing market, but from 2007 to 2013, Chinese lessors have experienced a significant growth and have expanded their market share from 9.1% to 37.8%. Ascend forecasts that Chinese lessors will continue to expand their market share to 55.0% by The following table sets forth the historical and forecasted growth of Chinese lessors market share in commercial aircraft leasing market from 2007 to Market share of Chinese lessors and foreign lessors in China s aircraft leasing market ( ) F* 2015F* 2016F* 2017F* 2018F* CAGR Chinese lessors(a) % Foreignlessors % Total aircraft under lease(b) ,061 1,137 1, % (a)/(b) % 13.9% 19.2% 23.7% 28.4% 33.3% 37.8% 40.0% 42.0% 48.0% 52.0% 55.0% 80

16 As of 31 December 2013, nine Chinese lessors were among the 20 largest aircraft leasing companies in terms of fleet size in China. The following table sets forth the 20 largest aircraft leasing companies leased to Chinese airlines in terms of fleet size as of 31 December largestaircraftleasingcompaniesinChina (1)(2) Lessor Aircraft in service Market Share ILFC % GECAS % ICBCLeasingCo* % ChangjiangLeasingCompany* % CDBLeasingCompany* % BBAMLLC % AirLeaseCorporation % BoComLeasing* % ChinaAircraftLeasingLimited* % AviationCapitalGroup % AVICInternationalLeasing* % SMBCAviationCapital % AircastleAdvisorLLC % AWAS % BOCAviation* % DragonAviationLeasingCompany* % StandardCharteredAviationFinance % ORIXAviation % AerCap % CITAerospace % ComsysAviationLeasingCoLtd* % Others % Total % Notes: (1) Means aircraft leased to China s airlines (2) None of the above 20 largest aircraft leasing companies in China is a listed company. * Chinese lessors 81

17 COMPETITIVE ANALYSIS OF CHINA S AIRCRAFT LEASING MARKET Category of Chinese lessors and the characteristics Chinese lessors may broadly be divided into four categories based on their ownership structure, including independent lessors, affiliates of commercial banks, affiliates of airlines and affiliates of aircraft manufacturers. Independent lessors According to Ascend, as of 31 December 2013, we are the largest independent Chinese lessor in terms of the number of aircraft in service and on order. Other independent Chinese lessors are Dragon Aviation Leasing Company and Comsys Aviation Leasing Company Limited. The independent status from aircraft manufacturers, commercial banks and airline operators provides the independent lessors greater flexibility in selecting appropriate aircraft and structuring their leases to address the specific business needs of the airline customers. The independent status also offers the lessors the flexibility to expand the customer base and provide a wide range of comprehensive fleet management services to the airline customers. Affiliates of commercial banks The largest Chinese lessors are affiliates of commercial banks, including BOC Aviation, ICBC Leasing Co., CDB Leasing Company and BoCom Leasing. These lessors have strong financial backing from the parent companies and are able to secure more favourable financing terms for aircraft acquisition. The reputation of these banks is also advantageous when dealing with aircraft manufacturers and airline operators. Affiliates of airlines Hainan Airline has equity interest in three Chinese lessors in this category, namely Changjiang Leasing Company, Hong Kong International Aviation Leasing, and Hong Kong Aviation Capital. With the strong support from their shareholders, airline affiliated lessors can source aircraft for sale and leaseback transactions from their parent company to expand their portfolios rapidly. Affiliates of aircraft manufacturers AVIC International Leasing is the only major manufacturer owned lessor in China. It offers customers aircraft leasing for aircraft manufactured by the parent company. One example is AVIC s MA60turbopropaircraft,17ofwhichareonleasewiththeairlinesinChina.OurCompanyhasalso worked with some regional airlines in China on aircraft sale and leaseback transaction. MostChineselessorsfocusonsaleandleasebacktransactionsinChina.Thisisduetothefactthat aircraftimportedintochinaisregulatedbycaacandndrc,andtheairlineshavetherightto import aircraft with import tax concession. Under sale and leaseback transaction, the airlines transfer the purchase commitment of the aircraft to the lessors. Chinese lessors are also placing direct order with the aircraft manufacturers without end-user lessee identified. This arrangement is intended to allow the lessors to have quick delivery of the aircraft to China s airlines. 82

18 Ranking of Chinese lessors The following table sets forth the ranking of Chinese lessors in terms of the number of commercial aircraftinserviceandinstorage,andaircraftonorderasof31december2013. Ranking of Chinese lessors Aircraft on order Aircraft in service Aircraft in storage (no C919 and ARJ) Total aircraft C919 on order ARJon order Independent aircraft leasing companies China Aircraft Leasing Company Limited Dragon Aviation Leasing Company ComsysAviationLeasingCoLtd Affiliates of commercial banks BOCAviation ICBCLeasingCo CDBLeasingCompany BoComLeasing CCBFinancialLeasing ABCFinancialLeasing Affiliates of airlines HongKongAviationCapital ChangjiangLeasingCompany Hong Kong International Aviation Leasing Affiliates of aircraft manufacturers AVICInternationalLeasing Note: Aircraft in storage refers to aircraft temporarily removed from commercial service, usually awaiting lease return or delivery toanewlessee,butcanalsosignifyaircraftwherethelessorislookingforalessee. The fleet numbers exclude any business jets, passenger jets for corporate use, turboprop aircraft and general aviation aircraft which are managed by the aircraft leasing companies. 83

19 AVIATION AND AIRCRAFT LEASING INDUSTRY IN INDIA According to India Brand Equity Foundation( IBEF ), a trust established by the Department of Commerce, Ministry of Commerce and Industry, Government of India, India is one of the fastest growing aviation markets and currently the ninth largest civil aviation market in the world. India sgdphasgrownatanaverageof7.8%from2003to2012.inlinewiththestronggrowthin economy, India s aviation industry has experienced significant expansion and the number of operationalairportsinindiaincreasedby75from2000to125airportsin2012.since2006,thetotal passengertrafficinindiahasexpandedatacagrof11.7%to159.3millionin2013,whileitstotal freighttrafficregisteredacagrof6.6%to2.2millionoverthesameperiod. Aircraft leasing market has also been growing significantly in India. According to the Ascend Report, there were 144 commercial aircraft operated by the Indian airlines and 26.4% of them were underleasesin2003.bytheendof2013,thenumberofcommercialaircraftoperatedbytheindian airlines and the percentage under leases increased to 346 and 58.4% respectively CAGR Leasedcommercialaircraft(a) % Totalcommercialaircraft(b) % (a)/(b) % 29.3% 43.8% 60.0% 57.9% 54.0% 48.6% 50.6% 54.7% 57.5% 58.4% IBEF forecasts that aviation industry will continue to grow and by 2020, passenger traffic in India willfurtherincreaseto450millionfrom159.3millionin2013andby2030,thenumberofairportin India will increase to 250 to cater the growing leisure and business travel demand. CONFIRMATION FROM OUR DIRECTORS As of the Latest Practicable Date, after taking reasonable steps, our Directors confirm that there is no significant or material adverse change in the market information since the respective dates of the various data contained in this section which may qualify, contradict or have an impact on the information in this document. 84