##### Table of Contents



As filed with the Securities and
Exchange Commission on June 30, 2004

---

---

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

FORM 20-F

|  |  |                                                                                               
|- |  | ----------------------------------------------------------------------------------------------
|o |  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934



|OR
|--
|x 

| |  | For the fiscal
year ended December 31, 2003
| |  | -------------------------------------------

|   |  |                                                                                         
|-- |  | ----------------------------------------------------------------------------------------
|OR
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|   |  |                                                                                         
|   |  | Commission file number: 1-14660                                                         

(CHINA SOUTHERN AIRLINES COMPANY LIMITED LOGO)

(Exact name of Registrant as specified in its charter)


CHINA SOUTHERN AIRLINES COMPANY LIMITED

(Translation of Registrants name into English)


THE PEOPLES REPUBLIC OF CHINA(Jurisdiction of incorporation or organization)

BAIYUN INTERNATIONAL AIRPORT
GUANGZHOU
PEOPLES REPUBLIC OF CHINA

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of
the Act:

|                                                 |  |                                           
|------------------------------------------------ |  | ------------------------------------------
|Title of each class:                             |  | Name of each exchange on which registered:
|                                                 |  |                                           
|                                                 |  |                                           
|Ordinary H Shares of par value RMB1.00 per share |  | New York Stock Exchange, Inc.             
|represented by American Depositary Shares        |  |                                           

Securities registered or to be registered pursuant to Section 12(g) of
the Act: None

Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuers
classes of capital or common stock as of the close of the period covered by
the annual report: 2,200,000,000 ordinary Domestic Shares of par value
RMB1.00 per share, 1,174,178,000 ordinary H Shares of par value RMB1.00
per share and 1,000,000,000 ordinary A Shares of par value
RMB1.00 per share were issued and outstanding as of December 31, 2003.

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.

|             
|-------------
|Yes  x  No  o

Indicate by check mark which financial statement item the Registrant
has elected to follow.

|                      
|----------------------
|Item 17  o  Item 18  x



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TABLE OF CONTENTS



|                                                  |                                                                                       |                                                                       |  |  |  |  |  | 
|------------------------------------------------- | ------------------------------------------------------------------------------------- | --------------------------------------------------------------------- |  |  |  |  |  | 
|FORWARD-LOOKING STATEMENTS                       
|INTRODUCTORY NOTE                                
|GLOSSARY OF AIRLINE INDUSTRY TERMS               
|PART I                                           
|                                                  | ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        
|                                                  | ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                      
|                                                  | ITEM 3. KEY INFORMATION                                                              
|                                                  |                                                                                       | Selected Financial Data                                              
|                                                  |                                                                                       | Capitalization and Indebtedness                                      
|                                                  |                                                                                       | Reasons for the Offer and Use of Proceeds                            
|                                                  |                                                                                       | Risk Factors                                                         
|                                                  | ITEM 4. INFORMATION ON THE COMPANY                                                   
|                                                  |                                                                                       | History and Development of the Company                               
|                                                  |                                                                                       | Business Overview                                                    
|                                                  |                                                                                       | Organizational Structure                                             
|                                                  |                                                                                       | Property, Plant and Equipment                                        
|                                                  | ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 
|                                                  |                                                                                       | Critical Accounting Policies                                         
|                                                  |                                                                                       | Overview                                                             
|                                                  |                                                                                       | Certain Financial Information and Operating Data by Geographic Region
|                                                  |                                                                                       | Operating Results                                                    
|                                                  |                                                                                       | Liquidity and Capital Resources                                      
|                                                  |                                                                                       | Contractual Obligations and Commercial Commitments                   
|                                                  | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   
|                                                  |                                                                                       | Directors and Senior Management                                      
|                                                  |                                                                                       | Compensation                                                         
|                                                  |                                                                                       | Board Practices                                                      
|                                                  |                                                                                       | Employees                                                            
|                                                  |                                                                                       | Share Ownership                                                      
|                                                  | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            
|                                                  |                                                                                       | Major Shareholders                                                   
|                                                  |                                                                                       | Related Party Transactions                                           
|                                                  | ITEM 8. FINANCIAL INFORMATION                                                        
|                                                  |                                                                                       | Consolidated Statements and Other Financial Information              
|                                                  |                                                                                       | Significant Changes                                                  
|                                                  | ITEM 9. THE OFFER AND LISTING                                                        
|                                                  |                                                                                       | Offer and Listing details                                            
|                                                  |                                                                                       | Plan of Distribution                                                 
|                                                  |                                                                                       | Markets                                                              
|                                                  |                                                                                       | Selling Shareholders                                                 
|                                                  |                                                                                       | Dilution                                                             
|                                                  |                                                                                       | Expenses of the Issue                                                
|                                                  | ITEM 10. ADDITIONAL INFORMATION                                                      
|                                                  |                                                                                       | Share Capital                                                        
|                                                  |                                                                                       | Memorandum and Articles of Association                               
|                                                  |                                                                                       | Material Contracts                                                   
|                                                  |                                                                                       | Exchange Controls                                                    
|                                                  |                                                                                       | Taxation                                                             
|                                                  |                                                                                       | Dividends and paying Agents                                          
|                                                  |                                                                                       | Statement by Experts                                                 
|                                                  |                                                                                       | Documents on Display                                                 
|                                                  |                                                                                       | Subsidiary Information                                               
|                                                  | ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                  
|                                                  | ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                      
|PART II                                          
|                                                  | ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                             
|                                                  | ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|PART III                                         
|                                                  | ITEM 15. CONTROLS AND PROCEDURES                                                     
|                                                  | ITEM 16.                                                                             
|                                                  | ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                           
|                                                  | ITEM 16B. CODE OF ETHICS                                                             
|                                                  | ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES                                     
|                                                  | ITEM 16D. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS     
|PART IV                                          
|                                                  | ITEM 17. FINANCIAL STATEMENTS                                                        
|                                                  | ITEM 18. FINANCIAL STATEMENTS                                                        
|                                                  | ITEM 19. EXHIBITS                                                                    
|EX-1 ARTICLES OF ASSOCIATION                     
|EX-4.1 FORM OF DIRECTOR'S SERVICE AGREEMENT      
|EX-4.2 NON-EXECUTIVE DIRECTOR'S SERVICE AGREEMENT
|EX-8 SUBSIDIARIES OF THE COMPANY                 
|EX-12.1 CERT CHAIRMAN OF THE BOARD OF DIRECTORS  
|EX-12.2 CERTIFICATION FROM THE PRESIDENT         
|EX-12.3 CERTIFICATION FROM THE CFO               
|EX-13.1 SECTION 906 CERT FROM THE CHAIRMAN       
|EX-13.2 SECTION 906 CERT FROM THE PRESIDENT      
|EX-13.3 SECTION 906 CERT FROM THE CFO            



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##### Table of Contents



TABLE OF CONTENTS

China Southern Airlines Company Limited

|                                                                  |                                                                       |  |      |    | 
|----------------------------------------------------------------- | --------------------------------------------------------------------- |  | ---- | -- | 
|                                                                  |                                                                       |  | Page
|                                                                  |                                                                       |  |     
|Forward-Looking Statements                                        |                                                                       |  | 1    |   
|Introductory Note                                                 |                                                                       |  | 1    |   
|Glossary of Airline Industry Terms                                |                                                                       |  | 2    |   
|PART I                                                           
|Item 1.     Identity of Directors, Senior Management and Advisers |                                                                       |  | 3    |   
|Item 2.     Offer Statistics and Expected Timetable               |                                                                       |  | 3    |   
|Item 3.     Key Information                                       |                                                                       |  | 3    |   
|                                                                  | Selected Financial Data                                               |  |      | 3  | 
|                                                                  | Capitalization and Indebtedness                                       |  |      | 7  | 
|                                                                  | Reasons for the Offer and Use of Proceeds                             |  |      | 7  | 
|                                                                  | Risk Factors                                                          |  |      | 7  | 
|Item 4.     Information on the Company                            |                                                                       |  | 11   |   
|                                                                  | History and Development of the Company                                |  |      | 11 | 
|                                                                  | Business Overview                                                     |  |      | 12 | 
|                                                                  | Organizational Structure                                              |  |      | 28 | 
|                                                                  | Property, Plant and Equipment                                         |  |      | 30 | 
|Item 5.     Operating and Financial Review and Prospects          |                                                                       |  | 31   |   
|                                                                  | Critical Accounting Policies                                          |  |      | 31 | 
|                                                                  | Overview                                                              |  |      | 31 | 
|                                                                  | Certain Financial Information and Operating Data by
Geographic Region |  |      | 32 | 
|                                                                  | Operating Results                                                     |  |      | 34 | 
|                                                                  | Liquidity and Capital Resources                                       |  |      | 38 | 
|                                                                  | Contractual Obligations and Commercial Commitments                    |  |      | 41 | 
|Item 6.     Directors, Senior Management and Employees            |                                                                       |  | 41   |   
|                                                                  | Directors and Senior Management                                       |  |      | 41 | 
|                                                                  | Compensation                                                          |  |      | 43 | 

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|                                                                        |                                                         |  |      |    | 
|----------------------------------------------------------------------- | ------------------------------------------------------- |  | ---- | -- | 
|                                                                        |                                                         |  | Page
|                                                                        |                                                         |  |     
|                                                                        | Board Practices                                         |  |      | 43 | 
|                                                                        | Employees                                               |  |      | 44 | 
|                                                                        | Share Ownership                                         |  |      | 45 | 
|Item 7.     Major Shareholders and Related Party Transactions           |                                                         |  | 45   |   
|                                                                        | Major Shareholders                                      |  |      | 45 | 
|                                                                        | Related Party Transactions                              |  |      | 46 | 
|                                                                        | Interest
of Experts and Counsel                         |  |      | 48 | 
|Item 8.     Financial Information                                       |                                                         |  | 48   |   
|                                                                        | Consolidated Statements and Other Financial Information |  |      | 48 | 
|                                                                        | Significant Changes                                     |  |      | 49 | 
|Item 9.     The Offer and Listing                                       |                                                         |  | 49   |   
|                                                                        | Offer and Listing Details                               |  |      | 50 | 
|                                                                        | Plan of Distribution                                    |  |      | 50 | 
|                                                                        | Markets                                                 |  |      | 50 | 
|                                                                        | Selling Shareholders                                    |  |      | 50 | 
|                                                                        | Dilution                                                |  |      | 50 | 
|                                                                        | Expenses of the Issue                                   |  |      | 50 | 
|Item 10.     Additional Information                                     |                                                         |  | 50   |   
|                                                                        | Share Capital                                           |  |      | 50 | 
|                                                                        | Memorandum and Articles of Association                  |  |      | 50 | 
|                                                                        | Material Contracts                                      |  |      | 55 | 
|                                                                        | Exchange Controls                                       |  |      | 55 | 
|                                                                        | Taxation                                                |  |      | 55 | 
|                                                                        | Dividends and Paying Agents                             |  |      | 56 | 
|                                                                        | Statement by Experts                                    |  |      | 56 | 
|                                                                        | Documents on Display                                    |  |      | 56 | 
|                                                                        | Subsidiary Information                                  |  |      | 57 | 
|Item 11.     Quantitative and Qualitative Disclosures About Market Risk |                                                         |  | 57   |   
|Item 12.     Description of Securities other than Equity Securities     |                                                         |  | 58   |   
|PART II                                                                

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|                                                                                          |  |  |      |  | 
|----------------------------------------------------------------------------------------- |  |  | ---- |  | 
|                                                                                          |  |  | Page
|                                                                                          |  |  |     
|Item 13.     Defaults, Dividend Arrearages and Delinquencies                              |  |  | 58   | 
|Item 14.     Material Modifications to the Rights of Security Holders
and Use of Proceeds |  |  | 58   | 
|PART III                                                                                 
|Item 15.     Control and Procedures                                                       |  |  | 60   | 
|Item 16.                                                                                  |  |  | 60   | 
|Item 16A.  Audit Committee Financial Expert                                               |  |  | 60   | 
|Item 16B.   Code of Ethics                                                                |  |  | 60   | 
|Item 16C.   Principal Accountant Fees and Services                                        |  |  | 60   | 
|Item 16D.  Audit Committee Exemption                                                      |  |  | 60   | 
|PART IV                                                                                  
|Item 17.     Financial Statements                                                         |  |  | 60   | 
|Item 18.     Financial Statements                                                         |  |  | 60   | 
|Item 19.     Exhibits                                                                     |  |  | 60   | 
|Signatures                                                                                |  |  | 62   | 

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##### Table of Contents






FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements. These statements
appear in a number of different places in this Annual Report. A forward
looking statement is usually identified by the use in this Annual Report of
certain terminology such as estimates, projects, expects, intends,
believes, plans, anticipates, or their negatives or other comparable
words. Also look for discussions of strategy that involve risks and
uncertainties. Forward-looking statements include statements regarding the
outlook for the Companys future operations, forecasts of future costs and
expenditures, evaluation of market conditions, the outcome of legal proceedings
(if any), the adequacy of reserves, or other business plans. You are cautioned
that such forward-looking statements are not guarantees and involve risks,
assumptions and uncertainties. The Companys actual results may differ
materially from those in the forward-looking statements due to risks facing the
Company or due to actual facts differing from the assumptions underlying those
forward-looking statements.

Some of these risks and assumptions, in addition to those identified under Item
3, Key Information  Risk Factors, include:



| | - |  | general economic and business conditions, including changes in interest rates;
| | - |  | ------------------------------------------------------------------------------
|
| | - |  | prices and other economic conditions;                                         
|
| | - |  | natural phenomena;                                                            
|
| | - |  | actions by government authorities, including changes in government regulation;
|
| | - |  | the Companys relationship with CSAHC;                                        
|
| | - |  | uncertainties associated with legal proceedings;                              
|
| | - |  | technological development;                                                    
|
| | - |  | future decisions by management in response to changing conditions;            
|
| | - |  | the Companys ability to execute prospective business plans; and              
|
| | - |  | misjudgments in the course of preparing forward-looking statements.           

The Company advises you that these cautionary remarks expressly qualify in
their entirety all forward-looking statements attributable to the Company, the
Group, and persons acting on their behalf.




INTRODUCTORY NOTE

In this Annual Report, unless the context indicates otherwise, the Company
means China Southern Airlines Company Limited, a joint stock company
incorporated in China on March 25, 1995, the Group means the Company and its
consolidated subsidiaries, and CSAHC means China Southern Air Holding Company,
the Companys parent company which holds a 50.3% controlling interest in the
Company.

References to China or the PRC are to the Peoples Republic of China,
excluding Hong Kong, Macau and Taiwan. References to Renminbi or RMB are
to the currency of China, references to U.S. dollars, $ or US$ are to the
currency of the United States of America (the U.S. or United States), and
reference to HK$ is to the currency of Hong Kong. Reference to the Chinese
Government is to the national government of China. References to Hong Kong
or Hong Kong SAR are to the Hong Kong Special Administrative Region of the
Peoples Republic of China. References to Macau or Macau SAR are to the
Macau Special Administrative Region of the Peoples Republic of China.

The Company presents its consolidated financial statements in Renminbi. The
consolidated financial statements of the Company as of December 31, 2002 and
2003 (the Financial Statements) have been prepared in accordance with
International Financial Reporting Standards (IFRS) promulgated by the
International Accounting Standards Board. IFRS includes International
Accounting Standards (IAS) and related interpretations. IFRS differs in
certain significant respects from accounting principles generally accepted in
the United States of America (U.S. GAAP). Information relating to the nature
and effect of such differences is presented in Note 33 to the Financial
Statements.

Solely for the convenience of the readers, this Annual Report contains
translations of certain Renminbi amounts into U.S. dollars at the rate of
US$1.00 = RMB8.2767, which is the average of the buying and selling rates as
quoted by the Peoples Bank of China at the close of business on December 31,
2003. No representation is made that the Renminbi amounts or U.S. dollar
amounts included in this Annual Report could have been or could be converted
into U.S. dollars or Renminbi, as the case may be, at any particular rate or at
all. Any discrepancies in the tables included herein between the amounts
listed and the totals are due to rounding.

1



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GLOSSARY OF AIRLINE INDUSTRY TERMS

In this Annual Report, unless the context indicates otherwise, the following
terms shall have the respective meanings set forth below.

|                                         |  |                                                                                                                                                                        
|---------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Capacity Measurements                    |  |                                                                                                                                                                        
|                                         |  |                                                                                                                                                                        
|available seat kilometers or ASKs    |  | the number of seats made available for sale multiplied by the kilometers flown                                                                                         
|                                         |  |                                                                                                                                                                        
|available ton kilometers or ATKs     |  | the number of tons of capacity available for the transportation of
revenue load (passengers and cargo) multiplied by the kilometers flown                              
|                                         |  |                                                                                                                                                                        
|Traffic Measurements                     |  |                                                                                                                                                                        
|                                         |  |                                                                                                                                                                        
|revenue passenger kilometers or RPKs |  | the number of revenue passengers carried multiplied by the kilometers
flown                                                                                            
|                                         |  |                                                                                                                                                                        
|cargo ton kilometers                   |  | the cargo load in tons multiplied by the kilometers flown                                                                                                              
|                                         |  |                                                                                                                                                                        
|revenue ton kilometers or RTKs       |  | the load (passenger and cargo) in tons multiplied by the kilometers flown                                                                                              
|                                         |  |                                                                                                                                                                        
|Yield Measurements                       |  |                                                                                                                                                                        
|                                         |  |                                                                                                                                                                        
|passenger yield                        |  | revenue from passenger operations divided by RPKs                                                                                                                      
|                                         |  |                                                                                                                                                                        
|cargo yield                            |  | revenue from cargo operations divided by cargo ton kilometers                                                                                                          
|                                         |  |                                                                                                                                                                        
|average yield                          |  | revenue from airline operations (passenger and cargo) divided by RTKs                                                                                                  
|                                         |  |                                                                                                                                                                        
|ton                                    |  | a metric ton, equivalent to 2,204.6 pounds                                                                                                                             
|                                         |  |                                                                                                                                                                        
|Load Factors                             |  |                                                                                                                                                                        
|                                         |  |                                                                                                                                                                        
|passenger load factor                  |  | RPKs expressed as a percentage of ASKs                                                                                                                                 
|                                         |  |                                                                                                                                                                        
|overall load factor                    |  | RTKs expressed as a percentage of ATKs                                                                                                                                 
|                                         |  |                                                                                                                                                                        
|breakeven load factor                  |  | the load factor required to equate scheduled traffic revenue with
operating costs assuming that total operating surplus is attributable to
scheduled traffic operations
|                                         |  |                                                                                                                                                                        
|Utilization                              |  |                                                                                                                                                                        
|                                         |  |                                                                                                                                                                        
|utilization rate                       |  | the actual number of flight hours per aircraft per operating day                                                                                                       
|                                         |  |                                                                                                                                                                        
|Equipment                                |  |                                                                                                                                                                        
|                                         |  |                                                                                                                                                                        
|rotables                               |  | aircraft parts that are ordinarily repaired and reused                                                                                                                 
|                                         |  |                                                                                                                                                                        
|expendables                            |  | aircraft parts that are ordinarily used up and replaced with new parts                                                                                                 

2



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##### Table of Contents






PART I




ITEM 1.          IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.

Not applicable.




ITEM 2.          OFFER STATISTICS AND EXPECTED TIMETABLE.

Not applicable.




ITEM 3.          KEY INFORMATION.




Selected Financial Data

The following selected data of consolidated statements of operations for each
of the years in the five-year period ended December 31, 2003 and consolidated
balance sheets for five years ended December 31,
2003 have been derived from the consolidated financial statements of the
Company. Such consolidated financial statements have been audited by KPMG,
Independent Registered Public Accounting Firm, and prepared in accordance with IFRS. IFRS differs in certain
significant respects from U.S. GAAP. See Note 33 to the Financial Statements
for the nature and effect of such differences related to the Group between IFRS
and U.S. GAAP as of December 31, 2002 and 2003 and for each of the years in the
three-year period ended December 31, 2003. The following information should be
read in conjunction with, and is qualified in its entirety by, the Financial
Statements of the Group.

Year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    US$(in million, except per share data)Income Statement Data:IFRS:Operating revenue
    
    
    13,299.6
    
    
    
    15,178.3
    
    
    
    16,879.7
    
    
    
    18,018.6
    
    
    
    17,470.1
    
    
    
    2,110.8Operating expenses
    
    
    11,449.7
    
    
    
    13,996.2
    
    
    
    15,479.0
    
    
    
    15,992.5
    
    
    
    17,014.4
    
    
    
    2,055.7Operating income
    
    
    1,849.9
    
    
    
    1,182.1
    
    
    
    1,400.7
    
    
    
    2,026.1
    
    
    
    455.7
    
    
    
    55.1Equity income of affiliated companies
    
    
    36.1
    
    
    
    45.9
    
    
    
    53.0
    
    
    
    37.0
    
    
    
    47.8
    
    
    
    5.8Equity loss of jointly controlled entities
    
    
    
    
    
    
    
    
    
    
    (4.0
    )
    
    
    (3.4
    )
    
    
    (39.5
    )
    
    
    (4.8
    )(Loss)/gain on sale of fixed assets
    
    
    (18.7
    )
    
    
    372.6
    
    
    
    (55.9
    )
    
    
    170.7
    
    
    
    (22.2
    )
    
    
    (2.7
    )Interest expense
    
    
    (1,192.2
    )
    
    
    (1,074.2
    )
    
    
    (933.7
    )
    
    
    (959.2
    )
    
    
    (823.7
    )
    
    
    (99.5
    )Exchange
(loss)/gain, net
    
    
    (426.5
    )
    
    
    318.5
    
    
    
    296.8
    
    
    
    (175.4
    )
    
    
    (164.4
    )
    
    
    (19.9
    )Other, net
    
    
    119.9
    
    
    
    86.3
    
    
    
    38.4
    
    
    
    43.3
    
    
    
    34.7
    
    
    
    4.2Income/(loss) before taxation and minority
interests
    
    
    368.5
    
    
    
    931.2
    
    
    
    795.3
    
    
    
    1,139.1
    
    
    
    (511.6
    )
    
    
    (61.8
    )Taxation (expense)/credit
    
    
    (128.0
    )
    
    
    (338.9
    )
    
    
    (320.5
    )
    
    
    (398.2
    )
    
    
    324.2
    
    
    
    39.2Minority interests
    
    
    (158.1
    )
    
    
    (90.5
    )
    
    
    (134.6
    )
    
    
    (165.1
    )
    
    
    (170.9
    )
    
    
    (20.7
    )Net income/(loss)
    
    
    82.4
    
    
    
    501.8
    
    
    
    340.2
    
    
    
    575.8
    
    
    
    (358.3
    )
    
    
    (43.3
    )Basic earnings/(loss) per share
    
    
    0.02
    
    
    
    0.15
    
    
    
    0.10
    
    
    
    0.17
    
    
    
    (0.09
    )
    
    
    (0.01
    )Basic earnings/(loss) per ADS
    
    
    1.22
    
    
    
    7.44
    
    
    
    5.04
    
    
    
    8.53
    
    
    
    (4.68
    )
    
    
    (0.56
    )Cash
dividends declared per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    
    
    
    
    U.S. GAAP:Net income/(loss)
    
    
    370.3
    
    
    
    354.4
    
    
    
    430.7
    
    
    
    474.0
    
    
    
    (359.6
    )
    
    
    (43.5
    )Basic earnings/(loss) per share
    
    
    0.11
    
    
    
    0.11
    
    
    
    0.13
    
    
    
    0.14
    
    
    
    (0.09
    )
    
    
    (0.01
    )Basic earnings/(loss) per ADS
    
    
    5.49
    
    
    
    5.25
    
    
    
    6.38
    
    
    
    7.02
    
    
    
    (4.69
    )
    
    
    (0.57
    )Cash
dividends declared per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    
    
    
    
    


3



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##### Table of Contents



December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    US$(in million)Balance Sheet Data:IFRS:Cash and cash equivalents
    
    
    4,588.4
    
    
    
    4,197.5
    
    
    
    2,817.9
    
    
    
    3,771.0
    
    
    
    2,080.2
    
    
    
    251.3Other current assets
    
    
    1,715.2
    
    
    
    1,691.9
    
    
    
    1,560.5
    
    
    
    1,834.8
    
    
    
    1,921.3
    
    
    
    232.1Fixed assets, net
    
    
    24,211.2
    
    
    
    23,282.1
    
    
    
    22,352.2
    
    
    
    26,920.8
    
    
    
    28,535.9
    
    
    
    3,447.7Total assets
    
    
    32,557.7
    
    
    
    30,924.0
    
    
    
    30,653.1
    
    
    
    37,188.0
    
    
    
    39,062.1
    
    
    
    4,719.5Notes payable, including current installments of
long term notes payable
    
    
    613.3
    
    
    
    783.1
    
    
    
    2,177.5
    
    
    
    5,240.7
    
    
    
    7,096.8
    
    
    
    857.4Current installments of obligations under
capital leases
    
    
    1,999.7
    
    
    
    1,776.2
    
    
    
    1,451.9
    
    
    
    1,566.7
    
    
    
    1,297.9
    
    
    
    156.8Notes payable, excluding current installments
    
    
    4,424.2
    
    
    
    3,788.7
    
    
    
    3,627.6
    
    
    
    5,835.4
    
    
    
    4,521.7
    
    
    
    546.3Obligations under capital leases, excluding
current installments
    
    
    11,490.9
    
    
    
    9,416.3
    
    
    
    7,691.6
    
    
    
    6,631.8
    
    
    
    5,543.1
    
    
    
    669.7Shareholders equity
    
    
    8,379.7
    
    
    
    8,881.4
    
    
    
    9,221.7
    
    
    
    9,613.2
    
    
    
    11,895.7
    
    
    
    1,437.3U.S. GAAP:Shareholders equity
    
    
    8,227.4
    
    
    
    8,527.3
    
    
    
    8,958.0
    
    
    
    9,287.3
    
    
    
    11,568.5
    
    
    
    1,397.7
 Selected Operating Data The following selected operating data of the Group for the five years
ended December 31, 2003 have been derived from consolidated financial
statements prepared in accordance with IFRS and other data provided by the
Group and have not been audited. In accordance with Order No. 88 of the Civil
Aviation Administration of China (the CAAC), titled Measures for the
Administration of Chinas Civil Aviation Statistics, new statistical standards
have been implemented with effect from January 1, 2001. The Group has not
adjusted the operating data for the corresponding period in 1999 according to
the new standards. The main differences between the two sets of standards are
set forth below:  1.
    
    The standard passenger weight has been changed from 75 kg per
person to 90 kg per person (luggage weight included). Luggage weight
will not be separately calculated;  2.
    
    Number of scheduled flights has been changed to number of takeoffs;  3.
    
    Any passenger carried on flights which fly international routes
will be counted as one domestic passenger and one international
passenger; however, any passenger carried on an irregular flight will
only be counted once; any cargo carried on flights which fly
international routes will be counted as one domestic and one
international cargo; however, cargo carried on an irregular flight
will only be counted once. Apart
from the data set out in the table below for year 1999, the operating data and the
profit analysis and comparison for other years below is calculated
and disclosed in accordance with the new statistical standards. See Glossary
of Airline Industry Terms at the front of this Annual Report for definitions
of certain terms used herein. Year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003CapacityASK (million) Domestic
    
    
    24,900
    
    
    
    28,345
    
    
    
    31,393
    
    
    
    33,753
    
    
    
    32,590 Hong Kong regional
    
    
    1,791
    
    
    
    1,744
    
    
    
    1,690
    
    
    
    1,746
    
    
    
    1,347 International
    
    
    5,155
    
    
    
    5,742
    
    
    
    6,981
    
    
    
    8,746
    
    
    
    6,930Total
    
    
    31,846
    
    
    
    35,831
    
    
    
    40,064
    
    
    
    44,245
    
    
    
    40,867ATK (million) Domestic
    
    
    2,865
    
    
    
    3,322
    
    
    
    3,622
    
    
    
    3,924
    
    
    
    3,772 Hong Kong regional
    
    
    214
    
    
    
    198
    
    
    
    185
    
    
    
    193
    
    
    
    150 International
    
    
    683
    
    
    
    1,087
    
    
    
    1,317
    
    
    
    1,798
    
    
    
    1,999Total
    
    
    3,762
    
    
    
    4,607
    
    
    
    5,124
    
    
    
    5,915
    
    
    
    5,921
 4




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##### Table of Contents



Year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003Kilometers flown (thousand)
    
    
    182,200
    
    
    
    209,431
    
    
    
    234,051
    
    
    
    258,379
    
    
    
    249,068Hours flown (thousand)
    
    
    287
    
    
    
    326
    
    
    
    365
    
    
    
    405
    
    
    
    385Number of flights Domestic
    
    
    126,120
    
    
    
    
    
    
    
    
    
    
    
     Hong Kong regional
    
    
    13,460
    
    
    
    
    
    
    
    
    
    
    
     International
    
    
    6,600
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    146,180
    
    
    
    
    
    
    
    
    
    
    
    Number of landing and take-offs Domestic
    
    
    
    
    
    
    165,726
    
    
    
    183,651
    
    
    
    194,776
    
    
    
    191,460 Hong Kong regional
    
    
    
    
    
    
    14,255
    
    
    
    13,712
    
    
    
    13,891
    
    
    
    11,400 International
    
    
    
    
    
    
    8,861
    
    
    
    10,698
    
    
    
    13,990
    
    
    
    11,330Total
    
    
    
    
    
    
    188,842
    
    
    
    208,061
    
    
    
    222,657
    
    
    
    214,190TrafficRPK (million) Domestic
    
    
    14,511
    
    
    
    16,974
    
    
    
    19,447
    
    
    
    22,092
    
    
    
    21,294 Hong Kong regional
    
    
    1,106
    
    
    
    1,074
    
    
    
    1,060
    
    
    
    1,081
    
    
    
    778 International
    
    
    3,068
    
    
    
    3,605
    
    
    
    4,550
    
    
    
    5,767
    
    
    
    4,315Total
    
    
    18,685
    
    
    
    21,653
    
    
    
    25,057
    
    
    
    28,940
    
    
    
    26,387RTK (million) Domestic
    
    
    1,518
    
    
    
    1,941
    
    
    
    2,217
    
    
    
    2,532
    
    
    
    2,424 Hong Kong regional
    
    
    106
    
    
    
    107
    
    
    
    105
    
    
    
    108
    
    
    
    78 International
    
    
    379
    
    
    
    565
    
    
    
    712
    
    
    
    974
    
    
    
    1,059Total
    
    
    2,003
    
    
    
    2,613
    
    
    
    3,034
    
    
    
    3,614
    
    
    
    3,561Passengers carried (thousand) Domestic
    
    
    12,769
    
    
    
    14,450
    
    
    
    16,499
    
    
    
    18,535
    
    
    
    18,259 Hong Kong regional
    
    
    1,434
    
    
    
    1,444
    
    
    
    1,409
    
    
    
    1,369
    
    
    
    1,019 International
    
    
    909
    
    
    
    957
    
    
    
    1,213
    
    
    
    1,589
    
    
    
    1,192Total
    
    
    15,112
    
    
    
    16,851
    
    
    
    19,121
    
    
    
    21,493
    
    
    
    20,470Cargo and mail carried (tons)
    
    
    390,750
    
    
    
    353,000
    
    
    
    398,000
    
    
    
    470,000
    
    
    
    464,000Load FactorsPassenger load factor (RPK/ASK) (%) Domestic
    
    
    58.3
    
    
    
    59.9
    
    
    
    61.9
    
    
    
    65.5
    
    
    
    65.3 Hong Kong regional
    
    
    61.8
    
    
    
    61.6
    
    
    
    62.7
    
    
    
    61.9
    
    
    
    57.8 International
    
    
    59.5
    
    
    
    62.8
    
    
    
    65.2
    
    
    
    65.9
    
    
    
    62.3Total
    
    
    58.7
    
    
    
    60.4
    
    
    
    62.5
    
    
    
    65.4
    
    
    
    64.6Overall load factor (RTK/ATK) (%) Domestic
    
    
    53.0
    
    
    
    58.4
    
    
    
    61.2
    
    
    
    64.5
    
    
    
    64.2 Hong Kong regional
    
    
    49.5
    
    
    
    54.0
    
    
    
    56.8
    
    
    
    55.8
    
    
    
    52.2 International
    
    
    55.5
    
    
    
    52.0
    
    
    
    54.1
    
    
    
    54.2
    
    
    
    53.0Total
    
    
    53.2
    
    
    
    56.7
    
    
    
    59.2
    
    
    
    61.1
    
    
    
    60.1Breakeven load factor (%)
    
    
    47.5
    
    
    
    54.0
    
    
    
    55.6
    
    
    
    55.9
    
    
    
    61.6YieldYield per RPK (RMB) Domestic
    
    
    0.65
    
    
    
    0.62
    
    
    
    0.62
    
    
    
    0.55
    
    
    
    0.57 Hong Kong regional
    
    
    1.00
    
    
    
    1.06
    
    
    
    1.06
    
    
    
    0.98
    
    
    
    0.96 International
    
    
    0.42
    
    
    
    0.43
    
    
    
    0.41
    
    
    
    0.42
    
    
    
    0.47Total
    
    
    0.63
    
    
    
    0.61
    
    
    
    0.60
    
    
    
    0.54
    
    
    
    0.57Yield per cargo and mail ton kilometers (RMB)
    
    
    1.63
    
    
    
    2.13
    
    
    
    1.76
    
    
    
    1.73
    
    
    
    1.62
 5




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##### Table of Contents



Year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003Yield per RTK (RMB) Domestic
    
    
    6.69
    
    
    
    5.90
    
    
    
    5.83
    
    
    
    5.21
    
    
    
    5.40 Hong Kong regional
    
    
    11.00
    
    
    
    11.19
    
    
    
    11.26
    
    
    
    10.36
    
    
    
    10.35 International
    
    
    3.96
    
    
    
    3.63
    
    
    
    3.31
    
    
    
    3.25
    
    
    
    2.90Total
    
    
    6.40
    
    
    
    5.63
    
    
    
    5.43
    
    
    
    4.84
    
    
    
    4.76Fleet Boeing
    
    
    81
    
    
    
    89
    
    
    
    91
    
    
    
    102
    
    
    
    108 Airbus
    
    
    20
    
    
    
    20
    
    
    
    20
    
    
    
    20
    
    
    
    24Total aircraft in service at period end
    
    
    101
    
    
    
    109
    
    
    
    111
    
    
    
    122
    
    
    
    132Overall utilization rate (hours per day)
    
    
    8.1
    
    
    
    8.7
    
    
    
    9.1
    
    
    
    9.8
    
    
    
    8.5FinancialOperating cost per ASK (RMB)
    
    
    0.36
    
    
    
    0.39
    
    
    
    0.39
    
    
    
    0.36
    
    
    
    0.42Operating cost per ATK (RMB)
    
    
    3.04
    
    
    
    3.04
    
    
    
    3.02
    
    
    
    2.70
    
    
    
    2.87
 Exchange Rate Information The following table sets forth certain information concerning exchange
rates, based on the noon buying rates in New York City for cable transfers in
foreign currencies, as certified for customs purposes by the Federal Reserve
Bank of New York (the Noon Buying Rate), between Renminbi and U.S. dollars
for the five most recent financial years. Average(1)PeriodPeriod
    
    End
    
    (RMB per US$)
    
    High
    
    LowAnnual Exchange Rate1999
    
    
    8.2793
    
    
    
    8.2793
    
    
    
    8.2917
    
    
    
    8.26692000
    
    
    8.2781
    
    
    
    8.2784
    
    
    
    8.2799
    
    
    
    8.27682001
    
    
    8.2766
    
    
    
    8.2766
    
    
    
    8.2910
    
    
    
    8.26422002
    
    
    8.2773
    
    
    
    8.2773
    
    
    
    8.2897
    
    
    
    8.21522003
    
    
    8.2767
    
    
    
    8.2772
    
    
    
    8.2800
    
    
    
    8.2769
 The following table sets out the range of high and low exchange rates,
based on the Noon Buying Rate, between Renminbi and U.S. dollars, for the
following periods. Period
    
    High
    
    LowMonthly Exchange RateDecember 2003
    
    
    8.2772
    
    
    
    8.2765January 2004
    
    
    8.2772
    
    
    
    8.2767February 2004
    
    
    8.2773
    
    
    
    8.2769March 2004
    
    
    8.2774
    
    
    
    8.2767April 2004
    
    
    8.2772
    
    
    
    8.2768May 2004
    
    
    8.2773
    
    
    
    8.2768June 2004
(up to June 25, 2004)
    
    
    8.2768
    
    
    
    8.2767
   (1)
    
    Determined by averaging the rates on the last business day of each month
during the relevant period. Dividend Payments No interim dividend was paid during the year ended December 31, 2003. The
Board of Directors of the Company (Board of Directors) does not recommend the payment of a final
dividend in respect of the year ended December 31, 2003. 6




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##### Table of Contents






Capitalization and Indebtedness

Not applicable.




Reasons for the Offer and Use of Proceeds

Not applicable.




Risk Factors

Risks relating to the Company

Government ownership and control of the Company

All Chinese airlines are wholly- or majority-owned either by the Chinese
Government or by provincial or municipal governments in China. CSAHC, an
entity wholly-owned by the Chinese Government, holds and exercises the rights
of ownership of all of the Domestic Shares or 50.3% of the equity of the
Company. The interests of the Chinese Government in the Company and in other
Chinese airlines may conflict with the interests of the holders of the ADSs, H
Shares and A Shares. The public policy considerations of the Chinese
Government in regulating the Chinese commercial aviation industry may also
conflict with its indirect ownership interest in the Company.

High operating leverage and foreign exchange exposure

The airline industry is generally characterized by a high degree of
operating leverage. In addition, due to high fixed costs, the expenses
relating to the operation of any flight do not vary proportionately with the
number of passengers carried, while revenues generated from a flight are
directly related to the number of passengers carried and the fare structure of
such flight. Accordingly, a decrease in revenues could result in a
proportionately higher decrease in net income. Moreover, as the Group
has substantial obligations denominated in foreign currencies, its results of
operations are significantly affected by fluctuations in foreign exchange
rates, particularly for the US dollar and the Japanese Yen. The Company
incurred a net exchange loss of RMB175 million and RMB164 million for 2002 and
2003, respectively, mainly as a result of yen fluctuations. A majority of
these exchange losses were unrealized in nature.

Potential conflicts of interest

CSAHC will continue to be the controlling shareholder of the Company and
CSAHC and certain of its affiliated companies will continue to provide certain
important services to the Company, including the import and export of aircraft
spare parts and other flight equipment, housing services and financial
services. In addition, Mr. Yan Zhi Qing, the Chairman of the Board of
Directors, also serves as the President
of CSAHC. The interests of CSAHC may conflict with those of the Company. In
addition, any disruption of the provision of services by CSAHCs affiliated
companies or a default by CSAHC of its obligations owed to the Company could
affect the Companys operations and financial condition. In particular, as
part of its cash management system, the Company periodically places significant
amount of demand deposits to Southern Airlines Group Finance Company Limited
(SA Finance), a PRC authorized financial institution controlled by CSAHC and
an affiliated company of the Company. As a result, the Companys deposits with
SA Finance are subject to the risks associated with the business of SA Finance
over which the Company does not exercise control. As of December 31, 2002 and
2003, the Group had short-term deposits of RMB901 million and RMB366 million,
respectively, with SA Finance.

Certain transactions between the Company and CSAHC or its affiliates (as
defined in the Rules Governing the Listing of Securities on the Stock Exchange
of Hong Kong Limited (the Hong Kong Listing Rules)) will constitute connected
transactions of the Company under the Hong Kong Listing Rules and, unless
exemptions are applicable or waivers are granted, will be subject to disclosure
requirements and/or independent shareholders approval in a general meeting.

7



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##### Table of Contents



Risks relating to certain real property

Although systems for registration and transfer of land use rights and
related real property interests in China have been implemented, such systems do
not yet comprehensively account for all land and related property interests.
The land in Guangzhou on which the Companys headquarters buildings and related
aircraft maintenance and other facilities are located and the buildings that
the Company uses at its route base in Wuhan, Haikou and Zhengzhou are leased by
the Company from CSAHC. However, CSAHC lacks adequate documentation evidencing
CSAHCs rights to such land and buildings, and, as a consequence, the lease
agreements between CSAHC and the Company for such land have not been registered
with the relevant authorities. As a result, such lease agreements may not be
enforceable. Lack of adequate documentation for land use rights and ownership
of buildings subjects the Company to challenges and claims by third parties
with respect to the Companys use of such land and buildings.

The Company has been occupying all of the land and buildings described
above without challenge. CSAHC has received written assurance from the CAAC to
the effect that CSAHC is entitled to continued use and occupancy of the land in
Guangzhou and certain related buildings and facilities. However, such
assurance does not constitute formal evidence of CSAHCs right to occupy such
lands, buildings and facilities, or the right to transfer, mortgage or lease
such real property interests. The Company cannot predict the magnitude of the
adverse effect on its operations if its use of any one or more of these parcels
of land or buildings were successfully challenged. CSAHC has agreed to
indemnify the Company and Guangzhou Aircraft Maintenance Engineering Company
Limited (GAMECO), the Companys jointly controlled entity, against any loss
or damage caused by any challenge of, or interference with, the use by the
Company and GAMECO of any of their respective land and buildings.

Risks associated with Hong Kong regional routes

The Companys Hong Kong regional routes benefit from traffic originating
in Taiwan. The Companys Hong Kong regional routes may be materially adversely
affected if direct flights between Taiwan and Mainland China were permitted in
the future. In such event, Xiamen Airlines Company Limited (Xiamen
Airlines), the Companys subsidiary, may apply for route rights for direct
flights between Taiwan and mainland China, due partly to the proximity to
Taiwan of Fujian province, where Xiamen Airlines is based. However, there can
be no assurance that sufficient routes and flights between destinations in
Taiwan and mainland China could be obtained by Xiamen Airlines, if at all, or
as to the yields on these routes and flights.

Risks Relating to the Chinese Commercial Aviation Industry

Government regulation

The Companys ability to implement its business strategy will continue to
be affected by regulations and policies issued or implemented by the CAAC,
which encompasses substantially all aspects of the Chinese commercial aviation
industry, including the approval of domestic, Hong Kong regional and
international route allocation, air fares, aircraft acquisition, jet fuel
prices and standards for aircraft maintenance, airport operations and air
traffic control. Such regulations and policies limit the flexibility of the
Company to respond to market conditions, competition or changes in the
Companys cost structure. The implementation of specific CAAC policies could
from time to time adversely affect the Companys operations. The CAAC has
confirmed in writing that the Company will be treated equally with other
Chinese airlines with respect to certain matters regulated by the CAAC.
Nevertheless, there can be no assurance that the CAAC will, in all
circumstances, apply its regulations and policies in a manner that results in
equal treatment of all airlines that are similarly situated.

Jet fuel supply and costs

The availability and cost of jet fuel have a significant impact on the
Groups results of operations. The Groups jet fuel costs for 2003 accounted
for 22.7% of its operating expenses. All of the domestic jet fuel requirements
of Chinese airlines (other than at the Shenzhen, Zhuhai and Sanya airports)
must be purchased from the exclusive providers, China Aviation Oil Supplies
Company (the CAOSC) and Bluesky Oil Supplies Company, companies controlled
and supervised by the CAAC. Chinese airlines may also purchase their jet fuel
requirements at the Shenzhen, Zhuhai and Sanya airports from joint ventures in
which the CAOSC is a partner. Jet fuel obtained from the CAOSCs regional
branches is purchased at uniform prices throughout China that are determined
and adjusted by the CAOSC from time to time with the approval of the CAAC and
the pricing department of the State Planning Commission based on market
conditions and other factors. As a result, the costs of transportation and
storage of jet fuel in all regions of China are spread among all domestic
airlines. Prior to 1994, domestic jet fuel prices were generally below
international jet fuel prices. Since then, however, domestic jet fuel price
from CAOSC has always been higher than international jet fuel prices, sometimes
creating tension in fuel supply. In addition, jet fuel shortages have occurred
in China and, on limited occasions before 1993, required the Company to delay
or cancel flights. Although such shortages have not materially affected the
Companys results of operations since 1993, there can be no assurance that such
shortage will not occur in the future. If such shortage occurs in the future
and the Company is forced to delay or cancel flights due to fuel shortage, its
operational reputation among passengers and results of operations may suffer.

8



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##### Table of Contents



Infrastructure limitations

The rapid increase in air traffic volume in China in recent years has put
pressure on many components of the Chinese commercial aviation industry,
including Chinas air traffic control system, the availability of qualified
flight personnel and airport facilities. Airlines, such as the Company, which
have route networks that emphasize short- to medium-haul routes are generally
more affected by insufficient aviation infrastructure in terms of on-time
performance and high operating costs due to fuel inefficiencies resulting from
the relatively short segments flown, as well as the relatively high proportion
of time on the ground during turnaround. All of these factors may adversely
affect the perception of the service provided by an airline and, consequently,
the airlines operating results. In recent years, the CAAC has placed
increasing emphasis on the safety of Chinese airline operations and has
implemented measures aimed at improving the safety record of the industry. The
ability of the Company to increase utilization rates and to provide safe and
efficient air transportation in the future will depend
in part on factors such as the improvement of national air traffic control
and navigation systems and ground control operations at Chinese airports, which
factors are beyond the control of the Company.

Competition

The CAACs extensive regulation of the Chinese commercial aviation
industry has had the effect of managing competition among Chinese airlines.
Nevertheless, competition has become increasingly intense in recent years due
to a number of factors, including relaxation of certain regulations by the
CAAC, and an increase in the capacity, routes and flights of Chinese airlines.
Competition in the Chinese commercial aviation industry has led to widespread
price-cutting practices that do not in all respects comply with applicable
regulations. Until the interpretation of these CAAC regulations has been
finalized and strictly enforced, discounted tickets from competitors will
continue to have an adverse effect on the Companys sales.

The Company faces varying degrees of competition on its Hong Kong regional
routes from certain Chinese airlines and Dragon Air and on its international
routes, primarily from non-Chinese airlines, most of which have significantly
longer operating histories, substantially greater financial and technological
resources and greater name recognition than the Company. In addition, the
publics perception of the safety and service records of Chinese airlines could
adversely affect the Companys ability to compete against its Hong Kong
regional and international competitors. Many of the Companys international
competitors have larger sales networks and participate in reservation systems
that are more comprehensive and convenient than those of the Company, or engage
in promotional activities, such as International Alliance programs, that may
enhance their ability to attract international passengers.

Limitation on foreign ownership

Chinese Government policies limit foreign ownership in Chinese airlines.
Under these policies, the percentage ownership of the Companys total
outstanding ordinary shares held by investors in Hong Kong and any country
outside China (Foreign Investors) may not in the aggregate exceed 49%.
Currently, 26.8% of the total outstanding ordinary shares of the Company is
held by Foreign Investors. As a result of this limitation on foreign
ownership, the Company will have no meaningful access to the international
equity capital markets unless the restriction on foreign ownership is lifted.

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Consolidation and Restructuring

In 2000, the CAAC announced a restructuring plan with respect to the PRC
aviation industry. Pursuant to such restructuring plan, domestic airlines are
directed to consolidate, on a voluntary basis, into three major airline groups
in China: CSAHC, China National Aviation Holding Company and China Eastern Air
Holding Group. The Company announced that it will also participate in such
consolidation and restructuring pursuant to the CAAC directives. The Company
has taken steps towards the purchase of the airline business of China Northern
Airlines Company and Xinjiang Airlines Company, two wholly owned subsidiaries
of CSAHC. These proposed acquisitions pursuant to the CAAC restructuring plan
may involve uncertainties and risks over a long period of time, including the
following:



| | - |  | failure to achieve the anticipated synergies, cost savings or
revenue enhancing opportunities resulting from the restructuring
activities;                                                   
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | diversion of managements attention from existing business
concerns and other business opportunities of the Group;                                                                           
|
| | - |  | difficulty in integrating the assets and business of other
airlines, including its employees, corporate culture, managerial
systems and processes, business information systems and services;
|
| | - |  | difficulty in exercising control and supervision over various new operations within the Group;                                                                                               
|
| | - |  | failure to retain key personnel; and                                                                                                                                                         
|
| | - |  | increase in financial pressure due to assumption of recorded/unrecorded liabilities of the acquired businesses.                                                                              

The inability to manage additional businesses or integrate successfully
the acquired businesses without substantial expense, delay or other operational
or financial problems, or the occurrence of one or more of the events
enumerated above, could materially adversely affect the Groups financial
condition and results of operations.

Risks relating to the PRC

Foreign exchange risks

Renminbi is not a freely convertible currency, and the Companys ability
to obtain or retain foreign currencies is subject to regulation in China.
Limitations on the availability of foreign exchange could have a material
adverse effect on the Companys operations and financial condition,
particularly in light of the Companys substantial foreign currency
obligations.

The value of Renminbi is subject to changes in Chinese Government policies
and depends to a large extent on Chinas domestic and international economic
and political developments, as well as supply and demand in the local market.
Since 1994, the official exchange rates for the conversion of Renminbi to US
dollars have been stable. There can be no assurance, however, that such rates
will not be volatile or that there will be no further devaluation of the
Renminbi against the foreign currencies in which the Companys obligations are
denominated, principally the US dollar and the Japanese Yen. Based on the
Companys foreign currency denominated obligations as of December 31, 2003, a
1% change in the exchange rate between the Renminbi and the US dollar, or
between the Renminbi and Japanese Yen, would have resulted in an unrealized
gain or loss of RMB152 million (US$18 million). As the Company is not able to
hedge effectively against the devaluation of the Renminbi other than by
retaining its foreign exchange-denominated earnings and receipts to the extent
permitted by applicable law, any future devaluation in the Renminbi could
adversely affect the Companys results of operations and financial condition.
The Companys results of operations and financial condition may also be
affected by changes in the value of currencies other than the Renminbi in which
the Companys earnings and obligations are denominated.

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Developing legal system

The Chinese legal system is based on written statutes and is a system,
unlike common law systems, in which decided legal cases have little
precedential value. In 1979, China began to promulgate a more comprehensive
system of laws. On December 29, 1993, the Chinese National Peoples Congress
promulgated the Company Law, which became effective on July 1, 1994. In August
1994, pursuant to the Company Law, the PRC State Council issued the PRC Special
Regulations on Overseas Offering and Listing of Shares by Companies Limited by
Shares to regulate joint stock companies that offer and list their shares
overseas. These laws, regulations and legal requirements are relatively
recent, and, like other laws, regulations and legal requirements applicable in
China (including with respect to the commercial aviation industry), their
interpretation and enforcement involve significant uncertainties.

Taxation of holders of H Shares or ADS by China

Chinese tax law generally provides for the imposition of a withholding tax
on dividends paid by a Chinese company to a non-Chinese shareholder at a rate
of 20%. In a notice issued by the State Taxation Bureau of the PRC and a
letter issued by the State Taxation Bureau, however, the Chinese tax
authorities confirmed that the imposition of this withholding tax on dividends
paid by joint stock companies, such as the Company, had been suspended.
Accordingly, any future dividends to be paid by the Company to holders of H
Shares or ADS who are foreign individuals not resident in China or which are
foreign enterprises with no permanent establishment in China will not be
subject to a Chinese withholding tax. In the event that the suspension of the
withholding tax is lifted, such payments will be subject to withholding tax at the
20% rate unless the holder is entitled to a tax waiver or a lower tax rate
under an applicable double-taxation treaty. See Item 10 Additional
Information  Taxation.




ITEM 4.         INFORMATION ON THE COMPANY.




History and Development of the Company

The Company is a joint stock company incorporated in China on March 25, 1995,
and is 50.3% owned by CSAHC. The registered address of the Company is
Guangzhou Economic & Technology Development Zone, Peoples Republic of China
(telephone no: (86)20-8612-4738, website: www.cs-air.com).

During 2001, the Company established a new 50%: 50% joint venture, namely
MTU Maintenance Zhuhai Co. Ltd, with MTU Maintenance Gmbh, a subsidiary of
Daimler-Benz Aerospace Group, to provide repair and maintenance services to
aircraft engines. The registered capital is
US$63.1 million.

During 2002, the Company entered into an Interest Transfer and Capital
Injection Agreement with China State Post Bureau, Shanghai Municipal Post
Office, Post Office of the Inner Mongolian Autonomous Region and China
Philately Corporation, pursuant to which the Company injected RMB150 million
(equivalent to approximately US$18.12 million) in cash to acquire 49% interest
in China Postal Airlines, Ltd. The China State Post Bureau holds the remaining
51%. In addition, the Company paid RMB136.5 million (equivalent to
approximately US$16.5 million) to acquire 39% interest in Sichuan Airlines
Corporation Limited to further expand its market shares in South-western China.
The Group also jointly established a new 51%: 49% joint venture, namely Zhuhai
Xiang Yi Aviation Technology Company Limited, the first sino-foreign joint
venture company engaging in aviation training services in the PRC, with CAE. The registered capital is US$29.8 million.

On March 13, 2003, the Company obtained an approval certificate from the
Ministry of Commerce to change to a permanent limited company with foreign
investments and obtained the business license on October 17, 2003 issued by the
State Administration of Industry and Commerce of the Peoples Republic of
China.

Pursuant to an extraordinary general meeting of shareholders held on May 21,
2002, a resolution was passed authorizing the Company to issue not more than
1,000,000,000 A shares of par value of RMB1.00 each. The Company issued and
listed its 1,000,000,000 A shares with a par value of RMB1.00 each on
the Shanghai Stock
Exchange in July 2003.

On October 17, 2003, the Companys registered address was moved to Guangzhou
Economic & Technology Development Zone. In accordance with the Rules and
Regulations for Implementation of Income Tax for Foreign Investment Enterprises
and Foreign Enterprises of the PRC and a taxation approval document Guangzhou
Municipal State Tax Bureau Suo De Shui Zi Que 020043, the Company is entitled
to enjoy the preferential tax policy implemented in the Guangzhou Economic &
Technology Development Zone effective October 1, 2003. As a result, the
Companys income tax rate has been changed to 15% from 33% beginning from that
date.

The Group had RMB1,492 million, RMB6,351 million and RMB4,707 capital
expenditures in 2001, 2002 and 2003 respectively. Of such capital expenditures
in 2003, RMB2,818 million were financed by bank borrowings while the remaining
RMB1,889 million were financed by internal resources. The capital expenditures
were primarily incurred on the additional investments in aircraft and flight
equipment under the Groups fleet expansion plans and Guangzhou new airport,
and, to a small extent, additional investments in other facilities and building for operations.

The Chinese Government has approved a new Guangzhou airport project, which
commenced construction in 2000, with completion targeted in August 2004. Upon
completion, the new airport will replace the Baiyun International Airport as
the main hub of the Groups route network. With the approval of the Chinese
Government, the Group began construction of its facilities at the new Guangzhou
airport in 2000. The Groups total investment will be RMB3,540 million, of
which RMB2,620 million will be financed by bank loans. Several major banks in
the PRC have committed to finance the project. The balance of RMB920 million will
be financed by internal resources. As of December 31, 2003, the Group invested
a total of RMB1,445.8 million for this new airport project. The Group believes
that the completion of the new airport will
substantially enhance the Groups operations in the Southern China region.

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Business Overview

General

The Group provides commercial airline services throughout China, Hong Kong
and Macau regions, Southeast Asia and other parts of the world. The Group is
one of the three largest Chinese airlines and, as of year end 2003, ranked
first in terms of passengers carried, number of scheduled flights per week,
number of hours flown and size of route network and aircraft fleet. During the
three years ended December 31, 2003, the Groups RPKs increased at a compound
annual rate of 2.6%, from 25,057 million in 2001 to 26,387 million in 2003,
while its capacity, measured in terms of ASKs, increased at a compound annual
rate of 1.0%, from 40,064 million in 2001 to 40,867 million in 2003. In 2003,
the Group carried 20.47 million passengers and had passenger revenue of
RMB15,010 million (US$1,814 million). Net loss for 2003 was RMB358 million
(US$43 million).

The
Group conducts a portion of its airline operations through its
airline subsidiaries namely Xiamen
Airlines, Southern Airlines Group Shantou Airlines Company Limited (Shantou
Airlines), Guangxi Airlines Company Limited (Guangxi Airlines), Zhuhai
Airlines Company Limited (Zhuhai Airlines) and Guizhou Airlines Company
Limited (Guizhou Airlines) (collectively, the Airline Subsidiaries). In
2003, the Airline Subsidiaries carried 7.62 million passengers and had
operating revenue of RMB5,368 million (US$608 million) and
accounted for 37.2%
and 30.7% of the Groups passengers carried and operating revenue,
respectively.

The
Group also provides air cargo and mail services.
The cargo and mail revenue of the Group increased by 9.5% to RMB1,955 million
(US$236 million) in 2003 as compared with 2002. The Groups airline
operations are fully integrated with its airline-related businesses, including
aircraft and engine maintenance, flight simulation and air catering operations.

The Group operates the most extensive route network among Chinese airlines
with a total of 334 routes as of December 31, 2003, including 274 domestic
routes, 18 Hong Kong regional routes (which include Hong Kong routes and Macau
routes), and 42 international routes. In 2003, the Group operated an average
of 4,118 landing and take-offs per week serving 94 destinations, including
major cities in China, such as Beijing, Shanghai, Tianjin, Guangzhou, Shenzhen,
Wuhan, Changsha, Zhengzhou, Xiamen, Xian and Chengdu. Most of the cities
served by the Group are located in commercial centers or rapidly developing
economic regions in China.

The Groups corporate headquarters and principal base of operations are
located in Guangzhou, which is the capital of Guangdong Province and the
largest city in southern China. Located in the rapidly developing Pearl River
Delta region, Guangzhou is also the transportation hub of southern China and
one of Chinas major gateway cities. Guangzhous significance has increased as
the transportation infrastructure of Guangdong Province has developed through
the construction and development of expressways, an extensive rail network and
the port cities of Yantian, Shekou, Chiwan, Mawan, Huangpu and Zhuhai.

In addition to its main route base in Guangzhou, the Group also maintains
twelve regional route bases in Zhengzhou, Wuhan, Changsha, Shenzhen, Zhuhai,
Xiamen, Fuzhou, Haikou, Guilin, Beihai, Shantou and Guiyang. All of these
regional route bases are located in provincial capitals or major commercial
centers in China.

The Groups operations primarily focus on the domestic market. In
addition, the Group also operates Hong Kong regional and international flights.
As of year end of 2003, the Group had 18 Hong Kong regional routes and 42
international routes. The Groups Hong Kong regional operations include
flights between destinations in China and Hong Kong and Macau. The Groups
international operations include scheduled services to Tokyo, Osaka, Amsterdam,
Sharjah, Los Angeles, Fukuoka, Seoul, Sydney and ten Southeast Asian
destinations. The Group operates the most extensive Southeast Asian route
network among Chinese airlines.

As of year end 2003, the Group operated a fleet of 132 aircraft,
consisting primarily of Boeing 737-300, 737-500, 737-700, 737-800, 747-400,
757-200 and 777-200 aircraft, and Airbus 319-100 and 320-200 aircraft.
Significant portions of these aircraft are held under capital and operating
leases. The average age of the Groups aircraft was 7.82 years at year end
2003.

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Restructuring and Initial Public Offering

As part of Chinas economic reforms in the 1980s, the PRC State Council
directed the CAAC to separate its governmental, administrative and regulatory
role from the commercial airline operations that were being conducted by the
CAAC and its regional administrators. As a result, CSAHC was established on
January 26, 1991 for the purpose of assuming the airline and airline-related
commercial operations of the Guangzhou Civil Aviation Administration, one of
the six regional bureaus of the CAAC. CSAHC was one of the 55 large-scale
enterprises designated by the Chinese Government to play a leading role in
their respective industries.

CSAHC was restructured in 1994 and 1995 in anticipation of the initial
public offering of the Company. The restructuring was effected through the
establishment of the Company and the execution of the Demerger Agreement, dated
as of March 25, 1995, as amended (the Demerger Agreement), between CSAHC and
the Company. Upon the restructuring, the Company assumed substantially all of
the airline and airline-related businesses, assets and liabilities of CSAHC,
and CSAHC retained its non-airline and non-airline-related businesses, assets
and liabilities, and the non-business assets and liabilities. Upon this
separation, all interests, rights, duties and obligations of CSAHC, whenever
created or accrued, were divided between the Company and CSAHC based on the
businesses, assets and liabilities assumed by each of them under the Demerger
Agreement. Under the Demerger Agreement, CSAHC agreed not to conduct or
participate or hold any interest in, either directly or indirectly, any
business, activity or entity in or outside China that competes or is likely to
compete with the commercial interests of the Group, although CSAHC may continue
to hold and control the affiliates of CSAHC existing on the date of the
Demerger Agreement and may continue to operate the businesses of such
affiliates.

In July 1997, the Company completed a private placement of 32,200,000 H
Shares to certain limited partnership investment funds affiliated with Goldman
Sachs & Co. and an initial public offering of 1,141,978,000 H Shares, par value
RMB 1.00 per share, and listing of the H Shares on the Stock Exchange of Hong
Kong Limited (the Hong Kong Stock Exchange) and American Depositary Shares
(ADSs, each ADS representing 50 H Shares) on the New York Stock Exchange.
Prior to the private placement and the initial public offering, all of the
issued and outstanding shares of capital stock of the Company, consisting of
2,200,000,000 Domestic Shares, par value RMB 1.00 per share, were owned by
CSAHC, which owns and exercises, on behalf of the Chinese Government and under
the supervision of the CAAC, the rights of ownership of the Domestic Shares
held by CSAHC. After giving effect to the private placement and the initial
public offering, CSAHC continues to own the 2,200,000,000 Domestic Shares,
representing approximately 65.2% of the total share capital of the Company, and
will be entitled to elect all the directors of the Company and to control the
management and policies of the Group. Domestic Shares and H Shares
are both ordinary shares of the Company.

Pursuant to an extraordinary general meeting of shareholders held on May
21, 2002, a resolution was passed authorizing the Company to issue not more
than 1,000,000,000 A shares of par value of RMB1.00 each. The Company issued
and listed its 1,000,000,000 A shares with a par value of RMB1.00 each on the
Shanghai Stock Exchange in July 2003. Subsequent to A share issue, the
shareholding of CSAHC on the Company was reduced to 50.3% from 65.2%.

Traffic

The following table sets forth certain statistical information with
respect to the Groups passenger and cargo and mail traffic for the years
indicated.

|                   |  |              |       |                  |  |               |      |               |  |                        |       |               |  |  |      |   |  |            |         |  |  |  |      |  
|------------------ |  | ------------ | ----- | ---------------- |  | ------------- | ---- | ------------- |  | ---------------------- | ----- | ------------- |  |  | ---- | - |  | ---------- | ------- |  |  |  | ---- | -
|                   |  |              |       |                  |  |               |      |               |  | Cargo and Mail Carried |       | Total Traffic
|Passengers Carried |  | (tons)       |       | (ton kilometers)
|                   |  |              |       |                 
|                   |  |              |       |                  |  | Increase      |      |               |  |                        |       | Increase      |  |  |      |   |  | Increase  
|                   |  |              |       |                  |  | (decrease)    |      |               |  |                        |       | (decrease)    |  |  |      |   |  | (decrease)
|                   |  |              |       |                  |  | over          |      |               |  |                        |       | over          |  |  |      |   |  | over      
|Year               |  | Total        |       | previous year    |  | Total         |      | previous year |  | Total                  |       | previous year
|                   |  |              |       |                  |  |               |      |               |  |                        |       |              
|                   |  | (in million) |       | (%)              |  | (in thousand) |      | (%)           |  | (in million)           |       | (%)          
|1999               |  |              | 15.11 |                  |  |               | 0.4  |               |  |                        | 390.8 |               |  |  | 12.3 |   |  |            | 2,003.0 |  |  |  | 4.6  |  
|2000               |  |              | 16.85 |                  |  |               | 11.5 |               |  |                        | 353.0 |               |  |  | (9.7 | ) |  |            | 2,613.0 |  |  |  | 30.5 |  
|2001               |  |              | 19.12 |                  |  |               | 13.5 |               |  |                        | 398.0 |               |  |  | 12.7 |   |  |            | 3,034.0 |  |  |  | 16.1 |  
|2002               |  |              | 21.49 |                  |  |               | 12.4 |               |  |                        | 470.0 |               |  |  | 18.1 |   |  |            | 3,614.0 |  |  |  | 19.1 |  
|2003               |  |              | 20.47 |                  |  |               | (4.7 | )             |  |                        | 464.0 |               |  |  | (1.3 | ) |  |            | 3,561.0 |  |  |  | (1.5 | )

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Route
Network

Overview

The Group operates the most extensive route network among Chinese
airlines. As of year end 2003, the Group operated 334 routes consisting of 274
domestic routes, 18 Hong Kong regional routes and 42 international routes. At
such date, the Groups route network served 71 destinations within China
and 23 destinations outside of China.

The Group continually evaluates its network of domestic, Hong Kong
regional and international routes in light of its operating profitability and
efficiency. The Group seeks to coordinate flight schedules with the Airline
Subsidiaries on shared routes to maximize load factors and utilization rates.
The acquisition of domestic, Hong Kong regional and international routes is
subject to approval of the CAAC, and the acquisition of Hong Kong regional and
international routes is also subject to the existence and the terms of
agreements between the Chinese Government and the government of the Hong Kong
SAR, the government of Macau Special Administrative Region of the Peoples
Republic of China (Macau SAR) and the government of the proposed foreign
destination.

In order to expand the Groups international route network, the Group has
entered into code-sharing agreements with several international airlines such
as Delta Airlines, Asiana Airlines, Japan Air System, Vietnam Airlines, Royal Dutch Airlines
and Garuda Indonesian, etc. Under the code sharing agreements, the airlines
are permitted to sell tickets on certain international routes for the Group to
passengers using their codes. Similarly, the Group is permitted to sell
tickets for these airlines using its CZ code. The code sharing agreements
help increase the number of the Groups international sales outlets.

Route Bases

The Groups main route base is in Guangzhou. The Group maintains twelve
regional route bases in Zhengzhou, Wuhan, Changsha, Shenzhen, Zhuhai, Xiamen,
Fuzhou, Haikou, Guilin, Beihai, Shantou and Guiyang. All of these regional
route bases are located in provincial capitals or major commercial centers in
China. The Groups network of route bases provides the Group with routes
covering all of China, except for Inner Mongolia, Tibet and Ningxia.

The Group believes that its extensive network of route bases enables it to
coordinate flights and deploy its aircraft more effectively and to provide more
convenient connecting flight schedules and access service and maintenance
facilities for its aircraft. The Group believes that the number and location
of these route bases may enhance the Groups ability to obtain the CAACs
approval of requests by the Group to open new routes and provide additional
flights between these bases and other destinations in China. Under current
regulations of the CAAC, airlines are generally expected to operate mainly from
their route bases.

The Chinese Government has approved a new Guangzhou airport project, which
commenced construction in 2000, with completion targeted in August 2004. Upon
completion, the new airport will replace the Baiyun International Airport as
the main hub of the Groups route network. With the approval of the Chinese
Government, the Group began construction of its facilities at the new Guangzhou
airport in 2000. The Groups total investment will be RMB3,540 million, of
which RMB2,620 million will be financed by bank loans. Several major banks in
the PRC have committed to finance the project. The balance of RMB920 million
will be financed by internal resources. As of December 31, 2003, the Group
invested a total of RMB1,445.8 million for this new airport project. The Group
believes that the completion of the new airport will substantially enhance the
Groups operations in the Southern China region.

Domestic Routes

The Groups domestic route network serves substantially all provinces and
autonomous regions in China, including Guangdong, Fujian, Hubei, Hunan, Hainan,
Guangxi, Jiangsu, Zhejiang, Henan and Anhui, and serves all four
centrally-administered municipalities in China, namely, Beijing, Shanghai,
Tianjin, and Chongqing. In 2003, the Groups most profitable domestic routes were the routes
between Guangzhou and Beijing, Guangzhou and Shanghai, Shenzhen and
Shanghai, Beijing and Guangzhou, Shenzhen and Beijing, Shanghai and
Guangzhou, Beijing and Shenzhen, Guangzhou and Zhengzhou, Zhengzhou
and Guangzhou and between Guangzhou, Dalian and Harbin.

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Hong Kong Regional Routes

The
Group offers scheduled service between Hong Kong and Guangzhou,
Kunming, Xiamen, Shantou, Beijing, Guilin, Meixian, Haikou, Wuhan,
Zhengzhou, Nanning, Changsha and Sanya; between Macau and Fuzhou,
Hangzhou and Xiamen. The Groups Hong Kong regional routes also
include routes between Hong Kong or Macau and other destinations in
China, including Zhang Jia Jie and Wu Yi Shan, which the Group
operates on a charter flight basis, as explained below. The Group
believes that the routes on which it operates these charter flights
are among its highest yielding routes, primarily because the Group
faces limited competition on such routes and is consequently less
subject to downward pricing pressures. In 2003, the most profitable
Hong Kong regional routes were those between Guangzhou and Hong Kong,
Hong Kong and Guangzhou, Hong Kong and Wuhan, Wuhan and Hong Kong,
Kunming and Hong Kong, Hong Kong and Xiamen, Hong Kong and Zhengzhou,
Hong Kong and Kunming, Zhengzhou and Hong Kong, Hong Kong and
Changsha.

The Groups charter flights are essentially regularly scheduled flights,
but in theory permission to operate these charter flights is subject to
monthly review by the CAAC and the Civil Aviation Department of the Hong Kong
SAR. The CAAC has informally indicated that it primarily considers market
demand and airline capability in granting permission for such flights. The
Group has been able to maintain all of its Hong Kong regional routes on which
it operates on a charter flight basis and believes that demand on such routes
will continue. In 2003, the Group operated a total of 11,395 flights
on its Hong Kong regional routes, accounting for approximately 29.8% of all
passengers carried by Chinese airlines on routes between Hong Kong or Macau and
destinations in China.

International Routes

The Group is the principal Chinese airline connecting the rapidly
developing Pearl River Delta region of China to Southeast Asia, with
24 routes
serving ten Southeast Asian destinations, including Singapore and major cities
in Indonesia, Thailand, Malaysia, Philippines, Vietnam and Laos. In
2003, the Groups most profitable Southeast Asian routes were
those between Manila, Xiamen and Beijing; Beijing, Xiamen and Manila;
Guangzhou and Singapore, and Guangzhou and Bankok. The Group believes that, among Chinese
airlines, it is well-positioned to benefit from the business opportunities
arising out of increased air traffic and the growing economic relationships
between China and Southeast Asian countries.

In
addition to the 24 routes serving ten Southeast Asian destinations, the
Group also operates 18 other international routes providing scheduled
service to Amsterdam, Sharjah, Osaka, Tokyo, Fukuoka, Seoul, Los Angeles,
Sydney and Melbourne.

Aircraft Fleet

The Groups fleet plan in recent years has emphasized expansion and
modernization through the acquisition of new aircraft and the retirement of
less efficient older aircraft. As of year end 2003, the Group operated a fleet
of 132 aircraft with an average age of 7.82 years. All aircraft of the Group
are Boeing and Airbus aircraft. The Group has the largest fleet among Chinese
airline companies. Most of the aircraft operated by the Group are leased
pursuant to various types of leasing arrangements.

The following table sets forth certain information regarding the Groups
fleet of 132 aircraft as of December 31, 2003.

|               |  |           |     |             |  |           |       |  |  |         |     | 
|-------------- |  | --------- | --- | ----------- |  | --------- | ----- |  |  | ------- | --- | 
|               |  |           |     |             |  |           |       |  |  | Average
|               |  | Number of |     | Average Age |  | Passenger
|Model          |  | Aircraft  |     | (years)     |  | Capacity 
|               |  |           |     |             |  |          
|Boeing 777-200 |  |           | 4   |             |  |           | 7.51  |  |  |         | 380 | 
|Boeing 777-21B |  |           | 5   |             |  |           | 6.27  |  |  |         | 292 | 
|Boeing 757-200 |  |           | 25  |             |  |           | 11.48 |  |  |         | 200 | 
|Boeing 747F    |  |           | 2   |             |  |           | 1.42  |  |  |         | n/a | 
|Boeing 737-800 |  |           | 12  |             |  |           | 0.78  |  |  |         | 167 | 
|Boeing 737-700 |  |           | 10  |             |  |           | 3.39  |  |  |         | 138 | 
|Boeing 737-500 |  |           | 18  |             |  |           | 11.10 |  |  |         | 132 | 
|Boeing 737-300 |  |           | 32  |             |  |           | 10.16 |  |  |         | 145 | 
|Airbus 319-100 |  |           | 4   |             |  |           | 0.42  |  |  |         | 128 | 
|Airbus 320-200 |  |           | 20  |             |  |           | 5.64  |  |  |         | 158 | 
|               |  |           |     |             |  |           |       |  |  |         |     | 
|               |  |           | 132 |             |  |           |       |  |  |         |     | 

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During 2003, the Group continued to expand and modernize its aircraft
fleet. In 2003, the Groups major aircraft transactions included:



| | (i)   |  | The acquisition of seven Boeing 737-800 aircraft financed by a
combination of internal funds and long term bank loans;
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | The addition of four Airbus 319-100 aircraft and three Boeing 737-700 aircraft under operating leases;                
|
| | (iii) |  | The early retirement of two Boeing 737-200 aircraft;                                                                  
|
| | (iv)  |  | The expiry of two Boeing 747 cargo freighters under short-term wet leases; and                                        
|
| | (v)   |  | The extension of four Boeing 737-300 under
operating leases for another 2 to 5 years.                                 

In addition, on April 8, 2004, the Company entered into an agreement with
Airbus SNC for the acquisition of fifteen Airbus 320-200 aircraft and six
Airbus 319-100 aircraft, scheduled for deliveries in 2005 and 2006.

Aircraft Financing Arrangements

Overview

A significant portion of the Groups aircraft is acquired under long-term
capital or operating leases or long-term mortgage loans with remaining terms to
maturity ranging from one to nine years. As of December 31, 2003, 29 of the
Groups 132 aircraft were operated under

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capital leases, 54 were operated under operating leases, 27 were financed
by long-term mortgage loans, while the remaining were acquired either with
cash proceeds or acquired by exercising the purchase options upon expiry of the
respective capital leases. The Groups planned acquisition of aircraft in the
foreseeable future will generally be made pursuant to operating leases or
financed by long-term mortgaged loans. The Groups determination as to its
acquisition strategy depends on the Groups evaluation at the time of its
capacity requirements, anticipated deliveries of aircraft, the Groups capital
structure and cash flow, prevailing interest rates and other general market
conditions.

The following table sets forth, as of December 31, 2003, the number of
Boeing and Airbus aircraft operated by the Group pursuant to capital and
operating leases and the remaining terms, expressed in years, of such leases.

|                           |  |         |    |           |  |            |    |  |  |         |      | 
|-------------------------- |  | ------- | -- | --------- |  | ---------- | -- |  |  | ------- | ---- | 
|                           |  |         |    |           |  |            |    |  |  | Average
|                           |  | Capital |    | Operating |  | Remaining 
|Model                      |  | Lease   |    | Lease     |  | Lease Term
|                           |  |         |    |           |  |           
|Boeing 777-200 and 777-21B |  |         | 5  |           |  |            | 3  |  |  |         | 7.66 | 
|Boeing 757-200             |  |         | 1  |           |  |            | 10 |  |  |         | 4.78 | 
|Boeing 737-700             |  |         |   |           |  |            | 4  |  |  |         | 6.13 | 
|Boeing 737-500             |  |         |   |           |  |            | 18 |  |  |         | 2.28 | 
|Boeing 737-300             |  |         | 5  |           |  |            | 13 |  |  |         | 3.24 | 
|Airbus 320-200             |  |         | 18 |           |  |            | 2  |  |  |         | 4.60 | 
|Airbus
319-100             |  |         |   |           |  |            | 4  |  |  |         | 9.57 | 
|                           |  |         |    |           |  |            |    |  |  |         |      | 
|                           |  |         | 29 |           |  |            | 54 |  |  |         |      | 

Capital Leases

As of December 31, 2003, the Groups aggregate future minimum lease
payments (including future finance charges) required under its capital leases
were RMB7,961 million (US$962 million). As of year end 2003, a majority of
the Groups capital leases had original terms ranging from ten to fifteen years
from the date of delivery of the relevant aircraft, and the remaining terms of
these leases ranged from one to six years. The Groups capital leases
typically cover a significant portion of the relevant aircrafts useful life
and transfer the benefits and risks of ownership to the Group. Under its
capital leases, the Group generally has an option to purchase the aircraft at
or near the end of the lease term. As is customary in the case of capital
leases, the Groups obligations are secured by the related aircraft, as well as
other collateral.

Operating Leases

As of December 31, 2003, the Groups aggregate future minimum lease
payments required under its operating leases were RMB8,120 million (US$981
million). As of year end 2003, the Groups operating leases had original terms
generally ranging from eight to ten years from the date of delivery of
the relevant aircraft, and the remaining terms of these leases generally ranged
from one to nine years. Pursuant to the terms of the operating leases, the
Group is obligated to make rental payments based on the lease term, with no
termination payment obligations or purchase option, and the lessor bears the
economic benefits and risks of ownership. Under its operating leases, the
Group has no option to purchase the aircraft and is required to return the
aircraft in the agreed condition at the end of the lease term. Although title
to the aircraft remains with the lessor, the Group is responsible during the
lease term for the maintenance, servicing, insurance, repair and overhaul of
the aircraft.

Pursuant to capital or
operating leases, the Group is obligated to indemnify the lessors against any
withholding or similar taxes that may be imposed on the lessors by taxing
authorities in China with regard to payments made pursuant to such leases. In
accordance with relevant PRC tax regulations, a PRC lessee is liable to pay PRC
withholding tax in respect of any lease payments regularly made to an overseas
lessor. Depending on the circumstances, this tax is generally imposed at a
fixed rate ranging from 10% to 20% of the lease payments, or in certain cases,
the interest components of such payments. Pursuant to an approval document
from the State Taxation Bureau, lease arrangements executed prior to September
1, 1999 are exempt from PRC withholding tax. The PRC withholding tax payable
in respect of the operating leases executed after September 1, 1999 of RMB12
million, RMB14 million and RMB8 million during 2001, 2002 and 2003
respectively, have been included as part of the operating lease charges.

Aircraft Flight Equipment

The jet engines used in the Groups aircraft fleet are manufactured by
General Electric Corporation, Rolls-Royce plc, United Technologies
International, Inc., CFM International, Inc. and International Aviation Engines
Corporation. As of year end 2003, the Group had 34 spare jet engines for its
fleet. The Group determines its requirements for jet engines based on all
relevant considerations, including manufacturers recommendations, the
performance history of the jet engines and the planned utilization of its
aircraft.

Rotables and certain of the expendables for the Groups aircraft are
generally purchased by Southern Airlines (Group) Import & Export Trading
Corporation (SAIETC), a subsidiary of CSAHC acting as agent for the Group, in
consideration of an agency fee. The Group arranges the ordering of aircraft,
jet engines and other flight equipment for the Airline Subsidiaries and keeps
an inventory of rotables and expendables for the Airline Subsidiaries.

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Aircraft Maintenance

A major part of the maintenance for the Groups fleet other than overhauls
of jet engines is performed by GAMECO, a joint venture established by the
Company and Hutchison Whampoa (Hutchison), consistent with the Groups
strategy to achieve fully integrated airline operations and to assure continued
access to a stable source of high quality maintenance services. The remaining
part of the maintenance for the Groups fleet other than overhauls of jet
engines is performed by service providers in China and overseas. GAMECO
performs all types of maintenance services, ranging from maintenance
inspections performed on aircraft before, after and between flights (line
maintenance services) to major overhaul performed at specified intervals.
GAMECO was the first of three aircraft maintenance facilities in China having
been certified as a repair station by both the CAAC and the FAA. In March
1998, GAMECO received an approval certificate from the United Kingdom Civil
Aviation Authority for the repair and maintenance of aircraft and aircraft
engines.

The Group believes that GAMECO performs major maintenance checks on the
Groups aircraft within time periods generally consistent with those of large
international airline maintenance centers. GAMECOs repair and maintenance
capabilities include overhaul of more than 90% of the Groups aircraft.
Although rotables for the Groups aircraft are generally imported through
SAIETC, a portion of expendables and other maintenance materials are directly
imported by GAMECO. GAMECO also provides line maintenance services to
12 other Chinese airlines and 11 international airlines. GAMECO provides
heavy maintenance services to 11 other Chinese airlines and seven
international airlines.

Under the Aircraft Maintenance and Engineering Agreement entered into
between GAMECO and the Company (the Aircraft Maintenance Agreement), GAMECO
charges the Group for expendables on a cost plus basis, and for labor based on
a formula that takes into account projected flight hours, costs and other
relevant factors. Fees under the Aircraft Maintenance Agreement are payable
50% in Renminbi and 50% in U.S. dollars. Each year, the Company and GAMECO
determine the components of the pricing formula. For the year ended December
31, 2003, GAMECOs revenue (excluding Value Added Tax) totaled RMB569 million, approximately 88.2% of which
was derived from services provided to the Group.

Overhauls of jet engines are performed by overseas qualified service
providers in Germany, Malaysia, Canada and England. Starting from 2003, MTU
Maintenance Zhuhai Co., Ltd., (MTU Zhuhai) a jointly controlled entity of the
Company and MTU Aero Engines Gmbh., also performed overhauls of
certain jet engines for
the Group. For the year ended December 31, 2003, a total of eleven jet engines
were major overhauled by MTU Zhuhai with total repair costs of RMB106 million.

Safety

The Group endeavors to maintain strict compliance with all laws and
regulations applicable to flight safety. In addition, the Group has adopted
measures to eliminate or minimize factors that may impair flight safety,
including specialized training programs and safety manuals. The Air Safety
Management Department of the Company implements safety-related training
programs on an ongoing basis in all of the Groups operations to raise the
safety awareness of all employees. As a result, overall flight safety has
gradually improved. There was no serious incidents involving casualty or
flight damage throughout the three years ended December 31,
2003. For
minor incidents which include various events and conditions prescribed by the
CAAC which do not involve serious personal injury or material damage to flight
equipment, the Group has kept the number consistently below the standard
prescribed by the CAAC. For example, the Companys flight incident ratio was
0.19, 0.42 and 0.13 in 2001, 2002 and 2003, respectively. In comparison,
CAACs published maximum acceptable flight incident ratio was 1.6 in 2001 and
1.5 in 2002 and 1.3 in 2003. This ratio is defined as the occurrence of one
incident for every 10,000 hours of flight time.

Jet Fuel

Jet fuel costs typically represent a major component of an airlines
operating expenses. The Groups jet fuel costs for 2003 accounted for 22.7% of
the Groups operating expenses. Like all Chinese airlines, the Group is
generally required by the Chinese Government to purchase its jet fuel
requirements from regional branches of CAOSC and Bluesky Oil Supplies Company,
except at the Shenzhen, Zhuhai and Sanya airports which are supplied by
Sino-foreign joint ventures in which CAOSC is a joint venture partner. CAOSC
is a State-owned organization controlled and supervised by the CAAC that
controls the importation and distribution of jet fuel throughout China.

Jet fuel obtained from CAOSCs regional branches is purchased at uniform
prices throughout China that are determined and adjusted by CAOSC from time to
time with the approval of the CAAC and the pricing department of the
National
Development and Reform Commission (NDRC) based on market conditions and
other factors. As a result, the costs of transportation and storage of jet
fuel in all regions of China are spread among all domestic airlines. Jet fuel
costs in China are influenced by costs at State-owned oil refineries and
limitations in the transportation infrastructure, as well as by insufficient
storage facilities for jet fuel in certain regions of China.

Prior to 1994, domestic jet fuel prices were generally below international
jet fuel prices. The Chinese Government had gradually increased domestic jet
fuel prices in order to reflect more accurately the costs of supplying jet fuel
in China. As a result, domestic jet fuel prices have become higher than those
in the international market since the beginning of 1994. With the WTO entry,
the jet fuel price in China will probably be trimmed by the market force to be
in line with the international market.

CAOSCs maximum fuel price in 2003 was RMB3,500 per ton. The average
price paid by the Group in 2003 was RMB3,074 per ton, which represents a 13.2%
increase from that of 2002.

To address the problem of high jet fuel prices since 2000, CAAC has
announced a policy permitting airlines to impose a fuel surcharge on passengers
carried by their domestic and Hong Kong regional flights for the purpose of
offsetting the effect of rising jet fuel prices. Such surcharges have been
imposed by the Group since November 1, 2000 at the prescribed rates set by the
CAAC.

In addition to purchases of jet fuel from CAOSC, the Group is also
permitted by the Chinese Government to purchase a portion of its jet fuel
requirements for its international flights from foreign fuel suppliers located
outside China at prevailing international market prices. Jet fuel purchased
from such sources outside China accounted for approximately 10.0% of the
Groups total jet fuel consumption in 2003.

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Flight Operations Flight operations for the Groups flights originating in Guangzhou are
managed by the Companys flight operations and marketing divisions, which are
responsible for formulating flight plans and schedules consistent with route
and flight approvals received from the CAAC. The Companys flight operations
center in Guangzhou is responsible for the on-site administration of flights,
including the dispatch and coordination of flights, deployment of aircraft,
ground services and crew staffing. In addition, each of the Airline
Subsidiaries maintains flight operations centers at all servicing airports for
on-site administration of their flights. The Companys general dispatch
offices are responsible for monitoring conditions on the Groups route network,
administering the Groups flight plans, collecting and monitoring navigation
data and analyzing and monitoring airport conditions. To enhance its management of flight operations, the Groups computerized
flight operations control system (SOC) began operation in May 1999. The system
utilizes advanced computer and telecommunications technology to manage the
Groups flights on a centralized, real-time basis. The Group believes that the
system will assist it to (i) compile flight schedules more efficiently; (ii)
increase the utilization of aircraft; (iii) allow real-time tracking of all of
the Groups flights; and (iv) improve coordination of the Groups aircraft
maintenance and ground servicing functions. Training of Pilots and Flight Attendants The Group believes that its pilot training program which was established
in cooperation with the CAAC affiliated Beijing Aeronautics and Aviation
University (the BAAU) has significantly improved the quality of the training
received by the Groups pilots and has helped maintain the quality of the
Groups staff of pilots at a level consistent with the expansion of operations
called for by the Groups business strategy. In the Groups pilot training program, trainees have two years of
theoretical training at the BAAU. After successful completion of academic and
physical examinations, students receive flight training for a period of
approximately 20 months at China Southern West Australian Flying College Pty Ltd.
(the Australian Pilot College), a company that is 65% owned by the Company
and 35% owned by CSAHC. Each student at the Australian Pilot College is
required to fly at least 230 hours before being awarded a flight certificate.
Graduates of the BAAU and the Australian Pilot College are hired by the Group
as trainee pilots after passing a CAAC-administered examination to obtain a
pilot license. The total training period for the Groups trainee pilots is
approximately five years. About 110 trainee pilots graduated from the
Australian Pilot College each year. Prior to January 2003, as part of the pilot training program, the Group
also operated a flight simulator training center in Zhuhai, Guangdong Province
(the Zhuhai Training Center), which was equipped with simulators for all
models of aircraft currently operated by the Group. Trainee pilots received
their initial training in the operation of a specific aircraft at the Zhuhai
Training Center, which also provided training to pilots from other Chinese
airlines. Such flight simulation training has been shifted to Zhuhai Xiang Yi
Aviation Technology Company Limited (Zhuhai Xiang Yi), a jointly controlled
entity between the Company and CAE International Holdings Limited, since
January 2003. Zhuhai Xiang Yi currently leases the flight simulation
facilities of Zhuhai Training Center from the Group and provides flight
simulation training services to the Group. The Groups pilots are required to be licensed by the CAAC, which requires
an annual recertification examination. The Groups pilots attend courses in
simulator training twice annually and in simulator emergency procedures
annually. The Group also conducts regular advanced training courses for
captains and captain candidates. Pilots advance in rank based on number of
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The Group conducts theoretical and practical training programs for its
flight attendants at its Flight Attendants Training Center in Guangzhou (the
Guangzhou Training Center). The Guangzhou Training Center is equipped with
computerized training equipment, as well as simulator cabins for all models of
aircraft currently operated by the Group. At the Guangzhou Training Center,
flight attendants of the Group receive comprehensive training in areas such as
in-flight service, emergency evacuation and water rescue. Ground Services The Group makes arrangements with airport authorities, other airlines or
ground services companies for substantially all ground facilities, including
jet-ways, waiting areas, ticket counters and support services buildings, at
each airport that it serves. The Group pays landing, parking and other fees to
such airports, including Baiyun International Airport in Guangzhou. At
domestic airports, such fees are generally determined by the CAAC. At Baiyun International Airport in Guangzhou, the Group operates its own
passenger check-in, cargo, mail and baggage handling, aircraft maintenance and
cleaning services. The Group also provides such services to other airlines
that operate in Baiyun International Airport. Ground services at the airports in Shenzhen, Changsha, Wuhan, Zhengzhou,
Haikou, Zhuhai, Xiamen, Fuzhou, Guilin, Shantou, Guiyang and Beihai are
primarily operated directly by the Group. Ground services at other airports in
China are provided to the Group by local airport authorities or local airlines
pursuant to various service agreements. Ground services and other services at
airports outside China are provided to the Group by foreign services providers
pursuant to various service agreements with such parties. All such agreements
of the Group are short-term and otherwise on terms that are customary in the
industry. Air Catering The Company owns a 51% equity interest in Guangzhou Nanland Air Catering
Company Limited (Nanland). Nanland provides in-flight meals, snacks, drinks
and related services for all of the Groups flights originating in Guangzhou
and substantially all other flights departing from Baiyun International
Airport. The Group contracts with various air catering suppliers with respect
to in-flight catering services for flights originating from other airports,
generally on an annual basis and otherwise on terms that are customary in the
industry. Cargo and Mail The Group also provides air cargo and mail services. Previously, a significant
portion of these services is combined with passenger flights services.
Currently, the Group has two Boeing 747-400 freighters servicing three
international cargo routes, Shenzhen to Chicago and Belgium and Shanghai to
Amsterdam. Route Shanghai to Amsterdam was newly opened in October 2003. In
October 2003, the Group took delivery of its first Boeing 737-300 QC (Quick Change)
cargo aircraft. The QC aircraft is designed to provide maximum utilization of
aircraft by allowing passenger use during the day and cargo operations at
night. Currently, the Group conducts its cargo business primarily through
its cargo division in Shenzhen. To further tap into the growing cargo market,
the Group has commenced the construction of a cargo centre in the Guangzhou new
airport in 2003, at a cost of Rmb190 million.


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Sales, Reservations and Marketing Passenger Ticket Sales and Reservations The Groups ticket sales and reservations are conducted by or through
independent sales agents and the Groups own network of exclusive sales offices
as well as the CAACs sales offices and CSAHCs affiliates. The Group has sales offices
in Guangzhou and its other route bases. In addition, the Group maintains
regional sales offices in other cities in China, including Beijing and
Shanghai. The Group maintains international sales offices in Bangkok, Manila,
Hanoi, Ho Chi Minh City, Singapore, Kuala Lumpur, Penang, Jakarta and Phnom
Penh in Southeast Asia, as well as in Osaka, Fukuoka, Tokyo, Seoul, Amsterdam,
Los Angeles, Sydney, Melbourne and Sharjah. In Hong Kong, ticket sales and reservations services are provided to the
Group by China National Aviation Corporation and Nanlung Travel Agency Limited
(a subsidiary of CSAHC) for a commission of 3%  9% of the ticket price. The Group
also has agency agreements with airlines in the Asia-Pacific region, Europe,
the United States and Africa for the processing of ticket sales and
reservations on a reciprocal basis. In 2003, approximately 30% of all ticket
sales for the Groups scheduled flights were made by the
Groups and CAACs network of sales offices and
CSAHCs affiliates. The Group also sells tickets and accepts
reservations through an extensive network of non-exclusive independent sales
agents, substantially all of whom operate in cities throughout China, with the
remainder operating principally in Hong Kong and other Southeast Asian
destinations served by the Group. Under the agency agreements with these sales
agents, the Group pays commissions based on the value of tickets sold. The
Group pays independent sales agents in China a commission of 3% of the ticket
price, and pays independent sales agents outside China a commission ranging
from 5% to 9% of the ticket price. Sales agents are typically permitted to
withhold their commission from the proceeds of ticket sales that are remitted
to the Group. In 2003, independent sales agents accounted for approximately
70% of the Groups ticket sales for its scheduled flights. Substantially all of the Groups sales offices and agents in China are
linked electronically to the CAACs computerized ticketing and reservations
system, which is in turn linked to all domestic airlines for flights throughout
China. The Group has also entered into membership agreements with several
international reservation systems, including ABACUS in Southeast Asia, SABRE
and GALILEO in the United States, AMADEUS in Europe and INFINI in Japan. These
systems facilitate reservations and sales of tickets for the Groups
international flights. Cargo The Groups cargo and mail services are promoted through its own cargo
divisions and independent cargo agents both within and outside China that track
available space among all airlines. In particular, the Group employs a number
of cargo agents in the Pearl River delta region. The Group generally pays such
agents a commission of 4% and 5% of the relevant cargo freight rate for
domestic and international services, respectively. Promotional and Marketing Activities The Group engages in regular promotional and marketing activities in an
effort to increase its market share. The Groups promotional and marketing
activities for domestic routes emphasize safety, passenger comfort and the
frequency of the Groups flights. The Groups promotional and marketing
activities for international and Hong Kong regional passengers emphasize the
Groups quality of service, extensive route network in China and greater
frequency of flights relative to other Chinese airlines. In addition, the
Group also promotes and markets its Hong Kong regional and international routes
on the basis of price. The Group has been seeking to increase its name recognition by offering
new services to passengers. For example, the Group was the first Chinese
airline to provide off-airport check-in services. The Group also offers
transfer and baggage thru-handling services to passengers connecting to other
airlines, including passengers connecting in Hong Kong for flights to Taiwan. To enhance relationships with its passengers, the Group has launched two
frequent flyer programs, namely the China Southern Airlines Sky Pearl Club,
and the Egret Mileage Plus. By the end of 2003, the Group had approximately
3,041,200 members under these programs. Regulation The Chinese commercial aviation industry is subject to a high degree of
regulation and oversight by the CAAC. Regulations and policies issued or
implemented by the CAAC encompass substantially all aspects of airline
operations, including the approval of domestic, Hong Kong regional and
international route allocation, published airfares, aircraft acquisition, jet
fuel prices and standards for aircraft maintenance, airport operations and air
traffic control. The Civil Aviation Law, which became effective in March
1996, provides a framework for regulation of many of these aspects of
commercial aviation activities. Although Chinas airlines operate under the
supervision and regulation of the CAAC, they are accorded an increasingly
significant degree of operational autonomy, including with respect to the
application for domestic, Hong Kong regional and international routes, the
allocation of aircraft among routes, the purchase of flight equipment, the
pricing of air fares within a certain range, the training and supervision of
personnel and their day-to-day operations.


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As an airline providing services on international routes, the Group is
also subject to a variety of bilateral civil air transport agreements that
provide for the exchange of air traffic rights between China and various other
countries. In addition, China is a contracting state, as well as a permanent
member, of the International Civil Aviation Organization (the ICAO), an
agency of the United Nations established in 1947 to assist in the planning and
development of international air transport, and is a party to many other
international aviation conventions. The ICAO establishes technical standards
for the international aviation industry. The Group believes that it, in all
material respects, complies with all such technical standards. Route Rights Domestic Routes.The right of any Chinese airline to carry passengers or
cargo on any domestic route must be obtained from the CAAC. Non-Chinese
airlines are not permitted to provide domestic air service between destinations
in China. The CAACs policy is to assign a domestic route to the Chinese
airline that is best suited to serve the route based, in part, on the location
of the airlines main or regional base at the point of origin. Under current
regulations, airlines are generally expected to operate mainly from their route
bases, and flights within a particular region are expected to be served by
airlines based in that region. The Group believes that these regulatory
parameters benefit airlines, such as the Group, that have a large number of
regional route bases. The CAAC also considers other factors that may make a
particular airline suitable to operate a domestic route, including the
applicants general operating authority, compliance with pricing regulations
and regulations applicable to safety and service quality, market demand, the
ability of the applicant in terms of its existing route, and airport facilities
and related support services. The CAAC considers market conditions for a domestic route in determining
whether the route should be allocated to one or more airlines. The CAAC
requires the passenger load factor on a particular route to reach 75% before
additional flights may be added on that route. Airlines serving the route are
given priority for such additional flights, and only if such airlines cannot
operate more flights will the CAAC permit another airline to commence service. Hong Kong Regional Routes.Hong Kong regional routes and landing rights
are derived from agreements between the Chinese Government and the government
of the Hong Kong SAR, and between the Chinese Government and the Portuguese government before December 20, 1999 and the government of Macau
SAR on and after December 20, 1999. Such rights are allocated by the CAAC
among the seven Chinese airlines permitted to fly to Hong Kong or Macau. The Group understands that the criteria for determining whether a Hong
Kong regional route will be allocated to a particular airline, include market
demand, the ability of the airline to service the route and the appropriateness
of the airlines aircraft for such route. A number of Hong Kong regional
routes are operated by Chinese airlines on a charter flight basis.
Permission to operate these flights is in theory subject to monthly review by
the CAAC and the Hong Kong Civil Aviation Department. The CAAC has informally
indicated that it primarily considers market demand and airline capability in
granting permission for such flights. International Routes.International route rights, as well as the
corresponding landing rights, are derived from air services agreements
negotiated between the Chinese Government, through the CAAC, and the government
of the relevant foreign country. Each government grants to the other the right
to designate one or more domestic airlines to operate scheduled service between
certain destinations within each of such countries. Upon entering into an air
services agreement, the CAAC determines the airline to be awarded such routes
based on various criteria, including the availability of appropriate aircraft,
flight and management personnel, safety record, the overall size of the
airline, financial condition and sufficiency of assets to bear civil
liabilities in international air services. These route rights may be
terminated by the CAAC under special circumstances. The criteria for determining whether an international route will be
allocated to a second airline generally include (i) the terms of the relevant
bilateral civil aviation agreement; (ii) consistency with overall national
plans and the national interest and the enhancement of reasonable competition;
and (iii) whether the international airports to be used are sufficient for the
aircraft flown and employ security measures consistent with international
standards. In addition, if the relevant bilateral civil aviation agreement permits
more than one Chinese airline to operate a particular international route, the
CAAC will only permit a second airline to operate on such route if the number
of passengers carried annually exceeds 100,000 and if there is a minimum
average load factor of 68% for routes with at least five weekly flights by
Chinese airlines, or 80% for routes with four or fewer weekly flights by
Chinese airlines.


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Air Fare Pricing Policy Published air fares of Chinese airlines for domestic routes are
established by the CAAC and the pricing department of the NDRC. The CAAC
determines and adjusts from time to time the published fare for each domestic
route based on several factors, including average airline operating costs,
market conditions, national transportation requirements and the ability of
consumers to pay increased fares. Airlines may offer discounts within a range
specified by the CAAC under certain circumstances. Published air fares of Chinese airlines for the Hong Kong regional routes
are determined by the CAAC and the relevant civil aviation authorities in Hong
Kong or Macau, subject to consultation between the relevant Chinese airlines
and Hong Kong or Macau airlines. Airlines may offer discounts on flights on
their Hong Kong regional routes. Published air fares of Chinese airlines for international routes are
determined through consultation between the relevant Chinese airlines and
foreign airlines in accordance with the civil aviation agreements between the
Chinese Government and the relevant foreign government, taking into account the
international air fare standards established through the International Air
Transport Association. All air fares for international routes must be
approved by the CAAC. Discounting of published international air fares is
permitted. Acquisition of Aircraft and Flight Equipment The CAAC requires all Chinese airlines to acquire their aircraft through
China Aviation Supplies Import and Export Corporation (CASC), an entity
controlled by the CAAC. If a Chinese airline plans to acquire an aircraft, the
airline must first seek approval from the CAAC and NDRC. The airline must, as
a condition of approval, provide specific acquisition plans, which are subject
to modification by the CAAC and NDRC. If the CAAC and NDRC approve an aircraft
acquisition, the airline negotiates the terms of the acquisition with the
manufacturer together with CASC because CASC possesses the license required to
import or export aircraft, and CASC receives a commission in respect thereof.
Most Chinese airlines are also required to acquire their aircraft engines,
spare parts and other flight equipment through CASC. The Company and a few
other Chinese airlines are permitted to import jet engines and other flight
equipment for their own use without the participation of CASC. In the case of
the Company, SAIETC acts as its importer agent and is paid an agency fee for
its services. Jet Fuel Supply and Pricing CAOSC and Bluesky Oil Supplies Company, companies controlled and
supervised by the CAAC, are the only jet fuel supply companies in China, with
the exception of the joint venture jet fuel supply companies that supply the
Shenzhen, Zhuhai and Sanya airports, in each of which CAOSC is a partner.
Airlines are generally not permitted to buy jet fuel from other suppliers in
their domestic operations, since the direct import of jet fuel for domestic
purposes is prohibited. As a result, all Chinese airlines purchase their
domestic jet fuel supply requirements (other than in respect of their Shenzhen,
Zhuhai or Sanya operations) from the seven regional branches of CAOSC. Jet
fuel obtained from such regional branches is purchased at uniform prices
throughout China that are determined and adjusted by CAOSC from time to time
with the approval of the CAAC and the pricing department of the NDRC based on
market conditions and other factors. Safety The CAAC has made the improvement of air traffic safety in China a high
priority and is responsible for the establishment of operational safety,
maintenance and training standards for all Chinese airlines. The Chinese
airlines are required to provide monthly flight safety reports to the CAAC,
including reports of flight or other incidents or accidents and other safety
related problems involving such airlines aircraft occurring during the
relevant reporting period. The CAAC periodically conducts safety inspections
on individual airlines.


23



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The CAAC oversees the standards of all Chinese airline pilots through its
operation of the CAAC Aviation College. The CAAC Aviation College is a
monitoring unit located in Tianjin which implements a uniform pilot
certification process applicable to all Chinese airline pilots and is
responsible for the issuance, renewal, suspension and cancellation of pilot
licenses. Every pilot is required to pass CAAC-administered examinations
before obtaining a pilot license and is subject to an annual recertification
examination. All aircraft operated by Chinese airlines, other than a limited number of
leased aircraft registered in foreign countries, are required to be registered
with the CAAC. All aircraft operated by Chinese airlines must have a valid
certificate of airworthiness, which is issued annually by the CAAC. In
addition, maintenance permits are issued to a Chinese airline only after its
maintenance capabilities have been examined and assessed by the CAAC. Such
maintenance permits are renewed annually. All aircraft operated by Chinese
airlines may be maintained and repaired only by CAAC-certified maintenance
facilities, whether located within or outside China. Aircraft maintenance
personnel must be certified by the CAAC before assuming aircraft maintenance
posts. Security The CAAC establishes and supervises the implementation of security
standards and regulations for the Chinese commercial aviation industry. Such
standards and regulations are based on Chinese laws, as well as standards
developed by international commercial aviation organizations. Each airline and
airport in China is required to submit to the CAAC an aviation security
handbook describing specific security procedures established by such airline or
airport for the day-to-day operations of commercial aviation and procedures for
staff training on security. Such security procedures must be based on relevant
CAAC regulations and international commercial aviation treaties. Chinese
airports and airlines that operate international routes must also adopt
security measures in accordance with the requirements of the relevant
international agreements. Noise and Environmental Regulation All airlines in China must comply with the noise and environmental
regulations of the PRC State Environmental Protection Agency. Applicable
regulations of the CAAC permit Chinese airports to refuse take-off and landing
rights to any aircraft that does not comply with noise regulations. Chinese Airport Policy The
CAAC supervises and regulates all civilian airports in China. The
local government of the PRC manages the administration of most civilian
airports in China, including Baiyun International Airport as of 2004,
with limited exceptions. Airports in China are also subject to regulation and ongoing review by
the CAAC, which determines take-off and landing charges, as well as charges for
the use of airports and airport services. Competition The CAACs extensive regulation of the Chinese commercial aviation
industry has had the effect of managing competition among Chinese airlines.
Nevertheless, competition has become increasingly intense in recent years due
to a number of factors, including relaxation of certain regulations by the
CAAC, an increase in the number of Chinese airlines and an increase in the
capacity, routes and flights of Chinese airlines. In the Chinese aviation industry, the three dominant airlines are the
Group, Air China and China Eastern Airlines (China Eastern). In 2003, these
three airlines together controlled approximately 56% of the commercial
aviation market in China as measured by passengers carried. Most major Chinese airlines have in recent years significantly expanded
their fleets, while at the same time, passenger traffic has not increased
proportionately. This has resulted in a reduction in the passenger load
factors for most Chinese airlines. As a result, Chinese airlines are required
to be more competitive with respect to, for example, quality of service,
including ticketing and reservations, in-flight services, flight scheduling and
timeliness. The Group expects that competition in Chinas commercial aviation industry
will continue to be intense. The Group will also face increasing competition
from alternative means of transport, such as highway and rail, as Chinas
transportation infrastructure improves. Relative to other Chinese airlines, however, the Group believes that it
possesses certain competitive advantages. The Group has the most extensive
route network and the largest number of regional route bases among Chinese
airlines, which the Group believes places it in a favorable position in the
route allocation process. The Group also has the largest aircraft fleet of any
Chinese airline, which, together with the Groups planned aircraft
acquisitions, will permit the Group to expand its operations and to improve the
deployment of the aircraft in its fleet. The Group also believes that its
dominant presence in the populous and economically developed southern and central
regions of China provides it with a competitive advantage in attracting new
customers and that its fully integrated flight training, aircraft and
engine maintenance, and air catering operations enable it to achieve and maintain high quality
service to its customers.


24



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##### Table of Contents



The following table sets forth the Groups market share of passengers
carried, cargo and mail carried and total traffic of Chinese airlines for the
years indicated. Passengers
    
    Cargo and Mail
    
    Total TrafficCarried
    
    Carried (tons)
    
    (ton kilometers)Industry
    
    Group's
    
    Industry
    
    Group's
    
    Industry
    
    Group'sYear
    
    Total
    
    Share
    
    Total
    
    Share
    
    Total
    
    Share(in million)
    
    (% of total)
    
    (in thousand)
    
    (% of total)
    
    (in billion)
    
    (% of total)1997
    
    
    56.3
    
    
    
    27.1
    
    
    
    1,247
    
    
    
    25.0
    
    
    
    8.7
    
    
    
    20.71998
    
    
    57.5
    
    
    
    26.2
    
    
    
    1,401
    
    
    
    24.9
    
    
    
    9.3
    
    
    
    20.41999
    
    
    60.9
    
    
    
    24.8
    
    
    
    1,704
    
    
    
    22.9
    
    
    
    10.6
    
    
    
    18.92000
    
    
    67.2
    
    
    
    24.9
    
    
    
    1,967
    
    
    
    22.5
    
    
    
    12.3
    
    
    
    20.02001
    
    
    75.2
    
    
    
    25.4
    
    
    
    1,709
    
    
    
    23.3
    
    
    
    14.1
    
    
    
    21.52002
    
    
    85.9
    
    
    
    25.0
    
    
    
    2,021
    
    
    
    23.3
    
    
    
    16.5
    
    
    
    21.92003
    
    
    87.6
    
    
    
    23.4
    
    
    
    2,190
    
    
    
    21.2
    
    
    
    17.1
    
    
    
    20.8
 Domestic Routes The Group competes against its domestic competitors primarily on the basis
of flight schedule, route network, quality of service, safety, type and age of
aircraft and, to a lesser extent and until recently, price. The Group competes
against nine other Chinese airlines in its various domestic route markets.
Of these competitors, the largest are two airlines owned or controlled by the
Chinese Government, and the remaining six airlines are operated by or under the
control of various Chinese provincial or municipal governments. The following table sets forth the Groups market share of the passengers
carried, cargo and mail carried on departing flights and total departing
flights at the ten busiest airports in China, based on passenger volume, in
2003. Passengers
    
    Cargo and
    
    DepartingAirport
    
    Carried (% of total)
    
    Mail Carried (% of total)
    
    Flights (% of total)Beijing
    
    
    12.1
    
    
    
    11.0
    
    
    
    10.8Shanghai Hongqiao
    
    
    15.4
    
    
    
    8.3
    
    
    
    15.9Guangzhou
    
    
    51.0
    
    
    
    40.7
    
    
    
    50.3Shenzhen
    
    
    27.9
    
    
    
    28.0
    
    
    
    24.9Kunming
    
    
    15.0
    
    
    
    12.3
    
    
    
    14.2Chengdu
    
    
    11.0
    
    
    
    14.5
    
    
    
    10.0Haikou
    
    
    25.3
    
    
    
    33.6
    
    
    
    19.5Xian
    
    
    8.6
    
    
    
    11.3
    
    
    
    6.2Shanghai Pudong
    
    
    7.8
    
    
    
    7.0
    
    
    
    7.9Hangzhou
    
    
    26.5
    
    
    
    20.7
    
    
    
    27.2
 The following table sets forth the Groups market share of the passengers
carried, cargo and mail carried on departing flights and total departing
flights at seven busiest airports in southern and central China (excluding
Guangzhou, Shenzhen and Haikou, which are included in the table above),
based on passenger volume, in 2003. Passengers
    
    Cargo and
    
    DepartingAirport
    
    Carried (% of total)
    
    Mail Carried (% of total)
    
    Flights (% of total)Wuhan Tianhe
    
    
    43.6
    
    
    
    45.1
    
    
    
    38.1Changsha
    
    
    40.4
    
    
    
    42.5
    
    
    
    35.7Zhengzhou
    
    
    68.1
    
    
    
    67.1
    
    
    
    54.1


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##### Table of Contents



Passengers
    
    Cargo and
    
    DepartingAirport
    
    Carried (% of total)
    
    Mail Carried (% of total)
    
    Flights (% of total)Guiyang
    
    
    32.6
    
    
    
    44.9
    
    
    
    29.3Shantou
    
    
    77.6
    
    
    
    67.9
    
    
    
    69.4Guilin
    
    
    36.8
    
    
    
    22.9
    
    
    
    35.6Zhuhai
    
    
    60.8
    
    
    
    62.3
    
    
    
    28.8Xiamen
    
    
    61.3
    
    
    
    38.7
    
    
    
    55.8
 Hong Kong Regional Routes The Group dominates the routes operated by Chinese airlines between Hong
Kong and Macau and China. In 2003, the Group operated an average of more than
219 charter and other scheduled flights per week between China and Hong Kong
or Macau, accounting for approximately 29.8% of the total number of passengers
carried by all Chinese airlines on the Hong Kong regional routes. The Group
believes that the routes on which it operates charter flights are among its
highest yielding routes, primarily because the Group faces limited competition
on such routes and is consequently less subject to downward pricing pressures.
Dragon Air, which is a Hong Kong-based airline, competes with the Group on many
of the Groups Hong Kong regional routes. Air Macau Group Ltd. (Air Macau), a Macau-based airline, started to
operate routes in 1996 between Macau and China, including destinations such as
Beijing, Shanghai, Xiamen and Wuhan. Air Macau also operates routes between
Macau and Taiwan, including flights which allow passengers to travel between
Taiwan and China through Macau. The air fares on some of Air Macaus routes
are significantly less than air fares on comparable routes of the Group. Air
Macaus routes provide an alternative to and compete with the Groups Hong Kong
regional routes for passengers travelling between Taiwan and China. International Routes The Group competes with Air China, China Eastern and many well-established
foreign airlines on its international routes. Most of these international
competitors have significantly longer operating histories, substantially
greater financial and technological resources and greater name recognition than
the Group. In addition, the publics perception of the safety and service
records of Chinese airlines may adversely affect the Groups ability to compete
against its Hong Kong regional and international competitors. Many of the
Groups international competitors have larger sales networks and participate in
reservation systems that are more comprehensive and convenient than those of
the Group, or engage in promotional activities that may enhance their ability
to attract international passengers. Air China has the most extensive international route network among Chinese
airlines. Beijing, the hub of Air Chinas operations, has been the destination
for most international flights to China. The Group competes against, among
other airlines, Thai Airways International, Singapore Airlines, Malaysian
Airlines System, Air China and China Eastern on flights to Southeast Asian
destinations. In the case of its European routes, the Groups competitors
include KLM-Royal Dutch Airlines. The Group faces competition on its
international route from Air China and China Eastern, each of which operates
several routes between destinations in China and the United States, as well as
international airlines that fly to Los Angeles from Hong Kong. The Group
competes in the international market primarily on the basis of safety, price,
timeliness and convenience of scheduling. Airline Subsidiaries The Airline Subsidiaries are joint ventures established by the Company and
local companies in the provinces or special economic zones where the Airline
Subsidiaries are based and are engaged in providing airline and related
services. The Company owns 60% equity interest in each of the Airline
Subsidiaries. As of December 31, 2003, Xiamen Airlines operated under its own MF code
a fleet of 27 aircraft on 81 domestic routes, five international route and
four Hong Kong regional routes. In 2003, Xiamen Airlines carried a total of
about 4.91 million passengers, or approximately 24.0% of the passengers carried
by the Group in that year, and had RMB3,460 million in operating revenue. As of December 31, 2003,
Shantou Airlines operated under the Groups CZ
code 5 aircraft on 52 domestic routes and two Hong Kong regional route. In 2003, Shantou Airlines carried a total of about
742,000 passengers, or 3.6% of the passengers carried by the Group in that
year. Total operating revenue of Shantou Airlines for the year ended December
31, 2003 was RMB546 million. As
of December 31, 2003, Guangxi Airlines operated under the CZ code 5
aircraft on 34 domestic routes, two international routes and three Hong Kong regional routes. In
2003, Guangxi Airlines carried a total of about 678,000 passengers, or 3.3% of
the total number of passengers carried by the Group in that year. Total
operating revenue of Guangxi Airlines for the year ended December 31, 2003 was
RMB457 million.


26



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##### Table of Contents



As of December 31, 2003, Zhuhai Airlines operated under the CZ code 4
aircraft on 34 domestic routes. In 2003,
Zhuhai Airlines carried a total of about 602,000 passengers, or approximately
2.9% of the total number of passengers carried by the Group in that year.
Total operating revenue of Zhuhai Airlines for the year ended December 31, 2003
was RMB436 million.

As of December 31, 2003, Guizhou Airlines operated under the CZ code 6
aircraft on 19 domestic routes.
In 2003, Guizhou Airlines carried a total of about 691,000
passengers, or approximately 3.4% of the total number of passengers carried by
the Group in 2003. Total operating revenue of Guizhou Airlines was
approximately RMB469 million for the year ended December 31, 2003.

Insurance

The CAAC maintains fleet and legal liability insurance on behalf of the
Group and all other Chinese airlines with the Peoples Insurance Company of
China (PICC) under the PICC master policy. The Group maintains aviation hull
all risks, spares and airline liability insurance, aircraft hull all risks and
spare engines deductible insurance, aviation hull war and allied perils policy
of the type and in the amount customary in the Chinese aviation industry.

Under Chinese law, civil liability of Chinese airlines for injuries
suffered by passengers on domestic flights is limited to RMB70,000
(approximately US$8,455) per passenger. Under the Convention for the
Unification of Certain Rules Relating to International Transportation by Air of
1929 (as amended by the protocol of 1955, the Warsaw Convention), unless a
separate agreement has been entered into between China and a specific country,
civil liability for injuries suffered by passengers on international flights is
limited to US$20,000 per passenger. The Group believes that it maintains
adequate insurance coverage for the maximum civil liability that can be imposed
in respect of injuries to passengers under Chinese law, the Warsaw Convention
or any separate agreement applicable to the Group.

The CAAC allocates insurance premiums payable in respect of the PICC
master policy to each participating airline based on the value of the airlines
insured aircraft or, in the case of leased aircraft, based on the amount
required by the terms of the lease. Insurance claims made by any participating
airline may cause the premiums paid by the Group under the PICC master policy
to increase. PICCs practice has been to reinsure a substantial portion of its
aircraft insurance business through reinsurance brokers on the London
reinsurance market.

Intellectual Property

The Groups businesses and operations, other than the businesses and
operations of Xiamen Airlines, are conducted under the names China Southern
and China Southern Airlines in both English and Chinese. The Group uses as
its logo a stylized rendition of a kapok plant. Xiamen Airlines conducts its
businesses and operations under the name of Xiamen Airlines in English and
Chinese and uses its own logo depicting a stylized rendition of an egret.

The names China Southern and China Southern Airlines contain Chinese
words of common usage and are therefore not eligible for registration as
tradenames under current Chinese law. The kapok logo is a trademark registered
in China and recorded with the International Air Transport Association
(IATA), the rights to which are owned by CSAHC. The Company and CSAHC have
entered into a trademark license agreement (the Trademark License Agreement),
pursuant to which CSAHC has licensed to the Group the right to use the names
China Southern and China Southern Airlines in both English and Chinese and
granted the Company a 10-year renewable license from 1997 to use the kapok logo
on a world-wide basis. CSAHC has retained the right to use the kapok logo in
connection with its non-airline related businesses conducted as of the date of
the Trademark License Agreement and to permit its affiliates that do not
compete, directly or indirectly, with the Group to use the kapok logo. Xiamen
Airlines owns all rights to its egret logo, which is a trademark registered in
China, and recorded with the IATA.

The Company owns all rights to three trademarks, being SKY PEARL CLUB, the logo
relating to Easy Cargo 5000 and SKY PEARL CARD which are registered in China,
and recorded with Trademark Office of the State Administration for Industry and
Commerce. Zhuhai Airlines Company Limited owns all rights to the airline logo
which is registered with the Trademark Office of the State Administration for
Industry and Commerce.

27



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##### Table of Contents






Organizational Structure

The following chart illustrates the corporate structure of the Group as of year
end 2003 and the aggregate effective equity interest of the Company in each of
its principal subsidiaries, affiliated companies and jointly
controlled entities.

(ORGANIZATIONAL STRUCTURE CHART)

28



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##### Table of Contents



The particulars of the Companys
principal subsidiaries as of December 31, 2003
are as follows:

|                                  |  |                         |  |                 |     |                     |  |          |   |  |  | 
|--------------------------------- |  | ----------------------- |  | --------------- | --- | ------------------- |  | -------- | - |  |  | 
|                                  |  |                         |  |                 |     | Attributable equity
|                                  |  | Place and date of       |  | interest to the
|Name of company                   |  | establishment/operation |  | Company        
|                                  |  |                         |  |                
|                                  |  |                         |  |                 |     | Direct              |  | Indirect
|                                  |  |                         |  |                 |     | %                   |  | %       
|Guangxi Airlines Company Limited  |  | PRC                     |  |                 | 60  |                     |  |          |  | 
|                                  |  | April 28, 1994          |  |                 |     |                     |  |          |   | 
|Southern Airlines Group Shantou   |  | PRC                     |  |                 | 60  |                     |  |          |   | 
|Airlines Company Limited          |  | July 20, 1993           |  |                 |     |                     |  |          |   | 
|Zhuhai Airlines Company Limited   |  | PRC                     |  |                 | 60  |                     |  |          |   | 
|                                  |  | May 8, 1995             |  |                 |     |                     |  |          |   | 
|Xiamen Airlines Company Limited   |  | PRC                     |  |                 | 60  |                     |  |          |  | 
|                                  |  | August 11, 1984         |  |                 |     |                     |  |          |   | 
|Guizhou Airlines Company Limited  |  | PRC                     |  |                 | 60  |                     |  |          |  | 
|                                  |  | November 12, 1991       |  |                 |     |                     |  |          |   | 
|Guangzhou Nanland Air Catering    |  | PRC                     |  |                 | 51  |                     |  |          |  | 
|Company Limited                   |  | November 21, 1989       |  |                 |     |                     |  |          |   | 
|China Southern West Australian    |  | Australia               |  |                 | 65  |                     |  |          |  | 
|Flying College Pty Ltd.           |  | January 26, 1971        |  |                 |     |                     |  |          |   | 
|China Southern Airlines (Group)   |  | PRC                     |  |                 | 100 |                     |  |          |  | 
|Zhuhai Helicopter Company Limited |  | August 31, 1993         |  |                 |     |                     |  |          |   | 
|Guangzhou Baiyun International    |  | PRC                     |  |                 | 61  |                     |  |          |  | 
|Logistic Company Ltd              |  | July 23, 2002           |  |                 |     |                     |  |          |   | 

Affiliated Companies and Jointly Controlled Entities

The particulars of the Groups principal affiliated companies and jointly
controlled entity as of December 31, 2003 are as follows:

|                               |  |                         |  |                              |    |        |  |          |   |  |  | 
|------------------------------ |  | ----------------------- |  | ---------------------------- | -- | ------ |  | -------- | - |  |  | 
|                               |  | Place and date of       |  | Attributable equity interest
|Name of company                |  | establishment/operation |  | to the company              
|                               |  |                         |  |                             
|                               |  |                         |  |                              |    | Direct |  | Indirect
|                               |  |                         |  |                              |    | %      |  | %       
|Guangzhou Aircraft Maintenance |  | PRC                     |  |                              | 50 |        |  |          |  | 
|Engineering Company Limited    |  | October 28, 1989        |  |                              |    |        |  |          |   | 

29



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##### Table of Contents



|                              |  |                         |  |                              |    |        |  |          |       |  |  | 
|----------------------------- |  | ----------------------- |  | ---------------------------- | -- | ------ |  | -------- | ----- |  |  | 
|                              |  | Place and date of       |  | Attributable equity interest
|Name of company               |  | establishment/operation |  | to the company              
|                              |  |                         |  |                             
|                              |  |                         |  |                              |    | Direct |  | Indirect
|                              |  |                         |  |                              |    | %      |  | %       
|Southern Airlines Group       |  | PRC                     |  |                              | 32 |        |  |          | 15.42 | 
|Finance Company Limited       |  | June 28, 1995           |  |                              |    |        |  |          |       | 
|Sichuan Airlines Corporation  |  | PRC                     |  |                              | 39 |        |  |          |      | 
|Limited                       |  | August 28, 2002         |  |                              |    |        |  |          |       | 
|China Postal Airlines Limited |  | PRC                     |  |                              | 49 |        |  |          |      | 
|                              |  | November 25, 1996       |  |                              |    |        |  |          |       | 
|MTU Maintenance Zhuhai        |  | PRC                     |  |                              | 50 |        |  |          |      | 
|Co.
Ltd.                      |  | April 6, 2001           |  |                              |    |        |  |          |       | 
|Zhuhai Xiang Yi Aviation      |  | PRC                     |  |                              | 51 |        |  |          |      | 
|Technology Company Limited    |  | July 10, 2002           |  |                              |    |        |  |          |       | 

Certain of the Companys subsidiaries, affiliated companies and jointly
controlled entities are PRC joint ventures which have limited duration pursuant
to PRC law.




Property, Plant and Equipment

For a discussion of the Groups aircraft, see Item 4, Information on the
Company  History and development of the Company -Aircraft Fleet.

The Groups headquarters in Guangzhou occupy an area of approximately 149,000
square meters of land and a total gross floor area of approximately 149,000
square meters. The Group leases from CSAHC the land in Guangzhou on which the
Groups headquarters and other facilities are located. The Group also leases
from CSAHC certain buildings at the Wuhan, Haikou and Zhengzhou airports.

The Companys principal properties are located at its headquarters site and at
its route bases. The following table sets forth certain information with
respect to the Companys properties at its headquarters in Guangzhou and
certain route bases as of the date hereof.

|          |  |                    |         |                    |  |  |  |        |  |       |        |        |  |  |  |  |  |  |         |  |  |  |        | 
|--------- |  | ------------------ | ------- | ------------------ |  |  |  | ------ |  | ----- | ------ | ------ |  |  |  |  |  |  | ------- |  |  |  | ------ | 
|          |  | Land               |         | Buildings         
|          |  |                    |         |                   
|          |  | (in square meters) |         | (in square meters)
|          |  | Owned              |         |                    |  |  |  | Leased |  | Owned |        | Leased
|          |  |                    |         |                    |  |  |  |        |  |       |        |       
|Guangzhou |  |                    |        |                    |  |  |  |        |  |       | 80,909 |        |  |  |  |  |  |  | 103,957 |  |  |  | 1,755  | 
|Shenzhen  |  |                    | 208,740 |                    |  |  |  |        |  |       |       |        |  |  |  |  |  |  | 35,174  |  |  |  |       | 
|Zhuhai    |  |                    | 170,062 |                    |  |  |  |        |  |       |       |        |  |  |  |  |  |  | 18,791  |  |  |  |       | 
|Changsha  |  |                    | 138,949 |                    |  |  |  |        |  |       |       |        |  |  |  |  |  |  | 47,190  |  |  |  |       | 
|Zhengzhou |  |                    | 290,841 |                    |  |  |  |        |  |       |       |        |  |  |  |  |  |  | 60,582  |  |  |  |       | 
|Haikou    |  |                    | 5,265   |                    |  |  |  |        |  |       |       |        |  |  |  |  |  |  | 59,543  |  |  |  | 19,633 | 
|Wuhan     |  |                    |        |                    |  |  |  |        |  |       | 31,061 |        |  |  |  |  |  |  | 435     |  |  |  | 26,061 | 
|Nanyang   |  |                    |        |                    |  |  |  |        |  |       |       |        |  |  |  |  |  |  | 12,156  |  |  |  |       | 

The following table sets forth certain information with respect to the
properties of the Airline Subsidiaries as of the date hereof.

|        |  |                    |         |                    |  |       |   |        |  |  |        |  |  |  |       | 
|------- |  | ------------------ | ------- | ------------------ |  | ----- | - | ------ |  |  | ------ |  |  |  | ----- | 
|        |  | Land               |         | Buildings         
|        |  |                    |         |                   
|        |  | (in square meters) |         | (in square meters)
|        |  | Owned              |         | Leased             |  | Owned |   | Leased
|        |  |                    |         |                    |  |       |   |       
|Xiamen  |  |                    | 211,632 |                    |  |       |  |        |  |  | 29,292 |  |  |  | 1,564 | 
|Shantou |  |                    | 20,292  |                    |  |       |  |        |  |  | 27,810 |  |  |  | 3,127 | 
|Zhuhai  |  |                    | 53,797  |                    |  |       |  |        |  |  | 29,697 |  |  |  | 1,513 | 
|Guilin  |  |                    |        |                    |  |       |  |        |  |  | 14,594 |  |  |  | 349   | 

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|        |  |                    |         |                    |  |       |   |        |  |  |        |  |  |  |   | 
|------- |  | ------------------ | ------- | ------------------ |  | ----- | - | ------ |  |  | ------ |  |  |  | - | 
|        |  | Land               |         | Buildings         
|        |  |                    |         |                   
|        |  | (in square meters) |         | (in square meters)
|        |  | Owned              |         | Leased             |  | Owned |   | Leased
|        |  |                    |         |                    |  |       |   |       
|Guizhou |  |                    | 270,001 |                    |  |       |  |        |  |  | 10,466 |  |  |  |  | 

As systems for registration and transfer of land use rights and related real
property interests in China have been implemented relatively recently, such
systems do not yet comprehensively account for all land and related property
interests. The land in Guangzhou on which the Groups headquarters and other
facilities are located and the buildings that the Group uses at its route base
in Wuhan, Haikou and Zhengzhou are leased by the Company from CSAHC. However,
CSAHC lacks adequate documentation evidencing CSAHCs rights to such land and
buildings, and, as a consequence, the lease agreements between CSAHC and the
Company for such land may not be registered with the relevant authorities.
Lack of registration may affect the validity of such lease agreements. There
are certain other parcels of land and buildings owned or used by the Group that
lack adequate documentation. Lack of adequate documentation for land use
rights and ownership of buildings may impair the ability of the Group to
dispose of or mortgage such land use rights and buildings.

The Group has been occupying all of the land and buildings described above
without challenge. CSAHC has received written assurance from the CAAC to the
effect that CSAHC is entitled to continued use and occupancy of the land in
Guangzhou. The Group understands that the CAAC is basing its conclusion on an
agreement among certain governmental authorities relating to such land. CSAHC
has agreed to indemnify the Group against any loss or damage caused by any
challenge of, or interference with, the use by the Group of any of their
respective land and buildings.




ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

The following discussion and analysis should be read in conjunction with
the Financial Statements of the Group contained elsewhere in this Annual
Report. The Group maintains its books and accounts in accordance with
PRC Accounting Rules and Regulations (PRC GAAP) and prepares
its financial statements in accordance with both PRC GAAP and IFRS. The
Financial Statements contained elsewhere in this Annual Report have been
prepared in accordance with IFRS. IFRS differs in certain significant respects
from U.S. GAAP. Information relating to the nature and effect of such
differences is presented in Note 33 to the Financial Statements.




Critical Accounting Policies

The discussion and analysis of the Groups financial condition and results
of operations are based upon the consolidated financial statements, which have
been prepared in accordance with IFRS. The preparation of such consolidated
financial statements requires the Group to make estimates and judgments that
affect the reported amount of assets and liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities at the
date of the consolidated
financial statements. Actual results may differ from these estimates under
different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Group
believes that its critical accounting policies are limited to those described
below. For a detailed discussion on the application of these and other
accounting policies, see Note 2 to the Financial Statements.

Revenue Recognition

The Group records sales of passenger, cargo and mail tickets as Sales in
advance of carriage, a current liability, on the consolidated balance sheet.
Passenger, cargo and mail revenues are recognized and the related current
liability is reduced when the transportation is provided. Sales in advance of
carriage therefore represents ticket sold for future travel dates and estimated
future refunds and exchanges of tickets sold for past travel dates. The Groups
balance of sales in advance of carriage as of December 31, 2003 was RMB466
million.

Estimating the amount of tickets that will be refunded, exchanged, or
expired involves some level of subjectivity and judgment. According to the
relevant rules in the PRC in relation to air transportation, the valid period
for tickets sold is up to a year from the date of sale. Sales in advance of
carriage, therefore, includes an estimate of the amount of future refunds and
exchanges, and expired tickets. These estimates are based on historical
experience over many years. The Group and members of the airline industry have
consistently applied this accounting method to estimate revenue from expired
tickets. Estimated future refunds and exchanges
included in sales in advance of carriage account are constantly evaluated based
on subsequent refund and exchange activity to validate the accuracy of the
Groups estimates with respect to expired tickets.

Events and circumstances outside of historical fare sale activity or
historical customer travel patterns, as noted above, can result in actual
refunds, exchanges, or expired tickets differing significantly from estimates.
The Group evaluates its estimates within a narrow range of acceptable amounts.
If actual refunds, exchanges, or expiry experience results in an amount outside
of this range, estimates and assumptions are reviewed and adjustments to Sales
in advance of carriage and to Passenger revenue are recorded as necessary.
The Groups estimation techniques have been consistently applied from year to
year; however, as with any estimates, actual refund and exchange activity may
vary from estimated amounts. Furthermore, the Group believes it is unlikely
that materially different estimates for future refunds, exchanges, and
forfeited tickets would be reported based on other reasonable assumptions or
conditions suggested by actual historical experience and other data available
at the time estimates were made.

Up to date, the Group has not experienced any material fluctuations in
estimated refunds and exchanges, and correspondingly, expired tickets, due to
many of the factors described above.

Fixed assets

The Group have approximately RMB28,536 million fixed assets as of December
31, 2003. In addition to the original cost of these assets, their recorded
value is impacted by a number of policy elections, including the estimation of
useful lives and residual values and when necessary, impairment charges.

The Group records aircraft at acquisition cost. Depreciable life is
determined through economic analysis, reviewing existing fleet plans,
recommendations from manufacturers and comparing estimated lives to other
airlines that operate similar fleets. Residual values are estimated based on
our historical experience with regards to the sale of aircraft and are
established in conjunction with the estimated useful lives of the aircraft.
Residual values are based on current dollars when the aircraft are acquired and
typically reflect asset values that have
not reached the end of their physical life. Both depreciable lives and residual
values are reviewed periodically to recognize changes in our fleet plan and
changes in conditions.

In addition, the Group evaluates fixed assets used in operations for
impairment. If circumstances indicate that the net book value of an asset may
not be recoverable, this asset may be considered impaired, and an impairment
loss may be recognized in accordance with IAS 36 Impairment of Assets. The
amount of impairment loss is the difference between the carrying amount of the
asset and its recoverable amount. The recoverable amount is the greater of the
net selling price and the value in use. In determining the value in use, the
Group utilizes certain assumptions, including, but not limited to: (i)
estimated fair market value of the assets, and (ii) estimated future cash flows
expected to be generated by these assets, which are based on additional
assumptions such as asset utilization, length of service the asset will be used
in the Groups operations and estimated residual values. The Group will use
all readily available information in determining an amount that is a reasonable
approximation of recoverable amounts, including estimates based on industry
trends and reference to market rates and transactions. Changes to the above
estimates may have a material effect on the Groups Financial Statements. As
of December 31, 2003, based on the result of evaluation, the Group considered
that no impairment is required.




Overview

In 2003, the Group encountered the most unprecedented challenges and
difficulties. The outbreak of the Severe Acute Respiratory Syndrome (SARS)
earlier 2003 severely hit the PRC aviation industry. From April to June
2003, the Groups passenger volume and passenger load factor dropped which
caused the revenue passenger kilometers (RPK) for April, May and June of 2003
to fall by 40%, 83.5% and 61.5% respectively, as compared to same period in
2002. In order to minimize the negative impact of SARS, the Group implemented
various measures to adjust its operating capacity, for example by reducing the
number of flights and suspending certain routes, in response to the reduced air
traffic demand caused by the negative impact of SARS. The SARS was effectively
under control in the PRC in July 2003 and the domestic market started to
recover in the third quarter of 2003. The Group gradually resumed all its
suspended flights since July 2003.

In order to alleviate the financial pressure suffered by the PRC civil
aviation industry as a result of the SARS epidemic, the PRC government waived
the levies of the CAAC Infrastructure Development Fund, sales tax and related
supplementary taxes on passenger revenue payable by the PRC airlines, during
the period from May 1, 2003 to December 31, 2003.

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In addition, the political tension in the Middle East, in particular the
Iraq war in March 2003, led to a surge in oil prices which in turn caused an
increase in the Groups jet fuel cost.

The Group conducts a portion of its airline operations through the Airline
Subsidiaries. Operating results for the Airline Subsidiaries are included in
each of the years presented in the Financial Statements. The Airline
Subsidiaries, which derive substantially all of their operating revenue from
passenger traffic, accounted for 26.8% and 30.7% of the Groups total operating
revenue, and 34.5% and 37.2% of the Groups total passengers carried, in 2002
and 2003, respectively. Xiamen Airlines is the largest member of the Airline
Subsidiaries, with operating revenue of RMB3,278 million and RMB3,460 million
in 2002 and 2003, respectively, or 18.2% and 19.8% of the Groups total
operating revenue.

The Groups operating revenue is substantially dependent on the passenger
and cargo traffic volume carried, which is subject to seasonal and other
changes in traffic patterns, the availability of appropriate time slots for the
Groups flights and alternative routes, the degree of competition from other
airlines and alternate means of transportation, as well as other factors that
may influence passenger travel demand and cargo and mail volume. In particular,
the Groups airline revenue is generally higher in the second and third
quarters than in the first and fourth quarters.

Like most airlines, the Group is subject to a high degree of financial and
operating leverage. A significant percentage of the Groups operating expenses
is fixed costs that do not vary proportionally based on the Groups yields or
the load factors. These fixed costs include depreciation expense, jet fuel
costs, landing and navigation fees, financing costs, operating lease payments,
aircraft maintenance costs and labor for flight crew, cabin crew and ground
personnel. Thus, a minor change in the Groups yields or load factors would
have a material effect on the Groups results of operations. In addition,
certain of these expenses, primarily financing costs and operating lease
payments, labor costs and depreciation do not vary based on the number of
flights flown. Thus, the Groups operating results can also be substantially
affected by minor changes in aircraft utilization rates. The Group is and will
continue to be highly leveraged with substantial obligations denominated in
foreign currencies and, accordingly, the results of its operations are
significantly affected by fluctuations in foreign exchange rates, particularly
for the U.S. dollar and the Japanese yen. The Group recognized a net exchange
loss of RMB175 million and RMB164 million in 2002 and 2003, respectively. These
amounts represented mainly unrealized exchange differences resulting from the
retranslation of the foreign currency borrowings.

A number of other external variables, including political and economic
conditions in China, tend to have a major impact on the Groups performance.
The Groups financial performance is also significantly affected by factors
arising from operating in a regulated industry. As substantially all aspects of
the Groups airline operations are regulated by the PRC government, the Groups
operating revenues and expenses are directly affected by the PRC governments
policies with respect to domestic airfares, jet fuel prices and landing and
navigation fees, among others. The nature and extent of airline competition and
the ability of Chinese airlines to expand are also affected by CAACs control
over route allocations. Any changes in the PRC governments regulatory
policies, or any implementation of such policies could have a significant
impact on the Groups future operations and its ability to implement its
operating strategy.




Certain Financial Information and Operating Data by Geographic Region

The following table sets forth certain financial information and operating
data by geographic region for the years ended December 31, 2002 and 2003:

Year ended December 31,
    
    2003 vs. 2002% Increase/2002
    
    2003
    
    (Decrease)TrafficRPK (million)Domestic
    
    
    22,092
    
    
    
    21,294
    
    
    
    (3.6
    )Hong Kong regional
    
    
    1,081
    
    
    
    778
    
    
    
    (28.0
    )International
    
    
    5,767
    
    
    
    4,315
    
    
    
    (25.2
    )Total
    
    
    28,940
    
    
    
    26,387
    
    
    
    (8.8
    )RTK (million)Domestic
    
    
    2,532
    
    
    
    2,424
    
    
    
    (4.3
    )Hong Kong regional
    
    
    108
    
    
    
    78
    
    
    
    (27.8
    )International
    
    
    974
    
    
    
    1,059
    
    
    
    8.7Total
    
    
    3,614
    
    
    
    3,561
    
    
    
    (1.5
    )RTK (million)Passenger ton kilometers
    
    
    2,584
    
    
    
    2,356
    
    
    
    (8.8
    )Cargo and mail ton kilometers
    
    
    1,030
    
    
    
    1,205
    
    
    
    17.0Total
    
    
    3,614
    
    
    
    3,561
    
    
    
    (1.5
    )


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Year ended December 31,
    
    2003 vs. 2002% Increase/2002
    
    2003
    
    (Decrease)Passengers carried (thousand)Domestic
    
    
    18,535
    
    
    
    18,259
    
    
    
    (1.5
    )Hong Kong regional
    
    
    1,369
    
    
    
    1,019
    
    
    
    (25.6
    )International
    
    
    1,589
    
    
    
    1,192
    
    
    
    (25.0
    )Total
    
    
    21,493
    
    
    
    20,470
    
    
    
    (4.8
    )Cargo and mail carried (thousand tons)Domestic
    
    
    404
    
    
    
    379
    
    
    
    (6.2
    )Hong Kong regional
    
    
    14
    
    
    
    12
    
    
    
    (14.3
    )International
    
    
    52
    
    
    
    73
    
    
    
    40.4Total
    
    
    470
    
    
    
    464
    
    
    
    (1.3
    )CapacityASK (million)Domestic
    
    
    33,753
    
    
    
    32,590
    
    
    
    (3.4
    )Hong Kong regional
    
    
    1,746
    
    
    
    1,347
    
    
    
    (22.9
    )International
    
    
    8,746
    
    
    
    6,930
    
    
    
    (20.8
    )Total
    
    
    44,245
    
    
    
    40,867
    
    
    
    (7.6
    )ATK (million)Domestic
    
    
    3,924
    
    
    
    3,772
    
    
    
    (3.9
    )Hong Kong regional
    
    
    193
    
    
    
    150
    
    
    
    (22.3
    )International
    
    
    1,798
    
    
    
    1,999
    
    
    
    11.2Total
    
    
    5,915
    
    
    
    5,921
    
    
    
    0.1Load FactorsPassenger load factor (RPK/ASK) (%)Domestic
    
    
    65.5
    
    
    
    65.3
    
    
    
    (0.3
    )Hong Kong regional
    
    
    61.9
    
    
    
    57.8
    
    
    
    (6.6
    )International
    
    
    65.9
    
    
    
    62.3
    
    
    
    (5.5
    )Overall
    
    
    65.4
    
    
    
    64.6
    
    
    
    (1.2
    )Overall load factor (RTK/ATK) (%)Domestic
    
    
    64.5
    
    
    
    64.2
    
    
    
    (0.5
    )Hong Kong regional
    
    
    55.8
    
    
    
    52.2
    
    
    
    (6.5
    )International
    
    
    54.2
    
    
    
    53.0
    
    
    
    (2.2
    )Overall
    
    
    61.1
    
    
    
    60.1
    
    
    
    (1.6
    )YieldYield per RPK (RMB)Domestic
    
    
    0.55
    
    
    
    0.57
    
    
    
    3.6Hong Kong regional
    
    
    0.98
    
    
    
    0.96
    
    
    
    (2.0
    )International
    
    
    0.42
    
    
    
    0.47
    
    
    
    11.9Overall
    
    
    0.54
    
    
    
    0.57
    
    
    
    5.6Yield per RTK (RMB)Domestic
    
    
    5.21
    
    
    
    5.40
    
    
    
    3.6Hong Kong regional
    
    
    10.36
    
    
    
    10.35
    
    
    
    (0.1
    )International
    
    
    3.25
    
    
    
    2.90
    
    
    
    (10.8
    )Overall
    
    
    4.84
    
    
    
    4.76
    
    
    
    (1.7
    )FinancialPassenger revenue (RMB million)Domestic
    
    
    12,234
    
    
    
    12,242
    
    
    
    0.1Hong Kong regional
    
    
    1,055
    
    
    
    750
    
    
    
    (28.9
    )International
    
    
    2,407
    
    
    
    2,018
    
    
    
    (16.2
    )Total
    
    
    15,696
    
    
    
    15,010
    
    
    
    (4.4
    )Cargo and mail revenue (RMB million)
    
    
    1,786
    
    
    
    1,955
    
    
    
    9.5


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Operating Results

The historical results of operations discussed below may not be indicative
of the Groups future operating performance. In addition to the factors
discussed under Overview above, the Groups future operations will be
affected by, among other things, changes in the aviation market, the cost of
jet fuel, aircraft acquisition and leasing costs, aircraft maintenance
expenses, take-off and landing charges, wages, salaries and benefits and other
operating expenses, foreign exchange rates and the rates of income taxes paid.

2003 Compared with 2002

The Group recorded a net loss of RMB358 million for 2003, as compared to a
net income of RMB576 million for 2002. The Groups operating revenue decreased
by RMB549 million or 3.0% from RMB18,019 million in 2002 to RMB17,470 million
in 2003. Passenger load factor decreased by 0.8 percentage point from 65.4% in
2002 to 64.6% in 2003. Passenger yield (in passenger revenue per RPK) increased
by 5.6% from RMB0.54 in 2002 to RMB0.57 in 2003. Average yield (in traffic
revenue per RTK) decreased by 1.7% from RMB4.84 in 2002 to RMB4.76 in 2003.
Operating expenses increased by RMB1,021 million or 6.4% from RMB15,993 million
in 2002 to RMB17,014 million in 2003. As operating revenue decreased while
operating expenses increased, operating profit decreased by 77.5% from RMB2,026
million in 2002 to RMB456 million in 2003. The Groups net non-operating
expenses increased by 9.1%, from RMB887 million in 2002 to RMB967 million in
2003, mainly due to a decrease in gain on disposal of fixed assets of RMB193
million, partly offset by a decrease in interest expense of RMB135 million.
Overall, the Group recorded a net loss of RMB358 million in 2003, as compared
to a net profit of RMB576 million in 2002.

Operating Revenue

Substantially all of the Groups operating revenue is attributable to
airline operations. Traffic revenue in 2003 and 2002 accounted for 97.1% and
97.0% respectively of total operating revenue. Passenger revenue and, cargo and
mail revenue accounted for 88.5% and 11.5% respectively of total traffic
revenue in 2003. The balance of the Groups operating revenue is derived from
commission income, income from general aviation operations, fees charged for
ground services and for air catering services and net income from lease
arrangements.

Operating revenue decreased by 3.0% from RMB18,019 million in 2002 to
RMB17,470 million in 2003. This decrease was primarily due to a 4.4% fall in
passenger revenue from RMB15,696 million in 2002 to RMB15,010 million in 2003
resulting from lower traffic volume caused by SARS. The total number of
passengers carried decreased by 4.8% to 20.5 million passengers in 2003. RPKs
decreased by 8.8% from 28,940 million in 2002 to 26,387 million in 2003,
primarily as a result of a decrease in passengers carried. However, passenger
yield increased by 5.6% from RMB0.54 in 2002 to RMB0.57 in 2003, mainly as the
result of the exemption of CAAC Infrastructure Development Fund and sales tax
during the period from May 1, 2003 to December 31, 2003.

Domestic passenger revenue, which accounted for 81.6% of the total
passenger revenue in 2003, increased slightly by 0.1% from RMB12,234 million in
2002 to RMB12,242 million in 2003. Domestic passenger traffic in RPKs decreased
by 3.6%, mainly due to a decrease in passengers carried. Passenger yield,
however, increased from RMB0.55 in 2002 to RMB0.57 in 2003, mainly as the
result of the aforesaid exemption of CAAC Infrastructure Development Fund and
sales tax.

Hong Kong passenger revenue, which accounted for 5.0% of total passenger
revenue, decreased by 28.9% from RMB1,055 million in 2002 to RMB750 million in
2003. For Hong Kong flights, passenger traffic in RPKs decreased by 28.0%,
while passenger capacity in ASKs decreased by 22.9%, resulting in a 4.1
percentage point decrease in passenger load factor from 2002. Passenger yield
decreased from RMB0.98 in 2002 to RMB0.96 in 2003 mainly due to slack in
traffic volume.

International passenger revenue, which accounted for 13.4% of total
passenger revenue, decreased by 16.2% from RMB2,407 million in 2002 to RMB2,018
million in 2003. For international flights, passenger traffic in RPKs decreased
by 25.2%, while passenger capacity in ASKs decreased by 20.8%, resulting in a
3.6 percentage point fall in passenger load factor from 2002. Passenger yield
increased by 11.9% from RMB0.42 in 2002 to RMB0.47 in 2003 mainly as the result
of the aforesaid exemption of CAAC Infrastructure Development Fund and sales
tax.

Cargo and mail revenue, which accounted for 11.5% of the Groups total
traffic revenue and 11.1% of total operating revenue, increased by 9.5% from
RMB1,786 million in 2002 to RMB1,955 million in 2003. The increase was
primarily due to the full year effect of the opening of two international cargo
routes to Los Angeles of the United States of America and Leige of Belgium in
late 2002.

Other operating revenue decreased by 6.0% from RMB537 million in 2002 to
RMB505 million in 2003. The decrease was primarily due to a decrease in
aircraft short-term lease income of RMB46 million.

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Operating Expenses

Substantially all of the Groups operating expenses result from its
airline operations. The vast majority of such expenses relate directly to
flight operations, aircraft and traffic servicing, aircraft repair and
maintenance and to depreciation and amortisation in respect of aircraft and
flight equipment. Expenses associated directly with the Groups flight
operations (collectively, flight operations expenses) include fuel costs,
operating lease payments, catering expenses, aircraft insurance, flight
personnel payroll and welfare and training expenses. Expenses associated
directly with repairs and maintenance in respect of the Groups aircraft
(collectively, repairs and maintenance expenses) include repairs and
maintenance and overhaul charges, the costs of consumables and other
maintenance materials and labour costs for maintenance personnel. Expenses
associated directly with the Groups aircraft and traffic servicing operations
(collectively aircraft and traffic servicing expenses) include landing and
navigation fees, rental payments and charges in respect of terminal and other
ground facilities and labour costs for ground personnel. The balance of the
Groups operating expenses result from promotional and marketing activities
(collectively, promotional and marketing expenses) such as sales commissions,
fees for use of the CAACs reservation system, ticket-printing and sales office
expenses, advertising and promotional expenses, and from general and
administrative expenses, such as administrative salaries and welfare and other
personnel benefits and office expenses.

Total operating expenses in 2003 amounted to RMB17,014 million,
representing an increase of 6.4% or RMB1,021 million over 2002, primarily due
to the combined effect of increases in jet fuel costs, maintenance expenses and
aircraft and traffic servicing expenses. Total operating expenses as a
percentage of total operating revenue increased from 88.8% in 2002 to 97.4% in
2003.

Flight operations expenses, which accounted for 41.6% of total operating
expenses, increased by 5.0% from RMB6,733 million in 2002 to RMB7,070 million
in 2003, primarily as a result of increases in jet fuel costs and operating
lease payments, partly offset by a decrease in catering expenses. Jet fuel
costs, which accounted for 54.7% of flight operations expenses, increased by
9.9% from RMB3,519 million in 2002 to RMB3,867 million in 2003 mainly as a
result of increased jet fuel prices. Operating lease payments increased by 8.4%
from RMB1,417 million in 2002 to RMB1,536 million in 2003, primarily due to the
full year effect of the addition of new operating leases in respect of four Boeing
757-200 aircraft in late 2002 and four Airbus 319-100 aircraft and three Boeing
737-700 aircraft during 2003. Catering expenses decreased by 18.4% from RMB625
million in 2002 to RMB510 million in 2003, primarily reflecting a tighter cost
controls exercised by the Group. Aircraft insurance costs decreased by 23.4%
from RMB256 million in 2002 to RMB196 million in 2003, primarily because of a
reduction in the rate of aircraft insurance premiums prescribed by the PRC
insurance company. Labor costs for flight personnel decreased by 6.8% from
RMB781 million in 2002 to RMB728 million in 2003, largely due to a decrease in
flight hours.

Maintenance expenses which accounted for 15.2% of total operating
expenses, increased by 11.0% from RMB2,333 million in 2002 to RMB2,589 million
in 2003. The increase was primarily attributable to an 11.3% increase in
aircraft maintenance and repair charges from RMB2,135 million in 2002 to
RMB2,377 million in 2003, mainly as the result of the effect of fleet expansion
in recent years.

Aircraft and traffic servicing expenses, which accounted for 16.3% of
total operating expenses, increased by 10.2% from RMB2,511 million in 2002 to
RMB2,767 million in 2003. The increase primarily resulted from an 8.9% rise in
landing and navigation fees from RMB2,354 million in 2002 to RMB2,563 million
in 2003, due to an increase in the charge rate for domestic landing and
navigation fees effective September 2002.

Promotional and marketing expenses, which accounted for 8.7% of total
operating expenses, decreased by 1.3% from RMB1,500 million in 2002 to RMB1,480
million in 2003. The decrease was due to 9.3% decrease in labor costs from
RMB248 million in 2002 to RMB225 million in 2003, as fewer bonuses were given
because of reduced sales volume in 2003.

General and administrative expenses, which accounted for 6.2% of the total
operating expenses, decreased slightly by 0.7% from RMB1,060 million in 2002 to
RMB1,053 million in 2003. This was mainly due to a decrease in scale of
operations during SARS period.

Depreciation and amortization, which accounted for 12.0% of total
operating expenses, increased by 10.8% from RMB1,840 million in 2002 to
RMB2,038 million in 2003. This increase was primarily as a result of the
addition of aircraft during 2003.

Operating
Income

Operating
income decreased by 77.5% from RMB2,026 million in 2002 to
RMB456 million in 2003. This was mainly because operating revenue decreased by
RMB549 million or 3.0% from 2002 while operating expenses increased by RMB1,021
million or 6.4% over the same period.

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Non-operating Income/(Expenses)

Interest expense decreased by 14.1% from RMB959 million in 2002 to RMB824
million in 2003, mainly reflecting the combined effect of scheduled debt
repayments and the replacement of certain RMB denominated bank loans with US$
denominated bank loans with lower interest rates.

Interest income decreased by 75.2% from RMB53 million in 2002 to RMB13
million in 2003. This was mainly attributable to a decrease in average cash
balances.

The Group recorded a net loss on sale of fixed assets of RMB22 million in
2003, mainly resulting from retirement of two old Boeing 737-200 aircraft.

During 2003, the Group recorded a net exchange loss of RMB164 million
predominantly due to its Japanese yen denominated borrowings as a result of the
Japanese yen appreciation. Such amount comprised mostly unrealized translation
loss.

Taxation

On October 17, 2003, the Companys registered address was moved to
Guangzhou Economic & Technology Development Zone. In accordance with the Rules
and Regulations for Implementation of Income Tax for Foreign Investment
Enterprises and Foreign Enterprises of the PRC and a taxation approval document
Guangzhou Municipal State Tax Bureau Suo De Shui Zi Que 020043, the Company
is entitled to enjoy the preferential tax policy implemented in the Guangzhou
Economic & Technology Development Zone effective from October 1, 2003. As a
result, the Companys income tax rate has been changed to 15% from 33%
beginning from that date.

The Group recorded an income tax credit of RMB324 million for 2003
compared to an income tax expense of RMB398 million for 2002. As a result of
the reduction in income tax rate, the Companys net deferred taxation liability
balance brought forward from December 31, 2002 of RMB507 million was reduced by
RMB392 million and a net deferred tax credit of RMB392 million was recognized
in 2003 for such reduction in income tax rate accordingly.

Minority Interests

Minority interests increased by 3.6% from RMB165 million in 2002 to RMB171
million in 2003, primarily reflecting the net income earned by certain of the
Groups airline subsidiaries for the year.

2002 Compared with 2001

The Group recorded a net income of RMB576 million for 2002, as compared to
a net income of RMB340 million for 2001. The Groups operating revenue
increased by RMB1,139 million or 6.7% from RMB16,880 million in 2001 to
RMB18,019 million in 2002. Passenger load factor increased by 2.9 percentage
points from 62.5% in 2001 to 65.4% in 2002. Passenger yield (in passenger
revenue per RPK) decreased by 10.0% from RMB0.60 in 2001 to RMB0.54 in 2002.
Average yield (in traffic revenue per RTK) decreased by 10.9% from RMB5.43 in
2001 to RMB4.84 in 2002. Operating expenses increased by RMB514 million or 3.3%
from RMB15,479 million in 2001 to RMB15,993 million in 2002. As operating
revenue increased more than operating expenses, operating profit increased by
44.7% from RMB1,401 million in 2001 to RMB2,026 million in 2002. The Groups
net non-operating expenses increased by 46.5%, from RMB605 million in 2001 to
RMB887 million in 2002, mainly due to an unfavorable movement in exchange
differences of RMB472 million, partly offset by a gain on disposal of four
Boeing 757-200 aircraft of RMB199 million. Overall, the Groups net income
increased by 69.2%, from RMB340 million in 2001 to RMB576 million in 2002.

Operating Revenue

Substantially all of the Groups operating revenue is attributable to its
airline operations. Traffic revenue in 2002 and 2001 accounted for 97.0% and
97.5% respectively of total operating revenue. Passenger revenue and, cargo and
mail revenue accounted for 89.8% and 10.2% respectively of total traffic
revenue in 2002. The balance of the Groups operating revenue is derived from
commission income, income from general aviation operations, fees charged for
ground services rendered to other Chinese airlines that operate flights in and
out of airports in Southern China (including the airports in Guangzhou,
Shenzhen, Xiamen and Wuhan), air catering services and aircraft lease income.

Operating revenue increased by 6.7% from RMB16,880 million in 2001 to
RMB18,019 million in 2002. This increase was primarily due to a 4.3% rise in
passenger revenue from RMB15,055 million in 2001 to RMB15,696 million in 2002
due to higher traffic volume. The total number of passengers carried increased
by 12.4% to 21.49 million passengers in 2002. RPKs increased by 15.5% from
25,057 million in

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2001 to 28,940 million in 2002, primarily as a result of an increase in
passengers carried. However, passenger yield decreased by 10.0% from RMB0.60 in
2001 to RMB0.54 in 2002, mainly as a result of a fall in the average fares
resulting from increased competition.

Domestic passenger revenue, which accounted for 78.0% of total passenger
revenue in 2002, increased by 1.4% from RMB12,068 million in 2001 to RMB12,234
million in 2002. For the Groups domestic routes, passenger traffic in RPKs
increased by 13.6%, while passenger capacity in ASKs increased by 7.5%,
resulting in 3.6 percentage points increase in passenger load factor, or an
increase of 5.8% from 2001. Passenger yield, however, decreased from RMB0.62 in
2001 to RMB0.55 in 2002 mainly as a result of increased competition among the
PRC airlines.

Hong Kong passenger revenue, which accounted for 6.7% of total passenger
revenue, decreased by 6.5% from RMB1,128 million in 2001 to RMB1,055 million in
2002. For Hong Kong flights, passenger traffic in RPKs increased by 2.0%, while
passenger capacity in ASKs increased by 3.3%, resulting in 0.8 percentage point
decrease in passenger load factor, or a decrease of 1.3% from 2001. Passenger
yield decreased from RMB1.06 in 2001 to RMB0.98 in 2002 mainly due to slack in
traffic volume.

International passenger revenue, which accounted for 15.3% of total
passenger revenue, increased by 29.4% from RMB1,860 million in 2001 to RMB2,407
million in 2002. For international flights, passenger traffic in RPKs
increased by 26.7%, while passenger capacity in ASKs increased by 25.3%,
resulting in a 0.7 percentage point gain in passenger load factor, or an
increase of 1.1% from 2001. Passenger yield increased slightly by 2.4% from
RMB0.41 in 2001 to RMB0.42 in 2002.

Cargo and mail revenue, which accounted for 10.2% of the Groups total
traffic revenue and 9.9% of total operating revenue, increased by 27.0% from
RMB1,406 million in 2001 to RMB1,786 million in 2002. The increase was
primarily due to the opening of two international cargo routes in 2002.

Other operating revenue increased by 28.4% from RMB418 million in 2001 to
RMB537 million in 2002. The increase was primarily due to increase in fees
charged for ground services rendered to other Chinese airlines as the traffic
volume increased as well as an income from a lease arrangement effected during
the year.

Operating Expenses

Substantially all of the Groups operating expenses result from its
airline operations. The vast majority of such expenses relate directly to
flight operations, aircraft and traffic servicing, aircraft repairs and
maintenance and to depreciation and amortization in respect of aircraft and
flight equipment. Expenses associated directly with the Groups flight
operations (collectively, flight operations expenses) include fuel costs,
operating lease payments, catering expenses, aircraft insurance, flight
personnel payroll and welfare and training expenses. Expenses associated
directly with repairs and maintenance in respect of the Groups aircraft
(collectively, maintenance expenses) include repairs and maintenance and
overhaul charges, the costs of consumables and other maintenance materials and
labor costs for maintenance personnel. Expenses associated directly with the
Groups aircraft and traffic servicing operations (collectively aircraft and
traffic servicing expenses) include landing and navigation fees, rental
payments and charges in respect of terminal and other ground facilities and
labor costs for ground personnel. The balance of the Groups operating
expenses result from promotional and marketing activities (collectively,
promotion and sales expenses) such as sales commissions, fees for use of the
CAACs reservation system, ticket-printing and
sales office expenses, advertising and promotional expenses, and from
general and administrative expenses, such as administrative salaries and
welfare and other personnel benefits and office expenses.

Total operating expenses in 2002 amounted to RMB15,993 million,
representing an increase of 3.3% or RMB514 million over 2001, primarily due to
the combined effect of the growth in operations and increase in maintenance
expenses. Total operating expenses as a percentage of total operating revenue
decreased from 91.7% in 2001 to 88.76% in 2002 as the increase in operating
revenue exceeded the increase in operating expenses.

Flight operations expenses, which accounted for 42.1% of total operating
expenses, decreased by 2.5% from RMB6,906 million in 2001 to RMB6,733 million
in 2002, mainly due to a decrease in operating lease rentals. Fuel costs, which
accounted for 52.3% of flight operations expenses decreased by 0.8% from
RMB3,549 million in 2001 to RMB3,519 million in 2002 mainly resulting from
decreased fuel prices. Operating lease rentals decreased by 25.9% from RMB1,913
million in 2001 to RMB1,417 million in 2002, primarily due to the termination
of wet leases of five Boeing 737-300/37K aircraft from Zhongyuan Airlines in
January 2002. Catering expenses increased by 12.8% from RMB554 million in 2001
to RMB625 million in 2002, reflecting primarily an increase in number of
passengers carried. Aircraft insurance costs increased by 108.1% from RMB123
million in 2001 in the rates of aircraft insurance premiums subsequent to the
911 incident of the United States. Labor costs for flight personnel increased
by 18.9% from RMB657 million in 2001 to RMB781 million in 2002, largely due to
an increase in flight hours as well as an increase in bonuses for flight
personnel.

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Maintenance expenses which accounted for 14.6% of total operating
expenses, increased by 15.8% from RMB2,015 million in 2001 to RMB2,333 million
in 2002. The increase was primarily attributable to a 15.7% increase in
aircraft maintenance and repair charges from RMB1,845 million in 2001 to
RMB2,135 million in 2002, mainly as a result of the effect of fleet expansion
in recent years and the growth in operations.

Aircraft and traffic servicing expenses, which accounted for 15.7% of
total operating expenses, increased by 9.3% from RMB2,298 million in 2001 to
RMB2,511 million in 2002. The increase primarily resulted from 9.1% rise in
landing and navigation fees from RMB2,157 million in 2001 to RMB2,353 million in
2002, as the number of flights increased.

Promotional and sales expenses, which accounted for 9.4% of total
operating expenses, decreased by 2.7% from RMB1,541 million in 2001 to RMB1,500
million in 2002. The decrease was due to 15.9% decrease in sale commissions and
bonuses paid to sales agents because of tighter cost controls exercised by the
Group.

General and administrative expenses, which accounted for 6.6% of total
operating expenses, increased by 18.8% from RMB892 million in
2001 to RMB1,060
million in 2002. This was mainly due to an increase in staff salaries and
welfare benefits of 27.8% from RMB439 million in 2001 to RMB561 million in 2002
and increased scale of operations.

Depreciation and amortization, which accounted for 11.5% of total
operating expenses, increased by 1.4% from RMB1,815 million in 2001 to RMB1,840
million in 2002. This was primarily as a result of the additions of aircraft
during 2002.

Operating Income

Operating
income increased by 44.7% from RMB1,401 million in 2001 to
RMB2,026 million in 2002, as operating revenue increased by RMB1,139 million or
6.7% from 2001, while operating expenses increased by RMB514 million or 3.3%
over the same period.

Non-operating Income/(Expenses)

Interest expense increased by 2.7% from RMB934 million in 2001 to RMB959
million in 2002, mainly reflecting the additional bank loans borrowed to
finance the acquisitions of aircraft, partly offset by scheduled debt
repayments during the year.

Interest income increased by 5.5% from RMB50 million in 2001 to RMB53
million in 2002. This was mainly due to an increase in cash balances.

The Group recognized a net gain on sale of fixed assets of RMB171 million
in 2002, mainly resulting from disposal of four Boeing 757-200 aircraft.

During 2002, the Group recorded a net exchange loss of RMB175 million
predominantly due to its Japanese yen denominated borrowings as a result of the
Japanese yen appreciation. Such amount comprised mostly unrealized translation
loss.

Taxation

The Group is subject to PRC income tax at a rate of 33%.

Taxation expense increased by 24.2% from RMB321 million in 2001 to RMB398
million in 2002, reflecting primarily an increase in profit before taxation. A
deferred tax asset of RMB149 million was recognized at December 31, 2002 in
respect of the unrelieved PRC tax losses brought forward from prior years. Such
tax losses are available for carry-forward to offset against future PRC taxable
profits for a maximum period of 5 years.

Minority Interests

Minority interests increased by 22.7% from RMB135 million in 2001 to
RMB165 million in 2002, primarily as a result of an increase in net profits of
the Groups Airline Subsidiaries.




Liquidity and Capital Resources

Prior to the initial public offering of the Company, the Group met its
working capital and capital expenditure requirements through cash from its
operations, the proceeds of certain long-term and short-term bank loans,
capital lease financing and rebates available under certain of the Groups
aircraft leases. In July 1997, the Company received net proceeds of RMB5,459
million from its initial public offering.

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A majority part of these net proceeds was utilized to finance the Groups
working capital and capital expenditure requirements. In July 2003, the
Company issued 1,000,000,000 A shares with a par value of RMB1.00 each at
issue price of RMB2.70 by way of a public offering to natural persons and
institutional investors in the PRC. The proceeds received by the Company, net
of the issuance costs of RMB59,233, amounted to RMB2,641 million and have been used
for the purchase of Boeing 737-800 aircraft in accordance with the disclosure
in the Prospectus for Offering of the A Shares.

As of December 31, 2003, the Group had loan facilities from several PRC
commercial banks for providing loan finance up to an approximate amount of
RMB9,860 million to the Group. As of December 31, 2003, an approximate amount
of RMB4,412 million was utilized. As of December 31, 2002 and 2003, the
Groups cash and cash equivalents totaled RMB3,771 million and RMB2,080
million, respectively.

Net cash inflows from operating activities in 2001, 2002 and 2003 were
RMB2,224 million, RMB3,698 million and RMB2,129 million, respectively.

Net cash used in investing activities in 2001, 2002 and 2003 was RMB3,036
million, RMB5,895 million and RMB5,434 million, respectively. Cash capital
expenditures in 2001, 2002 and 2003 were RMB1,492 million, RMB6,351 million and
RMB4,707 million, respectively, reflecting predominantly additional investments
in aircraft and flight equipment under the Groups fleet expansion plans and
Guangzhou new airport, and, to a small extent, additional investments in other facilities and buildings for operations.

Financing activities resulted in net cash (outflows)/inflows of RMB(568)
million, RMB3,150 million and RMB1,614 million in 2001, 2002 and 2003,
respectively. The net cash outflows of 2001 were primarily as a result of
making scheduled repayments of bank borrowings and capital lease obligations in
excess of proceeds from new bank borrowings.

As of December 31, 2003, the Groups aggregate long-term debt and
obligations under capital leases totaled RMB12,051 million. Based on such
amount, in 2004, 2005, 2006, 2007, 2008 and thereafter, amounts payable under
such debt and obligations will be RMB1,986 million, RMB1,716 million, RMB1,601
million, RMB1,660 million, RMB1,872 million and
RMB3,216 million. Such borrowings were
denominated, to a larger extent, in United States dollars and, to a smaller
extent, in Japanese yen, with a significant portion being fixed interest rate
borrowings. In the normal course of business, the Group is exposed to
fluctuations in foreign currencies. The Groups exposure to foreign currencies
was primarily as a result of its foreign currency debts. Depreciation or
appreciation of the Renminbi against foreign currencies affects the Groups
results significantly because the Groups foreign currency payments generally
exceed its foreign currency receipts. The Group is not able to hedge its
foreign currency exposure effectively other than by retaining its foreign
currency denominated earnings and receipts to the extent permitted by the State
Administration of Foreign Exchange, or subject to certain restrictive
conditions, entering into forward foreign exchange contracts with authorised
PRC banks.

As of December 31, 2003, the Groups short term bank debt was RMB6,409
million with interest rates ranging from 1.48% to 5.31%. The Groups weighted
average interest rate on short-term bank notes payable was 1.76% as of December
31, 2003. The primary use of the proceeds of the Groups short-term debt is to
finance working capital needs. The Group has generally been able to arrange
short-term bank loans with domestic banks in China as necessary and believes it
can continue to obtain them based on its well-established relationships with
various lenders.

As of December 31, 2003, the Group had obligations under operating leases
totaling RMB8,120 million, predominately for aircraft. Of such amount,
RMB1,483 million, RMB1,412 million, RMB1,144 million, RMB921 million, RMB771
million and RMB2,389 million respectively was due in 2004, 2005, 2006, 2007,
2008 and thereafter.

As of December 31, 2003, the Group had a working capital deficit of
RMB10,792 million, as compared to a working capital deficit of RMB7,016 million
as of December 31, 2002. Historically, the Group operated in a negative
working capital position, relying on cash inflow from operating activities and
short-term bank debt refinancings to meet its short-term liquidity and working
capital needs. The increase in the Groups working capital deficit from 2002
to 2003 was mainly because the Group sought increased short term debts to
finance its aircraft acquisitions. Upon deliveries of the aircraft, the Group
continued to seek renewal of its short-term debts instead of replacing such
debts with long-term debts, as the interest rates for short-term debts are lower.
The liquidity of the Group in the future will primarily be dependent on its
ability to maintain adequate cash inflow from operations to meet its debt
obligations as they become due and, on its ability to obtain adequate external
financing to meet its committed future capital expenditures. With regard to
its short-term debt outstanding as of December 31, 2003, the Group has obtained
firm commitments from its principal banker to renew relevant debts as they fall
due during 2004. With regard to its future capital commitments and other
financing requirements, the Group has already entered into loan financing
agreements with several PRC banks to provide loan finance up to an appropriate
amount of RMB8,450 million during 2004 and thereafter. As the Group is subject
to a high degree of operating leverage, a minor decrease in the Groups yield
and/or load factor could result in a significant decrease in its operating
revenue and hence its operating cashflows. This could arise in such
circumstances as where competition between Chinese airlines increases or

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where PRC aviation demand decreases. Similarly, a minor increase in the
jet fuel prices, particularly those in domestic market, could result in a
significant increase in the Groups operating expenses and hence a significant
decrease in its operating cashflows. This could be caused by fluctuations in
supply and demand in international oil market. Currently, the Groups existing
debt and lease facilities do not contain any financial covenants.
Nevertheless, as the Group is subject to a high degree of financial leverage,
an adverse change in the Groups operating cashflows could adversely affect its
financial health and hence weaken its ability to obtain additional debt and
lease facilities and to renew its short-term debt facilities as they fall due.

As of December 31, 2003, the Group had capital commitments in 2004 and
2005 of approximately RMB6,243 million and RMB7,385 million, respectively. Of
such amounts, RMB4,585 million in 2004 and RMB6,030 million in 2005 are related
to the acquisition of aircraft and related flight equipment, and RMB1,000
million in 2004 and RMB1,072 million in 2005 are related to the Groups facilities and equipment to be
constructed and installed at the Guangzhou new airport. This new airport is
expected to commence operations in August 2004 to replace the Guangzhou Baiyun
International Airport as the Groups main route base. The remaining amounts of
RMB658 million in 2004 and RMB283 million in 2005 are related to the Groups
other airport and office facilities and equipment, overhaul and maintenance
bases and training facilities.

As of December 31, 2003, the Group undertook to make a capital
contribution of approximately RMB446 million to jointly controlled entities.

As of December 31, 2003, the cash and cash equivalents of the Group totaled
RMB2,080 million. Of such balance, 22.2% was denominated in foreign currencies.

No interim dividend was paid during the year ended December 31, 2003. The
Board of Directors does not recommend the payment of a final
dividend in respect of the year ended December 31, 2003.

The Group expects that the Groups cash from operations and short-term and
long-term bank borrowings will be sufficient to meet its cash requirements in
the foreseeable future.

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Contractual Obligations and Commercial Commitments

The following table sets forth the Groups obligations and commitments to make
future payments under contracts and under contingent commitments as of December
31, 2003.

As of December 31, 2003Payment due by periodless thanTotal
    
    1 year
    
    1-3 years
    
    4-5 years
    
    After 5 years(RMB million)Contractual obligationsShort-term debt
    
    
    6,409
    
    
    
    6,409
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt
    
    
    5,210
    
    
    
    688
    
    
    
    1,426
    
    
    
    953
    
    
    
    2,143Capital lease obligations
    
    
    6,841
    
    
    
    1,298
    
    
    
    3,551
    
    
    
    1,725
    
    
    
    267Total contractual obligations
    
    
    18,460
    
    
    
    8,395
    
    
    
    4,977
    
    
    
    2,678
    
    
    
    2,410Other commercial commitmentsOperating lease commitments
    
    
    8,120
    
    
    
    1,483
    
    
    
    3,477
    
    
    
    1,412
    
    
    
    1,748Aircraft purchase commitments (Note 1)
    
    
    10,615
    
    
    
    4,585
    
    
    
    6,030
    
    
    
    
    
    
    
    Capital commitments in respect of
investments in the Guangzhou new airport
    
    
    2,072
    
    
    
    1,000
    
    
    
    1,072
    
    
    
    
    
    
    
    Other capital commitments
    
    
    941
    
    
    
    658
    
    
    
    283
    
    
    
    
    
    
    
    Investing commitments
    
    
    446
    
    
    
    446
    
    
    
    
    
    
    
    
    
    
    
    Total commercial obligations
    
    
    22,194
    
    
    
    8,172
    
    
    
    10,862
    
    
    
    1,412
    
    
    
    1,748


Note 1 Amounts shown are net of previously paid purchase deposits.




ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.




Directors and Senior Management

The following table sets forth certain information concerning directors
(Directors), senior management (Senior Management) and supervisors
(Supervisors) of the Company in 2003. There were certain changes in the
Companys Directors, Senior Management and Supervisors subsequent to December
31, 2003, details of which are set forth below.

|                |  |     |    |          |  |                                                   
|--------------- |  | --- | -- | -------- |  | --------------------------------------------------
|Name            |  | Age |    | Position
|                |  |     |    |         
|Yan Zhi Qing    |  |     | 62 |          |  | Chairman of the Board of Directors                
|Liu Ming Qi     |  |     | 60 |          |  | Vice Chairman of the
Board of Directors           
|Wang Chang Shun |  |     | 47 |          |  | Vice Chairman of the Board of Directors; President
|Peng An Fa      |  |     | 56 |          |  | Director                                          
|Wang Quan Hua   |  |     | 50 |          |  | Director                                          
|Zhao Liu An     |  |     | 56 |          |  | Director                                          
|Zhou Yong Qian  |  |     | 59 |          |  | Director                                          
|Zhou Yong Jin   |  |     | 61 |          |  | Director                                          
|Xu Jie Bo       |  |     | 39 |          |  | Director; Chief
Financial Officer; Vice President 
|Wu Rong Nan     |  |     | 62 |          |  | Director                                          
|Simon To        |  |     | 53 |          |  | Independent Non-Executive Director                
|Peter Lok       |  |     | 68 |          |  | Independent Non-Executive Director                
|Wei Ming Hai    |  |     | 40 |          |  | Independent Non-Executive Director                
|Wang Zhi        |  |     | 62 |          |  | Independent Non-Executive Director                
|Sui Guang Jun   |  |     | 43 |          |  | Independent Non-Executive Director                
|Liang Hua Fu    |  |     | 62 |          |  | Chairman of the Supervisory Committee             
|Gan Yu Hua      |  |     | 76 |          |  | Supervisor                                        
|Li Qi Hong      |  |     | 56 |          |  | Supervisor                                        
|Jiang Ping      |  |     | 54 |          |  | Vice President                                    
|Li Kun          |  |     | 44 |          |  | Vice President                                    

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|             |  |     |    |          |  |                  
|------------ |  | --- | -- | -------- |  | -----------------
|Name         |  | Age |    | Position
|             |  |     |    |         
|Yuan Xin An  |  |     | 47 |          |  | Vice President   
|Zheng En Ren |  |     | 59 |          |  | Vice President   
|Hao Jian Hua |  |     | 54 |          |  | Vice President   
|Su Liang     |  |     | 42 |          |  | Company Secretary

On May 13, 2003, Mr. Liu
Ming Qi, Mr. Peng An Fa, Mr. Wang Quan Hua, Mr.
Zhao Liu An, Mr. Zhou Yong Qian, Mr. Wang Zhi and Mr. Sui Guang Jun
respectively were appointed as Directors of the Company at the Shareholders
meeting of the Company. On May 13, 2003, Mr. Wang Shao Xi and Mr. Zhang Rui Ai tendered their
resignations to the Company as Directors of the Company due to retirement.
Their resignations were approved at the Shareholders meeting of the Company. On July 30, 2003, the Board of Directors resolved to appoint Mr. Hao Jian Hua
and Mr. Xu Jie Bo as Vice Presidents of the Company. On the same day, Mr. Yang
Guang Hua resigned as Vice President of the Company due to work arrangement. Mr. Yan Zhi Qingis the Chairman of the Board of Directors. He became an
employee of the Company in February 1996. Administrative positions which Mr.
Yan has held include Director of Flight Operations of the Hunan Provincial
Civil Aviation Administration, Director of the Guangxi Provincial Civil
Aviation Administration, Director of the Central and Southern China Civil
Aviation Administration, Director of the Political Department of the CAAC and
Party Secretary and Managing Vice President of the CSAHC Group. Mr. Yan is
currently the President and Vice Party Secretary of CSAHC. Mr. Yan
graduated from the School of Aviation Administration and Flight Control in
1962. Save as disclosed above, Mr. Yan is not connected with any directors,
senior management, substantial shareholders or controlling shareholders of the
Company. Mr. Liu Ming Qiis the Vice Chairman of the Board of Directors of the Company
and joined the Company since May 2003. Mr. Liu graduated from South China
Normal University and obtained a masters degree in economics from Fudan
University. Mr. Liu is currently the Party Secretary and the Vice President of
CSAHC. Mr. Liu began his career in 1968, and has successively served as the
Municipal Secretary and Mayor of Sanya city of Hainan province, the Vice
Governor of Hainan province, the Vice Director of Hong Kong and Macao Affairs
office of the State Council and the Vice Director of Macao Liaison Office of
the Central Government. Save as disclosed above, Mr. Liu is not connected with
any directors, senior management, substantial shareholders or controlling
shareholders of the Company. Mr. Wang Chang Shunis the Vice Chairman of the Board of Directors and the
President of the Company and joined the Company in April 2001. He began his
career in civil aviation in February 1976, mainly involved in air traffic
control. He has held positions as Director of the Flight Operations Office of
the Urumqi Civil Aviation Administration, Director of the Flight Meteorology
and Flight Safety Monitoring Division, Deputy General Manager of Xinjiang
Airlines and Deputy Director of Urumqi Civil Aviation Administration, Party
Secretary and Deputy General Manager of Xinjiang Airlines and Party Secretary
of Urumqi Civil Aviation Administration. Mr. Wang is also the Vice President of
CSAHC. Mr. Wang graduated from the School of the Chinese Academy of Social
Sciences as a post graduate in Business Management and is qualified as a Senior
Expert of Political Science. Save as disclosed above, Mr. Wang is not connected
with any directors, senior management, substantial shareholders or controlling
shareholders of the Company. Mr. Peng An Fais currently a Director of the Company and the Vice President of
CSAHC and became the employee of the Company since March 1995 after the
establishment of the Company. Mr. Peng graduated from the pilot department of
China Civil Aviation Flying College and the department of Chinese language and
literature of South China Normal University. Mr. Peng began his career in civil
aviation in 1969, and successively served as the Pilot Director, Vice Party
Secretary and Party Secretary of the Sixth Squadron of the Civil Aviation
Administration. In July 1994, Mr. Peng held office as the Party Secretary of
the Flight Operations Department of China Southern Airlines. In March 1998, Mr.
Peng served as the President and Vice Secretary of China Southern Airlines
Shenzhen Co. From August 2001 to October 2002, Mr. Peng served as the Vice
President of CSAHC. Mr. Peng is concurrently the Vice Chairman of Shenzhen Air
Catering Co., Ltd and CATIC (Hong Kong). Save as disclosed above, Mr. Peng
is not connected with any directors, senior management, substantial shareholders or
controlling shareholders of the Company. Mr. Wu Rong Nanis a Director of the Company. He joined CSAHC in January
1991 and became an employee of the Company upon its establishment in March
1995. Mr. Wu is an air traffic control engineer. He was once employed as the
Director of Flight Operations of the Guangzhou Civil Aviation Administration and
has been President of Xiamen Airlines since 1986. Mr. Wu is not connected with
any directors, senior management or substantial shareholders or controlling
shareholders of the Company. Mr. Simon Tohas been an Independent Non-Executive Director of the Company
since June 1999. Mr. To is currently the Managing Director of Hutchison Whampoa
(China) Limited, and also serves as director of several companies in Hong Kong
and Foreign-invested companies in China. Mr. To has managed investment projects
in China since early 1980s and is familiar with the laws and regulations of
Hong Kong and China. Mr. To graduated from the Stanford University with a
Master degree in Business Administration. Mr. To is not connected with any
directors, senior management or substantial shareholders or controlling
shareholders of the Company. Mr. Peter Lok has been an Independent Non-Executive Director of the Company
since June 2001. He is also a veteran in the civil aviation industry. Mr. Lok
joined the Civil Aviation Department of Hong Kong in 1956 and became its
Assistant Director in 1982, Deputy Director in 1988, and Director from 1990 to
1996. From 1997 to 2000, Mr. Lok was an advisor and president of Hong Kong
Commercial Airlines Center. Mr. Lok has sat on various Committees such as the
Evaluation Committees for the Design of Shanghais Pudong Airport, Committee
for Chinas Zhuhai Aviation and Spaceflight Fair, Evaluation Committees for the
IATA Eagle Award. He is also independent director of several listed airline
companies. Mr. Lok is not connected with any directors, senior management or
substantial shareholders or controlling shareholders of the Company. 42




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##### Table of Contents



Mr. Wei Ming Haihas been an Independent Non-Executive Director of the Company
since June 2001. He is a Professor and Dean of the School of Management of
Zhongshan University. Professor Wei has worked in Jiangxi Provincial Accounting
Association, and he started working in Zhongshan University from 1991. In 1993
he became the chairman of the Accounting Department in the School of Management
of Zhongshan University. In 1996 he became the Deputy Dean of the School of
Management in Zhongshan University. In January 2000, he became Dean of the
School of Management in Zhongshan University. Since 1998, Professor Wei has
been a doctorate advisor for Accounting Information and Investment Analysis.
Professor Wei is also on the board of directors of China Accountants
Association, Vice Chairman of Accountants Association of Guangdong Province,
Vice Chairman of Auditors Association of Guangzhou, Executive Member of the
Research Institute of Financial Costs for Young and Middle-aged Accountants,
member of American Accounting Association. Professor Wei holds a Ph.D degree in
economics and has an MBA degree from Tulane University in the United States of
America. He has published over ten academic books or textbooks, and over 60
academic papers. Mr. Wei is not connected with any directors, senior management
or substantial shareholders or controlling shareholders of the Company. Mr. Wang Zhihas been an Independent Non-Executive Director of the Company
since May 2003. Mr. Wang graduated from the Aircraft Design Department of
Harbin institute of Technology. Mr. Wang began his career in 1965, and has
successively served as the Director and Senior Engineer of Aeronautics Research
Institute of China, the Vice Director and Vice Secretary of the First Research
Institute of Civil Aviation, the Vice Director and Director of the Planning Bureau of CAAC and the
Director of the Planning Technology System Reform Department and the
Planning Technology Department of CAAC. Mr. Wang is also professor in several
universities. Mr. Wang is not connected with any directors, senior management or substantial
shareholders or controlling shareholders of the Company. Mr. Sui Guang Junhas been an independent Non-Executive Director of the Company since May 2003. Mr. Sui graduated from the Economic
Department of Jinan University and obtained a master degree. Mr. Sui obtained a doctor degree in the Management of
Organizations of Jinan University. He has successively served as the Vice Director of the Research Institute of Hong Kong
and Macao Economies and the Dean of Corporate Administration Department of Jinan University. Mr. Sui is currently the Chief
of the Post-doc Committee of Applied Economics and the Dean of Management College in Jinan University. Mr. Sui is not connected with any
directors, senior management or substantial
shareholders or controlling shareholders of the Company. Supervisory Committee As required by the Company Law and the Articles of Association, the Company has
a supervisory committee (the Supervisory Committee) which is primarily
responsible for the supervision of senior management of the Company, including
the Board of Directors, executive officers and other senior management
personnel, to ensure that they act in the interests of the Company, its
shareholders and employees, as well as in compliance with applicable law. The
Supervisory Committee consists of three Supervisors. Two of the Supervisors are
shareholder representatives appointed by shareholders, and one Supervisor is a
representative of the Companys employees. The Supervisors serve terms of three
years and may serve consecutive terms. Mr. Liang Hua Fu is the Chairman of the Supervisory Committee of the Company.
He became an employee of the Company since its establishment in March 1995.
Mr. Liang held numerous positions in the Guangzhou Civil Aviation
Administration, including Chief of the Navigation Division, Party Secretary of
the Transportation Department, Secretary of the Disciplinary Department and
Director of Administration and Supervision. Mr. Liang attended Tianjin Aviation
School and Guangzhou Political Science College. Mr. Liang is not connected with
any directors, senior management or substantial shareholders or controlling
shareholders of the Company. Mr. Gan Yu Huais a Supervisor of the Company. He became an employee of the Company
since its establishment in March 1995. Mr. Gan held various positions in the
Chinese commercial aviation industry, including Deputy Director of the Finance
Department, Deputy Chief Accountant and Director of the Audit Department of the
Guangzhou Civil Aviation Administration. He holds a Senior Accountant Certificate
and is a member of the International Auditors Association. Mr. Gan graduated
from Shanghai Li Xin Accounting College in 1948. Mr. Gan is not connected with
any directors, senior management or substantial shareholders or controlling
shareholders of the Company. Mr. Li Qi Hongis a Supervisor of the Company and the Representative of the Labour
Union of the Company. He became an employee of the Company since its
establishment in March 1995. Mr. Li graduated from the CAAC Aviation College
in 1968, and held various administrative positions in the commercial aviation
industry in China. Mr. Li is not connected with any directors, senior
management or substantial shareholders or controlling shareholders of the
Company. All Directors and Supervisors
of the Company have entered into service
contracts with the Company for a term of three years commencing on April 16,
2001. The service contracts of Mr. Liu Ming Qi, Mr. Peng An Fa, Mr. Wang Quan Hua, Mr. Zhao
Liu An, Mr. Zhou Yong Qian, Mr. Wang Zhi and Mr. Sui Guang Jun entered into on May 13,
2003 will expire at the end of the term of the current session of the Board.
Except for such service contracts, none of the Directors or Supervisors of the
Company has entered or proposed to enter into any other service contracts with
the Company or its subsidiaries. None of the Directors or Supervisors has
entered into any service contracts with the Company which is not determinable
by the Company within one year without payment of compensation, other than
statutory compensation. 
 Compensation RMB0.2 million has been paid to non-executive directors for the year ended
December 31, 2003. The aggregate compensation paid by the Company to all
directors (excluding non-executive directors), supervisors and senior
management for 2003 was RMB1.5 million. For the year ended
December 31, 2003,
the Company accrued an aggregate of approximately RMB25,000 on behalf of its
executive directors, supervisors and senior management pursuant to the SA
Pension Scheme and the retirement plans operated by various municipal
governments in which the Company participates. 
 Board Practices Directors service contracts with the Company or any of its subsidiaries
provide prorated monthly salary upon termination of employment in accordance
with his contract. The Director is entitled to paid leave in accordance with
his contract. Audit Committee 43




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##### Table of Contents



The
audit committee is appointed by the Board of Directors and consists of five
independent non-executive Directors. The current members of the audit
committee are Mr. Simon To, Mr. Peter Lok, Mr. Wei
Ming Hai, Mr. Wang Zhi and Mr. Sui Guang Jun. At least once
a year, the committee is required to meet with the external auditors without
any executive members of the Board in attendance. The quorum necessary for the
transaction of any business is two committee members. The committee will
normally meet four times a year. The external auditors or the Chief Financial
Officer of the Company may request a meeting of the audit committee.

The audit committee selects and engages, on behalf of the Company,
external auditors to audit the Companys annual financial statements and
considers questions regarding the audit fees and the resignation or dismissal
of the external auditors. The audit committee also reviews and approves the
planned scope of the Companys annual audit. In addition, the audit committee
reviews the annual and interim financial statements, the preliminary
announcement of results and any other announcement regarding the Companys
results or other financial information to be made public, before submission to
the Board of Directors. Moreover, the committee discusses problems arising from the audit
and reviews the external auditors management letter and managements response.
Furthermore, the audit committee reviews the effectiveness of the system of
internal financial controls from information provided by the Executive
Directorate and management of the Company and
ensures adherence to the Companys control policies so that the Companys
assets are safeguarded and that the financial records are complete and
accurate. The audit committee meets regularly with the Companys senior
financial, internal audit and the external auditors to consider the
Companys financial reporting, the nature and scope of audit review and the
effectiveness of the systems of internal control. The audit committee also
reviews any significant transactions that are not in the ordinary course of
business.

The Company has an internal audit department which reviews procedures in
all major financial and operational activities. This department is led by the
head of internal audit who is directly responsible to the Chairman of the Board
and submits regular reports to the audit committee.

The Company does not have a Remuneration Committee. The executive
compensation program of the Company is administered by the Board of Directors.




Employees

As of December 31, 2003, the
Group had 17,569 employees, including 1,943
pilots, 2,984 flight attendants, 2,317 maintenance personnel, 4,146 sales and
marketing personnel and 3,873 administrative personnel. All of the Groups
pilots, flight attendants, technical personnel, management personnel and sales
and marketing personnel are contract employees, and most of the Groups
ancillary service workers are temporary employees. Contract employees are
hired by the Group pursuant to renewable employment contracts with terms
ranging from three to five years. Temporary employees generally are hired by
the Group pursuant to at-will employment contracts or employment contracts with
a term of one year.

The Companys employees are members of a trade union organized under the
auspices of the All-Chinas Federation of Trade Unions, which is established in
accordance with the Trade Union Law of China. A representative of the Company
labor union currently serves on the Supervisory Committee of the Company. Each
of the Companys subsidiaries has its own trade union. The Group has not
experienced any strikes, slowdowns or labor disputes that have interfered with
its operations, and the Group believes that its relations with its employees
are good.

All employees of the Group receive cash remuneration and certain non-cash
benefits. Cash remuneration consists of salaries, bonuses and cash subsidies
provided by the Group. Salaries are determined in accordance with the national
basic wage standards. The total amount of wages payable by the Group to its
employees is subject to a maximum limit based on the
profitability of the Group and other factors. Bonuses are based on the
profitability of the Group. Cash subsidies are intended as a form of
cost-of-living adjustment. In addition to cash compensation, the Groups
contract employees receive certain non-cash benefits, including housing,
education and health services, and the Groups temporary employees receive
limited health services, but not housing or education. CSAHC provides certain
services in respect of these benefits to the Groups employees in consideration
of certain fees and other charges.

Pension Programs

Historically, the Group participated in an industry-wide pension scheme
managed by the CAAC. With effect from January 1, 1998, the pension scheme of
the CAAC was replaced by several new retirement schemes operated under the
auspices of various municipal governments. Employees of the Group are
currently covered by such schemes. Under such schemes, the Group is required
to pay quarterly premiums to the relevant municipal governments. The premiums
range from 14% to 19% of the total monthly salary, bonuses and other benefits
paid by the Group to its employees.

44



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##### Table of Contents



In addition, the Group was selected as one of the pilot enterprises to
establish a supplementary defined contribution retirement scheme for the
benefit of employees. In this connection, employees of the Group participate
in a supplementary defined contribution retirement scheme whereby the Group is
required to make defined contributions at the rate of 4.5% of total salaries. The Group has no
obligation for the payment of pension benefits beyond the contributions
described above. Contributions to the retirement schemes are charged to
consolidated statement of operations as and when incurred.

Workers Compensation

There is no workers compensation or other similar compensation scheme
under the Chinese labor and employment system. As required by Chinese law,
however, the Group, subject to certain conditions and limitations, pays for the
medical expenses of any contract employee who suffers a work-related illness,
injury or disability and continues to pay the full salary of, and provides all
standard cash subsidies to, such employee during the term of such illness,
injury or disability. The Group also pays for certain medical expenses of its
temporary employees.

At no
time during 2003 had any Director, Supervisor or member of the
Senior Management or any of their spouses or minor children, been granted or
exercised or subscribed for shares or debentures or options of the Company.




Share Ownership

Except
as disclosed herein, as of the date of this Annual Report, no Director, Senior Management or
Supervisor of the Company is a beneficial owner of any shares of the Companys
capital stock. As of the date of this Annual Report, no arrangement has been
put in place involving issue or grant of options or shares or securities of the
Company to any of the Director, Senior Management, Supervisor or employees of
the Company.

% to the
    
    % to thetotal
    
    total
    
    % to theissued
    
    issued
    
    totalThe
    
    
    
    
    
    
    
    
    
    share
    
    domestic
    
    issuedCompany/
    
    
    
    
    
    Number
    
    capital
    
    shares
    
    H sharesassociated
    
    Types of
    
    Type of
    
    of shares
    
    of the
    
    of the
    
    of the
    
    ShortName
    
    corporation
    
    interest
    
    shares
    
    held
    
    Company
    
    Company
    
    Company
    
    positionSimon To
    
    the Company
    
    Interest of
spouse
(Note 1)
    
    H Shares
    
    
    100,0000
    
    
    
    0.002
    %
    
    
    
    
    0.009
    %
    
    




---

|Note 1: |  | The spouse of Mr. Simon To is the owner of these
100,000 H Shares of the Company and accordingly, Mr.
Simon To, is taken to be interested in these 100,000
H Shares by virtue of the SFO.
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.




Major Shareholders

Share Capital Structure

As of
December 31, 2003, the total share capital of the Company was
4,374,178,000 shares, of which approximately 50.3% (2,200,000,000 domestic
shares) is held by CSAHC, approximately 26.84% (1,174,178,000 H shares) is
held by Hong Kong and overseas shareholders and approximately 22.86%
(1,000,000,000 A shares) is held by domestic shareholders.

Substantial Shareholders

As of
December 31, 2003, the following shareholders had an interest of 5%
or more in the Companys shares:

|                       |  |                               |  |                               |       |  
|---------------------- |  | ----------------------------- |  | ----------------------------- | ----- | -
|                       |  |                               |  | Approximate Percentage       
|Name                   |  | Number of Shares              |  | of the Total Number of Shares
|                       |  |                               |  |                              
|CSAHC                  |  | 2,200,000,000 domestic shares |  |                               | 50.30 | %
|HKSCC Nominees Limited |  | 1,149,955,998 H shares        |  |                               | 26.29 | %

The table below sets forth, as of
December 31, 2003, the following entities
hold 5% or more of the total number of H shares issued by the Company.

|                       |  |                    |               |                              |  |                           |       |  
|---------------------- |  | ------------------ | ------------- | ---------------------------- |  | ------------------------- | ----- | -
|                       |  |                    |               |                              |  | Approximate Percentage of
|Name                   |  | Number of H Shares |               | the Total Number of H Shares
|                       |  |                    |               |                             
|HKSCC
Nominees Limited |  |                    | 1,149,955,998 |                              |  |                           | 97.94 | %

45



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##### Table of Contents



Domestic shares and H shares have identical voting rights.




Related Party Transactions

The Company enters into transactions from time to time with CSAHC and its
affiliates. For a description of such transactions, see Note 25 to the
Financial Statements. In particular, the following arrangements, which the
Company believes are material to its operations, have been made between the
Company and CSAHC and its affiliates. The Company believes that these
arrangements are effected in the prevailing market rates and are commercially
reasonable and on terms no less favorable than terms available from third
parties.

Arrangements with CSAHC

Trademark License Agreement

The Company and CSAHC have entered into the Trademark License Agreement
dated May 22, 1997, pursuant to which CSAHC has acknowledged that the Group has
the right to use the name China Southern and China Southern Airlines in
both Chinese and English, and has granted to the Company a 10-year renewable
license to use the kapok logo on a world-wide basis in connection with its
airline-related businesses. CSAHC has retained the right to use the kapok logo
in connection with its non-airline related businesses conducted as of the date
of the Trademark License Agreement and to permit its affiliates that do not
compete, directly or indirectly, with the Group to use the kapok logo. Unless
CSAHC gives written notice of termination three months before the expiration of
the 10-year term of the agreement, the agreement will be automatically extended
for another 10-year term.

Leases

The Company as lessee and CSAHC as lessor have entered into the following
lease agreements:

The Company and CSAHC have entered into a land lease agreement dated May
22, 1997, in respect of the land used by the Company within Baiyun
International Airport. The total rental payment is RMB2.7 million per year.
The term of the lease is five years commencing April 1, 1997, and is renewable
by the Company thereafter.

The Company and CSAHC have separately entered into four lease agreements
dated May 22, 1997, in respect of office premises located at the east wing of
the Guangzhou Railway Station on Guangzhou Huanshi Dong Road, office premises
at Haikou Airport, office premises in Haikou City, and office premises at
Tianhe Airport in Wuhan, Hubei Province. The aggregate rental payment under
the four leases is RMB12.6 million per year. The original term of each lease
is one year and is renewable annually by the Company thereafter.

The Company and CSAHC have entered into an indemnification agreement dated
May 22, 1997, in which CSAHC has agreed to indemnify the Company against any
loss or damage caused by or arising from any challenge of, or interference
with, the Companys right to use certain land and buildings.

Comprehensive Services and Employee Benefits

The Company and CSAHC have entered into a comprehensive services agreement
dated May 22, 1997, pursuant to which CSAHC agrees to provide adequate quarters
to eligible employees of the Group as and when required. In return, the Group
agrees to pay a fixed annual fee of RMB85 million to CSAHC for a ten-year
period effective January 1, 1995.

Arrangements with CSAHCs Affiliates

Southern Airlines (Group) Import and Export Trading Company (SAIETC), a
wholly-owned subsidiary of CSAHC

The Company and SAIETC have entered into an agreement dated May 22, 1997,
for the import and export of aircraft, flight equipment, special vehicles for
airline use, communication and navigation facilities, and training facilities
for a term extending from May 22, 1997 to May 22, 2000 which was subsequently
extended to May 22, 2006 by mutual agreement between the parties. The parties
have mutually agreed that the agreement can be extended automatically.

For the year ended December 31, 2003, the amount incurred by the Group for
the import and export of the above equipment was RMB1,155 million, inclusive of
agency commission of 1.5% above the contract prices paid to SAIETC.

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##### Table of Contents



Southern Airlines Advertising Company (SAAC), which is 90% owned by the
Group and 10% owned by CSAHC

In August 2002, the Group entered into a takeover agreement with CSAHC.
As a result, the Group owns 90% and CSAHC owns 10% of SAAC.

The Company and SAAC have entered into an agreement dated May 22, 1997,
for the provision of advertising services for a term extending from May 22,
1997 to May 22, 2000. The agreement has been extended to May 22, 2006.

For the year ended December 31, 2003, the amount incurred by the Group to
SAAC for advertising services was RMB1.3 million.

Southern Airlines Group Finance Company Limited (SA Finance), which is
42% owned by CSAHC, 32% owned by the Company, 26% owned by five subsidiaries of
the Company

The Company has entered into a financial agreement dated May 22, 1997,
with SA Finance for the provision of financial services such as deposit and
loan facilities, credit facilities, financial guarantees and credit references
for a term extending from May 22, 1997 to May 22, 2000. As agreed by the
parties, the agreement has been extended for six years to May 22, 2006.

Under such agreement, (a) all funds that the Company deposits with SA
Finance will be deposited by SA Finance with the Commercial and Industrial Bank
of China, Bank of Communications, Bank of Agriculture, China Construction Bank,
or other banks of similar creditworthiness; and (b) SA Finance will not at any
time have outstanding loans in excess of the amount representing the aggregate
of (i) deposits received from entities other than the Company, (ii) SA
Finances shareholders equity and (iii) capital reserves.

As of December 31, 2003, the Group had short-term deposits placed with SA
Finance amounting to RMB365.9 million, which earned interest at the rate of
1.98%  3.00% per annum.

Shenzhen Air Catering Company Limited, which is 33% owned by CSAHC, and
67% owned by two independent third parties

The Company and Shenzhen Air Catering Company Limited have entered into an
agreement dated May 23, 1997 for the sale and purchase of in-flight meals for
flights originating or stopping at the airport in Shenzhen. Pursuant to such
agreement, Shenzhen Air Catering Company Limited would supply in-flight meals
to the Group from time to time during the term from May 23, 1997 to May 23,
1998. The parties have agreed that the agreement can be extended
automatically.

For the year ended December 31, 2003, the amount paid by the Group to
Shenzhen Air Catering Company Limited for the provision of in-flight meals was
approximately RMB28.2 million.

GAMECO, which is 50% owned by the Company and 50% owned by an independent
third party

The Company and GAMECO have entered into an Aircraft Maintenance and
Engineering Agreement for the provision of aircraft repair and maintenance
services. On May 17, 1996, the Company and GAMECO entered into an agreement
regarding the fee arrangement for the provision of such repair and maintenance
services (the Fee Agreement). Pursuant to the Fee Agreement and subsequent
agreements, GAMECO charged the Company for expendables at cost plus 15%, and
labor costs at US$30.0 per hour during 2003.

For the year ended December 31, 2003, the amount incurred by the Company
for such repair and maintenance services was RMB587.3 million.

The China Southern West Australian Flying College Pty Ltd (the Australian
Pilot College), which is 65% owned by the Company and 35% owned by CSAHC.

CSAHC and the Australian Pilot College entered into an agreement dated
October 7, 1993, for the provision of pilot training in Australia to the cadet
pilots of CSAHC (the Training Agreement). The Training Agreement will remain
in force unless terminated by either party upon 90 days prior written notice
to the other party. Pursuant to the Demerger Agreement, the Company has
assumed all the interests, rights and obligations of CSAHC under the Training
Agreement.

For the year ended December 31, 2003, the amount paid by the Group to the
Australian Pilot College for training services was RMB82.4 million.

47



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##### Table of Contents



Southern Airlines (Group) Economic Development Company (SAGEDC), which
is 61% owned by CSAHC and 39% owned by an independent third party.

The Company and SAGEDC have entered into an agreement dated May 22, 1997,
for the provision of drinks, snacks, liquor, souvenirs and other products for a
term extending from May 22, 1997, to May 22, 2007.

For the year ended December 31, 2003, the amount paid by the Group to
Southern Airlines (Group) Economic Development Company for the provision of
drinks, snacks, liquor, souvenirs and other products was RMB42.8 million.

Ticket sales arrangements

The Company has entered into ticket agency agreements for the sale of the
Groups air tickets with several subsidiaries of CSAHC (the Agents). The
Agents charge a commission, at a rate prescribed by the CAAC and the
International Air Transport Association, for each air ticket sold in
the amount of 3% of the ticket price for domestic tickets and 5%  12% of the
ticket price for Hong Kong regional/international tickets, respectively. In
addition to the Agents, the Company has other air ticket sales agents in China
who charge commission at the same rates. The Agents also act as air ticket
sales agents for other Chinese airlines and charge the same rates of commission
to such other airlines as those charged to the Company.

For the year ended December 31, 2003, the aggregate amount of ticket sales
of the Group conducted through the Agents was RMB143.0 million.

Interests
of Experts and Counsel

Not
applicable.




ITEM 8. FINANCIAL INFORMATION.




Consolidated Statements and Other Financial Information

See Item 18. Financial Statements for financial statements filed as part of
this Annual Report.

48



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##### Table of Contents






Significant Changes

No significant changes have occurred since the date of the financial statements
provided in Item 18 below.

Legal Proceedings

The Company is currently involved in a civil litigation (Hong Kong High
Court Action No. 515 of 2001) (Litigation). According to the writ of summons
for the Litigation, New Link Consultants Limited, the plaintiff, claimed
against the Company (as one of the defendants to the Litigation) on the basis
of certain evidence proving that United Aero-Supplies System of China, Limited
(UASSC) entered into an agreement with the defendants for exclusive purchase
of aviation equipment consigned to UASSC for sale and, that as the defendants
failed to perform the agreement, UASSC has the right to compensation. Since
UASSC is in the course of its winding up proceedings, all the rights and
benefits of UASSC in connection with the claim have been transferred to the
plaintiff. The Company, as one of the defendants to the Litigation, has been
claimed for unspecified damages for breach of the agreement. Given that the
Litigation is still at its preliminary stage, it is pre-matured to predict the
result of the court judgment. Based on the opinion given by its instructing
solicitors, the Companys directors consider that the Company has a reasonable
chance of success in its defense to the claim. At present, the Company has
filed an objection in respect of the jurisdiction of the court, and has
requested the court to transfer the case to the PRC for trial. Accordingly, the
Directors of the Company consider that a provision for such claim and/or the
associated legal costs is not required.

Other than the above legal proceeding, the Company is not party to any
material legal proceedings.

Dividend
Information

No interim dividend was paid during the year ended December
31, 2003. The Board of Directors does not recommend the payment of a
final dividend in respect of the year ended December 31, 2003.




ITEM 9. THE OFFER AND LISTING.

The principal trading market for the Companys H Shares is the Hong Kong Stock
Exchange, and the Companys trading code is 1055. The ADSs, each
representing 50 H Shares, are evidenced by ADRs issued by The Bank of New York
as the Depositary for the ADRs, and are listed on the New York Stock Exchange
under the symbol ZNH. As of May 31, 2004,
approximately 104,740,000 of the
Companys H Shares in the form of 2,094,800 ADSs were held in the U.S. by approximately
42 record holders in the U.S., including the Depository Trust
Company.

In July 2003, the Company issued and listed 1,000,000,000
A shares on the Shanghai Stock Exchange with trading code of
600029. The 2,200,000,000 Domestic Shares held by CSAHC
are not listed on any stock exchange and are essentially not
transferrable by CSAHC.

Set forth below for the periods indicated are the high and low sales prices of
H Shares on the Hong Kong Stock Exchange, ADSs on the New York Stock
Exchange and A Shares on the Shanghai Stock Exchange.

|                        |                                     |      |                    |      |                |      |                   |      |  |      |  |       |  |  |  |       |  |  |  |      |  |  |  |      | 
|----------------------- | ----------------------------------- | ---- | ------------------ | ---- | -------------- | ---- | ----------------- | ---- |  | ---- |  | ----- |  |  |  | ----- |  |  |  | ---- |  |  |  | ---- | 
|                        |                                     |      | The Stock
Exchange |      | The New
York   |      | The
Shanghai     
|                        |                                     |      | of Hong
Kong       |      | Stock
Exchange |      | Stock
Exchange   
|                        |                                     |      | Price per H Share  |      | Price per ADS  |      | Price per
A Share
|                        |                                     |      | (HK$)              |      | (US$)          |      | (RMB)            
|                        |                                     |      |                    |      |                |      |                  
|                        |                                     | High |                    | Low  |                | High |                   | Low  |  | High |  | Low  
|                        |                                     |      |                    |      |                |      |                   |      |  |      |  |      
|Annual
Market Prices    |                                     |      |                    |      |                |      |                   |      |  |      |  |      
|                        | Fiscal Year ended December 31, 1998 |      |                    | 2.40 |                |      |                   | 0.50 |  |      |  | 14.75 |  |  |  | 3.06  |  |  |  | N/A  |  |  |  | N/A  | 
|                        | Fiscal Year ended December 31, 1999 |      |                    | 2.25 |                |      |                   | 0.61 |  |      |  | 13.94 |  |  |  | 3.88  |  |  |  | N/A  |  |  |  | N/A  | 
|                        | Fiscal Year ended December 31, 2000 |      |                    | 2.93 |                |      |                   | 1.02 |  |      |  | 18.38 |  |  |  | 6.06  |  |  |  | N/A  |  |  |  | N/A  | 
|                        | Fiscal Year ended December 31, 2001 |      |                    | 2.95 |                |      |                   | 1.35 |  |      |  | 18.10 |  |  |  | 8.00  |  |  |  | N/A  |  |  |  | N/A  | 
|                        | Fiscal Year ended December 31, 2002 |      |                    | 3.60 |                |      |                   | 1.50 |  |      |  | 22.25 |  |  |  | 10.35 |  |  |  | N/A  |  |  |  | N/A  | 
|                        | Fiscal Year ended December 31, 2003 |      |                    | 3.50 |                |      |                   | 1.46 |  |      |  | 22.78 |  |  |  | 9.53  |  |  |  | 5.34 |  |  |  | 3.75 | 
|Quarterly Market Prices |                                     |      |                    |      |                |      |                   |      |  |      |  |       |  |  |  |       |  |  |  |      |  |  |  |     
|                        | Fiscal Year ended December 31, 2000 |      |                    |      |                |      |                   |      |  |      |  |       |  |  |  |       |  |  |  |      |  |  |  |      | 
|                        | First Quarter                       |      |                    | 1.86 |                |      |                   | 1.02 |  |      |  | 11.19 |  |  |  | 6.88  |  |  |  | N/A  |  |  |  | N/A  | 
|                        | Second Quarter                      |      |                    | 2.05 |                |      |                   | 1.06 |  |      |  | 12.44 |  |  |  | 6.06  |  |  |  | N/A  |  |  |  | N/A  | 
|                        | Third Quarter                       |      |                    | 2.93 |                |      |                   | 1.63 |  |      |  | 18.38 |  |  |  | 10.19 |  |  |  | N/A  |  |  |  | N/A  | 
|                        | Fourth Quarter                      |      |                    | 2.40 |                |      |                   | 1.46 |  |      |  | 15.06 |  |  |  | 9.56  |  |  |  | N/A  |  |  |  | N/A  | 
|                        | Fiscal Year ended December 31, 2001 |      |                    |      |                |      |                   |      |  |      |  |       |  |  |  |       |  |  |  |      |  |  |  |      | 
|                        | First Quarter                       |      |                    | 2.70 |                |      |                   | 1.83 |  |      |  | 17.38 |  |  |  | 12.22 |  |  |  | N/A  |  |  |  | N/A  | 
|                        | Second Quarter                      |      |                    | 2.95 |                |      |                   | 1.89 |  |      |  | 18.10 |  |  |  | 12.00 |  |  |  | N/A  |  |  |  | N/A  | 
|                        | Third Quarter                       |      |                    | 2.53 |                |      |                   | 1.35 |  |      |  | 16.50 |  |  |  | 8.00  |  |  |  | N/A  |  |  |  | N/A  | 
|                        | Fourth Quarter                      |      |                    | 2.42 |                |      |                   | 1.66 |  |      |  | 15.25 |  |  |  | 9.8   |  |  |  | N/A  |  |  |  | N/A  | 
|                        | Fiscal Year ended December 31, 2002 |      |                    |      |                |      |                   |      |  |      |  |       |  |  |  |       |  |  |  |      |  |  |  |      | 

49



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|                                    |                |      |                    |      |                |      |                   |      |  |      |  |       |  |  |  |       |  |  |  |      |  |  |  |      | 
|----------------------------------- | -------------- | ---- | ------------------ | ---- | -------------- | ---- | ----------------- | ---- |  | ---- |  | ----- |  |  |  | ----- |  |  |  | ---- |  |  |  | ---- | 
|                                    |                |      | The Stock
Exchange |      | The New
York   |      | The
Shanghai     
|                                    |                |      | of Hong
Kong       |      | Stock
Exchange |      | Stock
Exchange   
|                                    |                |      | Price per H Share  |      | Price per ADS  |      | Price per
A Share
|                                    |                |      | (HK$)              |      | (US$)          |      | (RMB)            
|                                    |                |      |                    |      |                |      |                  
|                                    |                | High |                    | Low  |                | High |                   | Low  |  | High |  | Low  
|                                    |                |      |                    |      |                |      |                   |      |  |      |  |      
|                                    | First Quarter  |      |                    | 2.83 |                |      |                   | 2.22 |  |      |  | 17.63 |  |  |  | 14.80 |  |  |  | NA   |  |  |  | NA   | 
|                                    | Second Quarter |      |                    | 3.42 |                |      |                   | 2.33 |  |      |  | 21.74 |  |  |  | 14.95 |  |  |  | NA   |  |  |  | NA   | 
|                                    | Third Quarter  |      |                    | 3.60 |                |      |                   | 1.89 |  |      |  | 22.25 |  |  |  | 12.00 |  |  |  | NA   |  |  |  | NA   | 
|                                    | Fourth Quarter |      |                    | 2.42 |                |      |                   | 1.50 |  |      |  | 15.00 |  |  |  | 10.35 |  |  |  | NA   |  |  |  | NA   | 
|Fiscal Year ended December 31,
2003 |                |      |                    |      |                |      |                   |      |  |      |  |       |  |  |  |       |  |  |  |      |  |  |  |     
|                                    | First Quarter  |      |                    | 2.62 |                |      |                   | 1.71 |  |      |  | 16.50 |  |  |  | 11.75 |  |  |  | N/A  |  |  |  | N/A  | 
|                                    | Second Quarter |      |                    | 2.40 |                |      |                   | 1.46 |  |      |  | 14.85 |  |  |  | 9.53  |  |  |  | N/A  |  |  |  | N/A  | 
|                                    | Third Quarter  |      |                    | 2.88 |                |      |                   | 2.03 |  |      |  | 18.59 |  |  |  | 13.25 |  |  |  | 4.15 |  |  |  | 3.75 | 
|                                    | Fourth Quarter |      |                    | 3.50 |                |      |                   | 2.50 |  |      |  | 22.78 |  |  |  | 16.76 |  |  |  | 5.34 |  |  |  | 3.86 | 
|Monthly Market Prices               |                |      |                    |      |                |      |                   |      |  |      |  |       |  |  |  |       |  |  |  |      |  |  |  |     
|                                    | December 2003  |      |                    | 3.50 |                |      |                   | 2.92 |  |      |  | 22.78 |  |  |  | 19.00 |  |  |  | 5.34 |  |  |  | 4.46 | 
|                                    | January 2004   |      |                    | 3.95 |                |      |                   | 3.35 |  |      |  | 25.18 |  |  |  | 21.94 |  |  |  | 6.30 |  |  |  | 4.95 | 
|                                    | February 2004  |      |                    | 4.68 |                |      |                   | 3.20 |  |      |  | 29.73 |  |  |  | 20.91 |  |  |  | 6.73 |  |  |  | 5.70 | 
|                                    | March 2004     |      |                    | 4.47 |                |      |                   | 3.30 |  |      |  | 28.60 |  |  |  | 21.00 |  |  |  | 6.57 |  |  |  | 5.77 | 
|                                    | April 2004     |      |                    | 3.90 |                |      |                   | 3.20 |  |      |  | 24.89 |  |  |  | 21.07 |  |  |  | 6.24 |  |  |  | 5.49 | 
|                                    | May 2004       |      |                    | 3.53 |                |      |                   | 2.47 |  |      |  | 22.62 |  |  |  | 15.95 |  |  |  | 6.10 |  |  |  | 4.82 | 




Offer and Listing details

Not applicable.




Plan of Distribution

Not applicable.




Markets

Not applicable.




Selling Shareholders

Not applicable.




Dilution

Not applicable.




Expenses of the Issue

Not applicable.




ITEM 10. ADDITIONAL INFORMATION.




Share Capital

Not applicable.




Memorandum and Articles of Association

The Company is registered with and has obtained a business license from the
State Administration Bureau of Industry and Commerce of the
Peoples Republic of China on March 25, 1995.
The Companys business license number is 1000001001760.

On March 13, 2003, the Company obtained an approval certificate from the
Ministry of Commerce to change to a permanent limited company with foreign
investments and obtained
the business license (Qi Gu Guo Zi Di No. 000995) on October 17, 2003 issued by
the State Administration of Industry and Commerce of the Peoples Republic of
China.

50



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Director

Pursuant to Article 13 of the Articles of Association, the business
purposes of the Company are: (i) to absorb domestic and foreign capital; (ii)
to assist in developing the aviation industry of China; (iii) to promote the
development of the national economy of China; (iv) to utilize corporate
incentive mechanisms of privatization; (v) to draw on the advanced management
expertise of other domestic and foreign companies; (vi) to continuously improve
the management of the Company; (vii) to enhance the market competitiveness of
the Company; (viii) to generate economic and social benefits for the Company;
and (ix) to generate steady income for the Companys shareholders. Pursuant to
Article 14 of the Articles of Association, the scope of business of the Company
shall be consistent with and subject to the scope of business approved by the
relevant supervisory department of the State. The scope of business of the
Company includes: (i) provision of scheduled and non-scheduled domestic,
regional and international air transportation services for passengers, cargo,
mail and luggage; (ii) undertaking general aviation services; (iii) provision
of aircraft repair and maintenance services; (iv) acting as agent for other
domestic and international airlines; (v) provision of air catering services and
(vi) engaging in other airline or airline-related business, including
advertising for such services.

Pursuant to Article 154 of the Articles of Association, where a director
of the Company is in any way, directly or indirectly, materially interested in
a contract, transaction or arrangement or proposed contract, transaction or
arrangement with the Company, (other than his contract of service with the
Company), he shall declare the nature and extent of his interests to the board
of directors at the earliest opportunity, whether or not the contract,
transaction or arrangement or proposal therefor is otherwise subject to the
approval of the board of directors.

Pursuant to Article 108 of the Articles of Association, where a director
is interested in any resolution proposed at a board meeting, such director
shall not be present and shall not have a right to vote. Such director shall
not be counted in the quorum of the relevant meeting.

Pursuant to Article 162 of the Articles of Association, the Company shall,
with the prior approval of shareholders in general meeting, enter into a
contract in writing with a director wherein his emoluments are stipulated. The
aforesaid emoluments include, emoluments in respect of his service as director,
supervisor or senior administrative officer of the Company or any subsidiary of
the Company; emoluments in respect of the provision of other services in
connection with the management of the affairs of the Company and any of its
subsidiaries; and payment by way of compensation for loss of office, or as
consideration for or in connection with his retirement from office.

Pursuant to Article 102(6) of the Articles of Association, the board of
directors has the power to formulate proposals for increases or reductions in
the Companys registered capital and the issue of debentures of the Company;
such resolutions must be passed by more than two-thirds of all the directors.

There is no mandatory retirement age for the directors of the Company.
The directors of the Company are not required to hold shares of the Company.

Ordinary Shares

Pursuant to Article 19 of the Articles of Association,subject to the
approval of the securities authority of the State Council, the Company may
issue and offer shares to domestic investors or foreign investors for
subscription. Foreign investors are those investors of foreign countries and
regions of Hong Kong, Macau and Taiwan who subscribe for shares issued by the
Company. Domestic investors are those investors within the territory of the
PRC (excluding investors of the regions referred to in the preceding sentence)
who subscribe for shares issued by the Company.

Pursuant to Article 20 of the Articles of Association,Shares issued by
the Company to domestic investors for subscription in Renminbi shall be
referred to as Domestic-Invested Shares. Shares issued by the Company to
foreign investors for subscription in foreign currencies shall be referred to
as Foreign-Invested Shares. Foreign-Invested Shares which are listed
overseas are called Overseas-Listed Foreign-Invested Shares. The foreign
currencies mean the legal currencies (apart from Renminbi) of other countries
or districts which are recognized by the foreign exchange control authority of
the State and can be used to pay the Company for the share price.

Pursuant to Article 21 of the Articles of Association,Domestic-Invested
Shares issued by the Company shall be called A Shares. Overseas-Listed
Foreign-Invested Shares issued by the Company and listed in Hong Kong shall be
called H Shares. H Shares are shares which have been admitted for listing on
The Stock Exchange of Hong Kong Limited, the par value of which is denominated
in Renminbi and which are subscribed for and traded in Hong Kong dollars. H
Shares can also be listed on a stock exchange in the United States of America
in the form of American depositary receipts.

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The
Company has issued a total of 4,374,178,000 ordinary shares, of which
(a) 2,200,000,000 domestic shares are held by CSAHC, (b) 1,174,178,000 H
shares are held by Hong Kong and overseas shareholders and
(c) 1,000,000,000 A shares are held by the PRC shareholders.

Pursuant to Article 54 of the Articles of Association, the ordinary
shareholders of the Company shall enjoy the following rights:



|(1) |  | the right to attend or appoint a proxy to attend shareholders general
meetings and to vote thereat;                                                                                    
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | the right to dividends and other distributions in proportion to the
number of shares held;                                                                                              
|   
|(3) |  | the right of supervisory management over the Companys business
operations, and the right to present proposals or enquiries;                                                            
|   
|(4) |  | the right to transfer, donate or pledge his shares in accordance with
laws, administrative regulations and provisions of these articles of
association;                                 
|   
|(5) |  | the right of knowledge and decision making power with respect to
important matters of the Company in accordance with laws, administrative
regulations and these articles of association;
|   
|(6) |  | the right to obtain relevant information in accordance with the
provisions of these articles of association, including:                                                                 



| | (i)  |  | the right to obtain a copy of these articles of association,
subject to payment of the cost of such copy;                                                                                                                                                  
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii) |  | the right to inspect and copy, subject to payment of a
reasonable charge:                                                                                                                                                                                  
|
| |      |  | (a)     all parts of the register of shareholders;                                                                                                                                                                                                         
|
| |      |  | (b)     personal particulars of each of the Companys
directors, supervisors, president and other senior
administrative officers, including:                                                                                                               
|
| |      |  | (aa)          present name and alias and any former name or alias;                                                                                                                                                                                         
|
| |      |  | (bb)          principal address (residence);                                                                                                                                                                                                               
|
| |      |  | (cc)          nationality;                                                                                                                                                                                                                                 
|
| |      |  | (dd)          primary and all other part-time occupations and duties;                                                                                                                                                                                      
|
| |      |  | (ee)          identification documents and their relevant numbers;                                                                                                                                                                                         
|
| |      |  | (c)     state of the Companys share capital;                                                                                                                                                                                                              
|
| |      |  | (d)     reports showing the aggregate par value, quantity,
highest and lowest price paid in respect of each class of shares repurchased by the Company since the end of last accounting year
and the aggregate amount paid by the Company for this purpose;
|
| |      |  | (e)     minutes of shareholders general meetings;                                                                                                                                                                                                         
|
| |      |  | (f)     interim and annual reports of the Company.                                                                                                                                                                                                         



|(7) |  | in the event of the termination or liquidation of the Company, to
participate in the distribution of surplus assets of the Company in
accordance with the number of shares held;
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(8) |  | other rights conferred by laws, administrative regulations and these
articles of association.                                                                                   

Pursuant to Article 55 of the Articles of Association, the ordinary
shareholders of the Company shall assume the following obligations:

52



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##### Table of Contents





|(1) |  | to abide by these articles of association;                                                             
|--- |  | -------------------------------------------------------------------------------------------------------
|   
|(2) |  | to pay subscription monies according to the number of shares subscribed
and the method of subscription;
|   
|(3) |  | no right to return shares to the Company unless laws and regulations
provide otherwise;                
|   
|(4) |  | other obligations imposed by laws, administrative regulations and these
articles of association.       

Shareholders are not liable to make any further contribution to the share
capital other than as agreed by the subscriber of the relevant shares on
subscription.

Action necessary to change rights of shareholders

Pursuant to Article 92 of the Articles of Association, those shareholders
who hold different classes of shares are shareholders of different classes.

The holders of the Domestic-Invested shares and holders of Overseas-Listed
Foreign-Invested Shares shall be deemed to be shareholders of different
classes.

Pursuant to Article 93 of the Articles of Association, rights conferred on
any class of shareholders in the capacity of shareholders (class rights) may
not be varied or abrogated unless approved by a special resolution of
shareholders in general meeting and by holders of shares of that class at a
separate meeting conducted in accordance with Articles 95 to 99.

Pursuant to Article 95 of the Articles of Association, shareholders of the
affected class, whether or not otherwise having the right to vote at
shareholders general meetings, shall nevertheless have the right to vote at
class meetings in respect of matters concerning sub-paragraphs (2) to (8), (11)
and (12) of Article 94, but interested shareholder(s) shall not be entitled to
vote at class meetings. Interested shareholder(s) is:



|(1) |  | in the case of a repurchase of shares by offers to all shareholders or
public dealing on a stock exchange under Article 31, a controlling
shareholder within the meaning of Article 57;                                                                                                        
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | in the case of a repurchase of share by an off-market contract under
Article 31, a holder of the shares to which the proposed contract relates;                                                                                                                                                  
|   
|(3) |  | in the case of a restructuring of the Company, a shareholder within a
class who bears less than a proportionate obligation imposed on that class
under the proposed restructuring or who has an interest in the proposed
restructuring different from the interest of shareholders of that class.

Pursuant to Article 96 of the Articles of Association, resolutions of a
class of shareholders shall be passed by votes representing more than
two-thirds of the voting rights of shareholders of that class represented at
the relevant meeting who, according to Article 95, are entitled to vote at
class meetings.

Pursuant to Article 97 of the Articles of Association, written notice of a
class meeting shall be given forty-five (45) days before the date of the class
meeting to notify all of the shareholders in the share register of the class of
the matters to be considered, the date and the place of the class meeting. A
shareholder who intends to attend the class meeting shall deliver his written
reply concerning attendance at the class meeting to the Company twenty (20)
days before the date of the class meeting.

If the number of shares carrying voting rights at the meeting represented
by the shareholders who intend to attend the class meeting reaches more than
one half of the voting shares at the class meeting, the Company may hold the
class meeting; if not, the Company shall within five (5) days notify the
shareholders again by public notice of the matters to be considered, the date
and the place for the class meeting. The Company may then hold the class
meeting after such publication of notice.

Pursuant to Article 98 of the Articles of Association, notice of class
meetings need only be served on shareholders entitled to vote thereat.

53



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Meeting of any class of shareholders shall be conducted in a manner as
similar as possible to that of general meetings of shareholders. The
provisions of these articles of association relating to the manner to conduct
any shareholders general meeting shall apply to any meeting of a class of
shareholders.

Pursuant to Article 99 of the Articles of Association, the special
procedures for voting at any meeting of a class of shareholders shall not apply
to the following circumstances:



|(1) |  | where the Company issues, upon the approval by special resolution of its
shareholders in general meeting, either separately or concurrently once
every twelve months, not more than 20 per cent of each of its existing
issued Domestic-Invested Shares and Overseas-Listed Foreign-Invested
Shares;
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | where the Companys plan to issue Domestic-Invested Shares and
Overseas-Listed Foreign-Invested Shares at the time of its establishment
is carried out within fifteen (15) months from the date of approval of the
Securities Committee of the State Council.                                       

Meetings of shareholders

Shareholders general meetings is the organ of authority of the Company
and shall exercise its functions and powers, among other things, to decide on
the Companys operational policies and investment plans, to elect and replace
directors and decide on matters relating to the remuneration of directors, to
examine and approve reports of the board of directors, etc.

There are two types of shareholders general meetings: annual general
meetings and extraordinary general meetings. Shareholders general meetings
shall be convened by the board of directors. Annual general meetings are held
once every year and within six (6) months from the end of the preceding
financial year.

Under any of the following circumstances, the board of directors shall
convene an extraordinary general meeting within two (2) months:



|(1) |  | when the number of directors is less than the number of directors
required by the Company Law or two thirds of the number of directors
specified in the Articles of Association;              
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | when the unrecovered losses of the Company amount to one third of the
total amount of its share capital;                                                                                      
|   
|(3) |  | when shareholder(s) holding 10 per cent or more of the Companys issued
and outstanding shares carrying voting rights request(s) in writing the
convening of an extraordinary general meeting;
|   
|(4) |  | when deemed necessary by the board of directors or as requested by the
supervisory committee.                                                                                                 

When the Company convenes a shareholders general meeting, written notice
of the meeting shall be given forty five (45) days before the date of the
meeting to notify all of the shareholders in the share register of the matters
to be considered and the date and the place of the meeting. A shareholder who
intends to attend the meeting shall deliver his written reply concerning the
attendance of the meeting to the Company twenty (20) days before the date of
the meeting.

The Company shall, based on the written replies received twenty (20) days
before the date of the shareholders general meeting from the shareholders,
calculate the number of voting shares represented by the shareholders who
intend to attend the meeting. If the number of voting shares represented by
the shareholders who intend to attend the meeting reaches one half or more of
the Companys total voting shares, the Company may hold the meeting; if not,
then the Company shall within five (5) days notify the shareholders again by
public notice of the matters to be considered, the place and date for, the
meeting. The Company may then hold the meeting after such publication of
notice.

Limitation on right to own securities

The PRC Special Regulations on Overseas Offering and the Listing of Shares
by Companies Limited by Share (the Special Regulations) and the Mandatory
Provisions for Articles of Association of Companies to be Listed Overseas (the
Mandatory Provisions) provide for different classes of shares to be
subscribed for and traded by local and overseas investors respectively. Shares
which can be traded by overseas investors must be in registered form and while
denominated in Renminbi, they are traded in foreign currency with dividends
payable in foreign currency. Local investors are prohibited from dealing in
such shares.

54



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##### Table of Contents



Merger, acquisition or corporate restructuring

Pursuant to Article 193 of the Articles of Association, in the event of
the merger or division of the Company, a plan shall be presented by the
Companys board of directors and shall be approved in shareholders general
meeting and the relevant examining and approving formalities shall be processed
as required by law. A shareholder who objects to the plan of merger or
division shall have the right to demand the Company or the shareholders who
consent to the plan of merger or division to acquire that dissenting
shareholders shareholding at a fair price. The contents of the resolution of
merger or division of the Company shall be made into special documents for
shareholders inspection. Such special documents shall be sent by mail to
holders of Overseas-Listed Foreign-Invested Shares.

The Articles of Association do not contain any provisions governing the
ownership threshold above which shareholder ownership must be disclosed.




Material Contracts

The Company has not entered into any material contracts, other than in the
ordinary course of business, during the preceding two years.




Exchange Controls

Under current Chinese foreign exchange regulations, Renminbi is fully
convertible for current account transactions, but is not freely convertible for
capital account transactions. Conversion from Renminbi into a foreign currency
or vice versa for purposes of capital account transactions requires prior
approvals of relevant Chinese Government agencies.

The Company is generally required by law to sell all its foreign exchange
revenues to Chinese banks at the exchange rates published by Chinese banks on
each business day, which rates may deviate only within a very narrow range from
the official rate published daily by the Peoples Bank of China, Chinas
central bank.

The Company may purchase foreign exchange directly from Chinese banks for any
current account transactions, such as trade transactions in its normal course
of business, including acquisition of aircraft and flight equipment (such
acquisition requires approvals from relevant Chinese Government agencies).

Payment of dividends by the Company to holders of the Companys H Shares and
ADSs is considered a current account transaction under Chinese law. Therefore,
there is no legal restriction on the conversion of Renminbi into foreign
exchange for the purpose of paying dividends to such holders of H Shares and
ADSs. In addition, the Companys Articles of Association require the Company
to pay dividends to holders of the Companys H Shares and ADSs in foreign
exchange.

Other Limitations

There are no limitations on the right of non-resident or foreign owners to
hold or vote H Shares or ADSs imposed by Chinese law or by the Articles of
Association or other constituent documents of the Company. However, under
current Chinese law, foreign ownership of the Company may not exceed 49%.




Taxation

The following is a general summary of certain Chinese tax consequences of the
acquisition, ownership and disposition of H Shares and ADSs. This summary is
based upon tax laws of China as in effect on the date of this Annual Report,
including the income tax treaty between the United States and China (the
U.S.-PRC Tax Treaty), all of which are subject to change or different
interpretation.

In general, for Chinese tax purposes, holders of ADSs will be treated as the
owners of the H Shares represented by those ADSs, and exchanges of H Shares for
ADSs, and ADSs for H Shares, will not be subject to taxation under the laws of
China.

55



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##### Table of Contents



This summary does not purport to address all material tax consequences for
holders or prospective purchasers of H Shares or ADSs, and does not take into
account the specific circumstances of such investors. Investors should consult
their own tax advisors as to Chinese or other tax consequences of the
acquisition, ownership and disposition of H Shares or ADSs.

Dividends

Chinese tax law generally provides for the imposition of a withholding tax
on dividends paid by a Chinese company to a non-Chinese shareholder at a rate
of 20%. However, the Chinese tax authorities have temporarily suspended
imposition of this withholding tax. Accordingly, dividends paid by the Company
to holders of H Shares or ADSs who are foreign individuals not resident in
China or which are foreign enterprises with no permanent establishment in China
will currently not be subject to Chinese withholding tax. In the event that
the suspension of the withholding tax is lifted, such payments will be subject
to withholding tax at the 20% rate unless the holder is entitled to a tax
waiver or a lower tax rate under an applicable double-taxation treaty.

China currently has double-taxation treaties with a number of countries,
including Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands,
Singapore, the United Kingdom and the United States. Under the U.S.-PRC Tax
Treaty, China may tax a dividend paid by the Company to a U.S. holder up to a
maximum of 10% of the gross amount of such dividend.

Capital Gains from Transfer or Disposition of Shares

Chinese tax law generally provides that an individual who transfers or
otherwise disposes of a companys shares of capital stock is subject to a 20%
capital gains tax. Currently, foreign enterprises and all individuals are
temporarily exempt from capital gains tax on transfers of shares of capital
stock of joint stock companies, such as the Company. Should such temporary
exemption be discontinued, such holders may be subject to a 20% capital gains
tax unless reduced by an applicable double-taxation treaty. Under the U.S.-PRC
Tax Treaty, for example, China may only impose a 20% capital gains tax from the
sale or other disposition by a U.S. holder of H Shares or ADSs representing an
interest in the Company of 25% or more.

Stamp Duty

Transfers of shares of capital stock of a company are not subject to
Chinese stamp duty if the transfer does not take place within China (excluding
Hong Kong, Macau and Taiwan).




Dividends and paying Agents

Not applicable.




Statement by Experts

Not applicable.




Documents on Display

The Company has filed this Annual Report on Form 20-F with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
Statements made in this annual report as to the contents of any document
referred to are not necessarily complete. With respect to each such document
filed as an exhibit to this annual report, reference is made to the exhibit for
a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.

The Company is subject to the informational requirements of the Exchange Act
and file reports and other information with the Securities and Exchange
Commission. Reports and other information which the Company filed with the
Securities and Exchange Commission, including this Annual Report on Form 20-F,
may be inspected and copied at the public reference room of the
Securities and Exchange Commission at

56



---



##### Table of Contents



450 Fifth Street N.W. Washington D.C. 20549

You can also obtain copies of this material by mail from the Public Reference
Section of the Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington D.C. 20549, at prescribed rates. Additionally, copies of this
material may be obtained from the Securities and Exchange Commissions Internet
site at http://www.sec.gov. The Commissions telephone number is
1-800-SEC-0330.




Subsidiary Information

Not applicable.




ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Group is subject to market risks due to fluctuations in interest rates.
The majority of the Groups borrowings is in the form of long-term fixed- and
variable-rate debts with original maturities ranging from two to 12 years.
Fluctuations in interest rates can lead to significant fluctuations in the fair
value of such debt instruments. From time to time, the Group may enter into
interest rate swaps designed to mitigate exposure relating to interest rate
risks. No such contract was outstanding as of December 31, 2003.

The Group is also exposed to foreign currency risk as a result of its aircraft
and flight equipment being sourced from overseas suppliers. Specifically, the
Groups foreign currency exposure relates primarily to its foreign currency
long-term debts used to finance such capital expenditures and its capital
commitments. Subject to certain restrictive conditions imposed by the State
Administration of Foreign Exchange, the Group may, from time to time, enter
into forward foreign exchange contracts to mitigate its foreign currency
exposures. No such contract was outstanding as of December 31,
2003.

As of December 31, 2003, the
Group operated a total of 83 aircraft under
operating and capital leases at rates that are substantially fixed. Such
leases expose the Group to market risks; however, in accordance with Item 305
of Regulation S-K, such leases have been excluded from the following market
risk tables. Commitments under operating and capital leases are disclosed in
Note 17 to the Financial Statements.

The following table provides
information regarding the Groups material interest rate
sensitive financial instruments as of December 31, 2003 and 2002:

57



---



##### Table of Contents



As of December 31, 2003
    
    As of December 31, 2002Expected maturity dateTotal
    
    
    
    
    
    Totalrecorded
    
    
    
    
    
    recorded2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    amount
    
    Fair value(2)
    
    amount
    
    Fair value(2)DebtFixed-rate notes payableIn US$
    
    
    624
    
    
    
    645
    
    
    
    402
    
    
    
    370
    
    
    
    217
    
    
    
    369
    
    
    
    2,627
    
    
    
    2,915
    
    
    
    3,429
    
    
    
    3,793Average interest rate
    
    
    6.81
    %
    
    
    6.78
    %
    
    
    6.78
    %
    
    
    6.78
    %
    
    
    6.78
    %
    
    
    6.79
    %
    
    
    6.79
    %
    
    
    
    
    
    
    6.86
    %
    
    
    Variable-rate notes payableIn US$
    
    
    5,867
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229
    
    
    
    2,276
    
    
    
    8,372
    
    
    
    8,372
    
    
    
    2,254
    
    
    
    2,254Average interest rate
    
    
    1.91
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.48
    %
    
    
    1.49
    %
    
    
    1.63
    %
    
    
    
    
    
    
    2.10
    %
    
    
    In RMB
    
    
    606
    
    
    
    5
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    3
    
    
    
    620
    
    
    
    620
    
    
    
    5,393
    
    
    
    5,393Average interest rate
    
    
    4.16
    %
    
    
    3.43
    %
    
    
    5.14
    %
    
    
    5.14
    %
    
    
    5.14
    %
    
    
    5.14
    %
    
    
    4.46
    %
    
    
    
    
    
    
    4.65
    %
    
    
    




|(1) |  | These interest rates are calculated based on the year end indices.                                                                               
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Fair value of debt instruments was estimated based on the interest rates
applicable to similar debt instruments as of December 31, 2003
and 2002.

The following table provides
information regarding the Groups material foreign currency
sensitive financial instruments and capital commitments as of
December 31, 2003
and 2002:

As of December 31, 2003
    
    As of December 31, 2002Expected maturity dateTotal
    
    
    
    
    
    Totalrecorded
    
    
    
    
    
    recorded2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    amount
    
    Fair value(2)
    
    amount
    
    Fair value(2)DebtFixed-rate notes payableIn US$
    
    
    624
    
    
    
    645
    
    
    
    402
    
    
    
    370
    
    
    
    217
    
    
    
    369
    
    
    
    2,627
    
    
    
    2,915
    
    
    
    3,429
    
    
    
    3,793Average interest rate
    
    
    6.81
    %
    
    
    6.78
    %
    
    
    6.78
    %
    
    
    6.78
    %
    
    
    6.78
    %
    
    
    6.79
    %
    
    
    6.79
    %
    
    
    
    
    
    
    6.86
    %
    
    
    Variable-rate notes payableIn US$
    
    
    5,867
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229
    
    
    
    2,276
    
    
    
    8,372
    
    
    
    8,372
    
    
    
    2,254
    
    
    
    2,254Average interest rate
    
    
    1.91
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.48
    %
    
    
    1.49
    %
    
    
    1.63
    %
    
    
    
    
    
    
    2.10
    %
    
    
    Capital commitment in US$
    
    
    4,585
    
    
    
    6,030
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,615
    
    
    
    10,615
    
    
    
    5,876
    
    
    
    5,876




|(1) |  | These interest rates are calculated based on the year end indices.                                                                                        
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Fair value of debt instruments was estimated based on the floating
interest rates applicable to similar debt instruments as of
December 31, 2002
and 2003.




ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

Not applicable.




PART II




ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

None.




ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.

There were no material modifications affecting the rights of securities holders
made during the fiscal year ended December 31, 2003.

Use of Proceeds



|(1) |  | Effective date of the Securities Act registration statement for which the
use of proceeds information is being disclosed:
|--- |  | -------------------------------------------------------------------------------------------------------------------------

58



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##### Table of Contents





|    |  | July 23, 1997.                                                                                                          
|--- |  | ------------------------------------------------------------------------------------------------------------------------
|   
|    |  | SEC file number assigned to such registration statement: 333-7114.                                                      
|   
|(2) |  | The offering commenced on July 23, 1997.                                                                                
|   
|(3) |  | The offering was not terminated prior to the sale of any securities
registered under the registration statement.        
|   
|(4) |  | (i)     The offering was not terminated prior to the sale of all securities registered under the registration statement.



| |  | (ii)           | Name of the managing underwriter:                
| |  | -------------- | -------------------------------------------------
|
| |  |                | Goldman Sachs (Asia) L.L.C. (global coordinator).
|
| |  | (iii) and (iv)

|                                                                                            |  |                    |  |                |  |                    |  |                |  |  |  |           |  |  |  | 
|------------------------------------------------------------------------------------------- |  | ------------------ |  | -------------- |  | ------------------ |  | -------------- |  |  |  | --------- |  |  |  | 
|                                                                                            |  |                    |  |                |  | Aggregate          |  |                |  |  |  | Aggregate
|                                                                                            |  |                    |  |                |  | price of           |  |                |  |  |  | offering 
|Title of each                                                                               |  |                    |  |                |  | offering           |  |                |  |  |  | price of 
|class of                                                                                    |  | Amount             |  | amount         |  | Amount             |  | amount        
|securities registered                                                                       |  | registered(1)      |  | registered(2)  |  | sold(3)            |  | sold(4)       
|                                                                                            |  |                    |  |                |  |                    |  |               
|Ordinary H Shares of
par value RMB 1.00
per share
represented by
American Depositary
Shares |  | 861,823,000 shares |  | US$528,469,864 |  | 851,501,000 shares |  | US$522,140,413

Notes:

(1)     The amount does not include 322,677,000 H Shares (some of which in the form
of ADSs) which have not been registered with the SEC, of which 290,477,000 H
Shares were sold to certain corporate investors in Hong Kong as part of the
global offering of the Company in July 1997 and 32,200,000 H Shares were sold
to certain limited partnership investment funds affiliated with Goldman, Sachs
& Co. in a private placement in June 1997 prior to the Companys global
offering.

(2)     Assumes that all H Shares were sold in the form of ADSs. The price to
public for each ADS is US$30.66. Each ADS represents 50 H Shares.

(3)     The amount does not include 322,677,000 H Shares referred to in note (1)
above.

(4)       The amount does not include US$197,865,536 which represents the proceeds
from the sale of 322,677,000 H Shares referred to in note (1) above. If the
latter amount is included, the aggregate amount of proceeds to the Company
would be US$720,005,950. In addition, the aggregate amount is calculated on
the assumption that all H Shares were sold in the form of ADSs. Based on the
actual sale of H Shares and ADSs, the aggregate amount of proceeds to the
Company was US$719,494,700. The issue price per H Share was HK$4.70.

(v)

|                                       |  |               |   | 
|-------------------------------------- |  | ------------- | - | 
|Underwriting discounts and commissions |  | US$36,593,000
|Finders fees                          |  |               |  | 
|Expenses paid to or for underwriters   |  | US$2,958,000 
|Other expenses                         |  | US$21,411,000
|Total expenses                         |  | US$60,962,000

Note:     No direct or indirect payments were made to directors, officers, general
partners of the Company or their associates, or to persons owning ten percent
or more of any class of equity securities of the Company, or to affiliates of
the Company. All payments were made to third parties.



|(vi) |  | Net offering proceeds to the Company after deducting the total expenses in item (4)(v) above:
|---- |  | ---------------------------------------------------------------------------------------------
|    
|     |  | US$658,532,700                                                                               

59



---



##### Table of Contents



Note:     The amount is calculated on the basis of the actual aggregate amount of
proceeds to the Company, and includes the proceeds from the sale of 322,677,000
H Shares referred to in note (1) of item (4)(iv) above.



|(vii) |  | As of December
31, 2003, the net offering proceeds to the Company was used up as
follows:
|----- |  | -----------------------------------------------------------------------------------------

|                                                     |  |                 
|---------------------------------------------------- |  | ----------------
|Construction of plant, building and facilities       |  | US$41.9 million 
|Purchase and installation of machinery and equipment |  | US$394.6 million
|Purchase of real estate                              |  |                
|Acquisition of other business(es)                    |  |                
|Repayment of indebtedness                            |  | US$192.4 million
|Working Capital                                      |  | US$29.6 million 

Note:     No direct or indirect payments were made to directors, officers, general
partners of the Company or their associates, or to persons owning ten percent
or more of any class of equity securities of the Company, or to affiliates of
the Company. All payments were made to third parties.



|(viii) |  | The uses of proceeds do not represent a material change in the use of
proceeds described in the prospectus.
|------ |  | -----------------------------------------------------------------------------------------------------------




PART III




ITEM 15. CONTROLS AND PROCEDURES

Our president and chief financial officer have
evaluated the effectiveness of our disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-15(e) or 15d-15(e), and concluded that,
based on their evaluation, our disclosure controls and procedures are effective
as of the end of the period covered by this Annual Report to ensure that
material information required to be included in this Annual Report would be
made known to them by others on a timely basis.

There has been no significant change in our internal controls or in other
factors that could significantly affect these controls subsequent to the
Evaluation Date.




ITEM 16.




ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

The Board of Directors has determined that Mr. Wei Ming Hai qualifies as
an audit committee financial expert in accordance with the terms of Item 16.A
of Form 20-F. See Item 6 Directors, Senior Management and Employees 
Directors and Senior Management




ITEM 16B. CODE OF ETHICS

As of the date of this Annual Report, the Company does not have, in form, a code of
ethics that applies to the president, chief financial
officer and principal accounting officer, or collectively, the senior corporate
officers. The senior executive officers, all of whom currently serve as our
directors, are subject to the director service contracts that they have with
the Company. Under the director service contracts, the directors, including the senior
corporate officers, agree that each director owes a fiduciary and diligence
obligation to the Company and that no such director shall engage in any
activities in competition with the Companys business or carry any activities
detrimental to the interests of the Company. Each of the directors, including
the senior corporate officers, also agreed to perform their respective duties
as directors and senior officers in accordance with the Company Law of the PRC,
relevant rules and regulations promulgated by China Securities Regulatory
Commission and the Mandatory Provisions of Articles of Association of Overseas
Listed Companies.




ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table sets forth the aggregate audit fees, audit-related
fees, tax fees of the Companys principal accountants and all other fees billed
for products and services provided by the Companys principal accountants other
than the audit fees, audit-related fees and tax fees for each of the fiscal
years 2002 and 2003:

Audit Fees
    
    Audit-Related Fees
    
    Tax Fees
    
    Other Fees2002
    
    RMB8.2 million
    
    
    RMB4.1 million
    
    
    
    RMB0.14 million
    
    
    
    2003
    
    RMB8.2 million
    
    
    RMB7.0 million
    
    
    
    RMB0.17 million
    
    
    
    RMB1.1 million


Audit-related fees

Services provided primarily consist of the following:



|a) |  | Review of the Groups 2003 interim financial report prepared under IFRS;
|-- |  | ------------------------------------------------------------------------



|b) |  | Audits of the Groups financial statements prepared under
PRC Accounting Rules and Regulations in connection with the Companys
listing of its A shares in the PRC; and     
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|c) |  | Audits of the financial statements of China Northern Airlines Company and
Xinjiang Airlines Company in connection with the Companys proposed
acquisition of these airlines.

Tax fees

Services provided primarily consist of tax compliance services.

Others

Services provided primarily consist of services to assist the Group in
documenting its internal controls over financial reporting and provide
observations and recommendations.

Before our principal accountants were engaged by the Company to render
audit or non-audit services, the engagement has been approved by our audit
committee.

Exemptions from the Listing Standards for Audit Committee

Not applicable.




ITEM 16D. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

The Company and its affiliated companies have not purchased any issued common
shares of the Company during 2003 and up to the date of this Annual Report.




PART IV




ITEM 17. FINANCIAL STATEMENTS.

Not applicable.




ITEM 18. FINANCIAL STATEMENTS.

Index to Financial Statements

|                                                                                            |  |     
|------------------------------------------------------------------------------------------- |  | ----
|                                                                                            |  | Page
|                                                                                            |  |     
|CONSOLIDATED FINANCIAL STATEMENTS OF
CHINA SOUTHERN AIRLINES COMPANY LIMITED                |  |     
|Report of Independent Registered Public Accounting Firm                                     |  | F-1 
|Consolidated Statements of Operations for the years ended December 31, 2001, 2002 and 2003  |  | F-2 
|Consolidated Balance Sheets as of December 31, 2002 and 2003                                |  | F-3 
|Consolidated Statements of Cash Flows for the years  ended December 31, 2001, 2002 and 2003 |  | F-4 
|Consolidated Statements of Changes in Shareholders Equity for the years                    |  |     
|ended December 31, 2001, 2002 and 2003                                                      |  | F-5 
|Notes to Consolidated Financial Statements                                                  |  | F-6 




ITEM 19. EXHIBITS.

60



---



##### Table of Contents



|            |  |                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                              
|            |  |                                                                                                                                     
|1           |  | Articles of Association                                                                                                             
|            |  |                                                                                                                                     
|4.1         |  | Form of Directors Service Agreement is
incorporated by reference in Exhibit 4(c).1 of
Form 20-F for the year of 2003.              
|            |  |                                                                                                                                     
|4.2         |  | Form of Non-Executive Directors Service Agreement
is incorporated by reference in Exhibit 4(c).2 of
Form 20-F for the year of 2003.
|            |  |                                                                                                                                     
|8           |  | Subsidiaries of the Company                                                                                                         
|            |  |                                                                                                                                     
|12.1        |  | Section 302 Certification of Chairman                                                                                               
|            |  |                                                                                                                                     
|12.2        |  | Section 302 Certification of President                                                                                              
|            |  |                                                                                                                                     
|12.3        |  | Section 302 Certification of Chief Financial Officer                                                                                
|            |  |                                                                                                                                     
|13.1        |  | Section 906 Certification of Chairman                                                                                               
|            |  |                                                                                                                                     
|13.2        |  | Section 906 Certification of President                                                                                              
|            |  |                                                                                                                                     
|13.3        |  | Section 906 Certification of Chief Financial Officer                                                                                

61



---



##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Statements of Operations for the years ended December 31, 2001, 2002 and 2003
    
    
    F-2Consolidated Balance Sheets as of December 31, 2002 and 2003
    
    
    F-3Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003
    
    
    F-4Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2001, 2002 and 2003
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of
China Southern Airlines Company Limited: We have audited the accompanying consolidated balance sheets of China
Southern Airlines Company Limited and its subsidiaries as of December 31, 2002
and 2003, and the related consolidated statements of operations, cash flows
and changes in shareholders equity for each of the years in the three-year
period ended December 31, 2003, all expressed in Renminbi. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of China
Southern Airlines Company Limited and its subsidiaries as of December 31, 2002
and 2003, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2003 in conformity with
International Financial Reporting Standards promulgated by the International
Accounting Standards Board. International Financial Reporting Standards vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 33 to the consolidated financial statements. The accompanying consolidated financial statements as of and for the year
ended December 31, 2003 have been translated into United States dollars solely
for the convenience of the reader. We have audited the translation, and in
our opinion, the consolidated financial statements expressed in Renminbi have
been translated into United States dollars on the basis set forth in Note 1 to
the consolidated financial statements. KPMG
Hong Kong
April 23, 2004 F-1




---



##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2001, 2002 and 2003 (Amounts in thousands, except per share data) Note
    
    2001
    
    2002
    
    2003
    
    2003RMB
    
    RMB
    
    RMB
    
    U.S. dollarsOperating revenue:Traffic revenue, net
    
    
    3
    
    
    
    16,461,532
    
    
    
    17,481,892
    
    
    
    16,964,800
    
    
    
    2,049,706Other revenue
    
    
    4
    
    
    
    418,126
    
    
    
    536,728
    
    
    
    505,323
    
    
    
    61,053Total operating revenue
    
    
    
    
    
    
    16,879,658
    
    
    
    18,018,620
    
    
    
    17,470,123
    
    
    
    2,110,759Operating expenses:Flight operations
    
    
    5
    
    
    
    6,905,628
    
    
    
    6,732,543
    
    
    
    7,070,031
    
    
    
    854,209Maintenance
    
    
    6
    
    
    
    2,014,579
    
    
    
    2,333,419
    
    
    
    2,588,613
    
    
    
    312,759Aircraft and traffic servicing
    
    
    7
    
    
    
    2,297,521
    
    
    
    2,511,284
    
    
    
    2,767,488
    
    
    
    334,371Promotion and sales
    
    
    8
    
    
    
    1,540,780
    
    
    
    1,499,587
    
    
    
    1,480,168
    
    
    
    178,836General and administrative
    
    
    9
    
    
    
    892,233
    
    
    
    1,060,010
    
    
    
    1,053,319
    
    
    
    127,263Depreciation and amortization
    
    
    
    
    
    
    1,814,974
    
    
    
    1,839,871
    
    
    
    2,037,971
    
    
    
    246,230Other
    
    
    
    
    
    
    13,270
    
    
    
    15,829
    
    
    
    16,804
    
    
    
    2,029Total operating expenses
    
    
    
    
    
    
    15,478,985
    
    
    
    15,992,543
    
    
    
    17,014,394
    
    
    
    2,055,697Operating income
    
    
    
    
    
    
    1,400,673
    
    
    
    2,026,077
    
    
    
    455,729
    
    
    
    55,062Non-operating income/(expenses):Equity income of affiliated companies
    
    
    
    
    
    
    53,077
    
    
    
    36,988
    
    
    
    47,798
    
    
    
    5,775Equity loss of jointly controlled entities
    
    
    
    
    
    
    (4,034
    )
    
    
    (3,352
    )
    
    
    (39,495
    )
    
    
    (4,772
    )(Loss)/gain on sale of fixed assets
    
    
    13, 24
    
    
    
    (55,889
    )
    
    
    170,740
    
    
    
    (22,217
    )
    
    
    (2,684
    )Interest income
    
    
    
    
    
    
    49,878
    
    
    
    52,618
    
    
    
    13,061
    
    
    
    1,578Interest expense
    
    
    16
    
    
    
    (933,717
    )
    
    
    (959,193
    )
    
    
    (823,725
    )
    
    
    (99,523
    )Exchange gain/(loss), net
    
    
    
    
    
    
    296,777
    
    
    
    (175,451
    )
    
    
    (164,443
    )
    
    
    (19,868
    )Other, net
    
    
    
    
    
    
    (11,509
    )
    
    
    (9,328
    )
    
    
    21,682
    
    
    
    2,619Total non-operating expenses
    
    
    
    
    
    
    (605,417
    )
    
    
    (886,978
    )
    
    
    (967,339
    )
    
    
    (116,875
    )Income/(loss) before taxation and minority interests
    
    
    
    
    
    
    795,256
    
    
    
    1,139,099
    
    
    
    (511,610
    )
    
    
    (61,813
    )Taxation (expense)/credit
    
    
    10
    
    
    
    (320,519
    )
    
    
    (398,227
    )
    
    
    324,277
    
    
    
    39,179Income/(loss) before minority interests
    
    
    
    
    
    
    474,737
    
    
    
    740,872
    
    
    
    (187,333
    )
    
    
    (22,634
    )Minority interests
    
    
    
    
    
    
    (134,512
    )
    
    
    (165,111
    )
    
    
    (170,934
    )
    
    
    (20,652
    )Net income/(loss)
    
    
    
    
    
    
    340,225
    
    
    
    575,761
    
    
    
    (358,267
    )
    
    
    (43,286
    )Basic earnings/(loss) per share
    
    
    2(w)
    
    
    
    0.10
    
    
    
    0.17
    
    
    
    (0.09
    )
    
    
    (0.01
    )
 See accompanying notes to
consolidated financial statements F-2




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
As of December 31, 2002 and 2003 (Amounts in thousands) Note
    
    2002
    
    2003
    
    2003RMB
    
    RMB
    
    U.S. dollarsASSETSCURRENT ASSETSCash and cash equivalents
    
    
    11
    
    
    
    3,771,043
    
    
    
    2,080,174
    
    
    
    251,329Trade receivables
    
    
    12
    
    
    
    671,776
    
    
    
    833,604
    
    
    
    100,717Other receivables
    
    
    
    
    
    
    372,586
    
    
    
    296,047
    
    
    
    35,769Inventories
    
    
    
    
    
    
    545,700
    
    
    
    543,777
    
    
    
    65,700Prepaid expenses and other current assets
    
    
    
    
    
    
    244,690
    
    
    
    247,926
    
    
    
    29,954TOTAL CURRENT ASSETS
    
    
    
    
    
    
    5,605,795
    
    
    
    4,001,528
    
    
    
    483,469FIXED ASSETS
    
    
    13
    
    
    
    26,920,829
    
    
    
    28,535,907
    
    
    
    3,447,739CONSTRUCTION IN PROGRESS
    
    
    14
    
    
    
    661,352
    
    
    
    1,629,689
    
    
    
    196,901LEASE PREPAYMENTS
    
    
    
    
    
    
    201,854
    
    
    
    348,652
    
    
    
    42,124INVESTMENTS
    
    
    15
    
    
    
    1,355,842
    
    
    
    1,358,495
    
    
    
    164,135LEASE AND EQUIPMENT DEPOSITS
    
    
    
    
    
    
    2,147,038
    
    
    
    2,932,591
    
    
    
    354,319OTHER ASSETS
    
    
    
    
    
    
    295,337
    
    
    
    255,233
    
    
    
    30,838TOTAL ASSETS
    
    
    
    
    
    
    37,188,047
    
    
    
    39,062,095
    
    
    
    4,719,525LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESNotes payable, including current installments of long-term notes payable
    
    
    16
    
    
    
    5,240,726
    
    
    
    7,096,846
    
    
    
    857,449Current installments of obligations under capital leases
    
    
    17
    
    
    
    1,566,698
    
    
    
    1,297,855
    
    
    
    156,808Accounts payable
    
    
    
    
    
    
    532,480
    
    
    
    928,093
    
    
    
    112,133Bills payable
    
    
    
    
    
    
    1,299,680
    
    
    
    438,135
    
    
    
    52,936Sales in advance of carriage
    
    
    
    
    
    
    390,531
    
    
    
    466,087
    
    
    
    56,313Taxes payable
    
    
    
    
    
    
    78,145
    
    
    
    89,954
    
    
    
    10,868Amounts due to related companies
    
    
    
    
    
    
    525,090
    
    
    
    929,003
    
    
    
    112,243Accrued expenses
    
    
    18
    
    
    
    2,341,454
    
    
    
    2,527,794
    
    
    
    305,411Other liabilities
    
    
    
    
    
    
    646,989
    
    
    
    1,019,811
    
    
    
    123,215TOTAL CURRENT LIABILITIES
    
    
    
    
    
    
    12,621,793
    
    
    
    14,793,578
    
    
    
    1,787,376NOTES PAYABLE, EXCLUDING CURRENT INSTALLMENTS
    
    
    16
    
    
    
    5,835,434
    
    
    
    4,521,735
    
    
    
    546,321OBLIGATIONS UNDER CAPITAL LEASES, EXCLUDING CURRENT INSTALLMENTS
    
    
    17
    
    
    
    6,631,751
    
    
    
    5,543,084
    
    
    
    669,722PROVISION FOR MAJOR OVERHAULS
    
    
    6
    
    
    
    141,887
    
    
    
    189,464
    
    
    
    22,891DEFERRED CREDITS
    
    
    19
    
    
    
    48,095
    
    
    
    46,554
    
    
    
    5,625DEFERRED TAXATION
    
    
    20
    
    
    
    779,234
    
    
    
    398,305
    
    
    
    48,124TOTAL LIABILITIES
    
    
    
    
    
    
    26,058,194
    
    
    
    25,492,720
    
    
    
    3,080,059MINORITY INTERESTS
    
    
    
    
    
    
    1,516,646
    
    
    
    1,673,668
    
    
    
    202,214SHAREHOLDERS EQUITY
    
    
    21,22
    
    
    
    9,613,207
    
    
    
    11,895,707
    
    
    
    1,437,252TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    37,188,047
    
    
    
    39,062,095
    
    
    
    4,719,525
 See accompanying notes to consolidated financial statements. F-3




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2002 and 2003 (Amounts in thousands) Note
    
    2001
    
    2002
    
    2003
    
    2003RMB
    
    RMB
    
    RMB
    
    U.S. dollarsCash inflows from operations
    
    
    28
    (a)
    
    
    3,185,523
    
    
    
    4,762,923
    
    
    
    3,074,718
    
    
    
    371,491Interest received
    
    
    
    
    
    
    49,878
    
    
    
    52,618
    
    
    
    13,061
    
    
    
    1,578Interest paid
    
    
    
    
    
    
    (970,734
    )
    
    
    (1,051,027
    )
    
    
    (923,901
    )
    
    
    (111,627
    )Income tax paid
    
    
    
    
    
    
    (40,724
    )
    
    
    (66,970
    )
    
    
    (35,129
    )
    
    
    (4,244
    )Net cash inflows from operating activities
    
    
    
    
    
    
    2,223,943
    
    
    
    3,697,544
    
    
    
    2,128,749
    
    
    
    257,198Investing activities:Proceeds from sale of aircraft
    
    
    
    
    
    
    566,493
    
    
    
    778,047
    
    
    
    29,275
    
    
    
    3,537Proceeds from sale of other fixed assets
    
    
    
    
    
    
    38,892
    
    
    
    47,150
    
    
    
    27,802
    
    
    
    3,359Proceeds from sale of investments in equity securities
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    Dividends received from affiliated companies
    
    
    
    
    
    
    5,946
    
    
    
    3,093
    
    
    
    
    
    
    
    (Increase)/decrease in other assets
    
    
    
    
    
    
    (345
    )
    
    
    (943
    )
    
    
    5,654
    
    
    
    683Payment of lease and equipment deposits
    
    
    
    
    
    
    (2,027,063
    )
    
    
    (1,999,233
    )
    
    
    (1,851,726
    )
    
    
    (223,727
    )Refund of lease and equipment deposits
    
    
    
    
    
    
    200,029
    
    
    
    2,117,386
    
    
    
    1,066,086
    
    
    
    128,806Capital expenditures
    
    
    
    
    
    
    (1,492,126
    )
    
    
    (6,351,030
    )
    
    
    (4,706,740
    )
    
    
    (568,674
    )Purchase of investments in equity securities
    
    
    
    
    
    
    (1,241
    )
    
    
    (6,721
    )
    
    
    (1,065
    )
    
    
    (129
    )Investments in affiliated companies
    
    
    
    
    
    
    (147,875
    )
    
    
    (136,500
    )
    
    
    
    
    
    
    Investments in jointly controlled entities
    
    
    
    
    
    
    (178,372
    )
    
    
    (295,670
    )
    
    
    (2,999
    )
    
    
    (362
    )Governmental subsidy for safety related capital expenditures
    
    
    
    
    
    
    
    
    
    
    40,240
    
    
    
    
    
    
    
    Effect of acquisition of subsidiaries, net of
cash and cash equivalents acquired
    
    
    28
    (c)
    
    
    
    
    
    
    (90,491
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    
    
    
    
    (3,035,662
    )
    
    
    (5,894,604
    )
    
    
    (5,433,713
    )
    
    
    (656,507
    )Net cash outflows before financing activities
    
    
    
    
    
    
    (811,719
    )
    
    
    (2,197,060
    )
    
    
    (3,304,964
    )
    
    
    (399,309
    )Financing activities:Proceeds from A share issue, net of issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,640,767
    
    
    
    319,060Proceeds from bank notes payable
    
    
    
    
    
    
    2,123,613
    
    
    
    6,996,780
    
    
    
    8,913,992
    
    
    
    1,076,998Repayment of bank notes payable
    
    
    
    
    
    
    (890,228
    )
    
    
    (2,194,630
    )
    
    
    (8,371,362
    )
    
    
    (1,011,437
    )Repayment of principal under capital lease obligations
    
    
    
    
    
    
    (1,756,098
    )
    
    
    (1,546,185
    )
    
    
    (1,555,390
    )
    
    
    (187,924
    )Minority shareholders contributions
    
    
    
    
    
    
    707
    
    
    
    10,625
    
    
    
    1,050
    
    
    
    127Dividends paid to shareholders
    
    
    
    
    
    
    
    
    
    
    (67,484
    )
    
    
    
    
    
    
    Dividends paid to minority shareholders
    
    
    
    
    
    
    (45,867
    )
    
    
    (48,866
    )
    
    
    (14,962
    )
    
    
    (1,807
    )Net cash (outflows)/inflows from financing activities
    
    
    
    
    
    
    (567,873
    )
    
    
    3,150,240
    
    
    
    1,614,095
    
    
    
    195,017(Decrease)/increase in cash and cash equivalents
    
    
    
    
    
    
    (1,379,592
    )
    
    
    953,180
    
    
    
    (1,690,869
    )
    
    
    (204,292
    )Cash and cash equivalents at beginning of year
    
    
    
    
    
    
    4,197,455
    
    
    
    2,817,863
    
    
    
    3,771,043
    
    
    
    455,621Cash and cash equivalents at end of year
    
    
    
    
    
    
    2,817,863
    
    
    
    3,771,043
    
    
    
    2,080,174
    
    
    
    251,329
 See accompanying notes to consolidated financial statements. F-4




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
For the years ended December 31, 2001, 2002 and 2003 (Amounts in thousands) Share
    
    Share
    
    Other
    
    RetainedNote
    
    capital
    
    premium
    
    reserves
    
    profits
    
    TotalRMB
    
    RMB
    
    RMB
    
    RMB
    
    RMBShareholders equity at January 1, 2001
    
    
    
    
    
    
    3,374,178
    
    
    
    3,813,659
    
    
    
    664,945
    
    
    
    1,028,656
    
    
    
    8,881,438Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    340,225
    
    
    
    340,225Appropriations to reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,229
    
    
    
    (22,229
    )
    
    
    Shareholders equity at December 31, 2001
    
    
    
    
    
    
    3,374,178
    
    
    
    3,813,659
    
    
    
    687,174
    
    
    
    1,346,652
    
    
    
    9,221,663Land use rights adjustment
    
    
    22
    (f)
    
    
    
    
    
    
    (129,703
    )
    
    
    
    
    
    
    12,970
    
    
    
    (116,733
    )Adjustments from adoption of new PRCaccounting regulations
    
    
    22
    (c)
    
    
    
    
    
    
    
    
    
    
    (185,540
    )
    
    
    185,540
    
    
    
    Dividend paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67,484
    )
    
    
    (67,484
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    575,761
    
    
    
    575,761Appropriations to reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,738
    
    
    
    (83,738
    )
    
    
    Shareholders equity at December 31, 2002
    
    
    
    
    
    
    3,374,178
    
    
    
    3,683,956
    
    
    
    585,372
    
    
    
    1,969,701
    
    
    
    9,613,207Issue of A shares
    
    
    21
    
    
    
    1,000,000
    
    
    
    1,640,767
    
    
    
    
    
    
    
    
    
    
    
    2,640,767Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (358,267
    )
    
    
    (358,267
    )Appropriations to reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,969
    
    
    
    (24,969
    )
    
    
    Shareholders equity at December 31, 2003
    
    
    
    
    
    
    4,374,178
    
    
    
    5,324,723
    
    
    
    610,341
    
    
    
    1,586,465
    
    
    
    11,895,707Shareholders equity at December 31, 2003 in
U.S. dollars
    
    
    
    
    
    
    528,493
    
    
    
    643,339
    
    
    
    73,741
    
    
    
    191,679
    
    
    
    1,437,252
 See accompanying notes to consolidated financial statements. F-5




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data) 1.     BASIS OF PRESENTATION China Southern Airlines Company Limited (the Company) and its
subsidiary companies (hereinafter collectively referred to as the Group) are
principally engaged in the provision of domestic, Hong Kong regional and
international passenger, and cargo and mail airline services, with flights
operating primarily from the Guangzhou Baiyun International Airport, which is
both the main hub of the Groups route network and the location of its
corporate headquarters. The Company was established in the Peoples Republic of China (the PRC,
China or the State) on March 25, 1995 as a joint stock limited company as
part of the Reorganization (the Reorganization) of the Companys holding
company, China Southern Air Holding Company (CSAHC). CSAHC is a state-owned
enterprise under the supervision of the PRC central government. The Companys H Shares and American Depositary Shares (ADS) (each ADS
representing 50 H Shares) are listed on the Stock Exchange of Hong Kong
Limited and the New York Stock Exchange, respectively, since July 1997. In
July 2003, the Company issued 1,000,000,000 A shares which are listed on the
Shanghai Stock Exchange. The consolidated financial statements have been prepared in Renminbi
(RMB), the national currency of China. Solely for the convenience of the
reader, the 2003 financial statements have been translated into United States
dollars at the rate of US$ 1.00 = RMB 8.2767, the rate quoted by the Peoples
Bank of China on December 31, 2003. No representation is made that the RMB
amounts could have been, or could be, converted into United States dollars
(US$) at that rate or at any other certain rate on December 31, 2003 or at
any other certain date. 2.     PRINCIPAL ACCOUNTING POLICIES (a)     Statement of compliance The consolidated financial statements of the Group have been prepared in
accordance with International Financial Reporting Standards (IFRS)
promulgated by the International Accounting Standards Board. IFRS includes
International Accounting Standards (IAS) and related interpretations. Information relating to the nature and effect of the significant
differences between IFRS and accounting principles generally accepted in the
United States of America (U.S. GAAP) are set forth in Note 33. (b)     Basis of preparation The consolidated financial statements of the Group are prepared on the
historical cost basis as modified by the revaluation of certain fixed assets
(Note 13). The accounting policies have been consistently applied by the Group
and except for a change in accounting policy for land use rights in 2002 (Note
22(f)), are consistent with those used in previous years. F-6




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) (c)     Basis of consolidation The consolidated financial statements include the financial statements of
the Company and all of its subsidiaries (see Note 29 for details of the
Companys principal subsidiaries) made up to December 31, each year.
Subsidiaries are those enterprises controlled by the Group. Control exists
when the Group has the power, directly or indirectly, to govern the financial
and operating policies of an enterprise so as to obtain benefits from its
activities. The financial statements of subsidiaries are included in the
consolidated financial statements from the date that control effectively
commences until the date that control effectively ceases. The results of subsidiary companies are included in the consolidated
statements of operations, and the share attributable to minority shareholders
is deducted from or added to the consolidated income after taxation. Losses
attributable to minority shareholders of partly owned subsidiaries are
accounted for based on the respective equity owned by the minority shareholders
up to the amount of the capital contribution and reserves attributable to the
minority shareholders. Thereafter, all further losses are assumed by the
Company. All significant intercompany balances and transactions have been
eliminated on consolidation. (d)     Interest- bearing borrowings Interest-bearing borrowings are recognized initially at cost, less
attributable transaction costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortized cost with any difference
between cost and redemption value being recognized in the consolidated
statements of operations over the period of the borrowings on an effective
interest basis. (e)     Cash and cash equivalents Cash and cash equivalents consist of cash in hand and balances with banks
and other financial institutions with an original maturity within three
months. For the purposes of the consolidated statements of cash flows, the
Group considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. None of the Groups
cash and cash equivalents is restricted as to withdrawal. (f)     Trade and other receivables Trade and other receivables are stated at cost less allowance for
doubtful accounts. Allowance for doubtful accounts are established based on
evaluation of the recoverability of these accounts at the balance sheet date.
In establishing such allowance, the Group considers various factors including
its historical write-off experience and industry economic trend. Past due
balances over a specific period and balances over a specific amount are
reviewed individually for collectibility. All other balances are reviewed on a
pooled basis. F-7




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) (g)     Inventories Inventories, which consist primarily of expendable spare parts and
supplies, are stated at cost less any applicable provision for obsolescence,
and are expensed when used in operations. Cost represents the average unit
cost. Inventories held for disposal is stated at the lower of cost and net
realizable value. Net realizable value represents estimated resale price. (h)     Fixed assets and depreciation Fixed assets are stated at cost or revalued amounts less accumulated
depreciation and impairment losses (refer to accounting policy n).
Revaluations are performed periodically to ensure that the carrying amount
does not differ materially from that which would be determined using fair
value at the balance sheet date. Depreciation is provided to write off the costs, or revalued amounts
where appropriate, of the fixed assets on a straight line basis over their
estimated useful lives, to residual values, as follows: Depreciable life
    
    Residual valueBuildings
    
    
    15 to 40 years
    
    
    
    NilOwned and leased aircraft
    
    
    8 to 15 years
    
    
    
    28.75%Other flight equipment- Jet engines
    
    
    8 to 15 years
    
    
    
    3%- Others, including rotable spares
    
    
    8 to 15 years
    
    
    
    NilMachinery and equipment
    
    
    5 to 10 years
    
    
    
    3%Vehicles
    
    
    6 years
    
    
    
    3%
 No depreciation is provided in respect of construction in progress. (i)     Leased assets Flight equipment under capital leases is stated at an amount equal to
lower of its fair value and the present value of minimum lease payments at
inception of the lease, and is amortized on a straight line basis over the
shorter of the lease term or estimated useful life of the asset to residual
values. In cases where title to the asset will be acquired by the Group at
the end of the lease, the asset is amortized on a straight line basis over the
estimated useful life of the asset to its residual value. Amounts payable in respect of capital leases are apportioned between
interest charges and reductions of obligations based on the interest rates
implicit in the leases. Interest charges are included in the consolidated
statements of operations to provide a constant periodic rate of charge over
the lease term. F-8




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) Gains on aircraft sale and leaseback transactions which result in capital
leases are deferred and amortized over the terms of the related leases. Gains
on other aircraft sale and leaseback transactions are recognized as income
immediately if the transactions are established at fair value. Any excess of
the sales price over fair value is deferred and amortized over the period the
assets are expected to be used. Operating lease payments are charged to the consolidated statements of
operations on a straight line basis over the terms of the related leases. (j)     Construction in progress Construction in progress represents office buildings, various
infrastructure projects under construction and equipment pending installation,
and is stated at cost. Cost comprises direct costs of construction as well as
interest charges during the periods of construction and installation.
Capitalization of these costs ceases and the construction in progress is
transferred to fixed assets when the asset is substantially ready for its
intended use, notwithstanding any delays in the issue of the relevant
commissioning certificates by the relevant PRC authorities. (k)     Lease prepayments Lease prepayments represent the purchase costs of land use rights and are
amortized on a straight line basis over the period of land use rights (Note
22(f)). (l)     Investments An affiliated company is an entity in which the Group has significant
influence, but not control or joint control, over its management, including
participating in the financial and operating policy decisions. A jointly controlled entity is an entity over whose activities the Group
has joint control, established by contractual agreement. The consolidated statements of operations include the Groups share of
the results of its affiliated companies and jointly controlled entities for
the year. In the consolidated balance sheets, the investments in affiliated
companies and jointly controlled entities are stated at the Groups
attributable share of net assets. When the Groups share of losses exceeds
the carrying amount of the affiliated company or jointly controlled entity,
the carrying amount is reduced to nil and recognition of further losses is
discontinued except to the extent that the Group has incurred obligations in
respect of the affiliated company or jointly controlled entity. Other investments are stated at cost less impairment losses (refer to
accounting policy n). Other investments represent unquoted available-for-sale
equity securities of companies established in the PRC. There is no quoted
market price for such equity securities and accordingly a reasonable estimate
of the fair value could not be made without incurring excessive costs. F-9




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) (m)     Deferred expenditure Custom duties and other direct costs in relation to modifying,
introducing and certifying certain operating leased aircraft are deferred and
amortized over the terms of the related leases. Lump sum housing benefits payable to employees of the Group are deferred
and amortized on a straight line basis over a period of 10 years, which
represents the vesting benefit period of the employees. (n)     Impairment loss The carrying amounts of the Groups assets, other than inventories (refer
to accounting policy g) and deferred tax assets (refer to accounting policy u)
are reviewed periodically in order to assess whether the recoverable amounts
have declined below the carrying amounts. These assets are tested for
impairment whenever events or changes in circumstances indicate that their
recorded carrying amounts may not be recoverable. When such a decline has
occurred, the carrying amount is reduced to the recoverable amount. The
recoverable amount is the greater of the net selling price and the value in
use. In determining the value in use, expected future cash flows generated by
the asset are discounted to their present value. The amount of the reduction
is recognized as an expense in the consolidated statements of operations. The Group assesses at each balance sheet date whether there is any
indication that an impairment loss recognized for an asset in prior years may
no longer exist. An impairment loss is reversed if there has been a change in
the estimates used to determine the recoverable amount. A subsequent increase
in the recoverable amount of an asset, when the circumstances and events that
led to the write-down or write-off cease to exist, is recognized as income.
The reversal is reduced by the amount that would have been recognized as
depreciation had the write-down or write-off not occurred. (o)     Deferred credits In connection with the acquisition or operating lease of certain aircraft
and engines, the Group receives various credits. Such credits are deferred
until the aircraft and engines are delivered, at which time they are either
applied as a reduction of the cost of acquiring the aircraft and engines,
resulting in a reduction of future depreciation, or amortized as a reduction
of rental expense for aircraft and engines under operating leases. F-10




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) (p)     Revenue recognition Passenger, cargo and mail revenues are recognized when the transportation
is provided. Ticket sales for transportation not yet provided are included in
current liabilities of the consolidated balance sheets as sales in advance of
carriage. Revenue from airline-related business is recognized when services
are rendered. Revenue is stated net of sales tax and contributions to the
Civil Aviation Administration of China (CAAC) Infrastructure Development
Fund. Interest income is recognized as it accrues unless collectibility is in
doubt. Dividend income is recognized when the Groups right to receive
payment is established. Operating lease income is recognized on a straight line basis over the
terms of the respective leases. (q)     Traffic commissions Traffic commissions are expensed when the transportation is provided and
the related revenue is recognized. Traffic commissions for transportation not
yet provided are recorded in the consolidated balance sheets as a prepaid
expense. (r)     Maintenance and overhaul costs Routine maintenance and repairs, and overhauls in respect of owned
aircraft and aircraft held under capital leases are expensed in the
consolidated statements of operations as and when incurred. In respect of
aircraft held under operating leases, a provision is made over the lease term
for the estimated cost of scheduled overhauls required to be performed on the
related aircraft prior to their return to the lessors. (s)     Translation of foreign currencies Foreign currency transactions during the year are translated into
Renminbi at the applicable rates of exchange prevailing on the transaction
dates. Foreign currency monetary balances at the balance sheet date are
translated into Renminbi at the exchange rates quoted by the Peoples Bank of
China ruling at the balance sheet date. Exchange differences are dealt with
in the consolidated statements of operations. (t)     Borrowing costs Borrowing costs are expensed in the consolidated statements of operations
as and when incurred, except to the extent that they are capitalized as being
directly attributable to the acquisition or construction of an asset which
necessarily takes a substantial period of time to get ready for its intended
use. F-11




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) (u)     Deferred taxation Deferred tax is provided using the balance sheet liability method on all
temporary differences between the carrying amounts for financial reporting
purposes and the amounts used for taxation purposes, except differences
relating to the initial recognition of assets or liabilities which affect
neither accounting nor taxable profit/loss. The tax value of losses expected to be available for utilization against
future taxable income is recognized as a deferred tax asset and offset against
the deferred tax liability attributable to the same legal tax unit and
jurisdiction. Net deferred tax assets are reduced to the extent that it is no
longer probable that the related tax benefit will be realized. (v)     Retirement benefits Contributions to retirement schemes and additional retirement benefits
paid to retired employees are charged to the consolidated statements of
operations as and when incurred (Note 24). (w)     Basic earnings/(loss) per share Basic earnings/(loss) per share for the years ended December 31, 2001,
2002 and 2003 have been computed by dividing net income/(loss) of RMB340,225,
RMB575,761 and RMB(358,267), respectively, by the weighted average number of
shares in issue of 3,374,178,000 in 2001 and 2002, and 3,831,712,000 in 2003,
respectively. The amount of diluted earnings/(loss) per share is not presented, as
there were no dilutive potential ordinary shares in existence during the years
ended December 31, 2001, 2002 and 2003. (x)     Frequent flyer award programs The Group maintains two frequent flyer award programs, namely, the China
Southern Airlines Sky Pearl Club and Egret Mileage Plus, which provide travel
awards to members based on accumulated mileage. The estimated incremental
cost to provide free travel is recognized as an expense and accrued as a
current liability as members accumulate mileage. As members redeem awards or
their entitlements expire, the incremental cost liability is reduced
accordingly to reflect the acquittal of the outstanding obligations. Revenue from mileage sales to third parties under the frequent flyer
award programs is recognized when the related transportation services are
provided. F-12




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) (y)     Provisions A provision is recognized in the consolidated balance sheets when the
Group has a legal or constructive obligation as a result of a past event, and
it is probable that an outflow of economic benefits will be required to settle
the obligations. If the effect is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects
current market assessments of the time value of money and, where appropriate,
the risks specific to the liability. (z)     Related parties For the purposes of these consolidated financial statements, parties are
considered to be related to the Group if the Group has the ability, directly or
indirectly, to control the party or exercise significant influence over the
party in making financial and operating decisions, or vice versa, or where the
Group and the party are subject to common control or common significant
influence. Related parties may be individuals or entities. (aa)     Segmental reporting The Group operates principally as a single business segment for the
provision of air transportation services. The analysis of operating revenue and
operating income by geographical segment is based on the following criteria:  (i)
    
    Traffic revenue from domestic services within the PRC (excluding Hong
Kong) is attributed to the domestic operation. Traffic revenue from
inbound/outbound services between the PRC and Hong Kong, and the PRC and
overseas destinations is attributed to the Hong Kong regional operation
and international operation, respectively.(ii)
    
    Other revenue from ticket selling, general aviation and ground services,
air catering and other miscellaneous services is attributed on the basis
of where the services are performed. (ab)     Use of estimates The preparation of the consolidated financial statements of the Group in
accordance with IFRS requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. F-13




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 3.     TRAFFIC REVENUE Traffic revenue is stated net of sales tax and levies paid to PRC
authorities and consists of: Year ended December 31,2001
    
    2002
    
    2003RMB
    
    RMB
    
    RMBPassenger
    
    
    15,055,496
    
    
    
    15,695,622
    
    
    
    15,009,885Cargo and mail
    
    
    1,406,036
    
    
    
    1,786,270
    
    
    
    1,954,91516,461,532
    
    
    
    17,481,892
    
    
    
    16,964,800
 Pursuant to various PRC revenue tax rules and regulations, the Group is
required to pay sales tax to national and local tax authorities at the rate of
approximately 3% of the ticket value in respect of flights originated in the
PRC during the years ended December 31, 2001, 2002 and 2003, except for the
period from May 1, 2003 to December 31, 2003 during which passenger revenue
was exempted from sales tax. Sales tax incurred by the Group for the years
ended December 31, 2001, 2002 and 2003 amounted to RMB535,473, RMB557,784 and
RMB205,925, respectively. In addition, the Group is required to pay contributions to the CAAC
Infrastructure Development Fund which were calculated at the rates of 5% and
2%, respectively, of the domestic and international/Hong Kong regional traffic
revenue during the years ended December 31, 2001, 2002 and 2003, except for
the period from May 1, 2003 to December 31, 2003 during which the Group was
exempted from paying the contributions. Contributions to the CAAC
Infrastructure Development Fund payable by the Group for the years ended
December 31, 2001, 2002 and 2003 totaled RMB759,385, RMB798,386 and
RMB250,802, respectively. Pursuant to approval documents issued by the CAAC, the Group imposes a
fuel surcharge on passengers carried by its domestic and Hong Kong regional
flights at certain prescribed rates on ticket fares. The fuel surcharge forms
part of the traffic revenue of the Group. For the years ended December 31,
2001, 2002 and 2003, the fuel surcharge revenue totaled RMB1,001,000,
RMB554,000 and RMB740,000, respectively. F-14




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 4.     OTHER OPERATING REVENUE Year ended December 31,2001
    
    2002
    
    2003RMB
    
    RMB
    
    RMBCommission income
    
    
    129,157
    
    
    
    137,928
    
    
    
    140,180General aviation income
    
    
    61,292
    
    
    
    68,225
    
    
    
    40,309Ground services income
    
    
    55,388
    
    
    
    78,616
    
    
    
    99,130Air catering income
    
    
    29,523
    
    
    
    38,077
    
    
    
    30,756Net income from lease arrangements (Note 13)
    
    
    
    
    
    
    51,682
    
    
    
    69,121Rental income
    
    
    
    
    
    
    
    
    
    
    40,307Aircraft lease income
    
    
    65,486
    
    
    
    46,640
    
    
    
    Other
    
    
    77,280
    
    
    
    115,560
    
    
    
    85,520418,126
    
    
    
    536,728
    
    
    
    505,323
 5.     FLIGHT OPERATIONS EXPENSES Year ended December 31,2001
    
    2002
    
    2003RMB
    
    RMB
    
    RMBFuel costs
    
    
    3,548,860
    
    
    
    3,519,005
    
    
    
    3,866,932Operating lease rentals
    
    
    1,912,832
    
    
    
    1,416,524
    
    
    
    1,536,466Air catering expenses
    
    
    554,165
    
    
    
    625,489
    
    
    
    509,839Aircraft insurance
    
    
    123,439
    
    
    
    256,238
    
    
    
    195,700Flight personnel payroll and welfare
    
    
    657,193
    
    
    
    781,223
    
    
    
    728,175Training expenses
    
    
    24,374
    
    
    
    38,908
    
    
    
    123,438Other
    
    
    84,765
    
    
    
    95,156
    
    
    
    109,4816,905,628
    
    
    
    6,732,543
    
    
    
    7,070,031
 F-15




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 6.     MAINTENANCE EXPENSES Year ended December 31,2001
    
    2002
    
    2003RMB
    
    RMB
    
    RMBRepairing and maintenance charges
    
    
    1,558,331
    
    
    
    1,842,213
    
    
    
    2,076,916Maintenance materials
    
    
    286,505
    
    
    
    292,492
    
    
    
    299,719Labor costs
    
    
    104,949
    
    
    
    130,254
    
    
    
    139,355Other
    
    
    64,794
    
    
    
    68,460
    
    
    
    72,6232,014,579
    
    
    
    2,333,419
    
    
    
    2,588,613
 An analysis of provision for major overhauls in respect of aircraft held
under operating leases is as follows: Year ended December 31,2001
    
    2002
    
    2003RMB
    
    RMB
    
    RMBBalance at beginning of year
    
    
    241,895
    
    
    
    187,125
    
    
    
    193,887Additional amount provided
    
    
    12,889
    
    
    
    49,051
    
    
    
    68,620Amount utilized
    
    
    (67,659
    )
    
    
    (42,289
    )
    
    
    (62,326
    )Balance at end of year
    
    
    187,125
    
    
    
    193,887
    
    
    
    200,181
 Balance of provision for major overhauls at December 31, 2002 and 2003 consisted of: December 31,2002
    
    2003RMB
    
    RMBCurrent portion (included in accrued expenses) (Note 18)
    
    
    52,000
    
    
    
    10,717Non-current portion
    
    
    141,887
    
    
    
    189,464193,887
    
    
    
    200,181
 F-16




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 7.     AIRCRAFT AND TRAFFIC SERVICING EXPENSES Year ended December 31,2001
    
    2002
    
    2003RMB
    
    RMB
    
    RMBLanding and navigation fees
    
    
    2,157,392
    
    
    
    2,353,412
    
    
    
    2,562,488Ground service charges
    
    
    140,129
    
    
    
    157,872
    
    
    
    205,0002,297,521
    
    
    
    2,511,284
    
    
    
    2,767,488
 8.     PROMOTION AND SALES EXPENSES Year ended December 31,2001
    
    2002
    
    2003RMB
    
    RMB
    
    RMBSales commissions
    
    
    891,646
    
    
    
    749,953
    
    
    
    757,423Ticket office expenses
    
    
    440,445
    
    
    
    515,648
    
    
    
    503,623Computer reservation services
    
    
    153,409
    
    
    
    174,547
    
    
    
    175,197Advertising and promotion
    
    
    26,434
    
    
    
    31,513
    
    
    
    23,756Other
    
    
    28,846
    
    
    
    27,926
    
    
    
    20,1691,540,780
    
    
    
    1,499,587
    
    
    
    1,480,168
 9.     GENERAL AND ADMINISTRATIVE EXPENSES Year ended December 31,2001
    
    2002
    
    2003RMB
    
    RMB
    
    RMBGeneral corporate expenses
    
    
    557,083
    
    
    
    658,833
    
    
    
    680,141Salaries and welfare
    
    
    312,396
    
    
    
    379,406
    
    
    
    339,343Provision for doubtful accounts (Note 32)
    
    
    1,729
    
    
    
    1,304
    
    
    
    12,031Other taxes and levies
    
    
    21,025
    
    
    
    20,467
    
    
    
    21,804892,233
    
    
    
    1,060,010
    
    
    
    1,053,319
 F-17




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 10.     TAXATION EXPENSE/(CREDIT) On October 17, 2003, the Companys registered address was moved to
Guangzhou Economic & Technology Development Zone. In accordance with the Rules
and Regulations for Implementation of Income Tax for Foreign Investment
Enterprises and Foreign Enterprises of the PRC and a taxation approval document
Guangzhou Municipal State Tax Bureau Suo De Shui Zi Que 020043, the Company
is entitled to enjoy the preferential tax policy implemented in the Guangzhou
Economic & Technology Development Zone effective October 1, 2003. As a result,
the Companys income tax rate has been changed to 15% from 33% beginning from
that date. As a result of the reduction in income tax rate, the Companys net
deferred taxation liability balance brought forward from December 31, 2002 of
RMB507,077 was reduced by RMB392,137 and a net deferred tax credit of
RMB392,137 was recognized for such reduction in income tax rate in the
consolidated statement of operations for the year ended December 31, 2003. In respect of the Groups overseas airline activities, the Group has
either obtained exemptions from overseas taxation pursuant to the bilateral
aviation agreements between the overseas governments and PRC governments, or
has sustained tax losses in these overseas jurisdictions. Accordingly, no
provision for overseas tax has been made for the years ended December 31, 2001,
2002 and 2003. Taxation expense/(credit) consisted of: Year ended December 31,2001
    
    2002
    
    2003RMB
    
    RMB
    
    RMBProvision for PRC income tax:Company and subsidiaries
    
    
    37,032
    
    
    
    71,651
    
    
    
    46,938Affiliated companies
    
    
    8,085
    
    
    
    9,424
    
    
    
    3,342Jointly controlled entities
    
    
    
    
    
    
    
    
    
    
    6,37245,117
    
    
    
    81,075
    
    
    
    56,652Deferred taxation (Note 20)- current year
    
    
    275,402
    
    
    
    317,152
    
    
    
    11,208- adjustment for change in income tax rate
    
    
    
    
    
    
    
    
    
    
    (392,137
    )320,519
    
    
    
    398,227
    
    
    
    (324,277
    )
 F-18




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) Actual taxation amount in the consolidated statements of operations for
the years ended December 31, 2001, 2002 and 2003 differed from the amounts
computed by applying the PRC income tax rate of 33%, 33% and 15%,
respectively, to income/(loss) before taxation and minority interests as a
result of the following: Year ended December 31,2001
    
    2002
    
    2003RMB
    
    RMB
    
    RMBExpected PRC taxation expense/(credit)
    
    
    262,434
    
    
    
    375,903
    
    
    
    (76,742
    )Adjustments:Gains on sale and leaseback transactions and
their amortization
    
    
    (5,075
    )
    
    
    (851
    )
    
    
    Effect on change in income tax rate
on deferred taxation
    
    
    
    
    
    
    
    
    
    
    (392,137
    )Rate differential on subsidiaries
    
    
    (51,245
    )
    
    
    (60,530
    )
    
    
    5,140Non-deductible expenses
    
    
    154,152
    
    
    
    61,454
    
    
    
    79,907Unrecognized tax losses
    
    
    
    
    
    
    
    
    
    
    21,894Expired tax losses
    
    
    
    
    
    
    
    
    
    
    34,218Other, net
    
    
    (39,747
    )
    
    
    22,251
    
    
    
    3,443320,519
    
    
    
    398,227
    
    
    
    (324,277
    )
 In accordance with relevant PRC tax regulations, a PRC lessee is liable
to pay PRC withholding tax in respect of any lease payments regularly made to
an overseas lessor. Depending on the circumstances, this tax is generally
imposed at a fixed rate ranging from 10% to 20% of the lease payments, or in
certain cases, the interest components of such payments. Pursuant to an
approval document from the State Taxation Bureau, lease arrangements executed
prior to September 1, 1999 are exempted from PRC withholding tax. The PRC withholding tax payable in respect of the operating leases
executed after September 1, 1999 of RMB11,962, RMB14,305 and RMB7,706,
respectively, during 2001, 2002 and 2003 has been included as part of the
operating lease rentals. 11.     CASH AND CASH EQUIVALENTS As of December 31, 2002 and 2003, cash and cash equivalents comprise cash
at bank and in hand and deposits with Southern Airlines Group Finance Company
Limited (SA Finance), a PRC authorized financial institution controlled by
CSAHC and an affiliated company of the Group. In accordance with the
financial agreement dated May 22, 1997 between the Company and SA Finance, all
the Groups deposits accepted by SA Finance as of December 31, 2002 and 2003
were simultaneously placed with several designated major PRC banks by SA
Finance. As of December 31, 2002 and 2003, the Groups deposits with SA
Finance totaled RMB900,979 and RMB365,906, respectively (Note 25). F-19




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 12.     TRADE RECEIVABLES December 31,2002
    
    2003RMB
    
    RMBTrade receivables, principally traffic
    
    
    731,894
    
    
    
    903,601Less: Allowance for doubtful accounts (Note 32)
    
    
    60,118
    
    
    
    69,997671,776
    
    
    
    833,604
 13.     FIXED ASSETS December 31,2002
    
    2003RMB
    
    RMBBuildings
    
    
    3,160,073
    
    
    
    3,287,593Aircraft
    
    
    24,970,695
    
    
    
    27,684,935Flight equipment, including rotable spares
    
    
    6,283,470
    
    
    
    6,842,064Machinery, equipment and vehicles
    
    
    1,782,400
    
    
    
    1,930,27336,196,638
    
    
    
    39,744,865Less: Accumulated depreciation and amortization
    
    
    9,275,809
    
    
    
    11,208,95826,920,829
    
    
    
    28,535,907
 Substantially all of the Groups buildings are located in the PRC. The
Group was formally granted the rights to use the twenty one parcels of land in
Guangzhou, Shenzhen, Zhuhai, Beihai, Changsha, Shantou, Haikou, Zhengzhou,
Guiyang and Wuhan by the relevant PRC authorities for a period of 30 to 70
years, which expire between 2020 and 2068. For other land in the PRC on which
the Groups buildings are erected, the Group was formally granted the rights to
use such land for periods of one to five years commencing in the second quarter
of 1997 pursuant to various lease agreements between the Group and CSAHC. The
leases with initial one-year term are automatically renewable for another
one-year period unless the Group gives appropriate notice of termination. In
this connection, rental payments totaling RMB15,224 were paid to CSAHC for each
of the years ended December 31, 2001, 2002 and 2003 in respect of these leases
(Note 23). The Group is obligated under various capital leases for aircraft that
expire at various dates during the next six years. The gross amount of
aircraft and related accumulated amortization recorded under capital leases are
as follows: F-20




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) December 31,2002
    
    2003RMB
    
    RMBAircraft
    
    
    11,459,978
    
    
    
    10,462,575Less: Accumulated amortization
    
    
    2,499,495
    
    
    
    2,605,4068,960,483
    
    
    
    7,857,169
 As of December 31, 2002 and 2003, certain aircraft of the Group with an
aggregate carrying amount of approximately RMB5,822,076 and RMB6,718,737,
respectively, were pledged as security under certain loan agreements (Note
16). In compliance with the PRC rules and regulations governing initial public
offering of shares by PRC joint stock limited companies, the fixed assets of
the Group as of December 31, 1996 were revalued. This revaluation was
conducted by Guangzhou Assets Appraisal Corp., a firm of independent valuers
registered in the PRC, on a depreciated replacement cost basis, and approved
by the China State-owned Assets Administration Bureau. In accordance with IAS 16 Property, Plant and Equipment, subsequent to
the 1996 revaluation, which was based on replacement costs, the fixed assets of
the Group are carried at revalued amounts, being the fair value at the date of
the revaluation less any subsequent accumulated depreciation and impairment
losses. Revaluation is performed periodically to ensure that the carrying
amount does not differ materially from that which would be determined using
fair value at the balance sheet date. In accordance with the revaluation
performed by the directors in respect of fixed assets held by the Group as of
December 31, 2000, the carrying amounts of fixed assets did not differ
materially from their respective fair value. The effect of the above revaluations was to increase annual depreciation
charges by approximately RMB65,000, RMB33,000 and RMB 33,000, respectively,
for 2001, 2002 and 2003. During 2003, the Group incurred a loss of RMB20,405 on early retirement
of two old Boeing 737-200 aircraft. During 2001 and 2002, pursuant to certain
sale and leaseback arrangements, the Group sold two Airbus 320-200 aircraft
and four Boeing 757-200 aircraft,
respectively, to independent third parties and then entered into
operating leases with such parties to lease back the aircraft for a period of
eight to nine years. The Group recognized a gain of RMB59,855 and RMB199,394,
respectively, in 2001 and 2002, being the excess of the sale proceeds which
approximated the aircrafts fair value on the date of disposal over the
aircrafts net book value and related disposal costs. Such loss/gain was
included under the sub-item (Loss)/gain on sale of fixed assets under
Non-operating income/(expenses) in the consolidated statements of
operations. During 2003, the Group entered into operating lease arrangements to lease
certain flight training facilities and buildings to Zhuhai Xiang Yi Aviation
Technology Company Limited (Zhuhai Xiang Yi), a jointly controlled entity of
the Group. The leases with initial one-year term are automatically renewable
for another one year unless either party gives appropriate notice of F-21




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) termination. In this connection, rental income totaling RMB34,175 was received
by the Group during 2003 in respect of the leases. As of December 31, 2003,
the cost and accumulated amortization of the relevant fixed assets totaled
RMB787,432 and RMB462,281, respectively. As of December 31, 2003, the Groups
rental receivable in respect of the leases due in 2004 amounted to RMB34,175. During 2001 and 2002, the Group entered into arrangements to lease
several of its aircraft to independent third parties. The terms of such
leases generally range from one to twelve months. The Group entered into two separate arrangements (the Arrangements)
with certain independent third parties during each of 2002 and 2003. Under
each of the Arrangements, the Group sold an aircraft and then immediately
leased back the aircraft for an agreed period. As agreed, the lease payment
obligations, with pre-determined net present value, are to be satisfied solely
out of the sale proceeds and such amount has been placed irrevocably by the
Group in form of deposits and debt securities in favour of the lessors. The
Group has an option to purchase the aircraft at a pre-determined date and an
agreed purchase price to be satisfied by the balances of the deposits and debt
securities outstanding at that date. In the event that the lease agreement is
early terminated by the Group, the Group is liable to pay a pre-determined
penalty to the lessor. As long as the Group complies with the lease
agreements, the Group is entitled to the continued possession and operation of
the aircraft. Since the Group retains substantially all risks and rewards
incident to ownership of the aircraft and enjoys substantially the same rights
to their use as before the Arrangements, no adjustment has been made to the
fixed assets. As of December 31, 2002 and 2003, the net present value of the
lease commitments and the corresponding defeased deposits and debt securities
amounted to RMB1,322,843 and RMB2,409,252, respectively. As a result of the
Arrangements, the Group received net cash benefits of RMB51,682 and RMB69,121
in 2002 and 2003, respectively, which have been recognized as income for the
respective years. F-22




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 14.     CONSTRUCTION IN PROGRESS As of December 31, 2002 and 2003, included in construction in progress was
an amount of RMB432,580 and RMB1,445,760, respectively, in relation to the
construction of Guangzhou New Airport. 15.     INVESTMENTS December 31,2002
    
    2003RMB
    
    RMBShare of net assets in affiliated companies
    
    
    692,026
    
    
    
    422,201Share of net assets in jointly controlled entities
    
    
    461,962
    
    
    
    731,323Other investments, at cost
    
    
    201,854
    
    
    
    204,9711,355,842
    
    
    
    1,358,495
 Details of the Groups principal affiliated companies and jointly
controlled entities are set out in Note 29. 16.     DEBT Short-term notes payable December 31,2002
    
    2003RMB
    
    RMBShort-term notes payable
    
    
    4,422,926
    
    
    
    6,408,806
 As of December 31, 2002 and 2003, borrowings under short-term notes
payable of the Group totaling RMB1,450,000 and RMB130,500, respectively, were
guaranteed by CSAHC. In addition, as of December 31, 2003, borrowings under
short-term notes payable of the Group totaling RMB63,000 and RMB21,000 were
guaranteed by Guangzhou Baiyun International Airport Company Limited and
Shenzhen Yingshun Investment Development Company Limited, respectively. Borrowings under short-term notes payable are used primarily to finance
working capital needs and are repayable in full on the respective due dates
with interest rates ranging from 1.42% to 5.31%. The Groups weighted average
interest rate on short-term notes payable was 3.11% and 1.76%, respectively, as
of December 31, 2002 and 2003. F-23




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) Long-term notes payable December 31,Interest rate and final maturity
    
    2002
    
    2003RMB
    
    RMBRenminbi denominated notes payable:Loans for construction projects
    
    Floating interest rates ranging from 4.94%to 5.25% per annum as of December 31, 2003,with maturities through 2009.
    
    
    893,838
    
    
    
    12,357Non-interest bearing loan from a municipalgovernment authority, repayable in 2005
    
    
    3,000
    
    
    
    3,000Loans for purchase of aircraft
    
    Floating interest rate of 5.49% per annumas of December 31, 2003, with maturitiesthrough 2004
    
    
    2,310,268
    
    
    
    63,500U.S. dollar denominated notes payable:Loans for purchase of aircraft
    
    Fixed interest rates ranging from 5.00%to 8.33% per annum as of December 31, 2003,with maturities through 2011.
    
    
    3,426,038
    
    
    
    2,612,687Floating interest rates ranging from 1.48% to1.50% per annum as of December 31, 2003with maturities through 2013
    
    
    
    
    
    
    2,505,134Loan for purchase of flight equipment
    
    Fixed interest rate of 8.35% per annumas of December 31, 2003, with maturityin 2004
    
    
    20,090
    
    
    
    13,0976,653,234
    
    
    
    5,209,775Less:
current installments
    
    
    
    
    (817,800
    )
    
    
    (688,040
    )5,835,434
    
    
    
    4,521,735
 As of December 31, 2002 and 2003, borrowings under long-term notes payable
of the Group totaling RMB3,360,945 and RMB2,564,586, respectively, were
guaranteed by certain financial institutions and secured by the mortgages over
certain of the Groups aircraft. In addition, as of December 31, 2002 and 2003,
borrowings under long-term notes payable of the Group totaling RMB1,890,118 and
RMB228,800, respectively, were guaranteed by CSAHC and RMB561,531 and
RMB10,052, respectively, were guaranteed by SA Finance. As of December 31, 2003, the Group had banking facilities with several PRC
commercial banks for providing loan finance up to an amount of RMB9,860,000. As
of December 31, 2003, an amount of approximately RMB4,412,000 was utilized. F-24




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) The aggregate annual maturities of long-term notes payable for each of the
five years subsequent to December 31, 2003 and thereafter are as follows: RMBYear ending December 31,2004
    
    
    688,0402005
    
    
    649,4922006
    
    
    403,9942007
    
    
    372,2512008
    
    
    447,465Thereafter
    
    
    2,648,5335,209,775
 Interest expense, net of the amounts capitalized, represents: Year ended December 31,2001
    
    2002
    
    2003RMB
    
    RMB
    
    RMBInterest incurred
    
    
    938,944
    
    
    
    1,023,379
    
    
    
    906,802Interest capitalized
    
    
    (5,227
    )
    
    
    (64,186
    )
    
    
    (83,077
    )Interest expense
    
    
    933,717
    
    
    
    959,193
    
    
    
    823,725
 Interest rates per annum at which borrowing costs were capitalized were
5.70%, 5.70% and 1.62% to 5.46%, respectively, for the years ended December
31, 2001, 2002 and 2003. F-25




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 17.     LEASE OBLIGATIONS Capital leases As of December 31, 2003, the Group leased 29 aircraft under capital
leases. The majority of these leases have terms of 10 to 15 years, and
expiration dates range from 2004 through 2009. As of December 31, 2003, future scheduled minimum lease payments under
capital leases, which were 74% and 26%, respectively, denominated in U.S.
dollars and Japanese yen, are as follows: Payments
    
    *Interest
    
    ObligationsRMB
    
    RMB
    
    RMBYear ending December 31,2004
    
    
    1,648,141
    
    
    
    350,286
    
    
    
    1,297,8552005
    
    
    1,356,614
    
    
    
    290,163
    
    
    
    1,066,4512006
    
    
    1,405,424
    
    
    
    208,566
    
    
    
    1,196,8582007
    
    
    1,445,207
    
    
    
    157,349
    
    
    
    1,287,8582008
    
    
    1,497,604
    
    
    
    73,503
    
    
    
    1,424,101Thereafter
    
    
    608,124
    
    
    
    40,308
    
    
    
    567,8167,961,114
    
    
    
    1,120,175
    
    
    
    6,840,939Less: current instalments of obligations under capital leases
    
    
    
    
    
    
    
    
    
    
    (1,297,855
    )5,543,084
 *Interest
rates ranged from 2.23% to 9.36%. Under the terms of the leases, the Group has the option to purchase, at
or near the end of the lease term, certain aircraft at fair market value and
others at either fair market value or a percentage of the respective lessors
defined cost of the aircraft. Security, including charges over the assets concerned and relevant
insurance policies, is provided to the lessors. In addition to the assets mortgaged as security under certain loan
agreements (Note 13), certain of the Groups aircraft with an aggregate
carrying amount of RMB8,960,483 and RMB7,857,169, respectively, as of December
31, 2002 and 2003 were mortgaged to secure facilities with financial
institutions granted to lessors totaling RMB8,198,449 and RMB6,840,939,
respectively, on these dates. F-26




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) Operating leases As of December 31, 2003, future minimum lease payments under
non-cancellable aircraft and flight equipment operating leases were as follows
(principally denominated in U.S. dollars): RMBYear ending December 31,2004
    
    
    1,482,8882005
    
    
    1,411,5202006
    
    
    1,143,7452007
    
    
    921,4562008
    
    
    771,374Thereafter
    
    
    2,388,874Total minimum lease payments
    
    
    8,119,857
 Amounts charged to rental expenses for operating leases for the years
ended December 31, 2001, 2002 and 2003 totaled RMB1,723,338, RMB1,348,277 and
RMB1,408,574, respectively. All of the Groups obligations under capital and operating leases are
guaranteed by financial institutions. 18.     ACCRUED EXPENSES December 31,2002
    
    2003RMB
    
    RMBLanding and navigation fees
    
    
    497,372
    
    
    
    825,811Duties and levies
    
    
    360,827
    
    
    
    336,839Fuel
    
    
    297,626
    
    
    
    254,801Interest
    
    
    174,626
    
    
    
    157,527Lease charges
    
    
    40,900
    
    
    
    18,144Accrued salaries, wages and benefits
    
    
    245,124
    
    
    
    197,332Repairs and maintenance
    
    
    198,465
    
    
    
    286,636Current portion of provision for major overhauls (Note 6)
    
    
    52,000
    
    
    
    10,717Lump sum housing benefits payable (Note 24)
    
    
    213,675
    
    
    
    129,521Other
    
    
    260,839
    
    
    
    310,4662,341,454
    
    
    
    2,527,794
 F-27




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 19.     DEFERRED CREDITS December 31,2002
    
    2003RMB
    
    RMBOperating lease rebates
    
    
    7,857
    
    
    
    6,316Governmental subsidy for safety related capital expenditures
    
    
    40,238
    
    
    
    40,23848,095
    
    
    
    46,554Movements during the year are as follows:Balance at beginning of year
    
    
    15,072
    
    
    
    48,095Additions during the year
    
    
    40,238
    
    
    
    Transferred to consolidated statement of operations
    
    
    (7,215
    )
    
    
    (1,541
    )Balance at end of year
    
    
    48,095
    
    
    
    46,554
 Operating lease rebates Pursuant to several operating lease arrangements for aircraft commenced
in January 1998, the Group received cash rebates totaling RMB24,838 from an
operating lessor in 1998. Such rebates have been deferred and amortized over
the terms of the respective lease to reduce the future operating lease
charges. Governmental subsidy for safety related capital expenditures During 2002, the Group received governmental subsidy for safety related
capital expenditures amounting to RMB40,240 for enhancing future flight
protection and safety standards. Such governmental subsidy is to be amortized
over the depreciable lives of the related fixed assets. F-28




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 20.     DEFERRED TAXATION Movements in net deferred tax liabilities are as follows: December 31,2002
    
    2003RMB
    
    RMBBalance at beginning of year
    
    
    (519,577
    )
    
    
    (779,234
    )Land use rights adjustment (Note 22(f))
    
    
    57,495
    
    
    
    Transferred to consolidated statement
of operations (Note 10)- current year
    
    
    (317,152
    )
    
    
    (11,208
    )- adjustment for change in income tax rate
    
    
    
    
    
    
    392,137Balance at end of year
    
    
    (779,234
    )
    
    
    (398,305
    )
 The net deferred tax liabilities were made up of the following taxation
effects: December 31,2002
    
    2003RMB
    
    RMBDeferred tax assets:Tax losses carried forward
    
    
    149,338
    
    
    
    222,936Fixed assets, principally due to repair charges capitalized
    
    
    319,697
    
    
    
    261,312Accrued expenses
    
    
    375,789
    
    
    
    106,491Other
    
    
    129,423
    
    
    
    8,989Total deferred tax assets
    
    
    974,247
    
    
    
    599,728Deferred tax liabilities:Undistributed profits of subsidiaries
    
    
    254,210
    
    
    
    Accrued expenses
    
    
    78,083
    
    
    
    80,545Fixed assets, principally due to difference in depreciation
    
    
    1,403,278
    
    
    
    847,781Other
    
    
    17,910
    
    
    
    69,707Total deferred tax liabilities
    
    
    1,753,481
    
    
    
    998,033Net deferred tax liabilities
    
    
    (779,234
    )
    
    
    (398,305
    )
 F-29




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable profits during
the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities and projected
future taxable profits in making this assessment. Based upon the projections
for future taxable profits over the periods in which the deferred tax assets
are deductible, management believes it is more likely than not that the Group
will realize the benefits of these deductible differences. The amount of the
deferred tax assets considered realizable, however, could be reduced in the
near term if estimates of future taxable profits during the carryforward period
are reduced. As of December 31, 2003, the Group had tax losses for PRC income tax
purposes totaling approximately RMB1,486,240. Such tax losses are available
for carry forward to set-off against future PRC assessable income for a
maximum period of five years. Of these tax losses, approximately RMB262,957,
RMB106,156 and RMB1,117,127 will expire after December 31, 2004, 2007 and
2008, respectively. As of December 31, 2003, the Group recorded a deferred
tax asset of RMB222,936 for such tax losses. As of December 31, 2003, the Group had tax losses of approximately
RMB303,000 available for offset against future assessable profits arising from
Hong Kong profits, if any, over an indefinite period. The Group has not
recognized a deferred tax asset in respect of such tax losses as it would not
be probable that future taxable profits will be available against which the
taxable losses can be utilized. 21.     SHARE CAPITAL December 31,2002
    
    2003RMB
    
    RMBRegistered capital as of December 31:2,200,000,000 domestic shares of RMB 1.00 each
    
    
    2,200,000
    
    
    
    2,200,0001,174,178,000 H shares of RMB 1.00 each
    
    
    1,174,178
    
    
    
    1,174,1781,000,000,000 A share of RMB1.00 each
    
    
    
    
    
    
    1,000,0003,374,178
    
    
    
    4,374,178Issued and paid up capital as of December 31:2,200,000,000 domestic shares of RMB 1.00 each
    
    
    2,200,000
    
    
    
    2,200,0001,174,178,000 H shares of RMB 1.00 each
    
    
    1,174,178
    
    
    
    1,174,1781,000,000,000 A share of RMB1.00 each
    
    
    
    
    
    
    1,000,0003,374,178
    
    
    
    4,374,178
 In July 2003, the Company issued 1,000,000,000 A shares with a par value
of RMB1.00 each at issue price of RMB2.70 by way of a public offering to
natural persons and institutional investors in the PRC. The share premium
received by the Company, net of the issuance costs of RMB59,233, amounted to
RMB1,640,767 and was credited to share premium account. F-30




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) All the domestic, H and A shares rank pari passu in all material respects. As
of December 31, 2002 and 2003, the retained earnings of the
Group included RMB135,010 and RMB112,985, respectively, of
undistributed earnings of companies which are 50% or less owned by
the Group and accounted for under the equity
method. 22.     RESERVES Movements of reserves are as follows: December 31,2002
    
    2003RMB
    
    RMBStatutory surplus reserve (Note (a))Balance at beginning of year
    
    
    391,867
    
    
    
    337,195Adjustments from adoption of
PRC accounting regulations (Note (c))
    
    
    (106,007
    )
    
    
    Transferred from consolidated statement of operations
    
    
    51,335
    
    
    
    23,856Balance at end of year
    
    
    337,195
    
    
    
    361,051Statutory public welfare fund (Note (b))Balance at beginning of year
    
    
    225,440
    
    
    
    171,574Adjustments from adoption of
PRC accounting regulations (Note (c))
    
    
    (79,533
    )
    
    
    Transferred from consolidated statement of operations
    
    
    25,667
    
    
    
    1,113Balance at end of year
    
    
    171,574
    
    
    
    172,687Discretionary surplus reserve (Note (d))Balance at beginning of year
    
    
    69,867
    
    
    
    76,603Transferred from consolidated statement of operations
    
    
    6,736
    
    
    
    Balance at end of year
    
    
    76,603
    
    
    
    76,603585,372
    
    
    
    610,341
 F-31




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) Notes: (a) According to the PRC Company Law and the Articles of Association of
the Company and certain of its subsidiaries, the Company and the relevant
subsidiaries are required to transfer 10% of their annual net income after
taxation, as determined under relevant PRC accounting regulations, to a
statutory surplus reserve until the reserve balance reaches 50% of the
registered capital. The transfer to this reserve must be made before
distribution of a dividend to shareholders. Statutory surplus reserve can be used to offset prior years losses, if
any, and may be converted into share capital by the issue of new shares to
shareholders in proportion to their existing shareholding or by increasing the
par value of the shares currently held by them, provided that the balance after
such issue is not less than 25% of the registered capital. (b) According to the PRC Company Law and the Articles of Association of
the Company and certain of its subsidiaries, the Company and the relevant
subsidiaries are required to transfer between 5% to 10% of their annual net
income after taxation, as determined under PRC accounting regulations, to the
statutory public welfare fund. This fund can only be utilized on capital items
for the collective benefits of the Companys and the relevant subsidiaries
employees such as the construction of dormitories, canteen and other staff
welfare facilities. This fund is non-distributable other than in liquidation.
The transfer to this reserve must be made before distribution of a dividend to
shareholders. (c) During 2002, the Group adopted certain new PRC accounting regulations
which resulted in adjustments to the amounts of the Groups income determined
under PRC accounting regulations in respect of prior years and corresponding
adjustments to amounts appropriated to the statutory surplus reserve, statutory
public welfare fund and discretionary surplus reserve for the prior years. (d) The usage of this reserve is similar to that of statutory surplus
reserve. (e) Dividend distributions may be proposed at the discretion of the
Companys Board of Directors, after consideration of the transfers referred to
above and making up cumulative prior years losses, if any. Pursuant to the
Companys Articles of Association, the net income of the Company for the
purpose of dividend distribution is deemed to be the lesser of net income
determined in accordance with (i) PRC accounting principles and financial
regulations, and (ii) IFRS; or if the financial statements of the Company are
not prepared in accordance with IFRS, the accounting standards of one of the
countries in which its shares are listed (Note 27). (f) The Group adopted IAS 40 Investment Property in 2002. According to
IAS 40, the land use rights which were previously included in fixed assets at
revaluation base are now presented as lease prepayments and carried at historical cost base with effect
from January 1, 2002. Accordingly, the unamortized surplus on previous
revaluations of the land use rights, net of related deferred tax asset, are
reversed to the share premium and retained profits accounts. The IAS 40 was
adopted prospectively in 2002 as the effect of this change did not have a
material impact on the Groups financial condition and results of operations in
the periods prior to the change. F-32




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 23.     COMMITMENTS AND CONTINGENCIES The Company has been advised by its Chinese legal counsel that, except
for liabilities constituting or arising out of or relating to the business
assumed by the Company in the Reorganization (Note 1), no other liabilities
were assumed by the Company, and the Company is not jointly and severally
liable for other debts and obligations incurred by CSAHC prior to the
Reorganization, except for certain loans from PRC banks which were fully
repaid by CSAHC. There are not, however, any definitive PRC regulations or
other pronouncements confirming such conclusion. The Group leases from CSAHC certain land in Guangzhou and certain land
and buildings in Wuhan, Haikou and Zhengzhou. The Group has a significant
investment in buildings and other leasehold improvements located on such land.
However, such land in Guangzhou and such land and buildings in Wuhan, Haikou
and Zhengzhou lack adequate documentation evidencing CSAHCs rights thereto
and the lease agreements between CSAHC and the Group may not be registered
with the relevant authorities. Lack of registration may affect the validity
of such lease agreements. With respect to the facilities in Guangzhou, CSAHC has received written
assurance from the CAAC to the effect that CSAHC is entitled to continued use
and occupancy of the land in Guangzhou. The Group understands that the CAAC is
basing its conclusion on an agreement among certain government authorities
relating to such land. Such assurance does not constitute formal evidence of
CSAHCs right to transfer, mortgage or lease such real property interests. The
Group cannot predict the magnitude of the effect on its financial condition or
results of operations to the extent that its use of one or more of these
parcels of land or the related facilities were successfully challenged. CSAHC
has agreed to indemnify the Group against any loss or damage caused by any
challenge or interference with the Groups use of any of its land and
buildings. The Group is currently involved in a civil litigation ( the Litigation).
According to the writ of summons for the Litigation, the plaintiff, claimed
against the Group for unspecified damages for breach of certain agreement.
Given that the Litigation is still at its preliminary stage, it is pre-matured
to predict the outcome. Based on the opinion given by the Companys instructing
solicitors, the directors of the Company consider that the Group has a
reasonable chance of success in its defense to the claim. Accordingly, the
directors of the Company consider that a provision for such claim and/or the
associated legal costs is not required. As of December 31, 2003, the Group had on order two Boeing 757-200
aircraft, thirteen Boeing 737-700 aircraft, four Airbus 330-200 aircraft, six
Embraer ERJ-145 aircraft and certain flight equipment, scheduled for
deliveries in 2004 to 2005. Deposits of RMB2,494,853 have been made towards
the purchase of these aircraft and related equipment. As of December 31,
2003, the aggregate future payments, including estimated amounts for price
escalation through anticipated delivery dates for these aircraft and related
equipment totaled approximately RMB10,615,079. As of December 31, 2003, additional capital expenditures of approximately
RMB3,012,607 have been authorized, of which approximately RMB849,847 have been
committed, for the Groups principal facilities. Such expenditures comprised
mainly RMB2,071,938 for facilities and equipment at the Guangzhou New Airport
and RMB940,669 for other airport and office facilities and equipment, overhaul
and maintenance bases and training centers. F-33




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) As of December 31, 2003, the Group was committed to make a capital
contribution of approximately RMB446,000 to jointly controlled entities. The Group has taken steps towards the purchase of the airline business of
China Northern Airlines Company and Xinjiang Airlines Company. No contractual
obligations existed as of December 31, 2003 and up to the date of approval of
these consolidated financial statements. The purchase price has not yet been
determined. 24.     RETIREMENT AND POST-RETIREMENT MEDICAL BENEFITS Employees of the Group participate in several defined contribution
retirement schemes organized separately by PRC municipal governments in regions
where the major operations of the Group are located. The Group is required to
contribute to these schemes at the rates ranging from 14% to 17% for 2001, 14%
to 19% for 2002 and 2003 of salary costs including certain allowances. A
member of the retirement schemes is entitled to pension benefits equal to a
fixed proportion of the salary at the retirement date. The retirement benefit
obligations of all existing and future retired staff of the Group are assumed
by these schemes. Contributions to the retirement schemes are charged to
consolidated statements of operations as and when incurred. Contributions to
the retirement schemes amounted to RMB62,833, RMB112,285 and RMB131,327,
respectively, during 2001, 2002 and 2003. In addition, the Group was selected as one of the pilot enterprises to
establish a supplementary defined contribution retirement scheme for the
benefit of employees. In this connection, employees of the Group participate
in a supplementary defined contribution retirement scheme whereby the Group is
required to make defined contributions at the rate of 4.5% of total salaries.
The Group has no obligation for the payment of pension benefits beyond the
contributions described above. Contributions to the retirement schemes are
charged to consolidated statements of operations as and when incurred.
Contributions to the retirement schemes amounted to RMB15,000, RMB19,337 and
RMB19,120, respectively, during 2001, 2002 and 2003. Furthermore, pursuant to the comprehensive services agreement (the
Services Agreement) dated May 22, 1997 between the Company and CSAHC, CSAHC
agrees to provide adequate quarters to eligible employees of the Group as and
when required. In return, the Group agrees to pay a fixed annual fee of RMB85,000 to CSAHC for a ten-year
period effective January 1, 1995. During 2001 and 2002, the Group provided additional quarters at its own
expense to certain employees who are not eligible for quarters pursuant to the
Services Agreement. These quarters were provided to the employees in accordance
with the relevant PRC housing reform policy. In 2001 and 2002, the Group
recognized a loss of RMB110,723 and RMB17,624, respectively, being the excess
of the cost of these quarters over the considerations received by the Group
from the employees, under the sub-item (Loss)/gain on sale of fixed assets
under Non-operating income/(expenses) in the consolidated statements of
operations. F-34




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CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) Subsequently, pursuant to an additional staff housing benefit scheme
effective September 2002, the Group has agreed to pay lump sum housing
allowances to certain employees who have not received quarters from CSAHC or
the Group according to the relevant PRC housing reform policy, for subsidizing
their purchases of housing. Such expenditure has been deferred and amortized on
a straight line basis over a period of 10 years, which represents the vesting
benefit period of the employees. An employee who quits prior to the end of the
vesting benefit period is required to pay back a portion of the lump sum
housing benefits determined on a pro-rata basis of the vesting benefit period
remained. The Group has the right to effect a charge on the employees house
and to enforce repayment through selling the house in the event of default in
repayment. Any shortfall in repayment would be charged against consolidated
statements of operations. As of December 31, 2003, the Group already made
payments totaling RMB130,479 under the scheme and recorded its remaining
contractual liabilities totaling RMB129,521 as accrued liabilities on the
consolidated balance sheets (Note 18). 25.     RELATED PARTY TRANSACTIONS The Group obtained various operational and financial services provided by
CSAHC and its affiliates, and the Groups affiliated companies and jointly
controlled entities during the normal course of its business. In the past,
CSAHC was under the direct control of the CAAC. However, such control has been
shifted to the State Assets Administration Committee since early 2003.
Consequently, transactions with the CAAC and its affiliates beginning from 2003
are no longer presented as related party transactions of the Group. The
principal related party transactions are described as follows: Allocation of routes and air fares Both domestic and international routes on which the Group and other PRC
airlines offer scheduled services are allocated by the CAAC. International air fares are subject to bilateral agreements between the
CAAC, acting on behalf of the PRC government, and other governments. Domestic
air fares are regulated jointly by the CAAC and the PRC Price Administrative
Bureau. Procurement of aircraft, flight equipment and other airline-related facilities Certain PRC airlines, including the Group, were granted permission to
acquire aircraft, flight equipment and other airline-related facilities
directly from manufacturers subject to the approval of their fleet expansion
plans by the relevant PRC government authorities. The Group acquires aircraft, flight equipment and other airline-related
facilities through Southern Airlines (Group) Import and Export Trading Company
(SAIETC), a wholly-owned subsidiary of CSAHC. Total purchases amounted to
RMB324,998, RMB583,548 and RMB1,154,553, respectively, for 2001, 2002 and 2003.
Handling fees totaling RMB16,161, RMB 36,306 and RMB27,051, respectively, were
paid to SAIETC for 2001, 2002 and 2003. F-35




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) Jet fuel supplies Jet fuel is subject to allocation in the PRC. The Group is required to
purchase jet fuel domestically from the China Aviation Oil Supply Company and
Lan Tian Oil Supply Company, companies controlled by the CAAC, at prices set by
such suppliers in conjunction with the CAAC and other PRC government
authorities. During the periods presented, such prices exceeded the
international market prices. The cost of jet fuel purchased by the Group in
accordance with such allocation was RMB2,586,688 and RMB2,373,956,
respectively, during 2001 and 2002. The remainder of the Groups jet fuel was
purchased from domestic markets and, to a lesser extent, from international
markets. Aircraft insurance Aviation insurance covering hull, war and passenger liability risk is
arranged by the CAAC on behalf of all PRC airlines with the Peoples Insurance
(Property) Company of China (PICC) under a master policy. PICC reinsures a
substantial portion of its aircraft insurance business through the
international reinsurance market. Insurance premiums are allocated to each
individual PRC airline by the CAAC based on the value of the airlines aircraft
and after taking into account the claims history of the airline. Insurance
premiums totaling RMB123,439 and RMB256,238, respectively, were incurred by the
Group during 2001 and 2002. Financial arrangements The Groups obligations under various lease and bank loan arrangements in
connection with aircraft acquisitions are secured by guarantees provided by
certain PRC financial institutions which obtained back-to-back guarantees from
the CAAC. Guarantee fees totaling RMB1,490 and RMB1,025, respectively, were
paid to these financial institutions during 2001 and 2002. Interest income is received from short-term deposits with SA Finance. The
applicable interest rate is determined in accordance with the savings rate
published by the Peoples Bank of China. Interest income totaling RMB13,771,
RMB10,530 and RMB3,100, respectively, was earned by the Group on such deposits
during 2001, 2002 and 2003 (Note 11). During 2003, CSAHC made short-term advances to the Group. These advances
are unsecured, non-interest bearing and repayable on demand. As of 31
December, 2003, the advances amounted to RMB165,995. F-36




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) Airline-related services The Group, jointly with other PRC airlines, participates in the CAACs
computer reservation system, under which the Group purchases computer
reservation services from the CAAC at rates determined based on the utilization
of the system. Service fees paid by the Group to the CAAC during 2001 and 2002
totaled RMB110,134 and RMB107,234, respectively. The Group utilizes the passenger departure and cargo handling computer
systems installed by the CAAC at certain PRC airports. Service fees are levied
by the CAAC based on the utilization of these systems. Service fees totaling
RMB57,424 and RMB62,111, respectively, were paid by the Group to the CAAC
during 2001 and 2002. The Group is required to pay landing and navigation fees to various PRC
airports in respect of take-off and landing slots allocated to the Group and
other ancillary services provided. Fees are payable by the Group based on the
scale rates published by the CAAC. Landing and navigation fees totaling
RMB1,527,600 and RMB1,667,706, respectively, were paid to various PRC airports
during 2001 and 2002. The Group purchases certain inflight meals and related services from
Shenzhen Air Catering Company Limited, a cooperative joint venture established
in the PRC, in respect of which CSAHC is entitled to 33% of its income after
tax. Such purchases amounted to RMB22,707, RMB29,058 and RMB28,199,
respectively, during 2001, 2002 and 2003. Commission is earned by certain subsidiaries of CSAHC in connection with
the air tickets sold by them on behalf of the Group. Commission is calculated
based on a fixed rate ranging from 1.5% to 12% on the ticket value. Commission
expenses incurred by the Group in respect of tickets sold by certain
subsidiaries of CSAHC totaled RMB37,017, RMB16,725 and RMB4,896, respectively,
during 2001, 2002 and 2003. Commission is earned by the CAACs sales offices and various PRC airlines
in connection with the air tickets sold by them on behalf of the Group.
Commission is calculated based on a fixed rate ranging from 1.5% to 12% on the
ticket value. Commission expenses incurred by the Group in respect of tickets
sold by the CAACs sales offices and various PRC airlines totaled RMB510,169
and RMB464,721, respectively, during 2001 and 2002. Commission income received
from other PRC airlines in connection with air tickets sold by the Group,
calculated based on a fixed rate ranging from 3% to 9% on the ticket value,
totaled RMB89,842 and RMB81,931, respectively, during 2001 and 2002. Ground service fees are received from other PRC airlines in respect of
ground services provided by the Group and Baiyun International Airport Group at
Guangzhou Baiyun International Airport. The Group was entitled to 50% of the
service fees. The Groups share of ground service fees received totaled
RMB23,513 and RMB39,735, respectively, during 2001 and 2002. The Group has a 50% equity interest in both Guangzhou Aircraft Maintenance
Engineering Company Limited (GAMECO) and MTU Maintenance Zhuhai Co., Ltd
(MTU Zhuhai), which provide comprehensive maintenance services to the Group.
Maintenance fees totaling RMB534,828, RMB592,311 and RMB693,303, respectively,
were incurred by the Group for services provided by GAMECO and MTU Zhuhai
during 2001, 2002 and 2003. F-37




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) Certain aircraft sundry supplies are purchased from Southern Airlines
(Group) Economic Development Company (SAGEDC), a subsidiary of CSAHC.
Supplies totaling RMB86,386, RMB101,350 and RMB42,389, respectively, were
purchased by the Group from SAGEDC during 2001, 2002 and 2003. The Group has a 51% equity interest in Zhuhai Xiang Yi, which provides
flight simulation services to the Group. Flight simulation service charges
totaling RMB101,355 were incurred by the Group for services provided by Zhuhai
Xiang Yi during 2003. In addition, the Group entered into operating lease
agreements to lease certain flight training facilities and buildings to Zhuhai
Xiang Yi. Rental income received by the Group amounted to RMB34,175 during
2003 (Note 13). Advertising services Advertising services are provided by Southern Airlines Advertising Company
(SA Advertising). SA Advertising was a subsidiary of CSAHC up to July 2002.
In August 2002, the Group acquired 90% equity interest in SA Advertising from
CSAHC. Expenses totaling RMB9,940 and RMB3,275, respectively, were incurred by
the Group for services provided by SA Advertising during 2001 and 2002. Wet lease rentals Pursuant to certain wet lease arrangements effected in August and November
2000, the Group incurred RMB300,000 during 2001 in respect of five Boeing
737-300/37K aircraft leased from Zhongyuan Airlines, a subsidiary of CSAHC.
Such lease arrangements were terminated in January 2002. During 2002 and 2003, wet lease rentals totaling RMB26,164 and RMB35,751,
respectively, were paid to Xinjiang Airlines Company, a subsidiary of CSAHC,
pursuant to a wet lease agreement in respect of a Boeing 757-200 aircraft
effective October 2002. The wet lease agreement was terminated in April 2003. During the period from August to October 2002, the Group received wet
lease rentals totaling RMB27,599 from wet leasing of an Airbus 320-200 aircraft
to Sichuan Airlines Corporation Limited, an affiliated company of the Group. Refund of medical benefit payments Prior to January 1, 2002, the Group paid a fixed annual fee to CSAHC in
return for CSAHC providing medical benefit, transportation subsidies and other
welfare facilities to the retirees of the Group. Such arrangement was
terminated on January 1, 2002. During 2003, CSAHC refunded RMB58,120 to the
Group which represented the difference between the aggregate fixed annual fees
received from the Group and the aggregate cost of services incurred by CSAHC
under the above arrangement. F-38




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) Acquisition of aircraft and related spare parts and vehicles During 2002, the Group acquired five Boeing 737-300/37K aircraft and
related spare parts and certain vehicles from Zhongyuan Airlines, a subsidiary
of CSAHC, at a consideration of approximately RMB1,096,866. The consideration
was satisfied by cash of approximately RMB132,130 together with an assumption
by the Group of Zhongyuan Airlines debts of approximately RMB964,736. In
addition, the Group received reimbursements of wet lease rentals totaling
RMB150,000 which it paid to Zhongyuan Airlines during the period from July 1,
2001 to December 31, 2001. Such reimbursements have been applied to reduce the
purchase costs of the acquired assets. Acquisition of subsidiaries In August 2002, the Group acquired 90% equity interest in each of
Guangzhou Aviation Hotel, Southern Airlines Advertising Company and South China
International Aviation & Travel Services Company from CSAHC at an aggregate
cash consideration of approximately RMB107,846. Such consideration is
determined by reference to the valuation reports prepared by GZAA Incorporated,
a firm of independent valuers registered in the PRC. These acquisitions are
not considered significant in the context of the Group. Amounts due to related companies Amounts due to related companies, which represent balance with CSAHC and
its affiliates, and the Groups affiliated companies and jointly controlled
entities, are unsecured, non-interest bearing and repayable within one year.
The balance as of December 31, 2002 also included balances with the CAAC and
its affiliates. Balances with other State-owned enterprises are excluded from
this caption, as other State-owned enterprises are not considered related
parties of the Group. In addition to the above, certain business undertakings of CSAHC also
provided hotel and other services to the Group. The total amount involved is
not material to the results of the Group. The directors of the Company are of the opinion that the above
transactions with related parties were entered into in the normal course of
business and on normal commercial terms or in accordance with the agreements
governing such transactions. F-39




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 26.     FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK Financial assets of the Group include cash and cash equivalents,
investments, trade receivables and other receivables. Financial liabilities of
the Group include notes payable, accounts payable, bills payable, sales in
advance of carriage, amounts due to related companies, accrual expenses, other
liabilities and obligations under capital leases. Liquidity risk As of December 31, 2002 and 2003, the Groups net current liabilities
amounted to RMB7,015,998 and RMB10,792,050, respectively. For the years ended
December 31, 2001, 2002 and 2003, the Group recorded a net cash inflow from
operating activities of RMB2,223,943, RMB3,697,544 and RMB2,128,749,
respectively, a net cash outflow from investing activities and financing
activities of RMB3,603,535, RMB2,744,364 and RMB3,819,618, respectively, and a
(decrease)/increase in cash and cash equivalents of RMB(1,379,592), RMB953,180
and RMB(1,690,869), respectively. With regard to 2004 and thereafter, the liquidity of the Group is
primarily dependent on its
ability to maintain adequate cash inflow from operations to meet its debt
obligations as they fall due, and on its ability to obtain adequate external
finance to meet its committed future capital expenditures. With regard to its
short-term notes payable outstanding as of December 31, 2003, the Group has
obtained firm commitments from its principal bankers to renew relevant loans as
they fall due during 2004. With regard to its future capital commitments and
other financing requirements, the Group has already entered into loan financing
agreements with several PRC banks to provide loan finance up to an approximate
amount of RMB8,450,000 during 2004 and thereafter. The directors of the Company
believe that such financing will be available to the Group. The directors of the Company have carried out a detailed review of the
cash flow forecast of the Group for the twelve months ending December 31, 2004.
Based on such forecast, the directors have determined that adequate liquidity
exists to finance the working capital and capital expenditure requirements of
the Group during that period. In preparing the cash flow forecast, the
directors have considered historical cash requirements of the Group as well as
other key factors, including the availability of the above-mentioned loan
finance which may impact the operations of the Group during the next
twelve-month period. The directors are of the opinion that the assumptions and
sensitivities which are included in the cash flow forecast are reasonable.
However, as with all assumptions in regard to future events, these are subject
to inherent limitations and uncertainties and some or all of these assumptions
may not be realized. F-40




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) Business risk The Group conducts its principal operations in PRC and accordingly is
subject to special considerations and significant risks not typically
associated with investments in equity securities of the United States of
America and Western European companies. These include risks associated with,
among others, the political, economic and legal environment, influence of the
CAAC over many aspects of its operations and competition in the passenger,
cargo and mail airline services industry. Interest rate risk The interest rates and terms of repayment of the notes payable and
obligations under capital leases of the Group are disclosed in Notes 16 and 17,
respectively. Foreign currency risk The Group has significant exposure to foreign currency as substantially
all of the Groups lease obligations and notes payable are denominated in
foreign currencies, principally US dollars, and to a lesser extent, Japanese
yen. Depreciation or appreciation of the Renminbi against foreign currencies
affects the Groups results significantly because the Groups foreign currency
payments generally exceed its foreign currency receipts. The Group is not able
to hedge its foreign currency exposure effectively other than by retaining its
foreign currency denominated earnings and receipts to the extent permitted by
the State Administration of Foreign Exchange (SAFE), or subject to certain
restrictive conditions, entering into forward foreign exchange contracts with
authorized PRC banks. Credit risk Substantially all of the Groups cash and cash equivalents are deposited
with PRC financial institutions. A significant portion of the Groups air tickets are sold by agents
participating in the Billing and Settlement Plan (BSP), a clearing scheme
between airlines and sales agents organized by International Air Transportation
Association. As of December 31, 2002 and 2003, the balance due from BSP
amounted to RMB353,246 and RMB446,399, respectively. Self insurance risk The Group maintains a limited amount of property insurance in respect of
certain personal and real property. F-41




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) Fair value The carrying amounts and estimated fair values of significant financial
assets and liabilities as of December 31, 2002 and 2003 are set out below. December 31,2002
    
    2003Carrying
    
    Fair
    
    Carrying
    
    Fairamount
    
    value
    
    amount
    
    valueRMB
    
    RMB
    
    RMB
    
    RMBCash and cash equivalents
    
    
    3,771,043
    
    
    
    3,771,043
    
    
    
    2,080,174
    
    
    
    2,080,174Trade receivables
    
    
    671,776
    
    
    
    671,776
    
    
    
    833,604
    
    
    
    833,604Other receivables
    
    
    372,586
    
    
    
    372,586
    
    
    
    296,047
    
    
    
    296,047Notes payable, including
current installments
of long-term notes payable
    
    
    5,240,726
    
    
    
    5,326,511
    
    
    
    7,096,846
    
    
    
    7,164,216Accounts payable
    
    
    532,480
    
    
    
    532,480
    
    
    
    928,093
    
    
    
    928,093Bills payable
    
    
    1,299,680
    
    
    
    1,299,680
    
    
    
    438,135
    
    
    
    438,135Sales in advance of carriage
    
    
    390,531
    
    
    
    390,531
    
    
    
    466,087
    
    
    
    466,087Amounts due to related companies
    
    
    525,090
    
    
    
    525,090
    
    
    
    929,003
    
    
    
    929,003Accrued expenses
    
    
    2,341,454
    
    
    
    2,341,454
    
    
    
    2,527,794
    
    
    
    2,527,794Other liabilities
    
    
    646,989
    
    
    
    646,989
    
    
    
    1,019,811
    
    
    
    1,019,811Notes payable, excluding
current installments
    
    
    5,835,434
    
    
    
    6,111,052
    
    
    
    4,521,735
    
    
    
    4,743,128
 The following methods and assumptions were used to estimate the fair value
for each class of financial instrument:  (i)
    
    Cash and cash equivalents, trade receivables, other receivables,
short-term notes payable, accounts payable, bills payable, sales in
advance of carriage, amounts due to related companies, accrued expenses
and other liabilities The carrying amounts approximate fair value because of the short
maturities of these instruments.  (ii)
    
    Long-term notes payable The fair value has been estimated by applying a discounted cash flow
approach using interest rates available to the Group for similar indebtedness. The economic characteristics of the Groups capital leases vary from lease
to lease. It is impractical to compare such leases with those prevailing in
the market within the constraints of timeliness and cost for the purpose of
estimating the fair value of such leases. Investments are unquoted equity
securities of companies established in the PRC. There is no quoted market
price for such equity securities and accordingly a reasonable estimate of the
fair value could not be made without incurring excessive costs. F-42




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) Fair value estimates are made at a specific point in time and based on
relevant market information about the financial instruments. These estimates
are subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. 27.     FOREIGN CURRENCY EXCHANGE The Renminbi is not freely convertible into foreign currencies. All
foreign exchange transactions involving Renminbi must take place either through
the Peoples Bank of China or other institutions authorized to buy and sell
foreign exchange or at a swap center. The Group currently maintains bank accounts in currencies other than the
Renminbi to engage in foreign exchange transactions. The amount of foreign
exchange that can be retained by the Group under this system is determined by
the SAFE based on the Groups expected payment obligations in foreign
currencies for lease and debt payments and for dividends. Any amounts of
foreign exchange that the Group receives in excess of such amount must be
converted into Renminbi at the rate prevailing in the PRC inter-bank market.
The Group will have access to foreign currency through the inter-bank system,
subject to the approval of the SAFE, to satisfy its foreign exchange
requirements where these exceed the amount of foreign exchange that the Group
has retained. The Articles of Association of the Company require cash dividends be
declared in Renminbi and paid to holders of the H shares in Hong Kong dollars
at the average closing exchange rate for Hong Kong dollars as announced by the
Peoples Bank of China for the calendar week preceding the date of the
dividend declaration. To the extent that the Company is unable to pay
dividends in foreign currency out of its own resources, it will have to obtain
foreign currency through the swap centers and PRC banks. Hong Kong dollar
dividend payments will be converted by the depositary and distributed to
holders of American Depositary Shares in United States dollars. F-43




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 28.     RECONCILIATION AND SUPPLEMENTARY STATEMENTS OF CASH FLOWS INFORMATION (a) The reconciliation of income/(loss) before taxation and minority
interests to cash inflows from operations is as follows: Year ended December 31,2001
    
    2002
    
    2003RMB
    
    RMB
    
    RMBIncome/(loss) before taxation and minority interests
    
    
    795,256
    
    
    
    1,139,099
    
    
    
    (511,610
    )Adjustments to reconcile income/(loss) before taxation
and minority interests to cash inflows from operations:Depreciation and amortization of fixed assets
    
    
    1,802,462
    
    
    
    1,839,293
    
    
    
    1,997,882Other amortization
    
    
    12,512
    
    
    
    9,816
    
    
    
    40,089Amortization of deferred credits
    
    
    (18,483
    )
    
    
    (7,217
    )
    
    
    (1,541
    )Equity income of affiliated companies
    
    
    (53,077
    )
    
    
    (36,988
    )
    
    
    (47,798
    )Equity loss of jointly controlled entities
    
    
    4,034
    
    
    
    3,352
    
    
    
    39,495(Gain)/loss on sale of aircraft
    
    
    (59,855
    )
    
    
    (199,394
    )
    
    
    20,405Loss on sale of other fixed assets
    
    
    115,744
    
    
    
    28,654
    
    
    
    1,812Interest income
    
    
    (49,878
    )
    
    
    (52,618
    )
    
    
    (13,061
    )Interest expense
    
    
    933,717
    
    
    
    959,193
    
    
    
    823,725Non-cash exchange (gain)/loss, net
    
    
    (292,630
    )
    
    
    174,978
    
    
    
    177,356Decrease/(increase) in trade receivables
    
    
    232,228
    
    
    
    (110,749
    )
    
    
    (161,828
    )Decrease/(increase) in other receivables
    
    
    42,938
    
    
    
    (166,004
    )
    
    
    76,539(Increase)/decrease in inventories
    
    
    (2,033
    )
    
    
    (76,472
    )
    
    
    1,923(Increase)/decrease in prepaid expenses
and other current assets
    
    
    (136,600
    )
    
    
    123,924
    
    
    
    (6,045
    )(Decrease)/increase in accounts payable
    
    
    (167,599
    )
    
    
    (61,843
    )
    
    
    395,613Increase/(decrease) in bills payable
    
    
    
    
    
    
    1,299,680
    
    
    
    (861,545
    )Increase in sales in advance of carriage
    
    
    31,036
    
    
    
    19,985
    
    
    
    75,556Increase/(decrease) in amounts due to related companies
    
    
    98,040
    
    
    
    (193,175
    )
    
    
    403,913(Decrease)/increase in accrued expenses
    
    
    (132,121
    )
    
    
    86,215
    
    
    
    203,439Increase/(decrease) in other liabilities
    
    
    70,254
    
    
    
    (33,032
    )
    
    
    372,822(Decrease)/increase in provision for major overhauls
    
    
    (40,422
    )
    
    
    16,226
    
    
    
    47,577Cash inflows from operations
    
    
    3,185,523
    
    
    
    4,762,923
    
    
    
    3,074,718
  (b)
    
    Disclosure of non-cash investing and financing activities: During 2002, the Group assumed from Zhongyuan Airlines debts totaling
RMB964,736 in partial satisfaction of the consideration payable for
acquisition of five Boeing 737-300/37K aircraft and other assets from
Zhongyuan Airlines (Note 25). F-44




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) (c)     Effect of acquisition of subsidiaries: Year ended December 31,2001
    
    2002
    
    2003RMB
    
    RMB
    
    RMBNet assets acquired:Fixed assets
    
    
    
    
    
    
    96,636
    
    
    
    Cash and cash equivalents
    
    
    
    
    
    
    17,355Trade receivables and other current assets
    
    
    
    
    
    
    20,681
    
    
    
    
    
    
    
    134,672
    
    
    
    Accounts payable
    
    
    
    
    
    
    3,623Accrued expenses and other liabilities
    
    
    
    
    
    
    11,220
    
    
    
    
    
    
    
    14,843
    
    
    
    Net assets value
    
    
    
    
    
    
    119,829
    
    
    
    Minority interests share of net assets value
    
    
    
    
    
    
    11,983
    
    
    
    Net assets value acquired by the Group
    
    
    
    
    
    
    107,846
    
    
    
    Consideration paid
    
    
    
    
    
    
    107,846
    
    
    
    Cash and cash equivalents acquired
    
    
    
    
    
    
    17,355
    
    
    
    Net cash outflow from acquisition of subsidiaries
    
    
    
    
    
    
    90,491
    
    
    
    
 F-45




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 29.     PRINCIPAL
SUBSIDIARIES, AFFILIATED COMPANIES AND JOINTLY CONTROLLED ENTITIES Details
of the Companys principal subsidiaries, affiliated companies
and jointly controlled entities as of December 31, 2003 are as follows: AttributablePlace of
    
    equity interestestablishment
    
    Direct
    
    Indirect
    
    PrincipalName of company
    
    /operation
    
    %
    
    %
    
    activitiesSubsidiariesGuangxi Airlines Company Limited
    
    PRC
    
    
    60
    
    
    
    
    
    
    AirlineSouthern Airlines Group Shantou Airlines Company Limited
    
    PRC
    
    
    60
    
    
    
    
    
    
    AirlineZhuhai Airlines Company Limited
    
    PRC
    
    
    60
    
    
    
    
    
    
    AirlineGuizhou Airlines Company Limited
    
    PRC
    
    
    60
    
    
    
    
    
    
    AirlineXiamen Airlines Company Limited
    
    PRC
    
    
    60
    
    
    
    
    
    
    AirlineGuangzhou Nanland Air Catering Company Limited
    
    PRC
    
    
    51
    
    
    
    
    
    
    Air cateringAffiliated companiesSouthern Airlines Group Finance Company Limited
    
    PRC
    
    
    32
    
    
    
    15.42
    
    
    Provision of
financial servicesSichuan Airlines Corporation Limited
    
    PRC
    
    
    39
    
    
    
    
    
    
    AirlineJointly controlled entitiesGuangzhou Aircraft Maintenance Engineering Company Limited (Note)
    
    PRC
    
    
    50
    
    
    
    
    
    
    Provision of aircraft
repair and
maintenance
servicesMTU Maintenance Zhuhai Co. Ltd.
    
    PRC
    
    
    50
    
    
    
    
    
    
    Provision of engine
repair and
maintenance
servicesChina Postal Airlines Limited
    
    PRC
    
    
    49
    
    
    
    
    
    
    AirlineZhuhai Xiang Yi Aviation Technology Company Limited
    
    PRC
    
    
    51
    
    
    
    
    
    
    Provision of flight
simulation services
  Note: Guangzhou Aircraft Maintenance Engineering Company Limited has
been reclassified from an affiliated company to a jointly controlled
entity since 2003 due to a change in the composition of its
shareholders in 2003. Certain of the Companys subsidiaries, affiliated companies and jointly
controlled entities are PRC joint ventures which have limited lives pursuant
to PRC law. F-46




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 30.     SEGMENTAL INFORMATION The Group operates primarily as a single business segment for the
provision of air transportation services. Geographic information about the
Groups operating revenue and income are as follows: Domestic
    
    Hong Kong
    
    International*
    
    TotalRMB
    
    RMB
    
    RMB
    
    RMBYear ended December 31, 2001Traffic revenue
    
    
    12,924,892
    
    
    
    1,182,492
    
    
    
    2,354,148
    
    
    
    16,461,532Other revenue
    
    
    359,895
    
    
    
    58,231
    
    
    
    
    
    
    
    418,12613,284,787
    
    
    
    1,240,723
    
    
    
    2,354,148
    
    
    
    16,879,658Operating income
    
    
    1,090,154
    
    
    
    219,686
    
    
    
    90,833
    
    
    
    1,400,673Year ended December 31, 2002Traffic revenue
    
    
    13,197,589
    
    
    
    1,118,695
    
    
    
    3,165,608
    
    
    
    17,481,892Other revenue
    
    
    485,046
    
    
    
    
    
    
    
    51,682
    
    
    
    536,72813,682,635
    
    
    
    1,118,695
    
    
    
    3,217,290
    
    
    
    18,018,620Operating income
    
    
    1,614,975
    
    
    
    193,440
    
    
    
    217,662
    
    
    
    2,026,077Year ended December 31, 2003Traffic revenue
    
    
    13,086,939
    
    
    
    807,677
    
    
    
    3,070,184
    
    
    
    16,964,800Other revenue
    
    
    436,122
    
    
    
    
    
    
    
    69,201
    
    
    
    505,32313,523,061
    
    
    
    807,677
    
    
    
    3,139,385
    
    
    
    17,470,123Operating income / (loss)
    
    
    440,158
    
    
    
    (29,210
    )
    
    
    44,781
    
    
    
    455,729
  *
    
    Asian market accounted for approximately 75%, 70% and 70%,
respectively, of the Groups total international traffic revenue
for the years ended December 31, 2001, 2002 and 2003. The
remaining portion was mainly derived from the Groups flights
to/from European and North American regions. The major revenue-earning assets of the Group are its aircraft fleet, most
of which are registered in the PRC. Since the Groups aircraft fleet is
employed flexibly across its route network, there is no suitable basis of
allocating such assets to geographic segments. Substantially all of the
Groups non-aircraft identifiable assets are located in PRC. F-47




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) 31.     SUBSEQUENT EVENTS In April 2004, the Company entered into a purchase agreement with Airbus
SNC for the acquisition of fifteen Airbus 320-200 aircraft and six Airbus
319-100 aircraft, scheduled for deliveries in 2005 and 2006. 32.     SUPPLEMENTARY INFORMATION Movements in allowance for doubtful accounts comprise: Year ended December 31,2001
    
    2002
    
    2003RMB
    
    RMB
    
    RMBBalance at beginning of year
    
    
    72,644
    
    
    
    59,019
    
    
    
    60,118Provision for doubtful accounts (Note 9)
    
    
    1,729
    
    
    
    1,304
    
    
    
    12,031Doubtful accounts written-off
    
    
    (15,354
    )
    
    
    (205
    )
    
    
    (2,152
    )Balance at end of year (Note 12)
    
    
    59,019
    
    
    
    60,118
    
    
    
    69,997
 33.     SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP The Groups accounting policies conform with IFRS which differ in certain
material respects from U.S. GAAP. Information relating to the nature and
effect of such differences are set out below. (a)     Sale and leaseback accounting Under IFRS, gains on sale and leaseback transactions where the subsequent
lease is an operating lease are recognized as income immediately, if the
transactions are established at fair value. Differences between the sale price
and fair value are deferred and amortized over the period for which the assets
are expected to be used. Under U.S. GAAP, such gains are deferred and amortized
over the term of the lease. (b)     Lease arrangements As disclosed in Note 13 to the consolidated financial statements, during
2002 and 2003, the Group entered into two separate arrangements with certain
independent third parties under which the Group sold aircraft and then
immediately leased back the aircraft for a pre-determined period. As a result
of the arrangements, the Group received a net cash benefit of RMB51,682 and
RMB69,121 in 2002 and 2003, respectively, which has been recognized as income
under IFRS. Under U.S. GAAP, such benefits are deferred and amortized over the
minimum lease period. F-48




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) In addition, under the lease arrangements, the commitments by the Group to
make long-term lease payments have been defeased by the placement of security
deposits. As such, under IFRS, such commitments and deposits are not recognized
on the consolidated balance sheets. Under U.S. GAAP, such commitments and
deposits amounting to RMB1,322,843 and RMB2,409,252 as of
December 31, 2002 and 2003, respectively, would be recognized on the consolidated balance sheets, as such
commitments are not deemed as extinguished by the placement of security
deposits. (c)     Capitalized interest Under IFRS, the Group capitalizes interest costs to the extent the related
borrowings are directly attributable to the acquisition or construction of an
asset. Under U.S. GAAP, interest costs capitalized are determined based on
specific borrowings related to the acquisition or construction of an asset, if
an entitys financing plans associate a specific new borrowing with a
qualifying asset. If average accumulated expenditures for the asset exceed the
amounts of specific new borrowings associated with the asset, additional
interest costs capitalized are based on the weighted average interest rate
applicable to other borrowings of the entity. (d)     Revaluation of fixed assets In connection with the Reorganization in 1996, the fixed assets of the
Group were revalued as of December 31, 1996 (see Notes 1 and 13 to the
consolidated financial statements). Such fixed asset revaluation resulted in
an increase in shareholders equity with respect to the increase in carrying
amount of certain fixed assets above their historical cost bases, while a
charge to the consolidated statement of operations was recorded with respect to
the reduction in carrying amount of certain fixed assets below their historical
cost bases. In addition, the revalued fixed asset amounts serve as the tax
bases of fixed assets for years beginning in 1997. Accordingly, the fixed
asset revaluation eliminated certain of the temporary differences which gave
rise to a deferred tax asset as of December 31, 1996. Such tax asset was
offset against the revaluation surplus. Under U.S. GAAP, fixed assets are stated at their historical cost unless
an impairment loss has been recorded. An impairment loss on fixed assets is
recorded under U.S. GAAP if the carrying amount of such asset exceeds its
future undiscounted cash flows, excluding finance costs. The future
undiscounted cash flows, excluding finance costs, of the Groups fixed assets
whose carrying amount was reduced in connection with the Reorganization, exceed
their historical cost carrying amount and, therefore, impairment of such assets
is not appropriate under U.S. GAAP. Accordingly, the revaluation reserve
recorded directly to shareholders equity and the charge recorded under IFRS in
1996 and the additional depreciation charges recorded in the seven years ended
December 31, 2003, as a result of the Reorganization are reversed for U.S. GAAP
purposes. However, as a result of the tax deductibility of the net revaluation
reserve, a deferred tax asset related to the reversal of the net revaluation
reserve is created under U.S. GAAP with a corresponding increase in
shareholders equity as of December 31, 1996. Such deferred tax asset will be
reversed upon depreciation of the net revaluation surplus included in the fixed
assets beginning 1997. F-49




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) (e)     Investments in affiliated company and jointly controlled entity During
2002, the Group invested in an affiliated company and a jointly
controlled entity, which were PRC state-owned enterprises. Under IFRS, such
investments are initially recorded on a fair value basis at the cost of
purchases borne by the Group. In the consolidated statements of operations,
the equity share of results of the investees are measured based on the fair
value of underlying net assets determined on the date of acquisitions. Under U.S. GAAP, such transactions would be considered to be combinations
of businesses under common control. Under U.S. GAAP, such investments are
initially recorded at the Groups equity share of net assets of the investees
determined on a historical cost basis. The differences between such amounts
and the cost of purchases are reflected as movements in the shareholders
equity. In the consolidated statements of operations, the equity share of
results of the investees are measured based on the historical cost basis. (f)     Acquisition of subsidiaries from CSAHC During
2002, the Group acquired 90% equity interest in certain
subsidiaries from CSAHC. Under IFRS, the purchase method of accounting was
applied to such business combination such that as from the date of combination,
the results of the acquired subsidiaries and their assets and liabilities are
included in the consolidated financial statements of the Group. Under U.S. GAAP, such transaction would be considered to be a combination
of entities under common control. Under U.S. GAAP, combination of entities
under common control are accounted for under the as if pooling-of-interests
method where assets and liabilities are accounted for at historical cost and
financial statements of previously separate entities for periods prior to the
combination generally are restated on a combined basis. The effect of this
difference was not material to the years presented. (g)     Provision
for major overhauls As disclosed in Notes 2(r) and 6 to the consolidated financial
statements prepared under IFRS, in respect of aircraft held under operating leases, a provision is made over
the lease term for the estimated cost of scheduled overhauls required to be performed on
the related aircraft prior to their return to the lessors. Under U.S. GAAP, a liability would be recorded at the outset of the
operating leases for the fair value of contractual obligations to perform the overhauls and a
deferred asset would be recorded for the corresponding amount, which would be amortized over the
term of the operating leases. The carrying amounts of such liability and asset would amount to
approximately RMB486,660 and RMB292,773 respectively as of
December 31, 2002 and RMB569,860 and RMB369,679 respectively as
of December 31, 2003. The effect of above difference on the net income/(loss) and
shareholders equity reported under U.S. GAAP was not material to the years presented. (h)     Financial statements presentation and disclosure In the consolidated statements of operations presented under IFRS,
(loss)/gain on sale of fixed assets is classified under Non-operating
income/(expenses). Under U.S. GAAP, such (loss)/gain would be classified under
Operating income/(expenses)  General and administrative. As disclosed in Note 20 to the consolidated financial statements, deferred
tax assets are presented on a net basis under IFRS. Under U.S. GAAP, the gross
amounts of such deferred tax assets and any applicable valuation allowances
would be separately disclosed. As of December 31, 2002 and 2003, the amount of
valuation allowances which have been netted off with deferred tax assets
amounted to approximately RMB48,480 and RMB53,000, respectively. F-50




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) (i)     New accounting pronouncements FIN 46R In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003) Consolidation of Variable Interest Entities which addresses
how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation
No. 46 Consolidation of Variable Interest Entities which was issued in
January 2003. The Group will be required to apply FIN 46R to variable
interests in VIEs created after December 31, 2003. For variable interests in
VIEs created before January 1, 2004, the Interpretation will be applied
beginning on January 1, 2005. For any VIEs that must be consolidated under FIN
46R that were created before January 1, 2004, the assets, liabilities and
noncontrolling interests of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the
consolidated balance sheets and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, liabilities and noncontrolling
interest of the VIE. The Group is evaluating the impact of applying FIN 46R
to existing VIEs in which it has variable interests and has not yet completed
this evaluation. FASB No. 150 FASB Statement No. 150 Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity was issued in May 2003. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement also includes required disclosures for financial
instruments within its scope. For the Group, the Statement was effective for
instruments entered into or modified after May 31, 2003 and otherwise will be
effective as of January 1, 2004, except for mandatorily redeemable financial
instruments. For certain mandatorily redeemable financial instruments, the
Statement will be effective for the Group on January 1, 2005. The effective
date has been deferred indefinitely for certain other types of mandatorily
redeemable financial instruments. The Group currently does not have any
financial instruments that are within the scope of this Statement. F-51




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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data) Effect on net income/(loss) of significant differences between IFRS and
U.S. GAAP is as follows: Reference
    
    Year ended December 31,in Noteabove
    
    2001
    
    2002
    
    2003
    
    2003RMB
    
    RMB
    
    RMB
    
    U.S. dollarsNet income/(loss) under IFRS
    
    
    
    
    
    
    340,225
    
    
    
    575,761
    
    
    
    (358,267
    )
    
    
    (43,286
    )U.S. GAAP adjustments:Sale and leaseback accounting
    
    
    (a
    )
    
    
    54,254
    
    
    
    (100,664
    )
    
    
    114,635
    
    
    
    13,850Lease arrangements
    
    
    (b
    )
    
    
    
    
    
    
    (49,960
    )
    
    
    (64,140
    )
    
    
    (7,749
    )Capitalized interest
    
    
    (c
    )
    
    
    18,000
    
    
    
    (31,473
    )
    
    
    (32,961
    )
    
    
    (3,982
    )Reversal of additional depreciation
arising from revaluation of fixed
assets
    
    
    (d
    )
    
    
    65,000
    
    
    
    33,000
    
    
    
    33,000
    
    
    
    3,987Investments in affiliated company and jointly
controlled entity
    
    
    (e
    )
    
    
    3,546
    
    
    
    (541
    )
    
    
    7,044
    
    
    
    851Deferred tax effects- current year
    
    
    
    
    
    
    (50,369
    )
    
    
    47,849
    
    
    
    (7,580
    )
    
    
    (916
    )- effect on
change in income tax rate on deferred taxation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51,368
    )
    
    
    (6,206
    )Net income/(loss) under U.S. GAAP
    
    
    
    
    
    
    430,656
    
    
    
    473,972
    
    
    
    (359,637
    )
    
    
    (43,451
    )Basic earnings/(loss) per share under U.S. GAAP
    
    
    
    
    
    
    0.13
    
    
    
    0.14
    
    
    
    (0.09
    )
    
    
    (0.01
    )Basic earnings/(loss) per ADS under U.S. GAAP*
    
    
    
    
    
    
    6.38
    
    
    
    7.02
    
    
    
    (4.69
    )
    
    
    (0.57
    )
 *Basic earnings/(loss) per ADS is calculated on the basis that one ADS is equivalent to 50 H shares. Effect on shareholders equity of significant differences between IFRS and
U.S. GAAP is as follows: Reference
    
    December 31,in Noteabove
    
    2002
    
    2003
    
    2003RMB
    
    RMB
    
    U.S. DollarsShareholders equity under IFRS
    
    
    
    
    
    
    9,613,207
    
    
    
    11,895,707
    
    
    
    1,437,252U.S. GAAP adjustments:Sale and leaseback accounting
    
    
    (a
    )
    
    
    (586,989
    )
    
    
    (472,354
    )
    
    
    (57,070
    )Lease arrangements
    
    
    (b
    )
    
    
    (49,960
    )
    
    
    (114,100
    )
    
    
    (13,786
    )Capitalized interest
    
    
    (c
    )
    
    
    381,021
    
    
    
    348,060
    
    
    
    42,053Revaluation of fixed assets, net of depreciation
    
    
    (d
    )
    
    
    (46,120
    )
    
    
    (13,120
    )
    
    
    (1,585
    )Investments in affiliated company
and jointly controlled entity
    
    
    (e
    )
    
    
    (118,003
    )
    
    
    (110,959
    )
    
    
    (13,406
    )Deferred tax effects
    
    
    
    
    
    
    94,175
    
    
    
    35,227
    
    
    
    4,256Shareholders equity under U.S. GAAP
    
    
    
    
    
    
    9,287,331
    
    
    
    11,568,461
    
    
    
    1,397,714
 F-52




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##### Table of Contents



SIGNATURES

The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.

| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | CHINA SOUTHERN AIRLINES COMPANY LIMITED(Registrant)                                                                    
| |                                                                                                                        
| |                                                                                                                        
| | /s/ Yan Zhi Qing
                    Name: Yan Zhi Qing
                    Title:   Chairman of the Board of Directors

Date: June 30, 2004





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##### Table of Contents



EXHIBIT INDEX

|            |  |                                                     
|----------- |  | ----------------------------------------------------
|Exhibit No. |  | Description of Exhibit                              
|            |  |                                                     
|1           |  | Articles of Association                             
|            |  |                                                     
|4.1         |  | Form of Directors Service Agreement                
|            |  |                                                     
|4.2         |  | Form of Non-Executive Directors Service Agreement  
|            |  |                                                     
|8           |  | Subsidiaries of the Company                         
|            |  |                                                     
|12.1        |  | Section 302 Certification of Chairman               
|            |  |                                                     
|12.2        |  | Section 302 Certification of President              
|            |  |                                                     
|12.3        |  | Section 302 Certification of Chief Financial Officer
|            |  |                                                     
|13.1        |  | Section 906 Certification of Chairman               
|            |  |                                                     
|13.2        |  | Section 906 Certification of President              
|            |  |                                                     
|13.3        |  | Section 906 Certification of Chief Financial Officer