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As filed with the Securities and Exchange Commission on [June 30, 2003]

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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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, 2002
| |  | -------------------------------------------

|   |  |                                                                                         
|-- |  | ----------------------------------------------------------------------------------------
|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 and 1,174,178,000 ordinary H Shares of par value RMB1.00
per share were issued and outstanding as of December 31, 2002.

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. [RESERVED]                                                                  
|                                                  | ITEM 16. [RESERVED]                                                                  
|PART IV                                          
|                                                  | ITEM 17. FINANCIAL STATEMENTS                                                        
|                                                  | ITEM 18. FINANCIAL STATEMENTS                                                        
|                                                  | ITEM 19. EXHIBITS                                                                    
|SIGNATURES                                       
|Ex-1 Articles of Association                     
|Ex-4.1 Form of Director's Service Agreement      
|Ex-4.2 Form of Non-Exclusive Director's Svc. Agmt
|Ex-8 Subsidiaries of Company                     
|EX-10.1 Cert Pursuant to 18 USC Section 1350     



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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                                              |  |      | 30 | 
|                                                                  | Property, Plant and Equipment                                         |  |      | 32 | 
|Item 5.     Operating and Financial Review and Prospects          |                                                                       |  | 33   |   
|                                                                  | Critical Accounting Policies                                          |  |      | 33 | 
|                                                                  | Overview                                                              |  |      | 34 | 
|                                                                  | Certain Financial Information and Operating Data by
Geographic Region |  |      | 34 | 
|                                                                  | Operating Results                                                     |  |      | 36 | 
|                                                                  | Liquidity and Capital Resources                                       |  |      | 41 | 
|                                                                  | Contractual Obligations and Commercial Commitments                    |  |      | 43 | 
|Item 6.     Directors, Senior Management and Employees            |                                                                       |  | 43   |   
|                                                                  | Directors and Senior Management                                       |  |      | 43 | 
|                                                                  | Compensation                                                          |  |      | 45 | 

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|                                                                        |                                                         |  |      |    | 
|----------------------------------------------------------------------- | ------------------------------------------------------- |  | ---- | -- | 
|                                                                        |                                                         |  | Page
|                                                                        |                                                         |  |     
|                                                                        | Board Practices                                         |  |      | 45 | 
|                                                                        | Employees                                               |  |      | 46 | 
|                                                                        | Share Ownership                                         |  |      | 47 | 
|Item 7.     Major Shareholders and Related Party Transactions           |                                                         |  | 47   |   
|                                                                        | Major Shareholders                                      |  |      | 47 | 
|                                                                        | Related Party Transactions                              |  |      | 48 | 
|Item 8.     Financial Information                                       |                                                         |  | 50   |   
|                                                                        | Consolidated Statements and Other Financial Information |  |      | 50 | 
|                                                                        | Significant Changes                                     |  |      | 51 | 
|Item 9.     The Offer and Listing                                       |                                                         |  | 51   |   
|                                                                        | Offer and Listing Details                               |  |      | 52 | 
|                                                                        | Plan of Distribution                                    |  |      | 52 | 
|                                                                        | Markets                                                 |  |      | 52 | 
|                                                                        | Selling Shareholders                                    |  |      | 52 | 
|                                                                        | Dilution                                                |  |      | 52 | 
|                                                                        | Expenses of the Issue                                   |  |      | 52 | 
|Item 10.     Additional Information                                     |                                                         |  | 52   |   
|                                                                        | Share Capital                                           |  |      | 52 | 
|                                                                        | Memorandum and Articles of Association                  |  |      | 52 | 
|                                                                        | Material Contracts                                      |  |      | 57 | 
|                                                                        | Exchange Controls                                       |  |      | 57 | 
|                                                                        | Taxation                                                |  |      | 57 | 
|                                                                        | Dividends and Paying Agents                             |  |      | 58 | 
|                                                                        | Statement by Experts                                    |  |      | 58 | 
|                                                                        | Documents on Display                                    |  |      | 58 | 
|                                                                        | Subsidiary Information                                  |  |      | 59 | 
|Item 11.     Quantitative and Qualitative Disclosures About Market Risk |                                                         |  | 59   |   
|Item 12.     Description of Securities other than Equity Securities     |                                                         |  | 60   |   
|PART II                                                                

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|                                                                                          |  |  |      |  | 
|----------------------------------------------------------------------------------------- |  |  | ---- |  | 
|                                                                                          |  |  | Page
|                                                                                          |  |  |     
|Item 13.     Defaults, Dividend Arrearages and Delinquencies                              |  |  | 60   | 
|Item 14.     Material Modifications to the Rights of Security Holders
and Use of Proceeds |  |  | 60   | 
|PART III                                                                                 
|Item 15.     [Reserved]                                                                   |  |  | 62   | 
|Item 16.     [Reserved]                                                                   |  |  | 62   | 
|PART IV                                                                                  
|Item 17.     Financial Statements                                                         |  |  | 62   | 
|Item 18.     Financial Statements                                                         |  |  | 62   | 
|Item 19.     Exhibits                                                                     |  |  | 62   | 
|Signatures                                                                                |  |  | 64   | 

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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 (formerly the SA Group);              
|
| | - |  | 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 65.2% controlling interest in the
Company (Southern Airlines (Group) changed its official name to China Southern
Air Holding Company on October 11, 2002.).

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 financial statements in Renminbi. The consolidated
financial statements of the Company as of December 31, 2001 and 2002, and the
consolidated financial statements for the years ended December 31, 2000, 2001
and 2002, together with the notes thereto (collectively, 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 material respects from
accounting principles generally accepted in the United States of America (U.S.
GAAP). See Note 31 to the Financial Statements for a description of the
material differences between IFRS and U.S. GAAP as of December 31 of 2001 and
2002 and for each of the years in the three-year period ended December 31, 2002
as they relate to the Company.

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 = RMB8.2773, 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,
2002. 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.

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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                                                                                                 

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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 consolidated income statement data for each of the years
in the five-year period ended December 31, 2002 and consolidated balance sheet
data for each of the years in the five-year period ended December 31, 2002 have
been derived from the consolidated financial statements of the Company. Such
consolidated financial statements have been audited by KPMG, independent
certified public accountants, and prepared in accordance with IFRS on the basis
that the Company with all its present divisions and subsidiaries had been so
constituted during the relevant periods. IFRS differs in certain material
respects from U.S. GAAP. See Note 31 to the Financial Statements for a
description of the material differences related to the Group between IFRS and
U.S. GAAP as of December 31, 2001 and 2002 and for each of the years in the
three-year period ended December 31, 2002. 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, |          |      |  |  |          |   |  | 
|                       |                                                      |  |      |          |      |  |                                     |          |      |  |                         |          |      |  |  |          |   |  | 
|                       |                                                      |  | 1998 |          | 1999 |  | 2000                                |          | 2001 |  | 2002                    |          | 2002
|                       |                                                      |  |      |          |      |  |                                     |          |      |  |                         |          |     
|                       |                                                      |  | RMB  |          | RMB  |  | RMB                                 |          | RMB  |  | RMB                     |          | US$ 
|                       |                                                      |  |      |          |      |  | (in million, except per share data) |          |      |  |                        
|Income Statement Data: |                                                      |  |      |          |      |  |                                     |          |      |  |                         |          |      |  |  |          |   |  |  |          |   |  |  |        
|IFRS:                  |                                                      |  |      |          |      |  |                                     |          |      |  |                         |          |      |  |  |          |   |  |  |          |   |  |  |        
|                       | Operating revenue                                    |  |      | 11,849.4 |      |  |                                     | 13,299.6 |      |  |                         | 15,178.3 |      |  |  | 16,879.7 |   |  |  | 18,018.6 |   |  |  | 2,176.9 |  
|                       | Operating expenses                                   |  |      | 11,259.4 |      |  |                                     | 11,449.7 |      |  |                         | 13,996.2 |      |  |  | 15,479.0 |   |  |  | 15,992.5 |   |  |  | 1,932.1 |  
|                       | Operating income                                     |  |      | 590.0    |      |  |                                     | 1,849.9  |      |  |                         | 1,182.1  |      |  |  | 1,400.7  |   |  |  | 2,026.1  |   |  |  | 244.8   |  
|                       | Equity (loss) income of affiliated companies         |  |      | (1.8     | )    |  |                                     | 36.1     |      |  |                         | 45.9     |      |  |  | 53.0     |   |  |  | 37.0     |   |  |  | 4.5     |  
|                       | Equity loss of jointly controlled entities           |  |      |         |      |  |                                     |         |      |  |                         |         |      |  |  | (4.0     | ) |  |  | (3.4     | ) |  |  | (0.4    | )
|                       | Gain (loss) on sale of fixed assets                  |  |      | 182.9    |      |  |                                     | (18.7    | )    |  |                         | 372.6    |      |  |  | (55.9    | ) |  |  | 170.7    |   |  |  | 20.6    |  
|                       | Interest expense                                     |  |      | (1,197.4 | )    |  |                                     | (1,192.2 | )    |  |                         | (1,074.2 | )    |  |  | (933.7   | ) |  |  | (959.2   | ) |  |  | (115.9  | )
|                       | Exchange (loss) gain, net                            |  |      | (366.3   | )    |  |                                     | (426.5   | )    |  |                         | 318.5    |      |  |  | 296.8    |   |  |  | (175.4   | ) |  |  | (21.2   | )
|                       | Other, net                                           |  |      | 205.2    |      |  |                                     | 119.9    |      |  |                         | 86.3     |      |  |  | 38.4     |   |  |  | 43.3     |   |  |  | 5.2     |  
|                       | (Loss) income before taxation and minority
interests |  |      | (587.4   | )    |  |                                     | 368.5    |      |  |                         | 931.2    |      |  |  | 795.3    |   |  |  | 1,139.1  |   |  |  | 137.6   |  
|                       | Taxation                                             |  |      | 178.6    |      |  |                                     | (128.0   | )    |  |                         | (338.9   | )    |  |  | (320.5   | ) |  |  | (398.2   | ) |  |  | (48.1   | )
|                       | Minority interests                                   |  |      | (105.8   | )    |  |                                     | (158.1   | )    |  |                         | (90.5    | )    |  |  | (134.6   | ) |  |  | (165.1   | ) |  |  | (19.9   | )
|                       | Net (loss) income                                    |  |      | (514.6   | )    |  |                                     | 82.4     |      |  |                         | 501.8    |      |  |  | 340.2    |   |  |  | 575.8    |   |  |  | 69.6    |  
|                       | Basic (loss) earnings per share                      |  |      | (0.15    | )    |  |                                     | 0.02     |      |  |                         | 0.15     |      |  |  | 0.10     |   |  |  | 0.17     |   |  |  | 0.021   |  
|                       | Basic (loss) earnings per ADS                        |  |      | (7.63    | )    |  |                                     | 1.22     |      |  |                         | 7.44     |      |  |  | 5.04     |   |  |  | 8.53     |   |  |  | 1.03    |  
|U.S. GAAP:             |                                                      |  |      |          |      |  |                                     |          |      |  |                         |          |      |  |  |          |   |  |  |          |   |  |  |        
|                       | Net (loss) income                                    |  |      | (582.2   | )    |  |                                     | 370.3    |      |  |                         | 354.4    |      |  |  | 430.7    |   |  |  | 474.0    |   |  |  | 57.3    |  
|                       | Basic (loss) earnings per share                      |  |      | (0.17    | )    |  |                                     | 0.11     |      |  |                         | 0.11     |      |  |  | 0.13     |   |  |  | 0.14     |   |  |  | 0.017   |  
|                       | Basic (loss) earnings per ADS                        |  |      | (8.63    | )    |  |                                     | 5.49     |      |  |                         | 5.25     |      |  |  | 6.38     |   |  |  | 7.02     |   |  |  | 0.85    |  

3



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##### Table of Contents



|                    |                                                                     |  |      |          |      |  |      |          |      |  |              |          |      |  |  |          |  |  |  |          |  |  |  |         | 
|------------------- | ------------------------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- | ---- |  | ------------ | -------- | ---- |  |  | -------- |  |  |  | -------- |  |  |  | ------- | 
|                    |                                                                     |  |      |          |      |  |      |          |      |  | December 31, |          |      |  |  |          |  |  |  |          |  |  | 
|                    |                                                                     |  |      |          |      |  |      |          |      |  |              |          |      |  |  |          |  |  |  |          |  |  | 
|                    |                                                                     |  | 1998 |          | 1999 |  | 2000 |          | 2001 |  | 2002         |          | 2002
|                    |                                                                     |  |      |          |      |  |      |          |      |  |              |          |     
|                    |                                                                     |  | RMB  |          | RMB  |  | RMB  |          | RMB  |  | RMB          |          | US$ 
|                    |                                                                     |  |      |          |      |  |      |          |      |  | (in million) |          |      |  |  |          |  |  | 
|Balance Sheet Data: |                                                                     |  |      |          |      |  |      |          |      |  |              |          |      |  |  |          |  |  |  |          |  |  |  |        
|IFRS:               |                                                                     |  |      |          |      |  |      |          |      |  |              |          |      |  |  |          |  |  |  |          |  |  |  |        
|                    | Cash and cash equivalents                                           |  |      | 4,103.7  |      |  |      | 4,588.4  |      |  |              | 4,197.5  |      |  |  | 2,817.9  |  |  |  | 3,771.0  |  |  |  | 455.6   | 
|                    | Other current assets                                                |  |      | 2,080.7  |      |  |      | 1,715.2  |      |  |              | 1,691.9  |      |  |  | 1,560.5  |  |  |  | 1,834.8  |  |  |  | 221.7   | 
|                    | Fixed assets, net                                                   |  |      | 22,904.3 |      |  |      | 24,211.2 |      |  |              | 23,282.1 |      |  |  | 22,352.2 |  |  |  | 26,920.8 |  |  |  | 3,252.4 | 
|                    | Total assets                                                        |  |      | 32,083.3 |      |  |      | 32,557.7 |      |  |              | 30,924.0 |      |  |  | 30,653.1 |  |  |  | 37,188.0 |  |  |  | 4,492.8 | 
|                    | Notes payable, including current portion of
long term notes payable |  |      | 666.8    |      |  |      | 613.3    |      |  |              | 783.1    |      |  |  | 2,177.5  |  |  |  | 5,240.7  |  |  |  | 633.1   | 
|                    | Current installments of obligations under
capital leases            |  |      | 1,120.0  |      |  |      | 1,999.7  |      |  |              | 1,776.2  |      |  |  | 1,451.9  |  |  |  | 1,566.7  |  |  |  | 189.3   | 
|                    | Notes payable, excluding current portion                            |  |      | 5,032.6  |      |  |      | 4,424.2  |      |  |              | 3,788.7  |      |  |  | 3,627.6  |  |  |  | 5,835.4  |  |  |  | 705.0   | 
|                    | Obligations under capital leases, excluding
current installments    |  |      | 11,845.3 |      |  |      | 11,490.9 |      |  |              | 9,416.3  |      |  |  | 7,691.6  |  |  |  | 6,631.8  |  |  |  | 801.2   | 
|                    | Shareholders equity                                                |  |      | 8,297.3  |      |  |      | 8,379.7  |      |  |              | 8,881.4  |      |  |  | 9,221.7  |  |  |  | 9,613.2  |  |  |  | 1,161.4 | 
|U.S. GAAP:          |                                                                     |  |      |          |      |  |      |          |      |  |              |          |      |  |  |          |  |  |  |          |  |  |  |        
|                    | Shareholders equity                                                |  |      | 7,857.1  |      |  |      | 8,227.4  |      |  |              | 8,527.3  |      |  |  | 8,958.0  |  |  |  | 9,287.3  |  |  |  | 1,122.0 | 

Selected Operating Data

The following selected operating data of the Group for the five years
ended December 31, 2002 have been derived from 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 General Administration of Civil
Aviation of China (also known as 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 1998 and 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, the operating data and the
profit analysis and comparison for the years 2001 and 2002 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, |        |      |  |       
|              |                      |       |  |        |        |      |  |                         |        |      |  |        |        |  | 
|              |                      |       |  | 1998   |        | 1999 |  | 2000                    |        | 2001 |  | 2002  
|              |                      |       |  |        |        |      |  |                         |        |      |  |       
|Capacity      |                      |       |  |        |        |      |  |                         |        |      |  |        |        |  |  |        |        |  |  |       
|ASK (million) |                      |       |  |        |        |      |  |                         |        |      |  |        |        |  |  |        |        |  |  |       
|              |  Domestic           |       |  | 23,417 |        |      |  | 24,900                  |        |      |  | 28,345 |        |  |  | 31,393 |        |  |  | 33,753 |       
|              |  Hong Kong regional |       |  | 1,673  |        |      |  | 1,791                   |        |      |  | 1,744  |        |  |  | 1,690  |        |  |  | 1,746  |       
|              |  International      |       |  | 5,060  |        |      |  | 5,155                   |        |      |  | 5,742  |        |  |  | 6,981  |        |  |  | 8,746  |       
|              |                      | Total |  |        | 30,150 |      |  |                         | 31,846 |      |  |        | 35,831 |  |  |        | 40,064 |  |  |        | 44,245 | 
|ATK (million) |                      |       |  |        |        |      |  |                         |        |      |  |        |        |  |  |        |        |  |  |       
|              |  Domestic           |       |  | 2,709  |        |      |  | 2,865                   |        |      |  | 3,322  |        |  |  | 3,622  |        |  |  | 3,924  |       
|              |  Hong Kong regional |       |  | 206    |        |      |  | 214                     |        |      |  | 198    |        |  |  | 185    |        |  |  | 193    |       
|              |  International      |       |  | 667    |        |      |  | 683                     |        |      |  | 1,087  |        |  |  | 1,317  |        |  |  | 1,798  |       

4



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##### Table of Contents



|                                        |                      |       |         |         |         |      |         |                         |         |      |         |         |         |  |         |         |         |  |         |         |         | 
|--------------------------------------- | -------------------- | ----- | ------- | ------- | ------- | ---- | ------- | ----------------------- | ------- | ---- | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- | 
|                                        |                      |       |         |         |         |      |         | Year ended December 31, |         |      |         |        
|                                        |                      |       |         |         |         |      |         |                         |         |      |         |         |         |  |        
|                                        |                      |       |         | 1998    |         | 1999 |         | 2000                    |         | 2001 |         | 2002   
|                                        |                      |       |         |         |         |      |         |                         |         |      |         |        
|                                        |                      | Total |         |         | 3,582   |      |         |                         | 3,762   |      |         |         | 4,607   |  |         |         | 5,124   |  |         |         | 5,915   | 
|Kilometers flown (thousand)             |                      |       | 170,188 |         |         |      | 182,200 |                         |         |      | 209,431 |         |         |  | 234,051 |         |         |  | 258,379 |        
|Hours flown (thousand)                  |                      |       | 239     |         |         |      | 287     |                         |         |      | 326     |         |         |  | 365     |         |         |  | 405     |        
|Number of flights                       |                      |       |         |         |         |      |         |                         |         |      |         |         |         |  |         |         |         |  |         |        
|                                        |  Domestic           |       |         | 121,902 |         |      |         | 126,120                 |         |      |         |        |         |  |         |        |         |  |         |        |        
|                                        |  Hong Kong regional |       |         | 12,477  |         |      |         | 13,460                  |         |      |         |        |         |  |         |        |         |  |         |        |        
|                                        |  International      |       |         | 5,930   |         |      |         | 6,600                   |         |      |         |        |         |  |         |        |         |  |         |        |        
|                                        |                      | Total |         |         | 140,309 |      |         |                         | 146,180 |      |         |         |        |  |         |         |        |  |         |         |        | 
|Number of landing and take-offs         |                      |       |         |         |         |      |         |                         |         |      |         |         |         |  |         |         |         |  |         |        
|                                        |  Domestic           |       |         |        |         |      |         |                        |         |      |         | 165,726 |         |  |         | 183,651 |         |  |         | 194,776 |        
|                                        |  Hong Kong regional |       |         |        |         |      |         |                        |         |      |         | 14,255  |         |  |         | 13,712  |         |  |         | 13,891  |        
|                                        |  International      |       |         |        |         |      |         |                        |         |      |         | 8,861   |         |  |         | 10,698  |         |  |         | 13,990  |        
|                                        |                      | Total |         |         |        |      |         |                         |        |      |         |         | 188,842 |  |         |         | 208,061 |  |         |         | 222,657 | 
|Traffic                                 |                      |       |         |         |         |      |         |                         |         |      |         |         |         |  |         |         |         |  |         |        
|RPK (million)                           |                      |       |         |         |         |      |         |                         |         |      |         |         |         |  |         |         |         |  |         |        
|                                        |  Domestic           |       |         | 14,637  |         |      |         | 14,511                  |         |      |         | 16,974  |         |  |         | 19,447  |         |  |         | 22,092  |        
|                                        |  Hong Kong regional |       |         | 972     |         |      |         | 1,106                   |         |      |         | 1,074   |         |  |         | 1,060   |         |  |         | 1,081   |        
|                                        |  International      |       |         | 2,652   |         |      |         | 3,068                   |         |      |         | 3,605   |         |  |         | 4,550   |         |  |         | 5,767   |        
|                                        |                      | Total |         |         | 18,261  |      |         |                         | 18,685  |      |         |         | 21,653  |  |         |         | 25,057  |  |         |         | 28,940  | 
|RTK (million)                           |                      |       |         |         |         |      |         |                         |         |      |         |         |         |  |         |         |         |  |         |        
|                                        |  Domestic           |       |         | 1,487   |         |      |         | 1,518                   |         |      |         | 1,941   |         |  |         | 2,217   |         |  |         | 2,532   |        
|                                        |  Hong Kong regional |       |         | 92      |         |      |         | 106                     |         |      |         | 107     |         |  |         | 105     |         |  |         | 108     |        
|                                        |  International      |       |         | 336     |         |      |         | 379                     |         |      |         | 565     |         |  |         | 712     |         |  |         | 974     |        
|                                        |                      | Total |         |         | 1,915   |      |         |                         | 2,003   |      |         |         | 2,613   |  |         |         | 3,034   |  |         |         | 3,614   | 
|Passengers carried (thousand)           |                      |       |         |         |         |      |         |                         |         |      |         |         |         |  |         |         |         |  |         |        
|                                        |  Domestic           |       |         | 12,985  |         |      |         | 12,769                  |         |      |         | 14,450  |         |  |         | 16,499  |         |  |         | 18,535  |        
|                                        |  Hong Kong regional |       |         | 1,287   |         |      |         | 1,434                   |         |      |         | 1,444   |         |  |         | 1,409   |         |  |         | 1,369   |        
|                                        |  International      |       |         | 780     |         |      |         | 909                     |         |      |         | 957     |         |  |         | 1,213   |         |  |         | 1,589   |        
|                                        |                      | Total |         |         | 15,052  |      |         |                         | 15,112  |      |         |         | 16,851  |  |         |         | 19,121  |  |         |         | 21,493  | 
|Cargo and mail carried (tons)           |                      |       | 348,041 |         |         |      | 390,750 |                         |         |      | 353,000 |         |         |  | 398,000 |         |         |  | 470,000 |        
|Load Factors                            |                      |       |         |         |         |      |         |                         |         |      |         |         |         |  |         |         |         |  |         |        
|Passenger load factor (RPK/ASK) (%)     |                      |       |         |         |         |      |         |                         |         |      |         |         |         |  |         |         |         |  |         |        
|                                        |  Domestic           |       |         | 62.5    |         |      |         | 58.3                    |         |      |         | 59.9    |         |  |         | 61.9    |         |  |         | 65.5    |        
|                                        |  Hong Kong regional |       |         | 58.1    |         |      |         | 61.8                    |         |      |         | 61.6    |         |  |         | 62.7    |         |  |         | 61.9    |        
|                                        |  International      |       |         | 52.4    |         |      |         | 59.5                    |         |      |         | 62.8    |         |  |         | 65.2    |         |  |         | 65.9    |        
|                                        |                      | Total |         |         | 60.6    |      |         |                         | 58.7    |      |         |         | 60.4    |  |         |         | 62.5    |  |         |         | 65.4    | 
|Overall load factor (RTK/ATK) (%)       |                      |       |         |         |         |      |         |                         |         |      |         |         |         |  |         |         |         |  |         |        
|                                        |  Domestic           |       |         | 54.9    |         |      |         | 53.0                    |         |      |         | 58.4    |         |  |         | 61.2    |         |  |         | 64.5    |        
|                                        |  Hong Kong regional |       |         | 44.9    |         |      |         | 49.5                    |         |      |         | 54.0    |         |  |         | 56.8    |         |  |         | 55.8    |        
|                                        |  International      |       |         | 50.4    |         |      |         | 55.5                    |         |      |         | 52.0    |         |  |         | 54.1    |         |  |         | 54.2    |        
|                                        |                      | Total |         |         | 53.5    |      |         |                         | 53.2    |      |         |         | 56.7    |  |         |         | 59.2    |  |         |         | 61.1    | 
|Breakeven load factor (%)               |                      |       | 52.3    |         |         |      | 47.5    |                         |         |      | 54.0    |         |         |  | 55.6    |         |         |  | 55.9    |        
|Yield                                   |                      |       |         |         |         |      |         |                         |         |      |         |         |         |  |         |         |         |  |         |        
|Yield per RPK (RMB)                     |                      |       |         |         |         |      |         |                         |         |      |         |         |         |  |         |         |         |  |         |        
|                                        |  Domestic           |       |         | 0.58    |         |      |         | 0.65                    |         |      |         | 0.62    |         |  |         | 0.62    |         |  |         | 0.55    |        
|                                        |  Hong Kong regional |       |         | 1.14    |         |      |         | 1.00                    |         |      |         | 1.06    |         |  |         | 1.06    |         |  |         | 0.98    |        
|                                        |  International      |       |         | 0.40    |         |      |         | 0.42                    |         |      |         | 0.43    |         |  |         | 0.41    |         |  |         | 0.42    |        
|                                        |                      | Total |         |         | 0.58    |      |         |                         | 0.63    |      |         |         | 0.61    |  |         |         | 0.60    |  |         |         | 0.54    | 
|Yield per cargo and mail ton kilometers |                      |       | 1.72    |         |         |      | 1.63    |                         |         |      | 2.13    |         |         |  | 1.76    |         |         |  | 1.73    |        

5



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##### Table of Contents



|                                         |                      |       |      |       |      |      |      |                         |      |      |      |       |      |  |      |       |      |  |      |       |      | 
|---------------------------------------- | -------------------- | ----- | ---- | ----- | ---- | ---- | ---- | ----------------------- | ---- | ---- | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- | 
|                                         |                      |       |      |       |      |      |      | Year ended December 31, |      |      |      |      
|                                         |                      |       |      |       |      |      |      |                         |      |      |      |       |      |  |     
|                                         |                      |       |      | 1998  |      | 1999 |      | 2000                    |      | 2001 |      | 2002 
|                                         |                      |       |      |       |      |      |      |                         |      |      |      |      
|Yield per RTK (RMB)                      |                      |       |      |       |      |      |      |                         |      |      |      |       |      |  |      |       |      |  |      |      
|                                         |  Domestic           |       |      | 6.15  |      |      |      | 6.69                    |      |      |      | 5.90  |      |  |      | 5.83  |      |  |      | 5.21  |     
|                                         |  Hong Kong regional |       |      | 12.59 |      |      |      | 11.00                   |      |      |      | 11.19 |      |  |      | 11.26 |      |  |      | 10.36 |     
|                                         |  International      |       |      | 3.71  |      |      |      | 3.96                    |      |      |      | 3.63  |      |  |      | 3.31  |      |  |      | 3.25  |     
|                                         |                      | Total |      |       | 6.04 |      |      |                         | 6.40 |      |      |       | 5.63 |  |      |       | 5.43 |  |      |       | 4.84 | 
|Fleet                                    |                      |       |      |       |      |      |      |                         |      |      |      |       |      |  |      |       |      |  |      |      
|                                         |  Boeing             |       |      | 81    |      |      |      | 81                      |      |      |      | 89    |      |  |      | 91    |      |  |      | 102   |     
|                                         |  Other              |       |      | 21    |      |      |      | 20                      |      |      |      | 20    |      |  |      | 20    |      |  |      | 20    |     
|Total aircraft in service at period end  |                      |       | 102  |       |      |      | 101  |                         |      |      | 109  |       |      |  | 111  |       |      |  | 122  |      
|Overall utilization rate (hours per day) |                      |       | 7.7  |       |      |      | 8.1  |                         |      |      | 8.7  |       |      |  | 9.1  |       |      |  | 9.8  |      
|Financial                                |                      |       |      |       |      |      |      |                         |      |      |      |       |      |  |      |       |      |  |      |      
|Operating cost per ASK (RMB)             |                      |       | 0.37 |       |      |      | 0.36 |                         |      |      | 0.39 |       |      |  | 0.39 |       |      |  | 0.36 |      
|Operating cost per ATK (RMB)             |                      |       | 3.14 |       |      |      | 3.04 |                         |      |      | 3.04 |       |      |  | 3.02 |       |      |  | 2.70 |      

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)    |  |      |        |     |  |  |        | 
|                     |  | Period |        |               |  |      |        |     |  |  |        | 
|Period               |  | End    |        | (RMB per US$) |  | High |        | Low
|                     |  |        |        |               |  |      |        |    
|Annual Exchange Rate |  |        |        |               |  |      |        |     |  |  |        |  |  |  |        | 
|1998                 |  |        | 8.2789 |               |  |      | 8.2789 |     |  |  | 8.2802 |  |  |  | 8.2770 | 
|1999                 |  |        | 8.2793 |               |  |      | 8.2793 |     |  |  | 8.2917 |  |  |  | 8.2669 | 
|2000                 |  |        | 8.2781 |               |  |      | 8.2784 |     |  |  | 8.2799 |  |  |  | 8.2768 | 
|2001                 |  |        | 8.2766 |               |  |      | 8.2766 |     |  |  | 8.2910 |  |  |  | 8.2642 | 
|2002                 |  |        | 8.2773 |               |  |      | 8.2773 |     |  |  | 8.2897 |  |  |  | 8.2152 | 

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 |        | Low
|                      |  |      |        |    
|Monthly Exchange Rate |  |      |        |     |  |  |        | 
|December 2002         |  |      | 8.2775 |     |  |  | 8.2770 | 
|January 2003          |  |      | 8.2772 |     |  |  | 8.2766 | 
|February 2003         |  |      | 8.2775 |     |  |  | 8.2768 | 
|March 2003            |  |      | 8.2775 |     |  |  | 8.2770 | 
|April 2003            |  |      | 8.2774 |     |  |  | 8.2769 | 
|May 2003              |  |      | 8.2771 |     |  |  | 8.2768 | 

On June 20, 2003, the noon rate of exchange, as reported by the Federal
Reserve Bank of New York, was RMB8.2770 per U.S. dollar.



---

|(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, 2002. The
Board of Directors of the Company does not recommend the payment of a final
dividend in respect of the year ended December 31, 2002. A final dividend of
RMB0.02 (before tax) per share totaling RMB67.5 million (before tax) in respect
of financial year 2001 was paid to shareholders during the year.

6



---



##### 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 65.2% 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 and
the H 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, including payments
made in connection with the Companys aircraft leases, 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, because the Company 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 recognized a net exchange
gain of RMB297 million for 2001 and incurred a net exchange loss of RMB175
million for 2002, as a result of yen fluctuations. A majority of these
exchange gain/loss 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 pension and
financial services. In addition, Mr. Yan Zhi Qing, the Chairman of the Board
of Directors of the Company (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 the
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 Group. 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, 2001 and 2002, the Group had short-term deposits of RMB1,341
million and RMB901 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.

Management reporting practices

The Companys management and other employees have experience operating the
Companys businesses since such businesses were conducted by CSAHC. However,
by comparison to other long-established international airlines, the Company has
fewer and less sophisticated financial, management and other reporting and
planning practices.

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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. There are certain other parcels of land and buildings owned or
used by the Company and the subsidiaries that lack adequate documentation.
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, and impairs the ability of the
Company to dispose of or mortgage such land use rights 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 affiliated company, 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 are 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

Impact of the Recent Outbreak of Severe Acute Respiratory Syndrome
(SARS)

The outbreak of SARS in the PRC, Hong Kong, Singapore and Taiwan has
brought about uncertainty to the global economy. In particular, the outbreak
of SARS in the PRC affected the domestic demand and has an overdue impact on
the overall economy of the PRC.

Based on the currently available information and certain historical
figures of the Group,



| | (i)  |  | the average revenue passenger kilometers (RPK) of the Group in
May 2003 decreased by 73.48% compared to April 2003, or by 83.50%
compared to the same period last year; and
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii) |  | the total number of passengers of the Group in May 2003 decreased by
82.60% compared to the same period last year.                                                         

In response to the adverse change in operational environment of the Group
brought about by the outbreak of SARS, the Group has implemented various
continuing measures to adjust its operational capacity accordingly, which
include negotiating with aircraft manufacturers to explore the possibility of
postponing the delivery date of new aircraft and requesting its staff to take
leave at a reduced salary on rotation. In addition, the Group has continued
its efforts in fully implementing the precautionary measures in accordance with
the general guidelines issued by the Hygiene Department of the Chinese
Government, in order to tackle the potential spread of SARS on its airlines and
at all contact points with its passenger.

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 encompass substantially all aspects of the Chinese commercial aviation
industry, including the approval of

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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 2002 accounted
for 22.0% 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, often
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.

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. The CAAC has just begun to monitor these activities and has
imposed fines on several airlines, including the Company and other major
airlines. However, 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

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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, 34.8% 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 of A Share
is lifted. Currently A Shares are domestic shares listed or to be listed on a
Chinese stock exchange.

Consolidation and Restructuring

In the second half of 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
(formerly, the Air China Group) and China Eastern Air Holding Group
(formerly, the Eastern Air Group). After CSAHC informed the Company that
CSAHC will participate in such restructuring plan, the Company announced that
it will also participate in such consolidation and restructuring pursuant to
the CAAC directives. The possible mergers of domestic airlines and other
restructuring and consolidation activities 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, 2002, 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 RMB119 million (US$14 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.

Developing legal system

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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 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 65.2% owned by CSAHC. The registered address of the Company is Baiyun
International Airport, Guangzhou 510405, Peoples Republic of China (telephone
no: (86)20-8612-4738, website: www.cs-air.com).

In the second half of 2000, the CAAC announced a restructuring policy with
respect to the PRC aviation industry. Domestic airlines are directed, on a
voluntary basis to consolidate into three major airline groups:
CSAHC, China National Aviation Holding Company and China Eastern Air Holding Group . In
line with such policy, CSAHC has acquired Zhongyuan Airlines, a regional
airline based in Henan Province, the PRC in 2001.

In April 2001, SA Group informed the Company that SA Group would participate in
the restructuring of the PRC aviation industry under PRC government directives.
Although such directives are general guidelines relating to consolidation and
restructuring of PRC aviation industry, it is highly unlikely that Chinese
airlines will not follow all or most of such proposals. SA Group informed the
Company that SA Group would conduct negotiations with China Northern Airlines
and Xinjiang Airlines with respect to possible cooperation involving
consolidation and restructuring with those airlines.

On October 11, 2002, SA Group, China Northern Airlines and Xinjiang Airlines
restructured and consolidated into a new airline group named as China Southern
Air Group after a long period of preparation. On the same date, SA Group
changed its official name to China Southern Air Holding Company (CSAHC).

The Group had RMB1,381 million, RMB1,492 million and RMB6,351 in capital
expenditures in 2000, 2001 and 2002 respectively. Of such capital expenditures
in 2002, RMB3,832 million were financed by bank borrowings while the remaining
RMB2,519 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 pilot training facilities and
other facilities and building for operations.

Shareholders resolutions of the Company were passed at the second Extraordinary
General Meeting of the Company in the year 2002 held on March 26, 2002
approving the issue of domestic ordinary share(s) of the Company of RMB 1.00
each. The number of A Shares proposed to be issued is not more than
1,000,000,000 A Shares. Other details of the A Shares Issue were previously
published by way of announcement dated March 26, 2002. The proposed A Share
Issue is subject to approval by the China Securities Regulatory Commission and
Shanghai Stock Exchange of the listing and trading in the A Shares on the
Shanghai Stock Exchange.

The Company has on June 18, 2002 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

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Company has 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, during the year, the Group acquired 39% interest in Sichuan
Airlines Corporation Limited to further expand its market shares in
South-western China. The Group also jointly established Zhuhai Xiang Yi
Aviation Technology Company Limited, the first sino-foreign joint venture
company engaging in aviation training services in the PRC, with CAE.




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 2002, 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, 2002, the Groups RPKs increased at a compound
annual rate of 15.6%, from 21,653 million in 2000 to 28,940 million in 2002,
while its capacity, measured in terms of ASKs, increased at a compound annual
rate of 11.1%, from 35,831 million in 2000 to 44,245 million in 2002. In 2002,
the Group carried 21.49 million passengers and had passenger revenue of
RMB15,696 million (US$1,896 million). Net income for 2002 was RMB576 million
(US$70 million).

The Group conducts a portion of its airline operations through 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
2002, the Airline Subsidiaries carried 7.41 million passengers and had
operating revenue of RMB4,829 million (US$583 million) and accounted for 34.5%
and 26.8% of the Groups passengers carried and operating revenue,
respectively.

The Group also provides air cargo and mail services. The Groups airline
operations are fully integrated with its airline-related businesses, including
aircraft maintenance and air catering operations. The cargo and mail revenue
of the Group increased by 27.0% to RMB1,786 million (US$216 million) in 2002 as
compared with 2001.

The Group operates the most extensive route network among Chinese airlines
with a total of 349 routes as of December 31, 2002, including 286 domestic
routes, 20 Hong Kong regional routes (which include Hong Kong routes and Macau
routes), and 43 international routes. In 2002, the Group operated an average
of 4,282 landing and take-offs per week serving 88 destinations, including 64
cities in China, including 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
ten regional route bases in Zhengzhou, Wuhan, Changsha, Shenzhen, Zhuhai,
Xiamen, Haikou, Guilin, 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 2002, the Group had 20 Hong Kong regional routes and 43
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 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 2002, the Group operated a fleet of 122 aircraft,
consisting primarily of Boeing 737-200, 737-300, 737-500, 737-700, 737-800,
747-200, 747-400, 757-200 and 777-200 aircraft and Airbus 320-200 aircraft. A
significant portion of these aircraft are held under capital and operating
leases. The average age of the Groups aircraft was 7.76 years at year end
2002.

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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. The remaining 34.8% of the share capital
of the Company is owned by holders of H Shares. Domestic Shares and H Shares
are both ordinary shares of the Company.

The Company has applied to the relevant PRC authorities for the issue of
not more than 1,000,000,000 A Shares and the listing of such A Shares on the
Shanghai Stock Exchange (the A Shares Issue Plan). The A Shares Issue Plan
was approved by the Independent shareholders at the Extraordinary General
Meetings held on March 26, 2002 and May 21, 2002, and the Board was authorised
to plan for and on behalf of the Company deal with all relevant matters
relating to the A Shares Issue.

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      |      |               |  |                        |       |               |  |  |      |  |  |          |         |  |  | 
|                   |  |              |       |                  |  | (decrease)    |      |               |  |                        |       | Increase      |  |  |      |  |  | Increase
|                   |  |              |       |                  |  | over          |      |               |  |                        |       | over          |  |  |      |  |  | over    
|Year               |  | Total        |       | previous year    |  | Total         |      | previous year |  | Total                  |       | previous year
|                   |  |              |       |                  |  |               |      |               |  |                        |       |              
|                   |  | (in million) |       | (%)              |  | (in thousand) |      | (%)           |  | (in million)           |       | (%)          
|1998               |  |              | 15.05 |                  |  |               | (1.3 | )             |  |                        | 348.0 |               |  |  | 11.6 |  |  |          | 1,915.0 |  |  |  | 6.7  | 
|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 | 

13



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Route Network

Overview

The Group operates the most extensive route network among Chinese
airlines. As of year end 2002, the Group operated 349 routes consisting of 286
domestic routes, 20 Hong Kong regional routes and 43 international routes. At
such date, the Groups route network served 64 destinations within China and 24
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 April 1997, the Company and Delta Airlines, one of the largest U.S.
airlines, entered into an agreement for the provision of code sharing in
respect of the Groups Guangzhou-Los Angeles route (the Code Sharing
Agreement). The Code Sharing Agreement was approved by the CAAC and became
effective in March 1999. Under the Code Sharing Agreement, Delta Airlines is
permitted to sell tickets for the Los Angeles-Guangzhou route to passengers
from various sales outlets in the United States using its DL code.
Passengers use Delta Airlines within the United States for travel to Los
Angeles, and the Group for travel from Los Angeles to Guangzhou. Similarly,
the Group is permitted to sell tickets for travel between Guangzhou and 13
destinations in the United States using its CZ code. Under this arrangement,
passengers use the Group for the Guangzhou-Los Angeles segment of the route and
Delta Airlines between Los Angeles and one of the specified U.S. destinations.
The Code Sharing Agreement increases the number of sales outlets within the
United States for the Groups Los Angeles-Guangzhou route and allows the Group
to provide coordinated reservation, confirmation and baggage check-in services
from Guangzhou to destinations in the United States.

The Group has also entered into code-sharing agreements with several
airlines such as Asiana Airlines, Japan Air System, Vietnam Airlines, Royal
Dutch Airlines and Garuda Indonesian. Such operating measures expand the
Groups route network.

Route Bases

The Groups main route base is in Guangzhou. The Group maintains ten
regional route bases in Zhengzhou, Wuhan, Changsha, Shenzhen, Zhuhai, Xiamen,
Haikou, Guilin, 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 for late 2003. 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, 2002, the Group
invested a total of RMB432.6 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 2002, the Groups most profitable domestic routes
were the routes between Guangzhou and Beijing, Guangzhou and Shanghai, Shenzhen
and Shanghai, Shenzhen and Beijing, Beijing and Guangzhou, Shanghai and
Guangzhou, Beijing and Shenzhen, Shanghai and Shenzhen, Guangzhou and Hangzhou;
and between Guangzhou, Dalian and Harbin.

14



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Hong Kong Regional Routes

The Group offers scheduled service between Hong Kong and Guangzhou,
Kunming, Xiamen, Shantou and Beijing. The Groups Hong Kong regional routes
also include routes between Hong Kong or Macau and other destinations in China,
including Guilin, Zhengzhou, Changsha, Haikou,Luoyang, Sanya, Zhang Jia Jie and
Guiyang, 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 2002, the most profitable Hong Kong regional
routes were those between Guangzhou and Hong Kong, Hong Kong and Wuhan, Hong
Kong and Guangzhou, Wuhan and Hong Kong, Hong Kong and Beijing, Hong Kong and
Xiamen, Kunming and Hong Kong, Hong Kong and Kunming, Xiamen and Hong Kong; and
between Beijing and Hong Kong.

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 2002, the Group operated a total of more than 13,500 flights
on its Hong Kong regional routes, accounting for approximately 31.2% 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 26 routes serving ten
Southeast Asian destinations, including Singapore and major cities in
Indonesia, Thailand, Malaysia, Philippines, Vietnam and Laos. In 2002, the
Groups most profitable Southeast Asian routes were those between Manila,
Xiamen and Beijing, Beijing, Xiamen and Manila, Singapore and Guangzhou; and
between Guangzhou and Singapore . 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 26 routes serving ten Southeast Asian destinations, the
Group also operates seventeen other international routes providing scheduled
service to Amsterdam, Sharjah, Osaka, Tokyo, Fukuoka, Seoul, Los Angeles,
Sydney and Melbourne. In April 2002, an international route between Guangzhou
and Tokyo was launched.

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 2002, the Group operated a fleet
of 122 aircraft with an average age of 7.76 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 122 aircraft as of December 31, 2002.

|                  |  |           |     |             |  |           |       |  |  |         |     | 
|----------------- |  | --------- | --- | ----------- |  | --------- | ----- |  |  | ------- | --- | 
|                  |  |           |     |             |  |           |       |  |  | Average
|                  |  | Number of |     | Average Age |  | Passenger
|Model             |  | Aircraft  |     | (years)     |  | Capacity 
|                  |  |           |     |             |  |          
|Boeing 777-200    |  |           | 4   |             |  |           | 6.53  |  |  |         | 380 | 
|Boeing 777-21B1GW |  |           | 5   |             |  |           | 5.28  |  |  |         | 292 | 
|Boeing 757-200    |  |           | 26  |             |  |           | 10.48 |  |  |         | 200 | 
|Boeing 737-800    |  |           | 5   |             |  |           | 0.22  |  |  |         | 167 | 
|Boeing 747F       |  |           | 4   |             |  |           | 7.01  |  |  |         | n/a | 
|Boeing 737-700    |  |           | 7   |             |  |           | 3.14  |  |  |         | 138 | 
|Boeing 737-500    |  |           | 18  |             |  |           | 10.15 |  |  |         | 132 | 
|Boeing 737-300    |  |           | 31  |             |  |           | 8.96  |  |  |         | 145 | 
|Boeing 737-200    |  |           | 2   |             |  |           | 15.77 |  |  |         | 128 | 
|Airbus 320-200    |  |           | 20  |             |  |           | 4.69  |  |  |         | 158 | 
|                  |  |           |     |             |  |           |       |  |  |         |     | 
|                  |  |           | 122 |             |  |           |       |  |  |         |     | 

15



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During 2002, the Group continued to expand and modernize its aircraft
fleet. In 2002, the Groups major aircraft transactions included:



| | (i)   |  | the cash purchase of one Boeing 757-200 aircraft and two Boeing
737-800 aircraft;                                    
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | the acquisitions of two Boeing 747-400 freighters and three Boeing 737-800 aircraft financed by long term bank loans;
|
| | (iii) |  | the acquisitions of five Boeing 737-300 aircraft from Zhongyuan Airlines, a subsidiary of CSAHC;                     
|
| | (iv)  |  | the addition of one Boeing 737-700 aircraft under operating lease;                                                   
|
| | (v)   |  | the extension of the operating leases of three Boeing 777-200 under
operating leases for another five years;and      
|
| | (vi)  |  | the sale and operating leaseback of four Boeing 757-200 aircraft.                                                    

Very Substantial Acquisition

On October 3, 2001 the Company entered into an agreement with the Boeing
Company for acquiring twenty Boeing 737-800 aircraft and two Boeing 747-400
freighters during the period between 2002 and 2005 (the Transactions). The
aggregate consideration in the Transactions exceeds 100% of the net tangible
assets of the Company as published in its annual report dated December 31, 2000
and constitutes very substantial transactions under the Hong Kong Listing
Rules. The PRC government and CSAHC, the 65.2% controlling shareholder of the
Company, have approved the Transactions. CSAHC does not have any interest in
the Transactions other than as a shareholder of the Company.

The twenty Boeing 737-800 aircraft acquired pursuant to the Transactions
will replace twenty existing Boeing 737 series aircraft that the Company
currently operates under operating leases. The Board considered that the
Transactions are in the best interest of the Company and its shareholders as a
whole.

Waiver from the Stock Exchange of Hong Kong Limited

A.     In March 2002, the Hong Kong Stock Exchange granted a waiver to allow
the Company to use a new size test based on ATKs to replace the normal net
asset test and consideration test under Chapter 14 of the Listing Rules in
respect of acquisition and disposal of aircraft.



| | The Hong Kong Stock Exchange has granted the waiver on and subject to the
following conditions:
| | -----------------------------------------------------------------------------------------------
|
| | 1.                                                                                             
|
| | 2.                                                                                             
|
| | 3.                                                                                             
|
| | 4.                                                                                             
|
| | 5.                                                                                             
|
| | 6.                                                                                             

16



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| | 7.  |  | Where the transaction is a discloseable transaction, disclosure
will take the form of a press announcement complying with rule 14.14
of the Listing Rules and details of the transaction will be set out
in the Companys next annual report and accounts. Where the
transaction is a major transaction or a very substantial acquisition,
the provisions of Chapter 14 of the Listing Rules will apply.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 8.  |  | An option to acquire aircraft will not be treated as
acquisition while the exercise of such an option will be treated as
the acquisition of an aircraft.                                                                                                                                                                                                                                                
|
| | 9.  |  | The waiver will only apply to acquisition/disposal of aircraft,
and acquisition or disposal of other types of assets by the Company
will be subject to provisions under Chapter 14 of the Listing Rules.                                                                                                                                                                                                
|
| | 10. |  | The Company will disclose in its annual reports and interim
reports the following information:                                                                                                                                                                                                                                                                                                          
|
|

| | (i)   |  | regarding future deliveries of aircraft, details of
aircraft on order including the number and type; and the years
in which such aircraft are scheduled to be delivered;                                
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | the number and type of aircraft which are subject to
options exercisable during a period of not less than 12 months
from the end of the financial year or period to which the annual
report relates; and
|
| | (iii) |  | details of the waiver granted pursuant to the
application.                                                                                                                                              
|

| | 11. |  | The Company remains a subsidiary of CSAHC. Should there be any
change in control of the Company, the Hong Kong Stock Exchange will
need to reconsider whether the waiver continues to be appropriate.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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B.     In November 2002, the Hong Kong Stock Exchange granted a waiver in
relation to the in-flight meals and ticket sales arrangements between the Group
and CSAHC after approval of the consolidation and restructuring proposal of the
PRC aviation industry by the State Council of the PRC (the Ongoing Connected
Transactions for In-Flight meals and Ticket Sales).



| | The Hong Kong Stock Exchange has granted the waiver on and subject to the
following conditions:
| | -----------------------------------------------------------------------------------------------
|
| | 1.     the Ongoing Connected Transactions for In-flight Meals and Ticket Sales
shall be:       



| | (a) |  | entered into in the ordinary and usual course of business of the
Group;                                                                                    
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | conducted either on normal commercial terms or on
terms no less favourable than terms available to (or from, as
appropriate) independent third parties; and
|
| | (c) |  | on terms that are fair and reasonable so far as the
shareholders of the Company and in the interest of the Company
as a whole are concerned;               



| |                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.      the aggregate annual amount payable by the Group to CSAHC, and the
aggregate annual amount payable by CSAHC to the Group, under the Ongoing
Connected Transactions for In-Flight Meals and Ticket Sales for each
financial year will not exceed the higher of HK$10 million and 3% of the
consolidated net tangible assets of the company as disclosed in its latest
published audited accounts (the Relevant Cap Amount);
|
| | 3.     the details of the Ongoing Connected Transactions for In-Flight Meals
and Ticket Sales will be disclosed in the companys annual report as set
out in Rule 14.25(1)(A) to (D) of the Listing Rules for the relevant
financial year of the Company;                                                                                                                                                                           
|
| | 4.     the independent non-executive directors will review annually and
confirm in the Companys annual report of the relevant financial year that
the Ongoing Connected Transactions for In-Flight Meals and Ticket Sales
have been conducted in the manner as stated in paragraph 1 above and
comply with the Relevant Cap Amount as stated in paragraph 2 above;                                                                 
|
| | 5.     the auditors of the Company shall review annually the transactions and
provide a letter to the Board of Directors stating that:                                                                                                                                                                                                                                                                                              



| | (a) |  | the Ongoing Connected Transactions for In-Flight
Meals and Ticket Sales have received approval of the Board of
Directors of the Company;                                                                                                                                                                  
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | the Ongoing Connected Transactions for In-Flight
Meals and Ticket Sales have been entered into in accordance with
the terms of the agreements relating to the transactions;                                                                                                                               
|
| | (c) |  | the aggregate annual amount payable by the Group to
CSAHC, and the aggregate annual amount payable by CSAHC to the
Group, under the Ongoing Connected Transactions for In-Flight
Meals and Ticket Sales for each financial year shall not exceed
the Relevant Cap Amount set out in paragraph 2 above; and
|
| | (d) |  | the Ongoing Connected Transactions for In-Flight
Meals and Ticket Sales are in accordance with the pricing policy
of the Group.                                                                                                                                                                           



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Where, for whatever reasons, the auditors decline to accept the
engagement or are unable to provide the auditors letter, the Directors
shall contact the Hong Kong Stock Exchange immediately.



| |                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     CSAHC shall provide to the Hong Kong Exchange an undertaking that, for
so long as the Companys shares are listed on the Hong Kong Stock
Exchange, it will provide the Companys auditors with full access to its
relevant records for the purpose of the auditors review of the Ongoing
Connected Transactions for In-Flight Meals and Ticket Sales.

Aircraft Financing Arrangements

Overview

A significant portion of the Groups aircraft is operated 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, 2002, 36 of the
Groups 122 Boeing and Airbus aircraft were

18



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operated under capital leases, 49 were operated under operating leases, 17
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 acquisitions of
aircraft in the foreseeable future will generally be made pursuant to operating
or capital leases. 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, 2002, 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 |  |         | 6  |           |  |            | 3  |  |  |         | 7.69 | 
|Boeing 757-200             |  |         | 3  |           |  |            | 11 |  |  |         | 5.17 | 
|Boeing 737-500             |  |         |   |           |  |            | 18 |  |  |         | 2.80 | 
|Boeing 737-300             |  |         | 9  |           |  |            | 12 |  |  |         | 2.16 | 
|Airbus 320-200             |  |         | 18 |           |  |            | 2  |  |  |         | 6.44 | 
|Boeing 737-700             |  |         |   |           |  |            | 1  |  |  |         | 6.67 | 
|                           |  |         |    |           |  |            |    |  |  |         |      | 
|                           |  |         | 36 |           |  |            | 49 |  |  |         |      | 

Capital Leases

As of December 31, 2002, the Groups aggregate future minimum lease
payments (including future finance charges) required under its capital leases
were RMB 9,745 million (US$1,177 million). As of year end 2002, a majority of
the Groups capital leases had original terms ranging from ten to 15 years from
the date of delivery of the relevant aircraft, and the remaining terms of these
leases ranged from one to eight years. The Groups capital leases typically
cover a substantial 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, 2002, the Groups aggregate future minimum lease
payments required under its operating leases were RMB8,537 million (US$1,031
million). As of year end 2002, the Groups operating leases had original terms
generally ranging from within one year to ten years from the date of delivery
of the relevant aircraft, and the remaining terms of these leases generally
ranged from one to eight 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.

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 2002, 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.

19



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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, Lockheed Martin (Lockheed) 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 18 other
Chinese airlines and nine international airlines. GAMECO provides heavy
maintenance services to fourteen other Chinese airlines and two international
airline.

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, 2002, GAMECOs revenue totaled RMB592 million, approximately 95% 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.

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, 2002. And 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
0.15, 0.19 and 0.42 in 2000, 2001 and 2002 respectively. In comparison, CAACs
published maximum acceptable flight incident ratio was 1.6 in 2000, 2001 and
1.3 in 2002. 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 2002 accounted for 22.0% 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 State
Development and Planning Commission (SDPC) 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

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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 2002 was RMB3,460 per ton. The average
price paid by the Group in 2002 was RMB2,715 per ton, which represents a 12.8%
decrease from that of 2001.

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 14.5% of the
Groups total jet fuel consumption in 2002.

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
approximate 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.

As part of the pilot training program, the Group also operates a flight
simulator training center in Zhuhai, Guangdong Province (the Zhuhai Training
Center), which is equipped with simulators for all models of aircraft
currently operated by the Group. Trainee pilots receive their initial training
in the operation of a specific aircraft at the Zhuhai Training Center, which
also provides training to pilots from other Chinese airlines.

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 at the Zhuhai Training Center. The Group also conducts regular
advanced training courses for captains and captain candidates. Pilots advance
in rank based on number of hours flown, types of aircraft flown and their
performance history.

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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
and Haikou 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.

Pursuant to an agreement dated March 24, 2001, Nanland has been providing
and will provide in-flight meals to the Xinjiang Airlines, a subsidiary of
CSAHC from time to time for a period of one year. The agreement will then be
automatically extended annually.

For the year ended December 31, 2002, the amount paid by Xinjiang Airlines
to Nanland for the provision of in-flight meals was approximately RMB2.9
million.

Pursuant to an agreement dated September 20, 1999, Xinjiang Airlines has
been providing and will provide in-flight meals to the Company for a period of
one year. The agreement will then be automatically extended annually. The
amount paid by the Group to Xinjiang Airlines for the provision of in-flight
meals for the year ended December 31, 2002 was approximately RMB1.1 million.

Cargo and Mail

The Group operates cargo and mail services primarily as part of its
passenger transportation services. The Groups cargo business expanded in
recent years as a result of increased demand for cargo and mail services
between Guangzhou and other destinations in China and Southeast Asia served by
the Group. The Group plans to continue to expand its cargo and mail operations
as a source of incremental revenue and as a means to improve overall load
factors. In April 2000, the Company opened a new international cargo route
between Shenzhen and Chicago, the U.S. for international cargo service.To
further cope with the increased aviation logistics resulting from the growth of
international trade as a result of the PRCs entry into World Trade
Organisation, the Group took delivery of two Boeing 747-400 freighters in the
second half of 2002. The Group conducts its cargo business primarily through
its cargo division in Shenzhen. In October 2002, the Group commenced cargo
and mail services between Shenzhen, Pudong, and Leige for twice per week with
one Boeing 747-400 freighter wet-leased from Atlas. Starting from April 10,
2003, the Group operates its own Boeing 747-400 freighter for the route between
Shenzhen, Pudong and Leige twice a week, and three times a week for the route
between Pudong and Leige.

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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 and CSAHCs sales offices. 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 (a CAAC affiliate) and Nanlung
Travel Agency Limited (a subsidiary of CSAHC) for a commission of 12% 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 2002, approximately
30% of all ticket sales for the Groups scheduled flights were made by the
Groups, CAACs and CSAHCs network of sales offices. 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 2002, 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, Baiyun Xinhua 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 2002, the Group had approximately
2,370,000 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

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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 Hong Kong regional and
international air fares within a certain range, the training and supervision of
personnel and their day-to-day operations.

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 SDPC. 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.

In November 1997, the CAAC announced that Chinese airlines would be
permitted to offer discounts within specified ranges to their customers. In
response to this policy, the Group instituted a multiple class airfare pricing
policy under which discounted rates were offered on certain air routes and
flights within the parameters of the CAACs policy.

This air fare policy resulted in severe price competition among Chinese
airlines. The CAAC believed that this development was not conducive to the
healthy development of Chinese airlines, and therefore in late May 1998
required that Chinese airlines may not offer a discount rate which is more than
20% below the published fare.

In February 1999, the CAAC adopted a new air fare policy prohibiting
discounting of domestic airfares except for special group of passengers such as
teachers, students, touring group and disabled soldiers, etc. The new policy
was intended to encourage Chinese airlines to compete on the basis of overall
service instead of fares. The Group believes that the stabilization in ticket
price to a certain extent contributed to the increase of the Groups revenue
and improved its results of operations in 2001.

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
Transportation 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 SDPC. The airline must, as
a condition of approval, provide specific acquisition plans, which are subject
to modification by the CAAC and SDPC. If the CAAC and SDPC 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 SDPC 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.

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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 manages the administration of most civilian
airports in China, including Baiyun International Airport, which is managed by
Baiyun International Airport Company, a company directly controlled by the
CAAC. 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 2002, these
three airlines together controlled approximately 51% 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

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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 maintenance and air catering operations enable it to achieve
and maintain high quality service to its customers.

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 Traffic   
|     |  | Carried      |      | Carried (tons) |  | (ton kilometers)
|     |  |              |      |                |  |                 
|     |  | Industry     |      | Groups        |  | Industry         |      | Groups      |  | Industry     |       | Groups     
|Year |  | 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  |  |  |  | 20.7 | 
|1998 |  |              | 57.5 |                |  |                  | 26.2 |              |  |              | 1,401 |              |  |  | 24.9 |  |  |  | 9.3  |  |  |  | 20.4 | 
|1999 |  |              | 60.9 |                |  |                  | 24.8 |              |  |              | 1,704 |              |  |  | 22.9 |  |  |  | 10.6 |  |  |  | 18.9 | 
|2000 |  |              | 67.2 |                |  |                  | 24.9 |              |  |              | 1,967 |              |  |  | 22.5 |  |  |  | 12.3 |  |  |  | 20.0 | 
|2001 |  |              | 75.2 |                |  |                  | 25.4 |              |  |              | 1,709 |              |  |  | 23.3 |  |  |  | 14.1 |  |  |  | 21.5 | 
|2002 |  |              | 85.9 |                |  |                  | 25.0 |              |  |              | 2,021 |              |  |  | 23.3 |  |  |  | 16.5 |  |  |  | 21.9 | 

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 three 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
2002.

|                  |  |                      |      |                           |  |                      |      |  |  |  |      | 
|----------------- |  | -------------------- | ---- | ------------------------- |  | -------------------- | ---- |  |  |  | ---- | 
|                  |  | Passengers           |      | Cargo and                 |  | Departing           
|Airport           |  | Carried (% of total) |      | Mail Carried (% of total) |  | Flights (% of total)
|                  |  |                      |      |                           |  |                     
|Beijing           |  |                      | 12.5 |                           |  |                      | 12.6 |  |  |  | 11.8 | 
|Shanghai Hongqiao |  |                      | 15.5 |                           |  |                      | 10.6 |  |  |  | 15.2 | 
|Guangzhou         |  |                      | 55.7 |                           |  |                      | 46.6 |  |  |  | 52.3 | 
|Shenzhen          |  |                      | 33.5 |                           |  |                      | 35.8 |  |  |  | 28.6 | 
|Kunming           |  |                      | 11.4 |                           |  |                      | 10.5 |  |  |  | 9.7  | 
|Chengdu           |  |                      | 11.4 |                           |  |                      | 12.0 |  |  |  | 10.3 | 
|Xiamen            |  |                      | 73.3 |                           |  |                      | 47.9 |  |  |  | 59.5 | 
|Haikou            |  |                      | 28.5 |                           |  |                      | 32.5 |  |  |  | 20.4 | 
|Xian              |  |                      | 10.2 |                           |  |                      | 13.7 |  |  |  | 7.2  | 
|Shanghai Pudong   |  |                      | 11.2 |                           |  |                      | 5.8  |  |  |  | 11.2 | 

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, Xiamen and Haikou, which are included in the table above),
based on passenger volume, in 2002.

|             |  |                      |      |                           |  |                      |      |  |  |  |      | 
|------------ |  | -------------------- | ---- | ------------------------- |  | -------------------- | ---- |  |  |  | ---- | 
|             |  | Passengers           |      | Cargo and                 |  | Departing           
|Airport      |  | Carried (% of total) |      | Mail Carried (% of total) |  | Flights (% of total)
|             |  |                      |      |                           |  |                     
|Wuhan Tianhe |  |                      | 53.9 |                           |  |                      | 52.5 |  |  |  | 36.9 | 
|Changsha     |  |                      | 50.3 |                           |  |                      | 71.8 |  |  |  | 35.6 | 
|Zhengzhou    |  |                      | 73.6 |                           |  |                      | 80.2 |  |  |  | 54.3 | 

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|        |  |                      |      |                           |  |                      |      |  |  |  |      | 
|------- |  | -------------------- | ---- | ------------------------- |  | -------------------- | ---- |  |  |  | ---- | 
|        |  | Passengers           |      | Cargo and                 |  | Departing           
|Airport |  | Carried (% of total) |      | Mail Carried (% of total) |  | Flights (% of total)
|        |  |                      |      |                           |  |                     
|Guiyang |  |                      | 29.9 |                           |  |                      | 39.8 |  |  |  | 23.6 | 
|Shantou |  |                      | 75.5 |                           |  |                      | 64.2 |  |  |  | 67.0 | 
|Guilin  |  |                      | 38.3 |                           |  |                      | 17.9 |  |  |  | 32.9 | 
|Zhuhai  |  |                      | 69.8 |                           |  |                      | 79.0 |  |  |  | 23.8 | 

Hong Kong Regional Routes

The Group dominates the routes operated by Chinese airlines between Hong
Kong and Macau and China. In 2002, the Group operated an average of more than
257 charter and other scheduled flights per week between China and Hong Kong
or Macau, accounting for approximately 31.2% 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, 2002, Xiamen Airlines operated under its own MF code
a fleet of 26 aircraft on 79 domestic routes, four international route and five
Hong Kong regional routes (exclusive of domestic and Hong Kong regional routes
shared with the Company). In 2002, Xiamen Airlines carried a total of about
4.98 million passengers, or approximately 23.2% of the passengers carried by
the Group in that year, and had RMB3,162 million in operating revenue.

As of December 31, 2002, Shantou Airlines operated under the Groups CZ
code 4 aircraft on 48 domestic routes, one international route and two Hong
Kong regional route. In 2002, Shantou Airlines carried a total of about
644,000 passengers, or 3.0% of the passengers carried by the Group in that
year. Total operating revenue of Shantou Airlines for the year ended December
31, 2002 was RMB488 million.

As of December 31, 2002, Guangxi Airlines operated under the CZ code 4
aircraft on 28 domestic routes (exclusive of domestic routes shared with the
Company), two international routes and four Hong Kong regional routes. In
2002, Guangxi Airlines carried a total of
about 626,000 passengers, or 2.9% 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, 2002 was RMB433 million.

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As of December 31, 2002, Zhuhai Airlines operated under the CZ code 4
aircraft on 21 domestic routes, and one international route. In 2002, Zhuhai
Airlines carried a total of about 681,000 passengers, or approximately 3.2% 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, 2002 was
RMB414 million.

As of December 31, 2002, Guizhou Airlines operated under the CZ code 4
aircraft on 21 domestic routes, one international route and one Hong Kong
regional route. In 2002, Guizhou Airlines carried a total of about 480,000
passengers, or approximately 2.2% of the total number of passengers carried by
the Group in 2002. Total operating revenue of Guizhou Airlines was
approximately RMB332 million for the year ended December 31, 2002.

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 RMB 70,000
(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.

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Organizational Structure

The following chart illustrates the corporate structure of the Group as of year
end 2002 and the aggregate effective equity interest of the Company in each of
its principal subsidiaries, affiliated companies and jointly controlled entity.

(ORGANIZATIONAL STRUCTURE CHART)

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##### Table of Contents



The particulars of the Companys principal subsidiaries at December 31, 2002
are as follows:

|                                  |  |                         |  |                 |     |                     |  |          |   |  |  | 
|--------------------------------- |  | ----------------------- |  | --------------- | --- | ------------------- |  | -------- | - |  |  | 
|                                  |  |                         |  |                 |     | Attributable equity
|                                  |  | Place and date of       |  | interest to the
|Name of company                   |  | establishment/operation |  | Company        
|                                  |  |                         |  |                
|                                  |  |                         |  |                 |     | Direct              |  | Indirect
|                                  |  |                         |  |                 |     | %                   |  | %       
|China Southern Airlines (Group)   |  | PRC                     |  |                 | 100 |                     |  |          |   | 
|Shenzhen Co.                      |  | October 14, 1983        |  |                 |     |                     |  |          |   | 
|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        |  |                 |     |                     |  |          |   | 
|Baiyun Xinhua (Guangzhou) Air     |  | PRC                     |  |                 | 70  |                     |  |          |  | 
|Cargo Service Co.                 |  | January 4, 1989         |  |                 |     |                     |  |          |   | 
|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 at December 31, 2002 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        |  |                              |    |        |  |          |   | 

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|                              |  |                         |  |                              |    |        |  |          |       |  |  | 
|----------------------------- |  | ----------------------- |  | ---------------------------- | -- | ------ |  | -------- | ----- |  |  | 
|                              |  | Place and date of       |  | Attributable equity interest
|Name of company               |  | establishment/operation |  | to the company              
|                              |  |                         |  |                             
|                              |  |                         |  |                              |    | Direct |  | Indirect
|                              |  |                         |  |                              |    | %      |  | %       
|Southern Airlines Group       |  | PRC                     |  |                              | 30 |        |  |          | 16.86 | 
|Finance Company Limited       |  | June 28, 1995           |  |                              |    |        |  |          |       | 
|Sichuan Airlines Corporation  |  | PRC                     |  |                              | 30 |        |  |          |      | 
|Limited                       |  | August 28, 2002         |  |                              |    |        |  |          |       | 
|China Postal Airlines Limited |  | PRC                     |  |                              | 49 |        |  |          |      | 
|                              |  | November 25, 1996       |  |                              |    |        |  |          |       | 
|MTU Maintenance Zhuhai        |  | PRC                     |  |                              | 50 |        |  |          |      | 
|Company Limited               |  | 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 |                    |  |  |  |        |  |       |       |        |  |  |  |  |  |  | 35,936  |  |  |  |       | 
|Zhuhai    |  |                    | 170,062 |                    |  |  |  |        |  |       |       |        |  |  |  |  |  |  | 18,791  |  |  |  |       | 
|Changsha  |  |                    | 138,949 |                    |  |  |  |        |  |       |       |        |  |  |  |  |  |  | 21,482  |  |  |  |       | 
|Zhengzhou |  |                    | 290,841 |                    |  |  |  |        |  |       |       |        |  |  |  |  |  |  | 9,672   |  |  |  |       | 
|Haikou    |  |                    | 5,265   |                    |  |  |  |        |  |       |       |        |  |  |  |  |  |  |        |  |  |  | 19,633 | 
|Wuhan     |  |                    |        |                    |  |  |  |        |  |       |       |        |  |  |  |  |  |  | 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 accounting
principles generally accepted in the PRC (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 material respects from U.S.
GAAP. For a discussion of the material differences between IFRS and U.S. GAAP
relating to the Group, see U.S. GAAP Reconciliation and Note 31 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 our
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 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. The Group makes estimates about a current
liability for tickets sold but not yet reported to the Group, the timing and
amount of tickets uplifted by other airlines and the amount of tickets sold
that will not be used. The Group periodically evaluates the liability and
record any resulting adjustments, which may be significant, in the consolidated
statement of operations in the period in which the evaluations are completed.

Fixed Assets

The Group depreciates its fixed assets on a straight-line basis to their
estimated residual values over their respective estimated useful life. In
addition, the Group evaluates fixed assets used in operations for impairment.
If circumstances indicate that the net book value of an asset or investment 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

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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.




Overview

During the year, the economic conditions in the PRC and other Asian regions
continued to show steady improvement, leading to an increase in demand for
aviation services. To increase the efficiency and global competitiveness of
PRC domestic airlines, the PRC Government implemented various measures to
maintain the momentum of economic growth and to streamline the airline industry
through mergers and restructuring.

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 29.7%, 29.7% and 26.8% of the Groups total
operating revenue, and 35.0%, 34.2% and 33.5% of the Groups total passengers
carried, in 2000, 2001 and 2002, respectively. Xiamen Airlines is the largest
member of the Airline Subsidiaries, with operating revenue of RMB2,737 million,
RMB3,185 million and Rmb3,162 million in 2000, 2001 and 2002, respectively, or
18.0%, 18.9% and 17.5% of the Groups total operating revenue in such years.

The Groups operating revenue is substantially dependent on overall passenger
and cargo traffic volume, 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 load
factors or the number of passengers carried. 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, operating lease payments, labor costs and depreciation and
amortization of aircraft and flight equipment, 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
recorded a net exchange gain (loss) of RMB319 million, RMB297 million and
RMB(175) million in 2000, 2001 and 2002, respectively. These amounts
represented mainly unrealized exchange differences resulting from the
retranslation of the foreign currency borrowings as of year end 2000, 2001 and
2002.

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 CAAC, the Groups
operating revenues and expenses are directly affected by the CAACs policies
with respect to domestic airfares, jet fuel prices and landing and navigation
charges, 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 CAACs regulatory policies, or any
implementation of such policies may 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, 2001 and 2002:

|              |                    |  |  |        |                         |  |               |        |                        |  |  |      |  |  | 
|------------- | ------------------ |  |  | ------ | ----------------------- |  | ------------- | ------ | ---------------------- |  |  | ---- |  |  | 
|              |                    |  |  |        | Year ended December 31, |  | 2002 vs. 2001
|              |                    |  |  |        |                         |  |              
|              |                    |  |  |        | 2001                    |  | 2002          |        | %
Increase/
(Decrease)
|              |                    |  |  |        |                         |  |               |        |                       
|Traffic       |                    |  |  |        |                         |  |               |        |                        |  |  |     
|RPK (million) |                    |  |  |        |                         |  |               |        |                        |  |  |     
|              | Domestic           |  |  | 19,447 |                         |  |               | 22,092 |                        |  |  | 13.6 | 
|              | Hong Kong regional |  |  | 1,060  |                         |  |               | 1,081  |                        |  |  | 2.0  | 
|              | International      |  |  | 4,550  |                         |  |               | 5,767  |                        |  |  | 26.7 | 

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|                                       |                               |       |        |        |                         |        |               |        |                        |        |      |       |       |       |  
|-------------------------------------- | ----------------------------- | ----- | ------ | ------ | ----------------------- | ------ | ------------- | ------ | ---------------------- | ------ | ---- | ----- | ----- | ----- | -
|                                       |                               |       |        |        |                         |        |               |        |                        |        |      |      
|                                       |                               |       |        |        | Year ended December 31, |        | 2002 vs. 2001
|                                       |                               |       |        |        |                         |        |              
|                                       |                               |       |        |        | 2001                    |        | 2002          |        | %
Increase/
(Decrease)
|                                       |                               |       |        |        |                         |        |               |        |                       
|                                       |                               | Total |        |        | 25,057                  |        |               |        | 28,940                 |        |      |       | 15.5  |      
|RTK (million)                          |                               |       |        |        |                         |        |               |        |                        |        |      |      
|                                       | Domestic                      |       |        | 2,217  |                         |        |               | 2,532  |                        |        |      | 14.2  |      
|                                       | Hong Kong regional            |       |        | 105    |                         |        |               | 108    |                        |        |      | 2.9   |      
|                                       | International                 |       |        | 712    |                         |        |               | 974    |                        |        |      | 36.8  |      
|                                       |                               |       | Total  |        |                         | 3,034  |               |        |                        | 3,614  |      |       |       | 14.1  |  
|RTK (million)                          |                               |       |        |        |                         |        |               |        |                        |        |      |      
|                                       | Passenger ton kilometres      |       |        | 2,236  |                         |        |               | 2,584  |                        |        |      | 15.6  |      
|                                       | Cargo and mail ton kilometers |       |        | 798    |                         |        |               | 1,030  |                        |        |      | 29.1  |      
|                                       |                               |       | Total  |        |                         | 3,034  |               |        |                        | 3,614  |      |       |       | 19.1  |  
|Passengers carried (thousand)
Domestic |                               |       | 16,499 |        |                         |        | 18,535        |        |                        |        | 12.3 |      
|                                       | Hong Kong regional            |       |        | 1,409  |                         |        |               | 1,369  |                        |        |      | (2.8  | )    
|                                       | International                 |       |        | 1,213  |                         |        |               | 1,589  |                        |        |      | 31.0  |      
|                                       |                               |       | Total  |        |                         | 19,121 |               |        |                        | 21,493 |      |       |       | 12.4  |  
|Cargo and mail carried (thousand tons) |                               |       |        |        |                         |        |               |        |                        |        |      |      
|                                       | Domestic                      |       |        | 348    |                         |        |               | 404    |                        |        |      | 16.1  |      
|                                       | Hong Kong regional            |       |        | 14     |                         |        |               | 14     |                        |        |      |      |      
|                                       | International                 |       |        | 36     |                         |        |               | 52     |                        |        |      | 44.4  |      
|                                       |                               |       | Total  |        |                         | 398    |               |        |                        | 470    |      |       |       | 18.1  |  
|Capacity                               |                               |       |        |        |                         |        |               |        |                        |        |      |      
|ASK (million)                          |                               |       |        |        |                         |        |               |        |                        |        |      |      
|                                       | Domestic                      |       |        | 31,393 |                         |        |               | 33,753 |                        |        |      | 7.5   |      
|                                       | Hong Kong regional            |       |        | 1,690  |                         |        |               | 1,746  |                        |        |      | 3.3   |      
|                                       | International                 |       |        | 6,981  |                         |        |               | 8,746  |                        |        |      | 25.3  |      
|                                       |                               | Total |        |        | 40,064                  |        |               |        | 44,245                 |        |      |       | 10.4  |      
|ATK (million)                          |                               |       |        |        |                         |        |               |        |                        |        |      |      
|                                       | Domestic                      |       |        | 3,622  |                         |        |               | 3,924  |                        |        |      | 8.3   |      
|                                       | Hong Kong regional            |       |        | 185    |                         |        |               | 193    |                        |        |      | 4.3   |      
|                                       | International                 |       |        | 1,317  |                         |        |               | 1,798  |                        |        |      | 36.5  |      
|                                       |                               |       | Total  |        |                         | 5,124  |               |        |                        | 5,915  |      |       |       | 15.4  |  
|Load Factors                           |                               |       |        |        |                         |        |               |        |                        |        |      |      
|Passenger load factor (RPK/ASK) (%)    |                               |       |        |        |                         |        |               |        |                        |        |      |      
|                                       | Domestic                      |       |        | 61.9   |                         |        |               | 65.5   |                        |        |      | 5.8   |      
|                                       | Hong Kong regional            |       |        | 62.7   |                         |        |               | 61.9   |                        |        |      | (1.3  | )    
|                                       | International                 |       |        | 65.2   |                         |        |               | 65.9   |                        |        |      | 1.1   |      
|                                       |                               |       | Total  |        |                         | 62.5   |               |        |                        | 65.4   |      |       |       | 4.6   |  
|Overall load factor (RTK/ATK) (%)      |                               |       |        |        |                         |        |               |        |                        |        |      |      
|                                       | Domestic                      |       |        | 61.2   |                         |        |               | 64.5   |                        |        |      | 5.4   |      
|                                       | Hong Kong regional            |       |        | 56.8   |                         |        |               | 55.8   |                        |        |      | (1.8  | )    
|                                       | International                 |       |        | 54.1   |                         |        |               | 54.2   |                        |        |      | 0.2   |      
|                                       |                               |       | Total  |        |                         | 59.2   |               |        |                        | 61.1   |      |       |       | 3.2   |  
|Yield                                  |                               |       |        |        |                         |        |               |        |                        |        |      |      
|Yield per RPK (RMB)                    |                               |       |        |        |                         |        |               |        |                        |        |      |      
|                                       | Domestic                      |       |        | 0.62   |                         |        |               | 0.55   |                        |        |      | (11.3 | )    
|                                       | Hong Kong regional            |       |        | 1.06   |                         |        |               | 0.98   |                        |        |      | (7.5  | )    
|                                       | International                 |       |        | 0.41   |                         |        |               | 0.42   |                        |        |      | 2.4   |      
|                                       |                               |       | Total  |        |                         | 0.60   |               |        |                        | 0.54   |      |       |       | (10.0 | )
|Yield per RTK (RMB)                    |                               |       |        |        |                         |        |               |        |                        |        |      |      
|                                       | Domestic                      |       |        | 5.83   |                         |        |               | 5.21   |                        |        |      | (10.6 | )    
|                                       | Hong Kong regional            |       |        | 11.26  |                         |        |               | 10.36  |                        |        |      | (8.0  | )    
|                                       | International                 |       |        | 3.31   |                         |        |               | 3.25   |                        |        |      | (1.8  | )    
|                                       |                               | Total |        |        | 5.43                    |        |               |        | 4.84                   |        |      |       | (10.9 | )    
|Financial                              |                               |       |        |        |                         |        |               |        |                        |        |      |      
|Passenger revenue (RMB million)        |                               |       |        |        |                         |        |               |        |                        |        |      |      

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|                                     |                    |       |       |        |                         |  |               |        |                        |  |      |      |     |  | 
|------------------------------------ | ------------------ | ----- | ----- | ------ | ----------------------- |  | ------------- | ------ | ---------------------- |  | ---- | ---- | --- |  | 
|                                     |                    |       |       |        |                         |  |               |        |                        |  |      |     
|                                     |                    |       |       |        | Year ended December 31, |  | 2002 vs. 2001
|                                     |                    |       |       |        |                         |  |              
|                                     |                    |       |       |        | 2001                    |  | 2002          |        | % Increase/
(Decrease)
|                                     |                    |       |       |        |                         |  |               |        |                       
|                                     | Domestic           |       |       | 12,068 |                         |  |               | 12,234 |                        |  |      | 1.4  |    
|                                     | Hong Kong regional |       |       | 1,128  |                         |  |               | 1,055  |                        |  |      | (6.5 | )  
|                                     | International      |       |       | 1,860  |                         |  |               | 2,407  |                        |  |      | 29.4 |    
|                                     |                    | Total |       |        | 15,056                  |  |               |        | 15,696                 |  |      |      | 4.3 | 
|Cargo and mail revenue (RMB million) |                    |       | 1,406 |        |                         |  | 1,786         |        |                        |  | 27.0 |     




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. The Group expects
depreciation expenses to increase in future as the Group continues to expand
its fleet.

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 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.

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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 operation 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.

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.

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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 Profit

Operating profit 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.

2001 Compared With 2000

The Group recorded net income of RMB340 million for 2001, a decrease of
32.2% from RMB502 million for 2000. The Groups operating revenue increased by
RMB1,702 million or 11.2% from RMB15,178 million in 2000 to RMB16,880 million
in 2001. Passenger load factor increased by 2.1 percentage point from 60.4% in
2000 to 62.5% in 2001. Passenger yield (in passenger revenue per RPK)
decreased by 1.6% from RMB 0.61 in 2000 to RMB0.60 in 2001. Average yield (in
traffic revenue per RTK) decreased by 3.6% from RMB5.63 in 2000 to RMB5.43 in
2001. Operating expenses increased by RMB1,483 million or 10.6% from RMB13,996
million in 2000 to RMB15,479 million in 2001. Of the increase in operating
expenses, an approximate amount of RMB243 million was attributable to the
increase in aircraft repair and maintenance expense and the remaining amount of
approximately RMB1,240 million was primarily due to operational growth. As
operating revenue increased more than operating expenses, operating income
increased by 18.5% from RMB1,182 million in 2000 to RMB1,401 million in 2001.
The Groups net non-operating expenses increased by 141.3%, from RMB251 million
in 2000 to RMB605 million in 2001, mainly reflecting a drop in sale of aircraft
under sale and leaseback transactions of RMB318 million and a loss on sale of
staff quarters of RMB111 million.

Operating Revenue

Substantially all of the Groups operating revenue is attributable to
airline operations. Traffic revenue in 2000 and 2001 accounted for 96.9% and
97.5% of total operating revenue, respectively. Passenger traffic and cargo
and mail traffic accounted for 91.5% and 8.5% of

38



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total traffic revenue in 2001,
respectively. 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, which 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 11.2% from RMB15,178 million in 2000 to
RMB16,880 million in 2001. This increase was primarily due to a 13.6% rise in
passenger revenue from RMB13,255 million in 2000 to RMB15,056 million in 2001,
primarily as a result of higher traffic volume. The total number of passengers
carried increased by 13.5% to 19.12 million passengers in 2001. RPKs increased
by 15.7% from 21,653 million in 2000 to 25,057 million in 2001, primarily as a
result of an increase in passengers carried. However, passenger yield
decreased by 1.6% from RMB0.61 in 2000 to RMB0.60 in 2001, primarily as a
result of a fall in the average fares of international passenger traffic.

Domestic passenger revenue, which accounted for 80.1% of total passenger
revenue in 2001, increased by 14.2% from RMB10,564 million in 2000 to RMB12,068
million in 2001. For the Groups domestic routes, passenger traffic in RPKs
increased by 14.6%, while passenger capacity increased by 10.8%, resulting in a
2.0 percentage point increase in passenger load factor, or an increase of 3.3%
from 2000. Passenger yield remained unchanged at RMB0.62.

Hong Kong passenger revenue, which accounted for 7.5% of total passenger
revenue, decreased by 1.3% from RMB1,143 million in 2000 to RMB1,128 million in
2001. For Hong Kong flights, passenger traffic in RPKs decreased by 1.3%,
while passenger capacity in ASKs, decreased 3.1%, resulting in a 1.1 percentage
point increase in passenger load factor, or an increase of 1.8% from 2000.
Passenger yield remained unchanged at RMB1.06.

International passenger revenue, which accounted for 12.4% of total
passenger revenue, increased by 20.2% from RMB1,548 million in 2000 to RMB1,860
million in 2001. For international flights, passenger traffic in RPKs
increased by 26.2%, while passenger capacity in ASKs increased by 21.6%,
resulting in a 2.4 percentage point increase in passenger load factor, or an
increase of 3.8% from 2000. Passenger yield decreased by 4.7% from RMB0.43 in
2000 to RMB0.41 in 2001, principally as a result of larger fare discounts being
offered on the long-haul flights, especially on the two new routes to
Australia, with a view to establishing the market share.

Cargo and mail revenue, which accounted for 8.5% of the Groups total
traffic revenue and 8.3% of total operating revenue, decreased by 3.1% from
RMB1,451 million in 2000 to RMB1,406 million in 2001. This decrease was
primarily due to increased competition in domestic and international markets.
In order to maintain its market share, larger discounts were given by the
Group, resulting in a drop of yield per RTK of 17.4%.

Other operating revenue decreased by 11.4% from RMB472 million in 2000 to
RMB418 million in 2001. This decrease was primarily due to a drop in aircraft
lease income of RMB45 million.

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 rentals, 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,
promotional and marketing expenses) such as sales commission, fees for use of
the CAACs reservation system, ticket-printing and sales office expenses,
advertising and promotional expenses, from general and administrative expenses,
such as administrative salaries and welfare and other personnel benefits and
office expenses, and from depreciation and amortization expenses.

Total operating expenses in 2001 amounted to RMB15,479 million,
representing an increase of 10.6% or RMB1,483 million over 2000, primarily due
to the combined effect of the growth in operations and increases in operating
lease rentals and repair and maintenance expenses. Total operating expenses as
a percentage of total operating revenue decreased from 92.2% in 2000 to 91.7%
in 2001 as the increase in operating revenue exceeded the increase in operating
expenses.

Flight operation expenses, which accounted for 44.6% of total operating
expenses, increased by 13.0% from RMB6,109 million in 2000 to RMB6,906 million
in 2001, primarily as a result of an increase in fuel costs, operating lease
rentals, catering expenses, aircraft insurance costs and labor costs for flight
personnel. Fuel costs, which accounted for 51.4% of flight operations
expenses, increased by 9.5%

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from RMB3,240 million in 2000 to RMB3,549 million
in 2001 as a result of the traffic capacity growth. Operating lease rentals
increased by 18.4% from RMB1,616 million in 2000 to RMB1,913 million in 2001,
due primarily to the full year effect of five Boeing 737-300/37K aircraft wet
leased from Zhongyuan Airlines commencing in 2000. Catering expenses increased
by 14.5% from RMB483 million in 2000 to RMB554 million in 2001, reflecting
primarily an increase in number of passengers carried. Aircraft insurance
costs increased by 44.7% from RMB85 million in 2000 to RMB123 million in 2001,
due largely to a rise in aircraft insurance premiums levied on PRC airlines by
the Peoples Insurance (Property) Company of China as a result of the September
11 attacks in the United States of America. Labor costs for flight personnel
increased by 14.1% from RMB576 million in 2000 to RMB657 million in 2001, due
largely to an increase in flight hours as well as an increase in bonuses for
flight personnel.

Maintenance expenses which accounted for 13.0% of total operating
expenses, increased by 14.6% from RMB1,759 million in 2000 to RMB2,015 million
in 2001. The increase was primarily attributable to a 15.2% increase in
aircraft maintenance and repair charges from RMB1,602 million in 2000 to
RMB1,845 million in 2001, mainly as a result of the effect of fleet expansion
in recent years.

Aircraft and traffic servicing expenses, which accounted for 14.8% of
total operating expenses, increased by 11.0% from RMB2,069 million in 2000 to
RMB2,298 million in 2001. The increase resulted from a 10.3% rise in landing
and navigation fees from RMB1,955 million in 2000 to RMB2,157 million in 2001,
as the number of flights increased.

Promotional and marketing expenses, which accounted for 10.0% of total
operating expenses, increased by 11.8% from RMB1,378 million in 2000 to
RMB1,541 million 2001. The increase was due to a 11.2% increase in commission
and bonuses paid to sales agents, which resulted from a rise in traffic revenue
and increased competition.

General and administrative expenses, which accounted for 5.9% of total
operating expenses, increased by 10.3% from RMB809 million in 2000 to RMB892
million in 2001. This was mainly due to an increase in staff salaries and
welfare benefits of 6.1% from RMB294 million in 2000 to RMB312 million in 2001
and increased scale of operations.

Depreciation and amortization, which accounted for 11.7% of total
operating expenses, decreased by 2.6% from RMB1,864 million in 2000 to RMB1,815
million in 2001. This was primarily as a result of the disposal of four Boeing
757-200 aircraft and two Airbus 320-200 aircraft under sale and leaseback
transactions in 2000 and 2001 respectively and full depreciation of certain old
flight equipment during 2001.

Operating Income

Operating income increased by 18.5% from RMB1,182 million in 2000 to
RMB1,401 million in 2001, as operating revenue increased by RMB1,702 million or
11.2% as compared to 2000, while operating expenses increased by RMB1,483
million or 10.6% over the same period.

Non-operating Income/(Expenses)

Interest expense decreased by 13.1% from RMB1,074 million in 2000 to
RMB934 million in 2001, mainly reflecting the scheduled debt repayments during
the year.

Interest income decreased by 44.8% from RMB90 million in 2000 to RMB50
million in 2001. This was mainly attributable to a decrease in domestic
deposit rates as well as a fall in the cash balances.

The Group recognized a net loss on sale of fixed assets of RMB56 million
in 2001, mainly resulting from the net effect of a loss of RMB111 million on
disposal of staff quarters and a gain of RMB60 million on disposal of two
Airbus 320-200 aircraft under sale and leaseback arrangements.

During 2001, the Group recorded a net exchange gain of RMB297 million
predominantly due to its Japanese yen denominated borrowings as a result of the
Japanese yen depreciation. Such amount comprised mostly unrealized translation
gains.

Taxation

The Group is subject to PRC income tax at a rate of 33%.
Taxation expense decreased by 5.4% from RMB339 million in 2000 to RMB321
million in 2001, reflecting primarily the decrease in income before taxation.
A deferred tax asset of RMB176 million was recognized at December 31, 2001 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 five years.

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Minority Interests

Minority interests increased by 48.5% from RMB91 million in 2000 to RMB135
million in 2001, primarily as a result of an increase in net income 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. A majority part of these net proceeds were utilized
to finance the Groups working capital and capital expenditure requirements.
As of December 31, 2002, the Group had loan facilities from several PRC
commercial banks for providing long term loan finance up to an approximate
amount of RMB12,360 million to the Group. As of December 31, 2002, an
approximate amount of RMB7,258 million was utilized. As of December 31, 2001
and 2002, the Groups cash and cash equivalents totaled RMB2,818 million and
RMB3,771 million, respectively.

Net cash inflows from operating activities in 2000, 2001 and 2002 were RMB2,355
million, RMB2,224 million and RMB3,698 million respectively.

Net cash used in investing activities in 2000, 2001 and 2002 was RMB256
million, RMB3,036 million and RMB5,895 million respectively. Cash capital
expenditures in 2000, 2001 and 2002 were RMB1,381 million, RMB1,492 million and
RMB6,351 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 pilot
training facilities and other facilities and buildings for operations.

Financing activities resulted in net cash (outflows)/inflow of RMB(2,490)
million, RMB(568) million and RMB3,150 million in 2000, 2001 and 2002,
respectively. The net cash outflows of 2000 and 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, 2002, the Groups aggregate long-term debt and obligations
under capital leases totaled RMB14,851 million. Based on such amount, in 2003,
2004, 2005, 2006, 2007 and thereafter, amounts payable under such debt and
obligations will be RMB2,384 million, RMB2,115 million, RMB2,111 million,
RMB5,125 million and RMB3,116 respectively. Such borrowings were denominated,
to a larger extent, in United States dollars and, to a smaller extent, in
Japanese yen, with almost all 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, 2002, the Groups short term bank debt was RMB4,423 million
with interest rates ranging from 1.9% to 5.3%. The Groups weighted average
interest rate on short-term bank notes payable was 3.11% as of December 31,
2002. 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, 2002, the Group had obligations under operating leases
totalling RMB8,537 million, predominately for aircraft. Of such amount,
RMB1,280 million, RMB1,328 million, RMB1,245 million, RMB1,002 million and
RMB3,682 million respectively was due in 2003, 2004, 2005, 2006, 2007 and
thereafter.

As of December 31, 2002, the Group had a working capital deficit of RMB7,016
million, as compared to a working capital deficit of RMB3,696 million as of
December 31, 2001. 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 2001 to 2002 was mainly because the Group
sought increased short term bank loans to finance its aircraft acquisitions.
Upon deliveries of the aircraft, the Group continued to seek renewal of its
short-term loans instead of replacing such loans with long term loans, as the
interest rate for short-term loans is 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 the future capital commitments, the

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Group
has obtained firm commitments from several PRC banks to provide loans up to
approximately RMB5,102 million and sought letters of intent from several PRC
banks to provide additional loans up to approximately RMB5,876 million. With
regard to the Groups long-term debt and lease obligations due in 2003 of
RMB3,664 million, the Group intends to meet such payment using its operating
cashflows. 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 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 capital 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.

The Group acquired certain of its aircraft pursuant to capital or operating
leases that obligate the Group 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 RMB5
million, RMB12 million and RMB14 million during 2000, 2001 and 2002
respectively, have been included as part of the operating lease charges.

As of December 31, 2002, the Group had capital commitments in 2003, 2004 and
2005 of approximately RMB6,204 million, RMB2,612 million
and RMB731 million,
respectively. Of such amounts, RMB2,801 million in 2003, RMB2,344 million in
2004 and RMB731 million in 2005 are related to the acquisition of aircraft and
related flight equipment, and RMB2,890 million in 2003 and RMB237 million in
2004 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 late 2003 to replace the Baiyun International Airport as
the Groups main route base. The remaining amounts of RMB513 million in 2003
and RMB31 million in 2004 are related to the Groups other airport and office
facilities and equipment, overhaul and maintenance bases and training
facilities. The Groups capital expenditures are generally subject to receipt
of various approvals of the Chinese Government and may be subject to change
depending on the timing of such approvals, prevailing market condition, the
availability of financing and other relevant factors.

As of December 31, 2002, the Group undertook to make a capital contribution of
approximately RMB60 million and RMB201 million to jointly controlled entity and
affiliated company, respectively.

As of December 31, 2002, cash and cash equivalents of the Group totaled
RMB3,771 million. Of such balance, 23.7% was denominated in foreign currencies
(mainly in United States dollars).

A final dividend of RMB0.02 (before tax) per share totaling RMB67.5 million
(before tax) in respect of financial year 2001 was paid to shareholders during
the year. No interim dividend was paid during the year ended December 31,
2002.

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, 2002.

|                                                                           |  |               |        |        |  |                        |       |          |  |               |       |  |  |  |       |  |  |  |       | 
|-------------------------------------------------------------------------- |  | ------------- | ------ | ------ |  | ---------------------- | ----- | -------- |  | ------------- | ----- |  |  |  | ----- |  |  |  | ----- | 
|                                                                           |  |               |        |        |  | As of December 3, 2002
|                                                                           |  |               |        |        |  |                       
|                                                                           |  |               |        |        |  | Payment due by period 
|                                                                           |  |               |        |        |  |                       
|                                                                           |  |               |        |        |  | less than              |       |          |  |               |       |  |  |  |       |  |  | 
|                                                                           |  | Total         |        | 1 year |  | 1-3 year               |       | 4-5 year |  | After 5 years
|                                                                           |  |               |        |        |  |                        |       |          |  |              
|                                                                           |  | (RMB million)
|Contractual obligations                                                    |  |               |        |        |  |                        |       |          |  |               |       |  |  |  |       |  |  |  |       | 
|Short-term debt                                                            |  |               | 4,423  |        |  |                        | 4,423 |          |  |               |      |  |  |  |      |  |  |  |      | 
|Long-term debt                                                             |  |               | 6,653  |        |  |                        | 817   |          |  |               | 1,887 |  |  |  | 2,686 |  |  |  | 1,263 | 
|Capital lease obligations                                                  |  |               | 8,198  |        |  |                        | 1,567 |          |  |               | 2,339 |  |  |  | 2,439 |  |  |  | 1,853 | 
|                                                                           |  |               |        |        |  |                        |       |          |  |               |       |  |  |  |       |  |  |  |       | 
|Total contractual obligations                                              |  |               | 19,274 |        |  |                        | 6,807 |          |  |               | 4,226 |  |  |  | 5,125 |  |  |  | 3,116 | 
|                                                                           |  |               |        |        |  |                        |       |          |  |               |       |  |  |  |       |  |  |  |       | 
|Other commercial commitments                                               |  |               |        |        |  |                        |       |          |  |               |       |  |  |  |       |  |  |  |       | 
|Operating leases commitment                                                |  |               | 8,537  |        |  |                        | 1,280 |          |  |               | 2,573 |  |  |  | 1,002 |  |  |  | 3,682 | 
|Aircraft purchase commitments                                              |  |               | 5,876  |        |  |                        | 2,801 |          |  |               | 2,344 |  |  |  | 731   |  |  |  |      | 
|Capital commitments in respect of
investments in the Guangzhou new airport |  |               | 526    |        |  |                        | 526   |          |  |               |      |  |  |  |      |  |  |  |      | 
|Other capital commitments                                                  |  |               | 44     |        |  |                        | 44    |          |  |               |      |  |  |  |      |  |  |  |      | 
|Investing commitments                                                      |  |               | 261    |        |  |                        | 261   |          |  |               |      |  |  |  |      |  |  |  |      | 
|                                                                           |  |               |        |        |  |                        |       |          |  |               |       |  |  |  |       |  |  |  |       | 
|Total commercial obligations                                               |  |               | 15,244 |        |  |                        | 4,912 |          |  |               | 4,917 |  |  |  | 1,733 |  |  |  | 3,682 | 
|                                                                           |  |               |        |        |  |                        |       |          |  |               |       |  |  |  |       |  |  |  |       | 

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 2002. There were certain changes in the
Companys Directors, Senior Management and Supervisors subsequent to December
31, 2002, details of which are set forth below.

|                |  |     |    |          |  |                                                   
|--------------- |  | --- | -- | -------- |  | --------------------------------------------------
|Name            |  | Age |    | Position
|                |  |     |    |         
|Yan Zhi Qing    |  |     | 60 |          |  | Chairman of the Board of Directors                
|Wang Chang Shun |  |     | 45 |          |  | Vice Chairman of the Board of Directors; President
|Li Feng Hua     |  |     | 53 |          |  | Director; Vice President                          
|Wang Shao Xi    |  |     | 61 |          |  | Director                                          
|Zhang Rui Ai    |  |     | 61 |          |  | Director                                          
|Zhou Yong Jin   |  |     | 59 |          |  | Director                                          
|Xu Jie Bo       |  |     | 37 |          |  | Director; Chief Financial Officer                 
|Wu Rong Nan     |  |     | 61 |          |  | Director                                          
|Simon To        |  |     | 51 |          |  | Independent Non-Executive Director                
|Peter Lok       |  |     | 66 |          |  | Independent Non-Executive Director                
|Wei Ming Hai    |  |     | 38 |          |  | Independent Non-Executive Director                
|Liang Hua Fu    |  |     | 61 |          |  | Chairman of the Supervisory Committee             
|Gan Yu Hua      |  |     | 74 |          |  | Supervisor                                        
|Li Qi Hong      |  |     | 55 |          |  | Supervisor                                        
|Jiang Ping      |  |     | 52 |          |  | Vice President                                    
|Li Kun          |  |     | 42 |          |  | Vice President                                    

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|               |  |     |    |          |  |                  
|-------------- |  | --- | -- | -------- |  | -----------------
|Name           |  | Age |    | Position
|               |  |     |    |         
|Yuan Xin An    |  |     | 46 |          |  | Vice President   
|Zheng En Ren   |  |     | 57 |          |  | Vice President   
|Yang Guang Hua |  |     | 49 |          |  | Vice President   
|Su Liang       |  |     | 40 |          |  | Company Secretary

On April 12, 2002, the Board of Directors by resolutions appointed Mr. Yuan Xi
An, Mr. Zheng En Ren and Mr. Yang Guang Hua respectively as Vice President of
the Company.

On October 11, 2002, Li Feng Hua resigned as the Director and Vice President of
the Company due to work arrangement.

On March 14, 2003, Mr. Wang Shao Xi and Mr. Zhang Rui An tendered their
resignations to the Company as Directors of the Company due to retirement.
Such resignation took effect after approval at the 2002 Annual General Meeting
of the Company.

In the Annual General Meeting held on May 13, 2003, it was resolved that Mr. Li
Feng Hua, Mr. Wang Shao Xi and Mr. Zhang Rui Ai resigned as directors of the
Company. It was also resolved that 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 were elected as directors of the Company during the same meeting.

Yan Zhi Qing is the Chairman of the Board of Directors. He became an employee
of the Company in February 1996. Mr. Yan has 36 years of experience in the
Chinese aviation industry. 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 CSAHC. Mr. Yan is currently the
President and Party Secretary of CSAHC. Mr. Yan graduated from the School of
Aviation Administration and Flight Control in 1962.

Wang Chang Shun is the Vice Chairman of the Board of Directors and the
President of the Company. He began his career in civil aviation in February
1976, mainly involved in air traffic control. He has held positions such as
Director of the Flight Operations Office of the Urumqi Civil Aviation
Administration, Director of the Flight Meteorology and Flight Safety Monitoring
Division, Party Secretary and Deputy General Manager of Xinjiang Airlines, and
Party Secretary of Urumqi Civil Aviation Administration. Mr. Wang is also Vice
President of CSAHC. Mr. Wang graduated from the Post-graduate Business
Management School of the Chinese Academy of Social Sciences and is qualified as
a Senior Expert of Political Science.

Zhou Yong Jin is 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. Zhou served as a Director of the Propaganda Department of CSAHC, Party
Secretary of the Transportation Department (Guangzhou) of the Company, and
Party Secretary of the Company Shenzhen branch. He is currently Chairman of
the Labor Union of the Company and a director of the Company.

Xu Jie Bo is a Director and the Chief Financial Officer of the Company. He
joined the Company in July 1998. Mr. Xu graduated from the Management
Department of Tianjin University and worked in the Financial Department of
Guangzhou Civil Aviation Administration upon graduation. In January 1992, he
was a supervisor of the Financial Management Office for Infrastructure
Projects. Subsequently in December 1992, he worked as a Deputy Director and
Director of the Financial Department of Central and Southern China Civil
Aviation Administration. In July 1998 he became General Manager of the
Financial Department of the Company. He is a Director and the Chief Financial
Officer. In addition, he is also a Director of Southern Airlines Group Shantou
Airlines Company Limited and Guangxi Airlines Company Limited.

Wu Rong Nan is 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.

Simon To is an Independent Non-executive Director of the Company. He is
currently a 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 Stanford University with a degree of Master of
Business Administration.

Peter Lok is an Independent Non-executive Director of the Company. He 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.
During the period of 1997 to 2000, Mr. Lok first served as the advisor, and later became the president of Hong Kong
Commercial Airlines Center. Mr. Lok has sat on various Committees

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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 an independent director of several other public
airline companies.

Wei Ming Hai is an Independent Non-executive Director of the Company. He is a
Professor and Dean of the School of Management of Zhongshan University.
Professor Wei 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 and in January 2000, 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 an Economics
Ph.D degree and a 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.

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. All three
Supervisors were appointed on January 27, 1995 at the first shareholders
meeting of the Company and re-appointed in the 1997 Annual General Meeting held
on June 15, 1998.

Liang Hua Fu is the Chairman of the Supervisory Committee of the Company.
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.

Gan Yu Hua is a Supervisor of the Company. 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
Account Certificate and is a member of the International Auditors Association.
Mr. Gan graduated from Shanghai Li Xin Accounting College in 1948.

Li Qi Hong is a Supervisor of the Company and the Representative of the
Labor Union of the Group. Mr. Li graduated from the CAAC Aviation College in
1968, and held various administrative positions in the commercial aviation
industry in China.

All Directors and Supervisors of the Company have entered into service
contracts with the Company for a term of three years commencing April 16, 2001.
Except for such service contracts, none of the Directors or Supervisors of the
Company has entered or has proposed to enter into any other service contract
with the Company or the Airline Subsidiaries.




Compensation

RMB0.1 million has been paid to non-executive directors for the year ended
December 31, 2002. The aggregate compensation paid by the Company to all
directors (excluding non-executive directors), supervisors and senior
management for 2002 was RMB1.4 million. For the year ended December 31, 2002,
the Company accrued an aggregate of approximately RMB64,000 on behalf of its
executive directors, supervisors and senior management pursuant to the SA
Pension Scheme and the retirement plans operated by various municipal
government 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

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The audit committee is appointed by the Board and consists of three
independent non-executive Directors. The current members of the audit
committee are Mr. Simon To, Mr. Peter Lok and Mr. Wei Ming Hai. 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. 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 by the independent auditors 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 independent 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, 2002, the Group had 17,031 employees, including 1,820
pilots, 2,570 flight attendants, 2,199 maintenance personnel, 3,832 sales and
marketing personnel and 3,583 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 determined by the CAAC 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.

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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.
This scheme which was previously organized by CSAHC has been handed over to
relevant PRC government agencies since January 2002. 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 income as and when incurred..

The Group is also required to provide retirees with medical benefits,
transportation subsidies and other welfare facilities. Previously, the Group
paid a fixed annual fee to CSAHC in return for CSAHC providing such benefits to
the retired employees of the Group. With effect from January 1, 2002, such
arrangement was terminated and the services are now provided by the Group
itself..

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 2002 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

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.




ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.




Major Shareholders

Share Capital Structure

As of December 31, 2002, the total share capital of the Company was
3,374,178,000 shares, of which approximately 65.2% (2,200,000,000 domestic
shares) is held by CSAHC and approximately 34.8% (1,174,178,000 H shares) is
held by Hong Kong and overseas shareholders.

Substantial Shareholders

As of December 31, 2002, 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 |  |                               | 65.20 | %
|HKSCC Nominees Limited |  | 1,148,129,999 H shares        |  |                               | 34.03 | %

The table below sets forth, as of December 31, 2002, the following entities
hold 5% 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
|                                  |  |                    |             |                             
|The Hongkong and
Shanghai Banking |  |                    | 643,649,717 |                              |  |                           | 54.82 | %

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|                        |  |                    |             |                              |  |                           |       |  
|----------------------- |  | ------------------ | ----------- | ---------------------------- |  | ------------------------- | ----- | -
|                        |  |                    |             |                              |  | Approximate Percentage of
|Name                    |  | Number of H Shares |             | the Total Number of H Shares
|                        |  |                    |             |                             
|Corporation Limited     |  |                    |             |                              |  |                           |       |  
|Standard Chartered Bank |  |                    | 154,060,050 |                              |  |                           | 13.12 | %

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 22 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.

Acquisition of Assets from CSAHC

During the year, 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 RMB1,097 million. The
consideration was satisfied by cash of approximately RMB132 million together
with an assumption by the Group of Zhongyuan Airlines debts of approximately
RMB965 million. In addition, the Group received reimbursements of wet lease
rentals totaling RMB150 million 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.

On August 29, 2002, the Company entered into agreements with CSAHC to
acquire 90% registered capital in each of Guangzhou Aviation Hotel, South China
International Aviation & Travel Services Company and Southern Airlines
Advertising Company from CSAHC at considerations of RMB99 million, RMB5 million
and RMB4 million, respectively. The remaining 10% registered capital in each
of these companies are still held by CSAHC. Following the transfer, Guangzhou
Aviation Hotel, South China International Aviation & Travel Services Company
and Southern Airlines Advertising Company became subsidiaries of the Company.
These acquisitions did not have a significant impact on the operating results
of the Group for the year ended December 31, 2002 or its financial position at
that date.

Arrangement 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 Group 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 Group 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.

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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 (renewable by the
parties). The agreement has been extended to May 22, 2003.

For the year ended December 31, 2002, the amount incurred by the Group for
the import and export of the above equipment was RMB584 million, inclusive of
agency commission of 1.5% above the contract prices paid to SAIETC.

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 Southern Airlines Advertising Company 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, 2003.

For the period from January to December 2002, , the amount incurred by the
Group to SAAC for advertising services was RMB3.3 million.

Southern Airlines Group Finance Company Limited (SA Finance), which is
42% owned by CSAHC, 30% owned by the Company, 28% owned by six 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. The agreement has been
extended up 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, 2002, the Group had short-term deposits placed with SA
Finance amounting to RMB901.0 million, which earned interest at the rate of
1.98% - 3.90% 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 term of agreement has been extended by the parties to May 23, 2003.

For the year ended December 31, 2002, the amount paid by the Group to
Shenzhen Air Catering Company Limited for the provision of in-flight meals was
approximately RMB29.1 million.

GAMECO, which is 50% owned by the Company and 50% owned by two independent
third parties

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

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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 2002.

For the year ended December 31, 2002, the amount incurred by the Company
for such repair and maintenance services was RMB592.3 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. The
35% shareholding was acquired by CSAHC from a previous shareholder in the
Australian Pilot College in 2000.

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, 2002, the amount paid by the Group to the
Australian Pilot College for training services was RMB56.3 million.

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

The Company and Southern Airlines (Group) Economic Development Company
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, 2002, 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 RMB101.4 million.

Guangzhou Nanland Air Catering Company Limited (Nanland), which is 51%
owned by the Company and 49% owned by an independent third party.

The Company and Nanland have entered into a catering agreement dated May
22, 1999, for the sale and purchase of in-flight meals for flights originating
or stopping at the airport in Guangzhou. Pursuant to such agreement, Nanland
will supply inflight meals to the Company from time to time during the term
from May 22, 1999 to May 22, 2000. The agreement will then be automatically
extended annually.

For the year ended December 31, 2002, the amount paid by the Group to
Nanland for the provision of in-flight meals was RMB88.9 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 Aviation Transportation 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, 2002, the aggregate amount of ticket sales
of the Group conducted through the Agents was RMB226.5 million.




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.

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Significant Changes

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

Legal Proceedings

The Company is not party to any material legal proceedings.

Dividend Information

A final dividend of RMB0.02 (before tax) per share totaling RMB67.5
million (before tax) in respect of financial year 2001 was paid to shareholders
during the year. No interim dividend was paid during the year ended December
31, 2002.




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, 2003,
approximately 71,405,500 of the
Companys H Shares in the form of 1,428,110 ADSs were held in the U.S. by approximately
43 record holders in the U.S., including the Depository Trust Company. The
Companys Domestic Shares are not listed on any stock exchange and are
essentially not transferable 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 and ADSs on the New York Stock
Exchange.

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

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|                      |                |  |                   |      |               |  |  |      |  |  |  |       |  |  |  |       | 
|--------------------- | -------------- |  | ----------------- | ---- | ------------- |  |  | ---- |  |  |  | ----- |  |  |  | ----- | 
|                      |                |  | Price per H Share |      | Price per ADS
|                      |                |  | (HK$)             |      | (US$)        
|                      |                |  |                   |      |              
|                      | First Quarter  |  |                   | 2.83 |               |  |  | 2.22 |  |  |  | 17.63 |  |  |  | 14.80 | 
|                      | Second Quarter |  |                   | 3.42 |               |  |  | 2.33 |  |  |  | 21.74 |  |  |  | 14.95 | 
|                      | Third Quarter  |  |                   | 3.60 |               |  |  | 1.89 |  |  |  | 22.25 |  |  |  | 12.00 | 
|                      | Fourth Quarter |  |                   | 2.42 |               |  |  | 1.50 |  |  |  | 15.00 |  |  |  | 10.35 | 
|Monthly Market Prices |                |  |                   |      |               |  |  |      |  |  |  |       |  |  |  |      
|                      | December 2002  |  |                   | 2.42 |               |  |  | 2.08 |  |  |  | 15.00 |  |  |  | 13.42 | 
|                      | January 2003   |  |                   | 2.55 |               |  |  | 2.10 |  |  |  | 16.50 |  |  |  | 13.24 | 
|                      | February 2003  |  |                   | 2.62 |               |  |  | 2.12 |  |  |  | 16.50 |  |  |  | 13.40 | 
|                      | March 2003     |  |                   | 2.22 |               |  |  | 1.71 |  |  |  | 14.38 |  |  |  | 11.75 | 
|                      | April 2003     |  |                   | 1.87 |               |  |  | 1.46 |  |  |  | 12.33 |  |  |  | 9.53  | 
|                      | May 2003       |  |                   | 2.15 |               |  |  | 1.66 |  |  |  | 13.65 |  |  |  | 10.46 | 




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
Chinas State Administration Bureau of Industry and Commerce on March 25, 1995.
The Companys business license number is 1000001001760.

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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.

53



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The Company has issued a total of 3,374,178,000 ordinary shares, of which
(a) 2,200,000,000 domestic shares are held by CSAHC and (b) 1,174,178,000 H
shares are held by Hong Kong and overseas 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:

54



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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.

55



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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.

56



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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).

The Company is permitted to retain the foreign exchange proceeds from its
initial public offering in July 1997. A portion of the proceeds has been used,
and the remaining proceeds will be used for the purposes which are consistent
with the disclosure made in the Companys prospectus dated July 1997.

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.

57



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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 facilities of the
Securities and Exchange Commission at:

58



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##### Table of Contents



450 Fifth Street N.W.
Room 1024
Washington D.C. 20549

7 World Trade Center
New York, New York 10048

500 West Madison Street
Suite 1400
Chicago, Illinois 60661-2511

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, 2002.

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, 2002.

As of December 31, 2002, the Group operated a total of 85 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 18 to the Financial Statements.

The following table provides information regarding the Groups interest rate
sensitive financial instruments as of December 31, 2002 and 2001:



|     |                             |  |                                                   |       |      |  |      |      |      |  |      |      |            |  |  |      |   |  |  |       |   |  |  |      |  
|---- | --------------------------- |  | ------------------------------------------------- | ----- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---------- |  |  | ---- | - |  |  | ----- | - |  |  | ---- | -
|     |                             |  | As of December 31, 2002                          
|     |                             |  |                                                  
|     |                             |  | Expected maturity date                           
|     |                             |  |                                                  
|     |                             |  | 2003                                              |       | 2004 |  | 2005 |      | 2006 |  | 2007 |      | Thereafter
|     |                             |  |                                                   |       |      |  |      |      |      |  |      |      |           
|     |                             |  | (Expressed in RMB million, except interest rates)
|Debt |                             |  |                                                   |       |      |  |      |      |      |  |      |      |            |  |  |      |   |  |  |       |   |  |  |     
|     | Fixed-rate notes payable   
|     | In US$                      |  |                                                   | 818   |      |  |      | 609  |      |  |      | 644  |            |  |  | 402  |   |  |  | 370   |   |  |  | 586  |  
|     | Average interest rate       |  |                                                   | 6.72  | %    |  |      | 6.73 | %    |  |      | 6.96 | %          |  |  | 6.95 | % |  |  | 6.98  | % |  |  | 6.97 | %
|     | Variable-rate notes payable | 
|     | In US$                      |  |                                                   | 2,254 |      |  |      |     |      |  |      |     |            |  |  |     |   |  |  |      |   |  |  |     |  
|     | Average interest rate (1)   |  |                                                   | 2.10  | %    |  |      |     |      |  |      |     |            |  |  |     |   |  |  |      |   |  |  |     |  
|     | In RMB                      |  |                                                   | 2,169 |      |  |      | 233  |      |  |      | 401  |            |  |  | 474  |   |  |  | 1,440 |   |  |  | 676  |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|     |                             |  |                                                   |       |                         |  |          |       |          |  |  |       |   |  |  |       | 
|---- | --------------------------- |  | ------------------------------------------------- | ----- | ----------------------- |  | -------- | ----- | -------- |  |  | ----- | - |  |  | ----- | 
|     |                             |  | As of December 31, 2002                           |       | As of December 31, 2001
|     |                             |  |                                                   |       |                        
|     |                             |  | Total                                             |       |                         |  |          |       | Total    |  |  |       |  
|     |                             |  | Recorded                                          |       | Fair                    |  | recorded |       | Fair    
|     |                             |  | Amount                                            |       | value(2)                |  | amount   |       | value(2)
|     |                             |  |                                                   |       |                         |  |          |       |         
|     |                             |  | (Expressed in RMB million, except interest rates) |       |                         |  |          |       |          |  | 
|Debt |                             |  |                                                   |       |                         |  |          |       |          |  |  |       |   |  |  |      
|     | Fixed-rate notes payable   
|     | In US$                      |  |                                                   | 3,429 |                         |  |          | 3,793 |          |  |  | 3,769 |   |  |  | 3,924 | 
|     | Average interest rate       |  |                                                   | 6.86  | %                       |  |          |      |          |  |  | 6.82  | % |  |  |      | 
|     | Variable-rate notes payable | 
|     | In US$                      |  |                                                   | 2,254 |                         |  |          | 2,254 |          |  |  | 498   |   |  |  | 498   | 
|     | Average interest rate (1)   |  |                                                   | 2.10  | %                       |  |          |      |          |  |  | 6.82  | % |  |  |      | 
|     | In RMB                      |  |                                                   | 5,393 |                         |  |          | 5,391 |          |  |  | 1,538 |   |  |  | 1,538 | 

59



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| |                           |  |                                                   |      |      |  |      |      |      |  |      |      |            |  |  |      |   |  |  |      |   |  |  |      |  
| | ------------------------- |  | ------------------------------------------------- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---------- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
| |                           |  | As of December 31, 2002                          
| |                           |  |                                                  
| |                           |  | Expected maturity date                           
| |                           |  |                                                  
| |                           |  | 2003                                              |      | 2004 |  | 2005 |      | 2006 |  | 2007 |      | Thereafter
| |                           |  |                                                   |      |      |  |      |      |      |  |      |      |           
| |                           |  | (Expressed in RMB million, except interest rates)
| | Average interest rate (1) |  |                                                   | 4.19 | %    |  |      | 5.40 | %    |  |      | 5.00 | %          |  |  | 5.15 | % |  |  | 5.08 | % |  |  | 5.18 | %

[Additional columns below]

[Continued from above table, first column(s) repeated]

| |                           |  |                                                   |      |                         |  |          |   |          |  |  |      |   |  |  |   | 
| | ------------------------- |  | ------------------------------------------------- | ---- | ----------------------- |  | -------- | - | -------- |  |  | ---- | - |  |  | - | 
| |                           |  | As of December 31, 2002                           |      | As of December 31, 2001
| |                           |  |                                                   |      |                        
| |                           |  | Total                                             |      |                         |  |          |   | Total    |  |  |      |  
| |                           |  | Recorded                                          |      | Fair                    |  | recorded |   | Fair    
| |                           |  | Amount                                            |      | value(2)                |  | amount   |   | value(2)
| |                           |  |                                                   |      |                         |  |          |   |         
| |                           |  | (Expressed in RMB million, except interest rates) |      |                         |  |          |   |          |  | 
| | Average interest rate (1) |  |                                                   | 4.65 | %                       |  |          |  |          |  |  | 5.30 | % |  |  |  | 



|(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 at December 31, 2002 and 2001.

The following table provides information regarding the Groups foreign currency
sensitive financial instruments and capital commitments as of December 31, 2002
and 2001 :



|                           |                             |  |                                                    |       |      |  |       |      |      |  |      |      |            |  |   |      |   |  |   |      |   |  |   |      |  
|-------------------------- | --------------------------- |  | -------------------------------------------------- | ----- | ---- |  | ----- | ---- | ---- |  | ---- | ---- | ---------- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                           |                             |  | As of December 31, 2002                           
|                           |                             |  |                                                   
|                           |                             |  | Expected maturity date                            
|                           |                             |  |                                                   
|                           |                             |  | 2003                                               |       | 2004 |  | 2005  |      | 2006 |  | 2007 |      | Thereafter
|                           |                             |  |                                                    |       |      |  |       |      |      |  |      |      |           
|                           |                             |  | (Expressed in
RMB million, except interest rates)
|Debt                       |                             |  |                                                    |       |      |  |       |      |      |  |      |      |            |  |   |      |   |  |   |      |   |  |   |     
|                           | Fixed-rate notes payable   
|                           | In US$                      |  |                                                    | 818   |      |  |       | 609  |      |  |      | 644  |            |  |   | 402  |   |  |   | 370  |   |  |   | 586  |  
|                           | Average
interest rate (1)   |  |                                                    | 6.72  | %    |  |       | 6.73 | %    |  |      | 6.96 | %          |  |   | 6.95 | % |  |   | 6.98 | % |  |   | 6.97 | %
|                           | Variable-rate notes payable | 
|                           | In US$                      |  |                                                    | 2,254 |      |  |       |     |      |  |      |     |            |  |   |     |   |  |   |     |   |  |   |     |  
|                           | Average interest rate (1)   |  |                                                    | 2.10  | %    |  |       |     |      |  |      |     |            |  |   |     |   |  |   |     |   |  |   |     |  
|Capital commitments in US$ |                             |  | 2,801                                              |       |      |  | 2,344 |      |      |  | 731  |      |            |  |  |      |   |  |  |      |   |  |  |     

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                           |                             |  |                                                    |       |                         |  |          |       |          |  |        |       |   |  |        |       | 
|-------------------------- | --------------------------- |  | -------------------------------------------------- | ----- | ----------------------- |  | -------- | ----- | -------- |  | ------ | ----- | - |  | ------ | ----- | 
|                           |                             |  | As of December 31, 2002                            |       | As of December 31, 2001
|                           |                             |  |                                                    |       |                        
|                           |                             |  | Total                                              |       |                         |  |          |       | Total    |  |        |       |  
|                           |                             |  | Recorded                                           |       | Fair                    |  | recorded |       | Fair    
|                           |                             |  | Amount                                             |       | value(2)                |  | amount   |       | value(2)
|                           |                             |  |                                                    |       |                         |  |          |       |         
|                           |                             |  | (Expressed in
RMB million, except interest rates) |       |                         |  |          |       |          |  |       
|Debt                       |                             |  |                                                    |       |                         |  |          |       |          |  |        |       |   |  |        |      
|                           | Fixed-rate notes payable   
|                           | In US$                      |  |                                                    | 3,429 |                         |  |          | 3,793 |          |  |        | 3,769 |   |  |        | 3,924 | 
|                           | Average
interest rate (1)   |  |                                                    | 6.86  | %                       |  |          |      |          |  |        | 6.82  | % |  |        |      | 
|                           | Variable-rate notes payable | 
|                           | In US$                      |  |                                                    | 2,254 |                         |  |          | 2,254 |          |  |        | 498   |   |  |        | 498   | 
|                           | Average interest rate (1)   |  |                                                    | 2.10  | %                       |  |          |      |          |  |        | 6.82  | % |  |        |      | 
|Capital commitments in US$ |                             |  | 5,876                                              |       |                         |  | 5,876    |       |          |  | 12,053 |       |   |  | 12,053 |      



|(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 at December 31, 2002
and 2001.




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, 2002.

Use of Proceeds



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

60



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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                                                                               

61



---



##### 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) |  | Amount of net offering proceeds to the Company used for as of December
31, 2002:
|----- |  | --------------------------------------------------------------------------------

|                                                       |  |                 
|------------------------------------------------------ |  | ----------------
|Construction of plant, building and facilities         |  | US$41.9 million 
|Purchase and installation of machinery and equipment   |  | US$389.7 million
|Purchase of real estate                                |  |                
|Acquisition of other business(es)                      |  |                
|Repayment of indebtedness                              |  | US$192.4 million
|Working Capital                                        |  | US$29.6 million 
|Temporary investments
(interest-bearing bank deposits) |  | US$4.9 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. [RESERVED]




ITEM 16. [RESERVED]




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                                 |  |     
|Independent Auditors Report                                                                                 |  | F-1 
|Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2002     |  | F-2 
|Consolidated Balance Sheets as of December 31, 2001 and 2002                                                 |  | F-3 
|Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2002 |  | F-4 
|Consolidated Statements of Changes in Shareholders Equity for each of the years in the three-year           |  |     
|period ended December 31, 2002                                                                               |  | F-5 
|Notes to Consolidated Financial Statements                                                                   |  | F-6 




ITEM 19. EXHIBITS.

62



---



##### 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 2002.              
|            |  |                                                                                                                                     
|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 2002.
|            |  |                                                                                                                                     
|8           |  | Subsidiaries of the Company                                                                                                         
|            |  |                                                                                                                                     
|10.1        |  | Section 906 Certification                                                                                                           

63



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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 27, 2003

64



---



##### Table of Contents



CERTIFICATION

I, Yan Zhi Qing, Chairman of the Board of Directors of CHINA SOUTHERN
AIRLINES COMPANY LIMITED, hereby certify in connection with the filing with the
U.S. Securities and Exchange Commission (SEC) of CHINA SOUTHERN AIRLINES
COMPANY LIMITEDs Annual Report on Form 20-F for the fiscal year ended December
31, 2002 (the Annual Report) that:



|1. |  | I have reviewed this annual report on Form 20-F of CHINA
SOUTHERN AIRLINES COMPANY LIMITED;                                                                                                                                                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;      
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of CHINA SOUTHERN AIRLINES COMPANY LIMITED
as of, and for, the periods presented in this annual report;
|  
|4. |  | CHINA SOUTHERN AIRLINES COMPANY LIMITEDs other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for CHINA SOUTHERN AIRLINES COMPANY LIMITED and
have:                                                      



| | (a) |  | designed such disclosure controls and procedures to
ensure that material information relating to CHINA SOUTHERN
AIRLINES COMPANY LIMITED, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual
report is being prepared;
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of CHINA SOUTHERN
AIRLINES COMPANY LIMITEDs disclosure controls and procedures as
of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and                                                                                                  
|
| | (c) |  | presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;                                                                                                                                                 



|5. |  | CHINA SOUTHERN AIRLINES COMPANY LIMITEDs other certifying
officers and I have disclosed, based on our most recent evaluation, to
CHINA SOUTHERN AIRLINES COMPANY LIMITEDs auditors and the audit
committee of CHINA SOUTHERN AIRLINES COMPANY LIMITEDs board of
directors (or persons performing the equivalent function):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect
CHINA SOUTHERN AIRLINES COMPANY LIMITEDs ability to record,
process, summarize and report financial data and have identified
for CHINA SOUTHERN AIRLINES COMPANY LIMITEDs auditors any
material weaknesses in internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in
CHINA SOUTHERN AIRLINES COMPANY LIMITEDs internal controls; and                                                                                                                                                                 



|6. |  | CHINA SOUTHERN AIRLINES COMPANY LIMITEDs other certifying
officers and I have indicated in this annual report whether or not
there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                             
| | ------------------------------------------------------------
| | /s/ Yan Zhi Qing                                            
| | Name: Yan Zhi Qing
Title: Chairman of the Board of Directors

Date: June 27, 2003

65



---



##### Table of Contents



CERTIFICATION

I, Wang Chang Shun, President of CHINA SOUTHERN AIRLINES COMPANY LIMITED,
hereby certify in connection with the filing with the U.S. Securities and
Exchange Commission (SEC) of CHINA SOUTHERN AIRLINES COMPANY LIMITEDs Annual
Report on Form 20-F for the fiscal year ended December 31, 2002 (the Annual
Report) that:



|1. |  | I have reviewed this annual report on Form 20-F of CHINA SOUTHERN
AIRLINES COMPANY LIMITED;                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of CHINA SOUTHERN AIRLINES LIMITED as of,
and for, the periods presented in this annual report;  
|  
|4. |  | CHINA SOUTHERN AIRLINES COMPANY LIMITEDs other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for CHINA SOUTHERN AIRLINES COMPANY LIMITED and
have:                                                



| | (a) |  | designed such disclosure controls and procedures to
ensure that material information relating to CHINA SOUTHERN
AIRLINES COMPANY LIMITED, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual
report is being prepared;
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of CHINA SOUTHERN
AIRLINES COMPANY LIMITEDs disclosure controls and procedures as
of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and                                                                                                  
|
| | (c) |  | presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;                                                                                                                                                 



|5. |  | CHINA SOUTHERN AIRLINES COMPANY LIMITEDs other certifying
officers and I have disclosed, based on our most recent evaluation, to
CHINA SOUTHERN AIRLINES COMPANY LIMITEDs auditors and the audit
committee of CHINA SOUTHERN AIRLINES COMPANY LIMITEDs board of
directors (or persons performing the equivalent function):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect
CHINA SOUTHERN AIRLINES LIMITEDs ability to record, process,
summarize and report financial data and have identified for
CHINA SOUTHERN AIRLINES COMPANY LIMITEDs auditors any material
weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in
CHINA SOUTHERN AIRLINES COMPANY LIMITEDs internal controls; and                                                                                                                                                         



|6. |  | CHINA SOUTHERN AIRLINES COMPANY LIMITEDs other certifying
officers and I have indicated in this annual report whether or not
there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                       
| | --------------------------------------
| | /s/ Wang Chang Shun                   
| | Name: Wang Chang Shun
Title: President

Date: June 27, 2003

66



---



##### Table of Contents



CERTIFICATION

I, Xu Jie Bo, Chief Financial Officer of CHINA SOUTHERN AIRLINES COMPANY
LIMITED, hereby certify in connection with the filing with the U.S. Securities
and Exchange Commission (SEC) of CHINA SOUTHERN AIRLINES COMPANY LIMITEDs
Annual Report on Form 20-F for the fiscal year ended December 31, 2002 (the
Annual Report) that:



|1. |  | I have reviewed this annual report on Form 20-F of CHINA SOUTHERN
AIRLINES COMPANY LIMITED;                                                                                                                                                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;      
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of CHINA SOUTHERN AIRLINES COMPANY LIMITED
as of, and for, the periods presented in this annual report;
|  
|4. |  | CHINA SOUTHERN AIRLINES COMPANY LIMITEDs other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for CHINA SOUTHERN AIRLINES LIMITED and have:                                                              



| | (a) |  | designed such disclosure controls and procedures to
ensure that material information relating to CHINA SOUTHERN
AIRLINES COMPANY LIMITED, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual
report is being prepared;
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of CHINA SOUTHERN
AIRLINES COMPANY LIMITEDs disclosure controls and procedures as
of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and                                                                                                  
|
| | (c) |  | presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;                                                                                                                                                 



|5. |  | CHINA SOUTHERN AIRLINES COMPANY LIMITEDs other certifying
officers and I have disclosed, based on our most recent evaluation, to
CHINA SOUTHERN AIRLINES COMPANY LIMITEDs auditors and the audit
committee of CHINA SOUTHERN AIRLINES COMPANY LIMITEDs board of
directors (or persons performing the equivalent function):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect
CHINA SOUTHERN AIRLINES COMPANY LIMITEDs ability to record,
process, summarize and report financial data and have identified
for CHINA SOUTHERN AIRLINES COMPANY LIMITEDs auditors any
material weaknesses in internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in
CHINA SOUTHERN AIRLINES COMPANY LIMITEDs internal controls; and                                                                                                                                                                 



|6. |  | CHINA SOUTHERN AIRLINES COMPANY LIMITEDs other certifying
officers and I have indicated in this annual report whether or not
there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                               
| | ----------------------------------------------
| | /s/ Xu Jie Bo                                 
| | Name: Xu Jie Bo
Title: Chief Financial Officer

Date: June 27, 2003

67



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##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 and 2002





---



##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                                  |  |      |     | 
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                                  |  | Page
|                                                                                                                                  |  |     
|Independent Auditors Report                                                                                                      |  |      | F-1 | 
|Consolidated Statements of Income for each of the years in the three-year period
ended December 31, 2002                          |  |      | F-2 | 
|Consolidated Balance Sheets as of December 31, 2001 and 2002                                                                      |  |      | F-3 | 
|Consolidated Statements of Cash Flows for each of the years in the three-year period
ended December 31, 2002                      |  |      | F-4 | 
|Consolidated Statements of Changes in Shareholders Equity for each of the years
in the three-year period ended December 31, 2002 |  |      | F-5 | 
|Notes to Consolidated Financial Statements                                                                                        |  |      | F-6 | 





---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

To 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, 2001
and 2002, and the related consolidated statements of income, cash flows and
changes in shareholders equity for each of the years in the three-year period
ended December 31, 2002, 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 auditing standards generally
accepted in the United States of America and Hong Kong. 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, 2001
and 2002, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2002 in conformity with
International Financial Reporting Standards.

International Financial Reporting Standards vary in certain material
respects from accounting principles generally accepted in the United States of
America. Application of accounting principles generally accepted in the
United States of America would have affected results of operations for the
years ended December 31, 2000, 2001 and 2002 and shareholders equity as of
December 31, 2001 and 2002 to the extent summarized in Note 31 to the
consolidated financial statements.

The accompanying consolidated financial statements as of and for the year
ended December 31, 2002 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.

KPMGHong Kong
March 14, 2003

F-1



---



##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2000, 2001 and 2002

(Amounts in thousands, except per share data)

|                                              |                                            |  |      |        |      |  |            |            |      |  |            |            |              |  |            |            |   |  |           |           |  
|--------------------------------------------- | ------------------------------------------ |  | ---- | ------ | ---- |  | ---------- | ---------- | ---- |  | ---------- | ---------- | ------------ |  | ---------- | ---------- | - |  | --------- | --------- | -
|                                              |                                            |  | Note |        | 2000 |  | 2001       |            | 2002 |  | 2002      
|                                              |                                            |  |      |        |      |  |            |            |      |  |           
|                                              |                                            |  |      |        |      |  | RMB        |            | RMB  |  | RMB        |            | U.S. dollars
|Operating revenue:                            |                                            |  |      |        |      |  |            |            |      |  |            |            |              |  |            |            |   |  |           |          
|                                              | Traffic revenue, net                       |  |      | 3      |      |  |            | 14,706,159 |      |  |            | 16,461,532 |              |  |            | 17,481,892 |   |  |           | 2,112,028 |  
|                                              | Other revenue                              |  |      | 4      |      |  |            | 472,159    |      |  |            | 418,126    |              |  |            | 536,728    |   |  |           | 64,843    |  
|                                              |                                            |  |      |        |      |  |            |            |      |  |            |            |              |  |            |            |   |  |           |           |  
|Total operating revenue                       |                                            |  |      |        |      |  | 15,178,318 |            |      |  | 16,879,658 |            |              |  | 18,018,620 |            |   |  | 2,176,871 |          
|                                              |                                            |  |      |        |      |  |            |            |      |  |            |            |              |  |            |            |   |  |           |           |  
|Operating expenses:                           |                                            |  |      |        |      |  |            |            |      |  |            |            |              |  |            |            |   |  |           |          
|                                              | Flight operations                          |  |      | 5      |      |  |            | 6,109,021  |      |  |            | 6,905,628  |              |  |            | 6,732,543  |   |  |           | 813,374   |  
|                                              | Maintenance                                |  |      | 6      |      |  |            | 1,758,581  |      |  |            | 2,014,579  |              |  |            | 2,333,419  |   |  |           | 281,906   |  
|                                              | Aircraft and traffic servicing             |  |      | 7      |      |  |            | 2,069,114  |      |  |            | 2,297,521  |              |  |            | 2,511,284  |   |  |           | 303,394   |  
|                                              | Promotion and sales                        |  |      | 8      |      |  |            | 1,377,682  |      |  |            | 1,540,780  |              |  |            | 1,499,587  |   |  |           | 181,169   |  
|                                              | General and administrative                 |  |      | 9      |      |  |            | 809,225    |      |  |            | 892,233    |              |  |            | 1,060,010  |   |  |           | 128,062   |  
|                                              | Depreciation and amortization              |  |      |        |      |  |            | 1,863,789  |      |  |            | 1,814,974  |              |  |            | 1,839,871  |   |  |           | 222,279   |  
|                                              | Other                                      |  |      |        |      |  |            | 8,805      |      |  |            | 13,270     |              |  |            | 15,829     |   |  |           | 1,912     |  
|                                              |                                            |  |      |        |      |  |            |            |      |  |            |            |              |  |            |            |   |  |           |           |  
|Total operating expenses                      |                                            |  |      |        |      |  | 13,996,217 |            |      |  | 15,478,985 |            |              |  | 15,992,543 |            |   |  | 1,932,096 |          
|                                              |                                            |  |      |        |      |  |            |            |      |  |            |            |              |  |            |            |   |  |           |           |  
|Operating income                              |                                            |  |      |        |      |  | 1,182,101  |            |      |  | 1,400,673  |            |              |  | 2,026,077  |            |   |  | 244,775   |          
|                                              |                                            |  |      |        |      |  |            |            |      |  |            |            |              |  |            |            |   |  |           |           |  
|Non-operating income/(expenses):              |                                            |  |      |        |      |  |            |            |      |  |            |            |              |  |            |            |   |  |           |          
|                                              | Equity income of affiliated companies      |  |      |        |      |  |            | 45,949     |      |  |            | 53,077     |              |  |            | 36,988     |   |  |           | 4,469     |  
|                                              | Equity loss of jointly controlled entities |  |      |        |      |  |            |           |      |  |            | (4,034     | )            |  |            | (3,352     | ) |  |           | (405      | )
|                                              | Gain/(loss) on sale of fixed assets        |  |      | 12, 21 |      |  |            | 372,596    |      |  |            | (55,889    | )            |  |            | 170,740    |   |  |           | 20,627    |  
|                                              | Interest income                            |  |      |        |      |  |            | 90,283     |      |  |            | 49,878     |              |  |            | 52,618     |   |  |           | 6,357     |  
|                                              | Interest expense                           |  |      | 17     |      |  |            | (1,074,236 | )    |  |            | (933,717   | )            |  |            | (959,193   | ) |  |           | (115,882  | )
|                                              | Exchange gain/(loss), net                  |  |      |        |      |  |            | 318,502    |      |  |            | 296,777    |              |  |            | (175,451   | ) |  |           | (21,197   | )
|                                              | Other, net                                 |  |      |        |      |  |            | (3,965     | )    |  |            | (11,509    | )            |  |            | (9,328     | ) |  |           | (1,127    | )
|                                              |                                            |  |      |        |      |  |            |            |      |  |            |            |              |  |            |            |   |  |           |           |  
|Total non-operating expenses                  |                                            |  |      |        |      |  | (250,871   | )          |      |  | (605,417   | )          |              |  | (886,978   | )          |   |  | (107,158  | )        
|                                              |                                            |  |      |        |      |  |            |            |      |  |            |            |              |  |            |            |   |  |           |           |  
|Income before taxation and minority interests |                                            |  |      |        |      |  | 931,230    |            |      |  | 795,256    |            |              |  | 1,139,099  |            |   |  | 137,617   |          
|Taxation                                      |                                            |  | 10   |        |      |  | (338,907   | )          |      |  | (320,519   | )          |              |  | (398,227   | )          |   |  | (48,111   | )        
|                                              |                                            |  |      |        |      |  |            |            |      |  |            |            |              |  |            |            |   |  |           |           |  
|Income before minority interests              |                                            |  |      |        |      |  | 592,323    |            |      |  | 474,737    |            |              |  | 740,872    |            |   |  | 89,506    |          
|Minority interests                            |                                            |  |      |        |      |  | (90,552    | )          |      |  | (134,512   | )          |              |  | (165,111   | )          |   |  | (19,947   | )        
|                                              |                                            |  |      |        |      |  |            |            |      |  |            |            |              |  |            |            |   |  |           |           |  
|Net income                                    |                                            |  |      |        |      |  | 501,771    |            |      |  | 340,225    |            |              |  | 575,761    |            |   |  | 69,559    |          
|                                              |                                            |  |      |        |      |  |            |            |      |  |            |            |              |  |            |            |   |  |           |           |  
|Basic earnings per share                      |                                            |  | 2(w) |        |      |  | 0.15       |            |      |  | 0.10       |            |              |  | 0.17       |            |   |  | 0.021     |          
|                                              |                                            |  |      |        |      |  |            |            |      |  |            |            |              |  |            |            |   |  |           |           |  

F-2



---



##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 and 2002

(Amounts in thousands)

|                                                                |                                                                     |  |       |    |      |  |            |            |      |  |              |            |  |  |           |           | 
|--------------------------------------------------------------- | ------------------------------------------------------------------- |  | ----- | -- | ---- |  | ---------- | ---------- | ---- |  | ------------ | ---------- |  |  | --------- | --------- | 
|                                                                |                                                                     |  | Note  |    | 2001 |  | 2002       |            | 2002
|                                                                |                                                                     |  |       |    |      |  |            |            |     
|                                                                |                                                                     |  |       |    |      |  | RMB        |            | RMB  |  | U.S. dollars
|ASSETS                                                          |                                                                     |  |       |    |      |  |            |            |      |  |              |            |  |  |           |          
|CURRENT ASSETS                                                  |                                                                     |  |       |    |      |  |            |            |      |  |              |            |  |  |           |          
|                                                                | Cash and cash equivalents                                           |  |       | 15 |      |  |            | 2,817,863  |      |  |              | 3,771,043  |  |  |           | 455,589   | 
|                                                                | Trade receivables                                                   |  |       | 11 |      |  |            | 556,542    |      |  |              | 671,776    |  |  |           | 81,159    | 
|                                                                | Other receivables                                                   |  |       |    |      |  |            | 196,751    |      |  |              | 372,586    |  |  |           | 45,013    | 
|                                                                | Inventories                                                         |  |       |    |      |  |            | 467,018    |      |  |              | 545,700    |  |  |           | 65,927    | 
|                                                                | Prepaid expenses and other current assets                           |  |       |    |      |  |            | 340,157    |      |  |              | 244,690    |  |  |           | 29,562    | 
|                                                                |                                                                     |  |       |    |      |  |            |            |      |  |              |            |  |  |           |           | 
|                                                                | TOTAL CURRENT ASSETS                                                |  |       |    |      |  |            | 4,378,331  |      |  |              | 5,605,795  |  |  |           | 677,250   | 
|FIXED ASSETS                                                    |                                                                     |  | 12    |    |      |  | 22,352,215 |            |      |  | 26,920,829   |            |  |  | 3,252,368 |          
|CONSTRUCTION IN PROGRESS                                        |                                                                     |  |       |    |      |  | 340,063    |            |      |  | 661,352      |            |  |  | 79,899    |          
|LEASE PREPAYMENTS                                               |                                                                     |  |       |    |      |  | 357,622    |            |      |  | 201,854      |            |  |  | 24,386    |          
|INVESTMENTS                                                     |                                                                     |  | 13    |    |      |  | 900,594    |            |      |  | 1,355,842    |            |  |  | 163,802   |          
|LEASE AND EQUIPMENT DEPOSITS                                    |                                                                     |  |       |    |      |  | 2,265,003  |            |      |  | 2,147,038    |            |  |  | 259,389   |          
|OTHER ASSETS                                                    |                                                                     |  |       |    |      |  | 59,274     |            |      |  | 295,337      |            |  |  | 35,680    |          
|                                                                |                                                                     |  |       |    |      |  |            |            |      |  |              |            |  |  |           |           | 
|                                                                | TOTAL ASSETS                                                        |  |       |    |      |  |            | 30,653,102 |      |  |              | 37,188,047 |  |  |           | 4,492,774 | 
|                                                                |                                                                     |  |       |    |      |  |            |            |      |  |              |            |  |  |           |           | 
|LIABILITIES AND SHAREHOLDERS EQUITY                            |                                                                     |  |       |    |      |  |            |            |      |  |              |            |  |  |           |          
|CURRENT LIABILITIES                                             |                                                                     |  |       |    |      |  |            |            |      |  |              |            |  |  |           |          
|                                                                | Notes payable, including current portion of long-term
notes payable |  |       | 17 |      |  |            | 2,177,516  |      |  |              | 5,240,726  |  |  |           | 633,144   | 
|                                                                | Current instalments of obligations under capital leases             |  |       | 18 |      |  |            | 1,451,929  |      |  |              | 1,566,698  |  |  |           | 189,276   | 
|                                                                | Accounts payable                                                    |  |       |    |      |  |            | 590,700    |      |  |              | 532,480    |  |  |           | 64,330    | 
|                                                                | Bills payable                                                       |  |       |    |      |  |            |           |      |  |              | 1,299,680  |  |  |           | 157,017   | 
|                                                                | Sales in advance of carriage                                        |  |       |    |      |  |            | 370,546    |      |  |              | 390,531    |  |  |           | 47,181    | 
|                                                                | Taxes payable                                                       |  |       |    |      |  |            | 73,464     |      |  |              | 78,145     |  |  |           | 9,441     | 
|                                                                | Amounts due to related companies                                    |  |       |    |      |  |            | 718,265    |      |  |              | 525,090    |  |  |           | 63,437    | 
|                                                                | Accrued expenses                                                    |  |       | 16 |      |  |            | 2,013,555  |      |  |              | 2,341,454  |  |  |           | 282,877   | 
|                                                                | Other liabilities                                                   |  |       |    |      |  |            | 678,133    |      |  |              | 646,989    |  |  |           | 78,164    | 
|                                                                |                                                                     |  |       |    |      |  |            |            |      |  |              |            |  |  |           |           | 
|                                                                | TOTAL CURRENT LIABILITIES                                           |  |       |    |      |  |            | 8,074,108  |      |  |              | 12,621,793 |  |  |           | 1,524,867 | 
|NOTES PAYABLE, EXCLUDING CURRENT PORTION                        |                                                                     |  | 17    |    |      |  | 3,627,594  |            |      |  | 5,835,434    |            |  |  | 704,992   |          
|OBLIGATIONS UNDER CAPITAL LEASES, EXCLUDING
CURRENT INSTALMENTS |                                                                     |  | 18    |    |      |  | 7,691,634  |            |      |  | 6,631,751    |            |  |  | 801,197   |          
|PROVISION FOR MAJOR OVERHAULS                                   |                                                                     |  | 6     |    |      |  | 125,661    |            |      |  | 141,887      |            |  |  | 17,142    |          
|DEFERRED CREDITS                                                |                                                                     |  | 19    |    |      |  | 15,072     |            |      |  | 48,095       |            |  |  | 5,811     |          
|DEFERRED TAXATION                                               |                                                                     |  | 14    |    |      |  | 519,577    |            |      |  | 779,234      |            |  |  | 94,141    |          
|                                                                |                                                                     |  |       |    |      |  |            |            |      |  |              |            |  |  |           |           | 
|                                                                | TOTAL LIABILITIES                                                   |  |       |    |      |  |            | 20,053,646 |      |  |              | 26,058,194 |  |  |           | 3,148,150 | 
|MINORITY INTERESTS                                              |                                                                     |  |       |    |      |  | 1,377,793  |            |      |  | 1,516,646    |            |  |  | 183,230   |          
|SHAREHOLDERS EQUITY                                            |                                                                     |  | 23,24 |    |      |  | 9,221,663  |            |      |  | 9,613,207    |            |  |  | 1,161,394 |          
|                                                                |                                                                     |  |       |    |      |  |            |            |      |  |              |            |  |  |           |           | 
|                                                                | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                          |  |       |    |      |  |            | 30,653,102 |      |  |              | 37,188,047 |  |  |           | 4,492,774 | 
|                                                                |                                                                     |  |       |    |      |  |            |            |      |  |              |            |  |  |           |           | 

See accompanying notes to consolidated financial statements.

F-3



---



##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2000, 2001 and 2002

(Amounts in thousands)

|                                                        |                                                                                  |  |            |            |      |  |            |            |              |  |            |            |   |  |          |          |  
|------------------------------------------------------- | -------------------------------------------------------------------------------- |  | ---------- | ---------- | ---- |  | ---------- | ---------- | ------------ |  | ---------- | ---------- | - |  | -------- | -------- | -
|                                                        |                                                                                  |  | 2000       |            | 2001 |  | 2002       |            | 2002        
|                                                        |                                                                                  |  |            |            |      |  |            |            |             
|                                                        |                                                                                  |  | RMB        |            | RMB  |  | RMB        |            | U.S. dollars
|Cash inflows from operations (Note 27)                  |                                                                                  |  | 3,506,432  |            |      |  | 3,185,523  |            |              |  | 4,762,923  |            |   |  | 575,420  |         
|                                                        | Interest received                                                                |  |            | 90,283     |      |  |            | 49,878     |              |  |            | 52,618     |   |  |          | 6,357    |  
|                                                        | Interest paid                                                                    |  |            | (1,115,283 | )    |  |            | (970,734   | )            |  |            | (1,051,027 | ) |  |          | (126,977 | )
|                                                        | Income tax paid                                                                  |  |            | (126,346   | )    |  |            | (40,724    | )            |  |            | (66,970    | ) |  |          | (8,091   | )
|                                                        |                                                                                  |  |            |            |      |  |            |            |              |  |            |            |   |  |          |         
|Net cash inflows from operating activities              |                                                                                  |  | 2,355,086  |            |      |  | 2,223,943  |            |              |  | 3,697,544  |            |   |  | 446,709  |         
|                                                        |                                                                                  |  |            |            |      |  |            |            |              |  |            |            |   |  |          |         
|Investing activities:                                   |                                                                                  |  |            |            |      |  |            |            |              |  |            |            |   |  |          |         
|                                                        | Proceeds from sale of aircraft                                                   |  |            | 948,863    |      |  |            | 566,493    |              |  |            | 778,047    |   |  |          | 93,998   |  
|                                                        | Proceeds from sale of other fixed assets                                         |  |            | 70,948     |      |  |            | 38,892     |              |  |            | 47,150     |   |  |          | 5,696    |  
|                                                        | Proceeds from sale of investments                                                |  |            | 5,000      |      |  |            |           |              |  |            | 68         |   |  |          | 8        |  
|                                                        | Dividends received from affiliated companies                                     |  |            | 59,064     |      |  |            | 5,946      |              |  |            | 3,093      |   |  |          | 374      |  
|                                                        | Decrease/(increase) in other assets                                              |  |            | 21,291     |      |  |            | (345       | )            |  |            | (943       | ) |  |          | (114     | )
|                                                        | Payment of lease and equipment deposits                                          |  |            | (105,740   | )    |  |            | (2,027,063 | )            |  |            | (1,999,233 | ) |  |          | (241,532 | )
|                                                        | Refund of lease and equipment deposits                                           |  |            | 262,465    |      |  |            | 200,029    |              |  |            | 2,117,386  |   |  |          | 255,806  |  
|                                                        | Capital expenditures                                                             |  |            | (1,381,018 | )    |  |            | (1,492,126 | )            |  |            | (6,351,030 | ) |  |          | (767,283 | )
|                                                        | Purchase of investments                                                          |  |            | (137,119   | )    |  |            | (1,241     | )            |  |            | (6,721     | ) |  |          | (812     | )
|                                                        | Investments in affiliated companies                                              |  |            |           |      |  |            | (147,875   | )            |  |            | (136,500   | ) |  |          | (16,491  | )
|                                                        | Investments in jointly controlled entities                                       |  |            |           |      |  |            | (178,372   | )            |  |            | (295,670   | ) |  |          | (35,721  | )
|                                                        | Governmental subsidy for safety related capital expenditures                     |  |            |           |      |  |            |           |              |  |            | 40,240     |   |  |          | 4,861    |  
|                                                        | Effect of acquisition of subsidiaries, net of
cash and cash equivalents acquired |  |            |           |      |  |            |           |              |  |            | (90,491    | ) |  |          | (10,932  | )
|                                                        |                                                                                  |  |            |            |      |  |            |            |              |  |            |            |   |  |          |         
|Net cash used in investing activities                   |                                                                                  |  | (256,246   | )          |      |  | (3,035,662 | )          |              |  | (5,894,604 | )          |   |  | (712,142 | )       
|                                                        |                                                                                  |  |            |            |      |  |            |            |              |  |            |            |   |  |          |         
|Net cash inflows/(outflows) before financing
activities |                                                                                  |  | 2,098,840  |            |      |  | (811,719   | )          |              |  | (2,197,060 | )          |   |  | (265,433 | )       
|                                                        |                                                                                  |  |            |            |      |  |            |            |              |  |            |            |   |  |          |         
|Financing activities:                                   |                                                                                  |  |            |            |      |  |            |            |              |  |            |            |   |  |          |         
|                                                        | Proceeds from bank notes payable                                                 |  |            | 261,849    |      |  |            | 2,123,613  |              |  |            | 6,996,780  |   |  |          | 845,297  |  
|                                                        | Repayment of bank notes payable                                                  |  |            | (726,286   | )    |  |            | (890,228   | )            |  |            | (2,194,630 | ) |  |          | (265,138 | )
|                                                        | Repayment of principal under capital lease obligations                           |  |            | (1,986,768 | )    |  |            | (1,756,098 | )            |  |            | (1,546,185 | ) |  |          | (186,798 | )
|                                                        | Minority shareholders contributions                                             |  |            | 505        |      |  |            | 707        |              |  |            | 10,625     |   |  |          | 1,284    |  
|                                                        | Dividends paid to shareholders                                                   |  |            |           |      |  |            |           |              |  |            | (67,484    | ) |  |          | (8,153   | )
|                                                        | Dividends paid to minority shareholders                                          |  |            | (39,038    | )    |  |            | (45,867    | )            |  |            | (48,866    | ) |  |          | (5,903   | )
|                                                        |                                                                                  |  |            |            |      |  |            |            |              |  |            |            |   |  |          |         
|Net cash (outflows)/inflow from financing
activities    |                                                                                  |  | (2,489,738 | )          |      |  | (567,873   | )          |              |  | 3,150,240  |            |   |  | 380,589  |         
|                                                        |                                                                                  |  |            |            |      |  |            |            |              |  |            |            |   |  |          |         
|(Decrease)/increase in cash and cash equivalents        |                                                                                  |  | (390,898   | )          |      |  | (1,379,592 | )          |              |  | 953,180    |            |   |  | 115,156  |         
|Cash and cash equivalents at beginning of year          |                                                                                  |  | 4,588,353  |            |      |  | 4,197,455  |            |              |  | 2,817,863  |            |   |  | 340,433  |         
|                                                        |                                                                                  |  |            |            |      |  |            |            |              |  |            |            |   |  |          |         
|Cash and cash equivalents at end of year                |                                                                                  |  | 4,197,455  |            |      |  | 2,817,863  |            |              |  | 3,771,043  |            |   |  | 455,589  |         
|                                                        |                                                                                  |  |            |            |      |  |            |            |              |  |            |            |   |  |          |         

See accompanying notes to consolidated financial statements.

F-4



---



##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders Equity
For the years ended December 31, 2000, 2001 and 2002

(Amounts in thousands)

|                                                          |                                                                           |  |           |   |         |  |           |          |          |  |         |          |   |  |           |         |   |  |           |          |  
|--------------------------------------------------------- | ------------------------------------------------------------------------- |  | --------- | - | ------- |  | --------- | -------- | -------- |  | ------- | -------- | - |  | --------- | ------- | - |  | --------- | -------- | -
|                                                          |                                                                           |  | Share     |   | Share   |  | Other     |          | Retained |  |         |          |  
|                                                          |                                                                           |  | capital   |   | premium |  | reserves  |          | profits  |  | Total  
|                                                          |                                                                           |  |           |   |         |  |           |          |          |  |        
|                                                          |                                                                           |  | RMB       |   | RMB     |  | RMB       |          | RMB      |  | RMB    
|Shareholders equity at January 1, 2000                   |                                                                           |  | 3,374,178 |   |         |  | 3,813,659 |          |          |  | 639,884 |          |   |  | 551,946   |         |   |  | 8,379,667 |         
|                                                          | Net income                                                                |  |           |  |         |  |           |         |          |  |         |         |   |  |           | 501,771 |   |  |           | 501,771  |  
|                                                          | Appropriations to reserves                                                |  |           |  |         |  |           |         |          |  |         | 25,061   |   |  |           | (25,061 | ) |  |           |         |  
|                                                          |                                                                           |  |           |   |         |  |           |          |          |  |         |          |   |  |           |         |   |  |           |         
|Shareholders equity at December 31, 2000                 |                                                                           |  | 3,374,178 |   |         |  | 3,813,659 |          |          |  | 664,945 |          |   |  | 1,028,656 |         |   |  | 8,881,438 |         
|                                                          | Net income                                                                |  |           |  |         |  |           |         |          |  |         |         |   |  |           | 340,225 |   |  |           | 340,225  |  
|                                                          | Appropriations to reserves                                                |  |           |  |         |  |           |         |          |  |         | 22,229   |   |  |           | (22,229 | ) |  |           |         |  
|                                                          |                                                                           |  |           |   |         |  |           |          |          |  |         |          |   |  |           |         |   |  |           |         
|Shareholders equity at December 31, 2001                 |                                                                           |  | 3,374,178 |   |         |  | 3,813,659 |          |          |  | 687,174 |          |   |  | 1,346,652 |         |   |  | 9,221,663 |         
|                                                          | Land use right adjustment (Notes 24 (f))                                  |  |           |  |         |  |           | (129,703 | )        |  |         |         |   |  |           | 12,970  |   |  |           | (116,733 | )
|                                                          | Adjustments from adoption of new PRC
accounting regulations (Notes 24(c)) |  |           |  |         |  |           |         |          |  |         | (185,540 | ) |  |           | 185,540 |   |  |           |         |  
|                                                          | Dividend paid                                                             |  |           |  |         |  |           |         |          |  |         |         |   |  |           | (67,484 | ) |  |           | (67,484  | )
|                                                          | Net income                                                                |  |           |  |         |  |           |         |          |  |         |         |   |  |           | 575,761 |   |  |           | 575,761  |  
|                                                          | Appropriations to reserves                                                |  |           |  |         |  |           |         |          |  |         | 83,738   |   |  |           | (83,738 | ) |  |           |         |  
|                                                          |                                                                           |  |           |   |         |  |           |          |          |  |         |          |   |  |           |         |   |  |           |         
|Shareholders equity at December 31, 2002                 |                                                                           |  | 3,374,178 |   |         |  | 3,683,956 |          |          |  | 585,372 |          |   |  | 1,969,701 |         |   |  | 9,613,207 |         
|                                                          |                                                                           |  |           |   |         |  |           |          |          |  |         |          |   |  |           |         |   |  |           |         
|Shareholders equity at December 31, 2002
in U.S. dollars |                                                                           |  | 407,642   |   |         |  | 445,068   |          |          |  | 70,720  |          |   |  | 237,964   |         |   |  | 1,161,394 |         
|                                                          |                                                                           |  |           |   |         |  |           |          |          |  |         |          |   |  |           |         |   |  |           |         

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) (formerly named as
Southern Airlines (Group)). 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.

The consolidated financial statements have been prepared in Renminbi
(RMB), the national currency of China. Solely for the convenience of the
reader, the 2002 financial statements have been translated into United States
dollars at the rate of US$ 1.00 = RMB 8.2773, the rate quoted by the Peoples
Bank of China on December 31, 2002. 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, 2002 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.

Differences between IFRS and accounting principles generally accepted in
the United States of America (U.S. GAAP) and their effect on net income for
the years ended December 31, 2000, 2001 and 2002, and on consolidated
shareholders equity as of December 31, 2001 and 2002 are set forth in Note
31.

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)

(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 12). The accounting policies have been consistently applied by the Group
and except for a change in accounting policy for land use rights (refer to note
24(f)), are consistent with those used in previous years.

(c)      Basis of consolidation

The consolidated financial statements include the financial statements of
the Company and all of its subsidiaries (see Note 28 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
statement of income, 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
statement of income 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 statement 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

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)

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

(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 value
|                          |                                  |                |                  |  |               
|Buildings                 |                                  | 15 to 40 years |                  |  | Nil           
|Owned 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    |  |                | Nil
|Machinery and equipment   |                                  | 5 to 10 years  |                  |  | 3%             |    
|Vehicles                  |                                  | 6 years        |                  |  | 3%             |    

No depreciation is provided in respect of construction in progress.

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)

(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
statement of income to provide a constant periodic rate of charge over the
lease term.

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 statement of
income 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
24(f)).

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)

(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 statement of income includes the Groups share of the
results of its affiliated companies and jointly controlled entities for the
year. In the consolidated balance sheet, 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.

(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 statement of income.

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)

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.

(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 sheet 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 sheet 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 statement of income 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.

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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)

(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 statement of income.

(t)     Borrowing costs

Borrowing costs are expensed in the consolidated statement of income 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.

(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 statement of income
as and when incurred (see Note 21).

(w)      Basic earnings per share

Basic earnings per share for the years ended December 31, 2000, 2001 and
2002 have been computed by dividing net income of RMB501,771, RMB340,225 and
RMB575,761, respectively, by the weighted average number of shares in issue of
3,374,178,000 in 2000, 2001 and 2002.

(x)     Frequent flyer award programs

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)

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.

(x)     Revenue from mileage sales under the frequent flyer award programs is
recognized when the related transportation services are provided.

(y)      Provisions

A provision is recognized in the consolidated balance sheet 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 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,
|               |  |                        
|               |  | 2000                    |            | 2001 |  | 2002
|               |  |                         |            |      |  |     
|               |  | RMB                     |            | RMB  |  | RMB 
|Passenger      |  |                         | 13,254,714 |      |  |      | 15,055,496 |  |  |  | 15,695,622 | 
|Cargo and mail |  |                         | 1,451,445  |      |  |      | 1,406,036  |  |  |  | 1,786,270  | 
|               |  |                         |            |      |  |      |            |  |  |  |            | 
|               |  |                         | 14,706,159 |      |  |      | 16,461,532 |  |  |  | 17,481,892 | 
|               |  |                         |            |      |  |      |            |  |  |  |            | 

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. Sales tax incurred by the Group for the years ended December 31, 2000,
2001 and 2002 amounted to RMB510,460, RMB535,473 and RMB557,784, 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 for the years ended December 31, 2000, 2001 and 2002. Contributions to
the CAAC Infrastructure Development Fund paid by the Group for the year ended
December 31, 2000, 2001 and 2002 totaled RMB666,982, RMB759,385 and
RMB798,386, respectively.
     .

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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)

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 the following prescribed rates:

|                                            |  |                                         
|------------------------------------------- |  | ----------------------------------------
|Applicable flights and periods              |  | Rates of fuel surcharge                 
|Domestic flights                            |  |                                         
|From November 1, 2000 to February 5, 2001   |  | Not more than 20% of published fare or  
|                                            |  | RMB150 per passenger, whichever is lower
|                                            |  |                                         
|From February 6, 2001 to December 31, 2001  |  | Not more than 14% of published fare or  
|                                            |  | RMB150 per passenger, whichever is lower
|                                            |  |                                         
|From January 1, 2002 to October 9, 2002     |  | Not more than 8% of published fare      
|                                            |  |                                         
|From October 10, 2002 onward                |  | Not more than 14% of published fare     
|                                            |  |                                         
|Hong Kong regional flights                  |  |                                         
|From Novmeber 16, 2000 to December 31, 2001 |  | RMB64 to RMB70 per passenger            
|                                            |  |                                         
|From January 1, 2002 onward                 |  | Nil                                     

The fuel surcharge forms part of the traffic revenue of the Group. For
the year ended December 31, 2000, 2001 and 2002, the fuel surcharge revenue
totaled RMB149,000, RMB1,001,000 and RMB554,000, respectively.

4.      OTHER OPERATING REVENUE

|                                              |  |                         |         |      |  |      |         |  |  |  |         | 
|--------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                                              |  | Year ended December 31,
|                                              |  |                        
|                                              |  | 2000                    |         | 2001 |  | 2002
|                                              |  |                         |         |      |  |     
|                                              |  | RMB                     |         | RMB  |  | RMB 
|Commission income                             |  |                         | 134,252 |      |  |      | 129,157 |  |  |  | 137,928 | 
|General aviation income                       |  |                         | 53,161  |      |  |      | 61,292  |  |  |  | 68,225  | 
|Ground services income                        |  |                         | 63,111  |      |  |      | 55,388  |  |  |  | 78,616  | 
|Air catering income                           |  |                         | 23,654  |      |  |      | 29,523  |  |  |  | 38,077  | 
|Aircraft lease income                         |  |                         | 110,635 |      |  |      | 65,486  |  |  |  | 46,640  | 
|Net income from a lease arrangement (Note 12) |  |                         |        |      |  |      |        |  |  |  | 51,682  | 
|Other                                         |  |                         | 87,346  |      |  |      | 77,280  |  |  |  | 115,560 | 
|                                              |  |                         |         |      |  |      |         |  |  |  |         | 
|                                              |  |                         | 472,159 |      |  |      | 418,126 |  |  |  | 536,728 | 
|                                              |  |                         |         |      |  |      |         |  |  |  |         | 

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CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

5.      FLIGHT OPERATION EXPENSES

|                                     |  |                         |           |      |  |      |           |  |  |  |           | 
|------------------------------------ |  | ----------------------- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                                     |  | Year ended December 31,
|                                     |  |                        
|                                     |  | 2000                    |           | 2001 |  | 2002
|                                     |  |                         |           |      |  |     
|                                     |  | RMB                     |           | RMB  |  | RMB 
|Fuel costs                           |  |                         | 3,240,129 |      |  |      | 3,548,860 |  |  |  | 3,519,005 | 
|Operating lease rentals              |  |                         | 1,615,574 |      |  |      | 1,912,832 |  |  |  | 1,416,524 | 
|Air catering expenses                |  |                         | 482,838   |      |  |      | 554,165   |  |  |  | 625,489   | 
|Aircraft insurance                   |  |                         | 85,431    |      |  |      | 123,439   |  |  |  | 256,238   | 
|Flight personnel payroll and welfare |  |                         | 575,861   |      |  |      | 657,193   |  |  |  | 781,223   | 
|Training expenses                    |  |                         | 30,885    |      |  |      | 24,374    |  |  |  | 38,908    | 
|Other                                |  |                         | 78,303    |      |  |      | 84,765    |  |  |  | 95,156    | 
|                                     |  |                         |           |      |  |      |           |  |  |  |           | 
|                                     |  |                         | 6,109,021 |      |  |      | 6,905,628 |  |  |  | 6,732,543 | 
|                                     |  |                         |           |      |  |      |           |  |  |  |           | 

6.      MAINTENANCE EXPENSES

|                                  |  |                         |           |      |  |      |           |  |  |  |           | 
|--------------------------------- |  | ----------------------- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                                  |  | Year ended December 31,
|                                  |  |                        
|                                  |  | 2000                    |           | 2001 |  | 2002
|                                  |  |                         |           |      |  |     
|                                  |  | RMB                     |           | RMB  |  | RMB 
|Repairing and maintenance charges |  |                         | 1,327,248 |      |  |      | 1,558,331 |  |  |  | 1,842,213 | 
|Maintenance materials             |  |                         | 274,987   |      |  |      | 286,505   |  |  |  | 292,492   | 
|Labor costs                       |  |                         | 94,565    |      |  |      | 104,949   |  |  |  | 130,254   | 
|Other                             |  |                         | 61,781    |      |  |      | 64,794    |  |  |  | 68,460    | 
|                                  |  |                         |           |      |  |      |           |  |  |  |           | 
|                                  |  |                         | 1,758,581 |      |  |      | 2,014,579 |  |  |  | 2,333,419 | 
|                                  |  |                         |           |      |  |      |           |  |  |  |           | 

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)

An analysis of provision for major overhauls in respect of aircraft held
under operating leases is as follows:

|                             |  |                         |         |      |  |      |         |   |  |  |         |  
|---------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                             |  | Year ended December 31,
|                             |  |                        
|                             |  | 2000                    |         | 2001 |  | 2002
|                             |  |                         |         |      |  |     
|                             |  | RMB                     |         | RMB  |  | RMB 
|Balance at beginning of year |  |                         | 289,228 |      |  |      | 241,895 |   |  |  | 187,125 |  
|Additional amount provided   |  |                         | 15,267  |      |  |      | 12,889  |   |  |  | 49,051  |  
|Amount utilized              |  |                         | (62,600 | )    |  |      | (67,659 | ) |  |  | (42,289 | )
|                             |  |                         |         |      |  |      |         |   |  |  |         |  
|Balance at end of year       |  |                         | 241,895 |      |  |      | 187,125 |   |  |  | 193,887 |  
|                             |  |                         |         |      |  |      |         |   |  |  |         |  

Balance of provision for major overhauls at December 31, 2001 and 2002 consisted of:

|                                                         |  |              |         |      |  |  |         | 
|-------------------------------------------------------- |  | ------------ | ------- | ---- |  |  | ------- | 
|                                                         |  | December 31,
|                                                         |  |             
|                                                         |  | 2001         |         | 2002
|                                                         |  |              |         |     
|                                                         |  | RMB          |         | RMB 
|Current portion (included in accrued expenses) (Note 16) |  |              | 61,464  |      |  |  | 52,000  | 
|Non-current portion                                      |  |              | 125,661 |      |  |  | 141,887 | 
|                                                         |  |              |         |      |  |  |         | 
|                                                         |  |              | 187,125 |      |  |  | 193,887 | 
|                                                         |  |              |         |      |  |  |         | 

7.      AIRCRAFT AND TRAFFIC SERVICING EXPENSES

|                            |  |                         |           |      |  |      |           |  |  |  |           | 
|--------------------------- |  | ----------------------- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                            |  | Year ended December 31,
|                            |  |                        
|                            |  | 2000                    |           | 2001 |  | 2002
|                            |  |                         |           |      |  |     
|                            |  | RMB                     |           | RMB  |  | RMB 
|Landing and navigation fees |  |                         | 1,955,144 |      |  |      | 2,157,392 |  |  |  | 2,353,412 | 
|Ground service charges      |  |                         | 113,970   |      |  |      | 140,129   |  |  |  | 157,872   | 
|                            |  |                         |           |      |  |      |           |  |  |  |           | 
|                            |  |                         | 2,069,114 |      |  |      | 2,297,521 |  |  |  | 2,511,284 | 
|                            |  |                         |           |      |  |      |           |  |  |  |           | 

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)

8.      PROMOTION AND SALES EXPENSES

|                              |  |                         |           |      |  |      |           |  |  |  |           | 
|----------------------------- |  | ----------------------- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                              |  | Year ended December 31,
|                              |  |                        
|                              |  | 2000                    |           | 2001 |  | 2002
|                              |  |                         |           |      |  |     
|                              |  | RMB                     |           | RMB  |  | RMB 
|Sales commissions             |  |                         | 802,277   |      |  |      | 891,646   |  |  |  | 749,953   | 
|Ticket office expenses        |  |                         | 414,161   |      |  |      | 440,445   |  |  |  | 515,648   | 
|Computer reservation services |  |                         | 120,071   |      |  |      | 153,409   |  |  |  | 174,547   | 
|Advertising and promotion     |  |                         | 24,719    |      |  |      | 26,434    |  |  |  | 31,513    | 
|Other                         |  |                         | 16,454    |      |  |      | 28,846    |  |  |  | 27,926    | 
|                              |  |                         |           |      |  |      |           |  |  |  |           | 
|                              |  |                         | 1,377,682 |      |  |      | 1,540,780 |  |  |  | 1,499,587 | 
|                              |  |                         |           |      |  |      |           |  |  |  |           | 

9.     GENERAL AND ADMINISTRATIVE EXPENSES

|                                          |  |                         |         |      |  |      |         |  |  |  |           | 
|----------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  |  | --------- | 
|                                          |  | Year ended December 31,
|                                          |  |                        
|                                          |  | 2000                    |         | 2001 |  | 2002
|                                          |  |                         |         |      |  |     
|                                          |  | RMB                     |         | RMB  |  | RMB 
|General corporate expenses                |  |                         | 493,484 |      |  |      | 557,083 |  |  |  | 658,833   | 
|Salaries and welfare                      |  |                         | 294,358 |      |  |      | 312,396 |  |  |  | 379,406   | 
|Provision for doubtful accounts (Note 30) |  |                         | 2,072   |      |  |      | 1,729   |  |  |  | 1,304     | 
|Other taxes and levies                    |  |                         | 19,311  |      |  |      | 21,025  |  |  |  | 20,467    | 
|                                          |  |                         |         |      |  |      |         |  |  |  |           | 
|                                          |  |                         | 809,225 |      |  |      | 892,233 |  |  |  | 1,060,010 | 
|                                          |  |                         |         |      |  |      |         |  |  |  |           | 

10.      TAXATION

Pursuant to the income tax rules and regulations of the PRC, the Group is
liable to PRC income tax at a rate of 33% in respect of all periods presented.

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, 2000,
2001 and 2002.

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)

Income tax provision consisted of:

|                            |                          |  |                         |        |      |  |         |        |  |  |         |        | 
|--------------------------- | ------------------------ |  | ----------------------- | ------ | ---- |  | ------- | ------ |  |  | ------- | ------ | 
|                            |                          |  | Year ended December 31,
|                            |                          |  |                        
|                            |                          |  | 2000                    |        | 2001 |  | 2002   
|                            |                          |  |                         |        |      |  |        
|                            |                          |  | RMB                     |        | RMB  |  | RMB    
|Provision for income tax:   |                          |  |                         |        |      |  |         |        |  |  |         |       
|                            | Company and subsidiaries |  |                         | 59,297 |      |  |         | 37,032 |  |  |         | 71,651 | 
|                            | Affiliated companies     |  |                         | 12,024 |      |  |         | 8,085  |  |  |         | 9,424  | 
|                            |                          |  |                         |        |      |  |         |        |  |  |         |        | 
|                            |                          |  | 71,321                  |        |      |  | 45,117  |        |  |  | 81,075  |       
|Deferred taxation (Note 14) |                          |  | 267,586                 |        |      |  | 275,402 |        |  |  | 317,152 |       
|                            |                          |  |                         |        |      |  |         |        |  |  |         |        | 
|                            |                          |  | 338,907                 |        |      |  | 320,519 |        |  |  | 398,227 |       
|                            |                          |  |                         |        |      |  |         |        |  |  |         |        | 

Actual income tax expense differed from the amounts computed by applying
the PRC income tax rate of 33% to income before taxation and minority
interests as a result of the following:

|                              |                                                                 |  |                         |         |      |  |         |         |   |  |         |         |  
|----------------------------- | --------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ------- | ------- | - |  | ------- | ------- | -
|                              |                                                                 |  | Year ended December 31,
|                              |                                                                 |  |                        
|                              |                                                                 |  | 2000                    |         | 2001 |  | 2002   
|                              |                                                                 |  |                         |         |      |  |        
|                              |                                                                 |  | RMB                     |         | RMB  |  | RMB    
|Expected PRC taxation expense |                                                                 |  | 307,306                 |         |      |  | 262,434 |         |   |  | 375,903 |        
|Adjustments:                  |                                                                 |  |                         |         |      |  |         |         |   |  |         |        
|                              | Gains on sale and leaseback transactions and
their amortization |  |                         | (7,612  | )    |  |         | (5,075  | ) |  |         | (851    | )
|                              | Rate differential on subsidiaries taxed at 15%                  |  |                         | (40,745 | )    |  |         | (51,245 | ) |  |         | (60,530 | )
|                              | Non-deductible expenses                                         |  |                         | 70,512  |      |  |         | 154,152 |   |  |         | 61,454  |  
|                              | Other, net                                                      |  |                         | 9,446   |      |  |         | (39,747 | ) |  |         | 22,251  |  
|                              |                                                                 |  |                         |         |      |  |         |         |   |  |         |        
|                              |                                                                 |  | 338,907                 |         |      |  | 320,519 |         |   |  | 398,227 |        
|                              |                                                                 |  |                         |         |      |  |         |         |   |  |         |        

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.

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)

The PRC withholding tax payable in respect of the operating leases
executed after September 1, 1999 of RMB5,020, RMB11,962 and RMB14,305,
respectively, during 2000, 2001 and 2002 has been included as part of the
operating lease rentals.

11.      TRADE RECEIVABLES

|                                                |  |              |         |      |  |  |         |  
|----------------------------------------------- |  | ------------ | ------- | ---- |  |  | ------- | -
|                                                |  | December 31,
|                                                |  |             
|                                                |  | 2001         |         | 2002
|                                                |  |              |         |     
|                                                |  | RMB          |         | RMB 
|Trade receivables, principally traffic          |  |              | 615,561 |      |  |  | 731,894 |  
|Less: Allowance for doubtful accounts (Note 30) |  |              | (59,019 | )    |  |  | (60,118 | )
|                                                |  |              |         |      |  |  |         |  
|                                                |  |              | 556,542 |      |  |  | 671,776 |  
|                                                |  |              |         |      |  |  |         |  

12.      FIXED ASSETS

|                                                |  |              |            |      |  |  |            |  
|----------------------------------------------- |  | ------------ | ---------- | ---- |  |  | ---------- | -
|                                                |  | December 31,
|                                                |  |             
|                                                |  | 2001         |            | 2002
|                                                |  |              |            |     
|                                                |  | RMB          |            | RMB 
|Buildings                                       |  |              | 2,966,159  |      |  |  | 3,207,816  |  
|Aircraft                                        |  |              | 19,845,652 |      |  |  | 24,970,695 |  
|Flight equipment, including rotable spares      |  |              | 5,858,622  |      |  |  | 6,350,363  |  
|Machinery, equipment and vehicles               |  |              | 1,539,889  |      |  |  | 1,667,764  |  
|                                                |  |              |            |      |  |  |            |  
|                                                |  |              | 30,210,322 |      |  |  | 36,196,638 |  
|Less: Accumulated depreciation and amortization |  |              | (7,858,107 | )    |  |  | (9,275,809 | )
|                                                |  |              |            |      |  |  |            |  
|                                                |  |              | 22,352,215 |      |  |  | 26,920,829 |  
|                                                |  |              |            |      |  |  |            |  

Substantially all of the Groups buildings are located in the PRC. The
Group was formally granted the rights to use the twenty 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 building 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 Company 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, 2000, 2001 and 2002 in respect of these leases.
See Note 20.

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)

The Group is obligated under various capital leases for aircraft that
expire at various dates during the next nine years. The gross amount of
aircraft and related accumulated amortization recorded under capital leases are
as follows:

|                               |  |              |            |      |  |  |            |  
|------------------------------ |  | ------------ | ---------- | ---- |  |  | ---------- | -
|                               |  | December 31,
|                               |  |             
|                               |  | 2001         |            | 2002
|                               |  |              |            |     
|                               |  | RMB          |            | RMB 
|Aircraft                       |  |              | 11,454,527 |      |  |  | 11,459,978 |  
|Less: Accumulated amortization |  |              | (2,238,389 | )    |  |  | (2,499,495 | )
|                               |  |              |            |      |  |  |            |  
|                               |  |              | 9,216,138  |      |  |  | 8,960,483  |  
|                               |  |              |            |      |  |  |            |  

As of December 31, 2001 and 2002, certain aircraft of the Group with an
aggregate carrying amount of approximately RMB5,079,342 and RMB5,822,076,
respectively, were pledged as security under certain loan agreements. See
Note 17.

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 a depreciated 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 RMB68,000, RMB65,000 and RMB 33,000, respectively,
for 2000, 2001 and 2002.

Pursuant to certain sale and leaseback arrangements, the Group sold four
Boeing 757-200 aircraft, two Airbus 320-200 aircraft and four Boeing 757-200
aircraft, respectively, during 2000, 2001 and 2002 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 RMB377,817, RMB59,855 and RMB199,394, respectively, in 2000, 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,
under the sub-item Gain/(loss) on sale of fixed assets under
Non-operating income/(expenses) in the consolidated statements of income.

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)

During 2000, 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. Depreciation of the
relevant aircraft from the date of commencement of the leases to December 31,
2000, 2001 and 2002 or the expiry date of the leases, whichever is earlier,
was RMB19,027, RMB9,671 and RMB4,176, respectively.

During 2002, the Group entered into an arrangement with certain
independent third parties under which the Group sold an aircraft and then
immediately leased back the aircraft for a period of 26 years. As agreed, the
lease payment obligations, with pre-determined net present value totaling
RMB1,295,680 equivalent, is 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 favor of the lessor. The Group has an option to
purchase the aircraft at the 16.6th year and the agreed purchase price is 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 agreement, the Group is entitled
to the quiet use of, and continued possession and use or operation of, the
aircraft. Since the Group retains substantially the same rights to its use as
before the arrangement, no adjustment has been made to the fixed assets. As
of December 31, 2002, the net present value of the lease commitments and the
corresponding defeased deposits and debt securities amounted to RMB1,322,843.
As a result of the arrangement, the Group received a net cash benefit of
RMB51,682 which has been recognized as income for the year.

13.     INVESTMENTS

|                                                   |  |      |         |      |  |  |           | 
|-------------------------------------------------- |  | ---- | ------- | ---- |  |  | --------- | 
|                                                   |  | 2001 |         | 2002
|                                                   |  |      |         |     
|                                                   |  | RMB  |         | RMB 
|Share of net assets in affiliated companies        |  |      | 531,055 |      |  |  | 692,026   | 
|Share of net assets in jointly controlled entities |  |      | 174,338 |      |  |  | 461,962   | 
|Other investments, at cost                         |  |      | 195,201 |      |  |  | 201,854   | 
|                                                   |  |      |         |      |  |  |           | 
|                                                   |  |      | 900,594 |      |  |  | 1,355,842 | 
|                                                   |  |      |         |      |  |  |           | 

Details of the Companys principal affiliated companies and jointly
controlled entities are set out in Note 28.

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.     DEFERRED TAXATION

Movements in net deferred tax liabilities are as follows:

|                                                          |  |              |          |      |  |  |          |  
|--------------------------------------------------------- |  | ------------ | -------- | ---- |  |  | -------- | -
|                                                          |  | December 31,
|                                                          |  |             
|                                                          |  | 2001         |          | 2002
|                                                          |  |              |          |     
|                                                          |  | RMB          |          | RMB 
|Balance at beginning of year                              |  |              | (244,175 | )    |  |  | (519,577 | )
|Land use rights adjustment (Note 24(f))                   |  |              |         |      |  |  | 57,495   |  
|                                                          |  |              |          |      |  |  |          |  
|                                                          |  |              | (244,175 | )    |  |  | (462,082 | )
|Transferred to consolidated statement
of income (Note 10) |  |              | (275,402 | )    |  |  | (317,152 | )
|                                                          |  |              |          |      |  |  |          |  
|Balance at end of year                                    |  |              | (519,577 | )    |  |  | (779,234 | )
|                                                          |  |              |          |      |  |  |          |  

The deferred tax liabilities were made up of the taxation effect of:

|                             |                                       |                                |                           |           |              |           |          |           |           |         | 
|---------------------------- | ------------------------------------- | ------------------------------ | ------------------------- | --------- | ------------ | --------- | -------- | --------- | --------- | ------- | 
|                             |                                       |                                |                           |           | December 31,
|                             |                                       |                                |                           |           |             
|                             |                                       |                                |                           |           | 2001         |           | 2002    
|                             |                                       |                                |                           |           |              |           |         
|                             |                                       |                                |                           |           | RMB          |           | RMB     
|Deferred tax assets:         |                                       |                                |                           |           |              |           |          |          
|                             | Tax losses carried forward            |                                |                           | 175,926   |              |           |          | 149,338   |          
|                             | Repairs and maintenance accruals      |                                |                           | 171,122   |              |           |          | 63,896    |          
|                             | Repair charges capitalized            |                                |                           | 265,319   |              |           |          | 319,697   |          
|                             | Accrued expenses                      |                                |                           | 295,597   |              |           |          | 311,893   |          
|                             | Other                                 |                                |                           | 122,321   |              |           |          | 129,423   |          
|                             |                                       |                                |                           |           |              |           |          |           |          
|                             |                                       |                                | Total deferred tax assets |           |              | 1,030,285 |          |           |           | 974,247 | 
|                             |                                       |                                |                           |           |              |           |          |           |          
|Deferred tax liabilities:    |                                       |                                |                           |           |              |           |          |          
|                             | Undistributed profits of subsidiaries |                                |                           | 219,330   |              |           |          | 254,210   |          
|                             | Repairs and maintenance accruals      |                                |                           | 73,851    |              |           |          | 78,083    |          
|                             | Depreciation of fixed assets          |                                |                           | 1,237,532 |              |           |          | 1,403,278 |          
|                             | Other                                 |                                |                           | 19,149    |              |           |          | 17,910    |          
|                             |                                       |                                |                           |           |              |           |          |           |          
|                             |                                       | Total deferred tax liabilities |                           |           | 1,549,862    |           |          |           | 1,753,481 |        
|                             |                                       |                                |                           |           |              |           |          |           |          
|Net deferred tax liabilities |                                       |                                | (519,577                  | )         |              |           | (779,234 | )        
|                             |                                       |                                |                           |           |              |           |          |           |          

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)

As of December 31, 2001 and 2002, the Group had tax losses for PRC income
tax purposes totaling approximately RMB533,109 and RMB452,539, respectively.
Such tax losses are available for carry forward to set-off against future PRC
assessable income for a maximum period of five years. As of December 31, 2001
and 2002, the Group recorded a deferred tax asset of RMB175,926 and
RMB149,338, respectively, for such tax losses.

15.      CASH AND CASH EQUIVALENTS

As of December 31, 2001 and 2002, 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, 2001 and 2002
were simultaneously placed with several designated major PRC banks by SA
Finance. As of December 31, 2001 and 2002, the Groups deposits with SA
Finance totaled RMB1,341,126 and RMB900,979, respectively. See Note 22.

16.      ACCRUED EXPENSES

|                                                          |  |              |           |      |  |  |           | 
|--------------------------------------------------------- |  | ------------ | --------- | ---- |  |  | --------- | 
|                                                          |  | December 31,
|                                                          |  |             
|                                                          |  | 2001         |           | 2002
|                                                          |  |              |           |     
|                                                          |  | RMB          |           | RMB 
|Landing and traffic charges                               |  |              | 353,148   |      |  |  | 497,372   | 
|Duties and levies                                         |  |              | 446,180   |      |  |  | 360,827   | 
|Fuel                                                      |  |              | 169,777   |      |  |  | 297,626   | 
|Interest                                                  |  |              | 202,274   |      |  |  | 174,626   | 
|Lease charges                                             |  |              | 11,658    |      |  |  | 40,900    | 
|Accrued salaries, wages and benefits                      |  |              | 237,804   |      |  |  | 245,124   | 
|Insurance premium                                         |  |              | 2,955     |      |  |  | 1,972     | 
|Repairs and maintenance                                   |  |              | 306,088   |      |  |  | 198,465   | 
|Current portion of provision for major overhauls (Note 6) |  |              | 61,464    |      |  |  | 52,000    | 
|Lump sum housing benefits payable (Note 21)               |  |              |          |      |  |  | 213,675   | 
|Other                                                     |  |              | 222,207   |      |  |  | 258,867   | 
|                                                          |  |              |           |      |  |  |           | 
|                                                          |  |              | 2,013,555 |      |  |  | 2,341,454 | 
|                                                          |  |              |           |      |  |  |           | 

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)

17.     DEBT

Short-term notes payable

|                         |  |              |           |      |  |  |           | 
|------------------------ |  | ------------ | --------- | ---- |  |  | --------- | 
|                         |  | December 31,
|                         |  |             
|                         |  | 2001         |           | 2002
|                         |  |              |           |     
|                         |  | RMB          |           | RMB 
|Short-term notes payable |  |              | 1,431,105 |      |  |  | 4,422,926 | 
|                         |  |              |           |      |  |  |           | 

As of December 31, 2001 and 2002, borrowings under short-term notes
payable of the Group totaling RMB976,644 and RMB1,450,000, respectively, were
guaranteed by CSAHC.

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 1.92% to 5.3%. The Groups weighted average
interest rate on short-term notes payable was 4.28% and 3.11%, respectively, as
of December 31, 2001 and 2002.

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)

Long-term notes payable

|                                       |  |                                                                                                                     |  |              |           |      |  |  |           |  
|-------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- |  |  | --------- | -
|                                       |  |                                                                                                                     |  | December 31,
|                                       |  |                                                                                                                     |  |             
|                                       |  | Interest rate and final maturity                                                                                    |  | 2001         |           | 2002
|                                       |  |                                                                                                                     |  |              |           |     
|                                       |  |                                                                                                                     |  |              | RMB       |      |  |  | RMB       |  
|Renminbi denominated notes
payable:    |  |                                                                                                                     |  |              |           |     
|Loans for construction
projects        |  | Floating interest rates ranging from 4.94%
to 6.21% per annum as of December 31, 2002,
with maturity through 2009.  |  |              | 115,562   |      |  |  | 893,838   |  
|                                       |  | Non-interest bearing loans from a municipal
government authority, repayable in 2004                                 |  |              | 3,000     |      |  |  | 3,000     |  
|Loans for purchase
of aircraft         |  | Floating interest rates ranging from 5.02%
to 5.49% per annum as of December 31,
2002, with maturities through 2012 |  |              | 485,700   |      |  |  | 2,310,268 |  
|U.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, 2002,
with maturities through 2011.   |  |              | 3,741,749 |      |  |  | 3,426,038 |  
|Loan for purchase of
flight equipment  |  | Fixed interest rate of 8.35% per annum
as of December 31, 2002, with maturity
through 2004                          |  |              | 27,994    |      |  |  | 20,090    |  
|                                       |  |                                                                                                                     |  |              |           |      |  |  |           |  
|                                       |  |                                                                                                                     |  |              | 4,374,005 |      |  |  | 6,653,234 |  
|Less: current portion                  |  |                                                                                                                     |  |              | (746,411  | )    |  |  | (817,800  | )
|                                       |  |                                                                                                                     |  |              |           |      |  |  |           |  
|                                       |  |                                                                                                                     |  |              | 3,627,594 |      |  |  | 5,835,434 |  
|                                       |  |                                                                                                                     |  |              |           |      |  |  |           |  

As of December 31, 2001 and 2002, borrowings under long-term notes payable
of the Group totaling RMB3,741,749 and RMB3,360,945, 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, 2001 and 2002,
borrowings under long-term notes payable of the Group totaling RMB321,700 and
RMB1,890,118, respectively, were guaranteed by CSAHC and as of December 31,
2002, RMB561,531 was guaranteed by SA Finance.

As of December 31, 2002, the Group had banking facilities with several PRC
commercial banks for providing loan finance up to an amount of RMB12,360,000.
As of December 31, 2002, an amount of approximately RMB7,258,000 was utilized.

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)

The aggregate annual maturities of long-term notes payable for each of the
five years subsequent to December 31, 2002 and thereafter are as follows:

|                         |            |  |           |           | 
|------------------------ | ---------- |  | --------- | --------- | 
|                         |            |  | RMB      
|Year ending December 31, |            |  |           |          
|                         | 2003       |  |           | 817,800   | 
|                         | 2004       |  |           | 842,036   | 
|                         | 2005       |  |           | 1,045,049 | 
|                         | 2006       |  |           | 875,127   | 
|                         | 2007       |  |           | 1,810,673 | 
|                         | Thereafter |  |           | 1,262,549 | 
|                         |            |  |           |          
|                         |            |  | 6,653,234 |          
|                         |            |  |           |          

Interest expense, net of the amounts capitalized, represents:

|                     |  |                         |           |      |  |      |         |   |  |  |           |  
|-------------------- |  | ----------------------- | --------- | ---- |  | ---- | ------- | - |  |  | --------- | -
|                     |  | Year ended December 31,
|                     |  |                        
|                     |  | 2000                    |           | 2001 |  | 2002
|                     |  |                         |           |      |  |     
|                     |  | RMB                     |           | RMB  |  | RMB 
|Interest incurred    |  |                         | 1,074,236 |      |  |      | 938,944 |   |  |  | 1,023,379 |  
|Interest capitalized |  |                         |          |      |  |      | (5,227  | ) |  |  | (64,186   | )
|                     |  |                         |           |      |  |      |         |   |  |  |           |  
|Interest expense     |  |                         | 1,074,236 |      |  |      | 933,717 |   |  |  | 959,193   |  
|                     |  |                         |           |      |  |      |         |   |  |  |           |  

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)

18.      LEASE OBLIGATIONS

Capital leases

As of December 31, 2002, the Group leased 34 aircraft under capital
leases. The majority of these leases have terms of 10 to 15 years, and
expiration dates range from 2003 through 2011.

As of December 31, 2002, future scheduled minimum lease payments under
capital leases, which were 78% and 22%, respectively, denominated in U.S.
dollars and Japanese yen, are as follows:

|                                                              |            |  |           |           |           |  |             |         |  |  |            |           | 
|------------------------------------------------------------- | ---------- |  | --------- | --------- | --------- |  | ----------- | ------- |  |  | ---------- | --------- | 
|                                                              |            |  | Payments  |           | *Interest |  | Obligations
|                                                              |            |  | RMB       |           | RMB       |  | RMB        
|Year ending December 31,                                      |            |  |           |           |           |  |             |         |  |  |            |          
|                                                              | 2003       |  |           | 2,006,392 |           |  |             | 439,694 |  |  |            | 1,566,698 | 
|                                                              | 2004       |  |           | 1,624,381 |           |  |             | 351,237 |  |  |            | 1,273,144 | 
|                                                              | 2005       |  |           | 1,352,472 |           |  |             | 286,208 |  |  |            | 1,066,264 | 
|                                                              | 2006       |  |           | 1,390,900 |           |  |             | 205,592 |  |  |            | 1,185,308 | 
|                                                              | 2007       |  |           | 1,409,863 |           |  |             | 156,188 |  |  |            | 1,253,675 | 
|                                                              | Thereafter |  |           | 1,960,607 |           |  |             | 107,247 |  |  |            | 1,853,360 | 
|                                                              |            |  |           |           |           |  |             |         |  |  |            |           | 
|                                                              |            |  | 9,744,615 |           |           |  | 1,546,166   |         |  |  | 8,198,449  |          
|                                                              |            |  |           |           |           |  |             |         |  |  |            |          
|Less: current instalments of obligations under capital leases |            |  |           |           |           |  |             |         |  |  | (1,566,698 | )        
|                                                              |            |  |           |           |           |  |             |         |  |  |            |          
|                                                              |            |  |           |           |           |  |             |         |  |  | 6,631,751  |          
|                                                              |            |  |           |           |           |  |             |         |  |  |            |          

*Interest rates ranged from 1.0% to 11.0%.

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 pledged as security under certain loan
agreements (see Note 12), certain of the Groups aircraft with an aggregate
carrying amount of RMB9,216,138 and RMB8,960,483, respectively, as of December
31, 2001 and 2002 were pledged to secure facilities with financial institutions
granted to lessors totaling RMB9,143,563 and RMB8,198,449, respectively, on
these dates.

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)

Operating leases

As of December 31, 2002, future minimum lease payments under
non-cancellable aircraft and flight equipment operating leases were as follows
(principally denominated in U.S. dollars):

|                             |  |     |           | 
|---------------------------- |  | --- | --------- | 
|                             |  | RMB
|Year ending December 31,     |  |     |           | 
|2003                         |  |     | 1,280,060 | 
|2004                         |  |     | 1,327,631 | 
|2005                         |  |     | 1,245,150 | 
|2006                         |  |     | 1,001,954 | 
|2007                         |  |     | 783,739   | 
|Thereafter                   |  |     | 2,898,104 | 
|                             |  |     |           | 
|Total minimum lease payments |  |     | 8,536,638 | 
|                             |  |     |           | 

Amounts charged to rental expenses for operating leases for the years
ended December 31, 2000, 2001 and 2002 totaled RMB1,415,997, RMB1,723,338 and
RMB1,348,277, respectively.

All of the Groups obligations under capital and operating leases are
guaranteed by financial institutions.

19.      DEFERRED CREDITS

|                                                             |  |              |         |      |  |  |        |  
|------------------------------------------------------------ |  | ------------ | ------- | ---- |  |  | ------ | -
|                                                             |  | December 31,
|                                                             |  |             
|                                                             |  | 2001         |         | 2002
|                                                             |  |              |         |     
|                                                             |  | RMB          |         | RMB 
|Gains from sale and leaseback of fixed assets                |  |              | 2,999   |      |  |  |       |  
|Operating lease rebates                                      |  |              | 12,073  |      |  |  | 7,855  |  
|Governmental subsidy for safety related capital expenditures |  |              |        |      |  |  | 40,240 |  
|                                                             |  |              |         |      |  |  |        |  
|                                                             |  |              | 15,072  |      |  |  | 48,095 |  
|                                                             |  |              |         |      |  |  |        |  
|Movements during the year are as follows:                    |  |              |         |      |  |  |        |  
|Balance at beginning of year                                 |  |              | 33,555  |      |  |  | 15,072 |  
|Additions during the year                                    |  |              |        |      |  |  | 40,240 |  
|Transferred to consolidated statement of income              |  |              | (18,483 | )    |  |  | (7,217 | )
|                                                             |  |              |         |      |  |  |        |  
|Balance at end of year                                       |  |              | 15,072  |      |  |  | 48,095 |  
|                                                             |  |              |         |      |  |  |        |  

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)

Gains from sale and leaseback of fixed assets

During 1991 and 1992, a total of ten aircraft under capital leases were
sold. Seven of these aircraft were leased back under operating leases for a
period of two years. Pursuant to the sales agreement, the Group agreed to
lease an additional ten replacement aircraft. The gain on the sale of the ten
aircraft was RMB575,811. Of this amount, RMB215,693 and RMB129,464,
respectively, were recorded directly to other income in 1991 and 1992, and the
balance, representing the sale price in excess of fair value of the
replacement aircraft, has been deferred and amortized over the respective
operating lease periods.

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.

20.     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 (see 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 Company may not be registered
with the relevant authorities. Lack of registration may affect the validity
of such lease agreements.

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)

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 Company 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.

As of December 31, 2002, the Group had on order fifteen Boeing 737-800
aircraft and certain flight equipment, scheduled for deliveries in 2003 to
2005. Deposits of RMB1,659,964 have been made towards the purchase of these
aircraft and related equipment. As of December 31, 2002, the aggregate future
payments, including estimated amounts for price escalation through anticipated
delivery dates for these aircraft and related equipment totaled approximately
RMB5,875,996.

As of December 31, 2002, additional capital expenditures of approximately
RMB3,671,852 have been authorized, of which approximately RMB569,587 have been
committed, for the Groups principal facilities. Such expenditures comprised
mainly RMB3,127,420 for facilities and equipment at the Guangzhou New Airport
and RMB544,432 for other airport and office facilities and equipment, overhaul
and maintenance bases and training centers.

As of December 31, 2002, the Group was committed to make a capital
contribution of approximately RMB60,000 and RMB201,000, respectively, to
jointly controlled entity and affiliated company.

21.      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 13% to 17% for 2000, 14%
to 17% for 2001, and 14% to 19% for 2002, 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.

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.
This scheme which was previously organized by CSAHC has been handed over to
relevant PRC government agencies since January 1, 2002. The Group has no
obligation for the payment of pension benefits beyond the contributions
described above. Contributions to the retirement schemes are changed to
consolidated statement of income as and when incurred.

F-31



---



##### Table of Contents



CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

The Group is also required to provide retirees with medical benefits,
transportation subsidies and other welfare facilities. Previously, the Group
paid a fixed annual fee to CSAHC in return for CSAHC providing such benefits to
the retired employees of the Group. With effect from January 1, 2002, such
arrangement was terminated and the services are now provided by the Group
itself.

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 Non-operating income/(expenses) in the consolidated
statements of income.

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
statement of income. As of December 31, 2002, the Group already made payments
totaling RMB46,325 under the scheme and recorded its remaining contractual
liabilities totaling RMB213,675 as accrued liabilities on the consolidated
balance sheet (See Note 16).

22.      RELATED PARTY TRANSACTIONS

Substantially all transactions undertaken by the Group during the periods
presented were effected on such terms as have been determined by the CAAC or
other relevant PRC authorities. In addition, many of the involved
counterparties were either regulated by or connected with such authorities.
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.

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)

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 and jet engines

Certain PRC airlines, including the Group, were granted permission to
acquire aircraft directly from manufacturers subject to the approval of their
fleet expansion plans by the relevant PRC government authorities.

The Group acquires engines through Southern Airlines (Group) Import and
Export Trading Company (SAIETC), a wholly-owned subsidiary of CSAHC. In this
connection, handling fees totaling RMB2,181, RMBNil and RMB2,840, respectively,
were paid to SAIETC for 2000, 2001, and 2002.

Procurement of rotables and engineering spare parts

The Group also acquires rotables and engineering spare parts through
SAIETC and pays handling fees to it in return. Total purchases amounted to
RMB352,679, RMB324,998 and RMB583,548, respectively, for 2000, 2001 and 2002.
Handling fees totaling RMB11,602, RMB16,161 and RMB 33,466, respectively, were
paid to SAIETC for 2000, 2001 and 2002.

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 RMB2,387,646, RMB2,586,688 and
RMB2,373,956, respectively, during 2000, 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 RMB85,431, RMB123,439 and RMB256,238, respectively, were
incurred by the Group during 2000, 2001 and 2002.

Financial arrangements

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)

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 RMB1,985, RMB1,490 and RMB1,025,
respectively, were paid to these financial institutions during 2000, 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 RMB35,728,
RMB13,771 and RMB10,530, respectively, was earned by the Group on such deposits
during 2000, 2001 and 2002. See Note 15.

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 2000, 2001
and 2002 totaled RMB82,725, 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
RMB40,584, RMB57,424 and RMB62,111, respectively, were paid by the Group to the
CAAC during 2000, 2001 and 2002.

The Group is required to pay take-off and landing 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. Take-off and landing fees totaling
RMB1,327,413, RMB1,527,600 and RMB1,667,706, respectively, were paid to various
PRC airports during 2000, 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 RMB17,941, RMB22,707 and RMB29,058,
respectively, during 2000, 2001 and 2002.

Commission is earned by the CAACs sales offices, various PRC airlines and
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 the CAACs sales offices, various PRC
airlines and certain subsidiaries of CSAHC totaled RMB554,102, RMB547,186 and
RMB481,446, respectively, during 2000, 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 RMB100,994, RMB89,842 and RMB81,931, respectively, during 2000,
2001 and 2002.

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CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

Ground service fees are received from other 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
RMB20,933, RMB23,513 and RMB39,735, respectively, during 2000, 2001 and 2002.

The Company has a 50% equity interest in Guangzhou Aircraft Maintenance
Engineering Company Limited (GAMECO), which provides comprehensive
maintenance services to the Group. Maintenance fees totaling RMB471,044,
RMB534,828 and RMB592,311, respectively, were incurred by the Group for
services provided by GAMECO during 2000, 2001 and 2002.

Certain aircraft sundry supplies are purchased from Southern Airlines
(Group) Economic Development Company (SAGEDC), a subsidiary of CSAHC.
Supplies totaling RMB72,054, RMB86,386 and RMB101,350, respectively, were
purchased by the Group from SAGEDC during 2000, 2001 and 2002.

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 RMB10,712, RMB9,940 and RMB3,275, respectively, were
incurred by the Group for services provided by SA Advertising during 2000, 2001
and 2002.

Wet lease rentals

Pursuant to certain wet lease arrangements effected in August and November
2000, the Group incurred RMB108,699 and RMB300,000, respectively, during 2000
and 2001 in respect of five Boeing 737-300/37K aircraft leased from Zhongyuan
Airlines, a subsidiary of CSAHC. No such rentals were paid in 2002 since the
termination of lease arrangements in January 2002.

During 2002, wet lease rentals totaling RMB26,164 were paid to Xinjiang
Airlines, a subsidiary of CSAHC, pursuant to a wet lease agreement in respect
of a Boeing 757-200 aircraft effective October 2002.

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.

Acquisition of aircraft and related spare parts and vehicles

During the year, 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

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CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

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 did
not have a significant impact on the operating results of the Group for the
year ended December 31, 2002 or its financial position at that date.

Amounts due to related companies

Amounts due to related companies include balances with the CAAC and CSAHC
and their affiliated companies. These amounts are unsecured and non-interest
bearing and have no fixed repayment terms. These amounts are normally settled
on a current basis. Balances with other State-owned enterprises are excluded
from this caption as other State-owned enterprises are not considered related
parties.

23.      SHARE CAPITAL

|                                              |                                                |  |              |           |      |  |           |           | 
|--------------------------------------------- | ---------------------------------------------- |  | ------------ | --------- | ---- |  | --------- | --------- | 
|                                              |                                                |  | December 31,
|                                              |                                                |  |             
|                                              |                                                |  | 2001         |           | 2002
|                                              |                                                |  |              |           |     
|                                              |                                                |  | RMB          |           | RMB 
|Registered capital as of December 31:         |                                                |  |              |           |      |  |           |          
|                                              | 2,200,000,000 domestic shares of RMB 1.00 each |  |              | 2,200,000 |      |  |           | 2,200,000 | 
|                                              | 1,174,178,000 H shares of RMB 1.00 each        |  |              | 1,174,178 |      |  |           | 1,174,178 | 
|                                              |                                                |  |              |           |      |  |           |           | 
|                                              |                                                |  | 3,374,178    |           |      |  | 3,374,178 |          
|                                              |                                                |  |              |           |      |  |           |           | 
|Issued and paid up capital as of December 31: |                                                |  |              |           |      |  |           |          
|                                              | 2,200,000,000 domestic shares of RMB 1.00 each |  |              | 2,200,000 |      |  |           | 2,200,000 | 
|                                              | 1,174,178,000 H shares of RMB 1.00 each        |  |              | 1,174,178 |      |  |           | 1,174,178 | 
|                                              |                                                |  |              |           |      |  |           |           | 
|                                              |                                                |  | 3,374,178    |           |      |  | 3,374,178 |          
|                                              |                                                |  |              |           |      |  |           |           | 

All the domestic and H shares rank pari passu in all material respects.

As of December 31, 2001 and 2002, the retained earnings of the Group
included RMB110,539 and RMB135,010, respectively, of undistributed earnings of
affiliated companies accounted for under the equity method.

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CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

Pursuant to an extraordinary general meeting of shareholders held on May
21, 2002, a resolution was passed for the Company to issue not more than
1,000,000,000 A shares of par value of RMB1.00 each. As of the date of approval
of these consolidated financial statements, no A shares have been issued.

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CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

24.      RESERVES

Movements of reserves are as follows:

|                                                                   |  |              |         |      |  |  |          |  
|------------------------------------------------------------------ |  | ------------ | ------- | ---- |  |  | -------- | -
|                                                                   |  | December 31,
|                                                                   |  |             
|                                                                   |  | 2001         |         | 2002
|                                                                   |  |              |         |     
|                                                                   |  | RMB          |         | RMB 
|Statutory surplus reserve (Note (a))                               |  |              |         |      |  |  |          |  
|Balance at beginning of year                                       |  |              | 381,216 |      |  |  | 391,867  |  
|Adjustments from adoption of
PRC accounting regulations (Note (c)) |  |              |        |      |  |  | (106,007 | )
|Transferred from consolidated statement of income                  |  |              | 10,651  |      |  |  | 51,335   |  
|                                                                   |  |              |         |      |  |  |          |  
|Balance at end of year                                             |  |              | 391,867 |      |  |  | 337,195  |  
|                                                                   |  |              |         |      |  |  |          |  
|Statutory public welfare fund (Note (b))                           |  |              |         |      |  |  |          |  
|Balance at beginning of year                                       |  |              | 219,877 |      |  |  | 225,440  |  
|Adjustments from adoption of
PRC accounting regulations (Note (c)) |  |              |        |      |  |  | (79,533  | )
|Transferred from consolidated statement of income                  |  |              | 5,563   |      |  |  | 25,667   |  
|                                                                   |  |              |         |      |  |  |          |  
|Balance at end of year                                             |  |              | 225,440 |      |  |  | 171,574  |  
|                                                                   |  |              |         |      |  |  |          |  
|Discretionary surplus reserve (Note (d))                           |  |              |         |      |  |  |          |  
|Balance at beginning of year                                       |  |              | 63,852  |      |  |  | 69,867   |  
|Transferred from consolidated statement of income                  |  |              | 6,015   |      |  |  | 6,736    |  
|                                                                   |  |              |         |      |  |  |          |  
|Balance at end of year                                             |  |              | 69,867  |      |  |  | 76,603   |  
|                                                                   |  |              |         |      |  |  |          |  
|                                                                   |  |              | 687,174 |      |  |  | 585,372  |  
|                                                                   |  |              |         |      |  |  |          |  

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.

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CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

(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 transfer to this reserve from the consolidated statement of income is
subject to the approval of shareholders at general meetings. Its usage 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. See Note 26.

(f)       In the current year, the Group adopted IAS 40 Investment Property.
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 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. As such, comparative figures of fixed assets, lease prepayments
and reserves have not been adjusted for but have been reclassified to conform
with the current years presentation.

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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)

25.     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 and obligations under capital
leases.

Business risk

The Group conducts its principal operations in China 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 capital
lease obligations of the Group are disclosed in Notes 17 and 18, respectively.

Foreign currency risk

The Group has significant exposure to foreign currency as substantially
all of the Groups lease obligations and a significant portion of its 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, 2001 and 2002, the balance due from BSP
amounted to RMB226,135 and RMB353,246, respectively.

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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)

Liquidity risk

As of December 31, 2001 and 2002, the Groups net current liabilities
amounted to RMB3,695,777 and RMB7,015,998, respectively. For the years ended
December 2000, 2001 and 2002, the Group recorded a net cash inflow from
operating activities of RMB2,355,086, RMB2,223,943 and RMB3,697,544,
respectively, a net cash outflow from investing activities and financing
activities of RMB2,745,984, RMB3,603,535 and RMB2,744,364, respectively, and an
(decrease)/increase in cash and cash equivalents of RMB(390,898),
RMB(1,379,592) and RMB953,180, respectively.

With regard to 2003 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, 2002 of approximately
RMB4,422,926, the Group has obtained firm commitments from several PRC banks to
renew such borrowings as they fall due during 2003. With regard to the future
capital commitments, the Group has already entered into loan financing
agreements with several PRC banks to provide loan finance up to an approximate
amount of RMB5,102,000 and sought letters of intent from several PRC banks to
provide the remaining required loan finance of approximately RMB5,876,000. 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, 2003.
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.

Self insurance risk

The Group maintains a limited amount of property insurance in respect of
certain personal and real property.

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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 at December 31, 2001 and 2002 are set out below.

|                                   |  |              |           |       |  |          |           |       |  |  |           |  |  |  |           | 
|---------------------------------- |  | ------------ | --------- | ----- |  | -------- | --------- | ----- |  |  | --------- |  |  |  | --------- | 
|                                   |  | December 31,
|                                   |  |             
|                                   |  | 2001         |           | 2002 
|                                   |  |              |           |      
|                                   |  | Carrying     |           | Fair  |  | Carrying |           | Fair 
|                                   |  | amount       |           | value |  | amount   |           | value
|                                   |  |              |           |       |  |          |           |      
|                                   |  | RMB          |           | RMB   |  | RMB      |           | RMB  
|Cash and cash equivalents          |  |              | 2,817,863 |       |  |          | 2,817,863 |       |  |  | 3,771,043 |  |  |  | 3,771,043 | 
|Notes payable, current portion     |  |              | 2,177,516 |       |  |          | 2,208,056 |       |  |  | 5,240,726 |  |  |  | 5,326,511 | 
|Notes payable, non-current portion |  |              | 3,627,594 |       |  |          | 3,752,143 |       |  |  | 5,835,434 |  |  |  | 6,111,052 | 

The following methods and assumptions were used to estimate the fair value
and each class of financial instrument:

(i)     Cash and cash equivalents, and short-term notes payable

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
interests in companies established in the PRC. There is no quoted market price
for such interests and securities in the PRC and accordingly a reasonable
estimate of the fair value could not be made without incurring excessive costs.

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.

F-42



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CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

26.     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.

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CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

27.      RECONCILIATION AND SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION

(a)       The reconciliation of income before taxation and minority
interests to cash inflows from operations is as follows:

|                                                                                                        |                                                                  |  |                         |           |      |  |           |           |   |  |           |           |  
|------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  | ----------------------- | --------- | ---- |  | --------- | --------- | - |  | --------- | --------- | -
|                                                                                                        |                                                                  |  | Year ended December 31,
|                                                                                                        |                                                                  |  |                        
|                                                                                                        |                                                                  |  | 2000                    |           | 2001 |  | 2002     
|                                                                                                        |                                                                  |  |                         |           |      |  |          
|                                                                                                        |                                                                  |  | RMB                     |           | RMB  |  | RMB      
|Income before taxation and minority interests                                                           |                                                                  |  | 931,230                 |           |      |  | 795,256   |           |   |  | 1,139,099 |          
|Adjustments to reconcile income before taxation
and minority interests to cash inflows from operations: |                                                                  |  |                         |           |      |  |           |           |   |  |           |          
|                                                                                                        | Depreciation and amortization of fixed assets                    |  |                         | 1,845,279 |      |  |           | 1,802,462 |   |  |           | 1,839,293 |  
|                                                                                                        | Other amortization                                               |  |                         | 18,510    |      |  |           | 12,512    |   |  |           | 9,816     |  
|                                                                                                        | Amortization of deferred credits                                 |  |                         | (26,160   | )    |  |           | (18,483   | ) |  |           | (7,217    | )
|                                                                                                        | Equity income of affiliated companies                            |  |                         | (45,949   | )    |  |           | (53,077   | ) |  |           | (36,988   | )
|                                                                                                        | Equity income of jointly controlled entities                     |  |                         |          |      |  |           | 4,034     |   |  |           | 3,352     |  
|                                                                                                        | Gain on sale of aircraft                                         |  |                         | (377,817  | )    |  |           | (59,855   | ) |  |           | (199,394  | )
|                                                                                                        | Loss on sale of other fixed assets                               |  |                         | 5,221     |      |  |           | 115,744   |   |  |           | 28,654    |  
|                                                                                                        | Interest income                                                  |  |                         | (90,283   | )    |  |           | (49,878   | ) |  |           | (52,618   | )
|                                                                                                        | Interest expense                                                 |  |                         | 1,074,236 |      |  |           | 933,717   |   |  |           | 959,193   |  
|                                                                                                        | Non-cash exchange (gain)/loss, net                               |  |                         | (312,592  | )    |  |           | (292,630  | ) |  |           | 174,978   |  
|                                                                                                        | Decrease/(increase) in inventories                               |  |                         | 41,682    |      |  |           | (2,033    | ) |  |           | (76,472   | )
|                                                                                                        | Increase/(decrease) in amounts due to related companies          |  |                         | 144,565   |      |  |           | 98,040    |   |  |           | (193,175  | )
|                                                                                                        | (Increase)/decrease in trade receivables                         |  |                         | (26,364   | )    |  |           | 232,228   |   |  |           | (110,749  | )
|                                                                                                        | Decrease/(increase) in other receivables                         |  |                         | 8,552     |      |  |           | 42,938    |   |  |           | (166,004  | )
|                                                                                                        | Increase/(decrease) in prepaid expenses
and other current assets |  |                         | (5,579    | )    |  |           | (136,600  | ) |  |           | 123,924   |  
|                                                                                                        | Decrease in accounts payable                                     |  |                         | (137,333  | )    |  |           | (167,599  | ) |  |           | (61,843   | )
|                                                                                                        | Increase in bills payable                                        |  |                         |          |      |  |           |          |   |  |           | 1,299,680 |  
|                                                                                                        | Increase in sales in advance of carriage                         |  |                         | 17,720    |      |  |           | 31,036    |   |  |           | 19,985    |  
|                                                                                                        | Increase/(decrease) in accrued expenses                          |  |                         | 393,476   |      |  |           | (132,121  | ) |  |           | 86,215    |  
|                                                                                                        | Increase/(decrease) in other liabilities                         |  |                         | 95,371    |      |  |           | 70,254    |   |  |           | (33,032   | )
|                                                                                                        | (Decrease)/increase in provision for major overhauls             |  |                         | (47,333   | )    |  |           | (40,422   | ) |  |           | 16,226    |  
|                                                                                                        |                                                                  |  |                         |           |      |  |           |           |   |  |           |          
|Cash inflows from operations                                                                            |                                                                  |  | 3,506,432               |           |      |  | 3,185,523 |           |   |  | 4,762,923 |          
|                                                                                                        |                                                                  |  |                         |           |      |  |           |           |   |  |           |          

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)

(b)       Disclosure of non-cash investing and financing activities:

During 2002, the Group assumed from Zhongyuan Airlines debts totaling
RMB964,736 in partly satisfaction of the consideration payable for acquisition
of five Boeing 737-300/37K aircraft and other assets from Zhongyuan Airlines
(Note 21).

(C)       Effect of acquisitions of subsidiaries:

|                                                  |  |                         |   |      |  |      |   |  |  |  |         | 
|------------------------------------------------- |  | ----------------------- | - | ---- |  | ---- | - |  |  |  | ------- | 
|                                                  |  | Year ended December 31,
|                                                  |  |                        
|                                                  |  | 2000                    |   | 2001 |  | 2002
|                                                  |  |                         |   |      |  |     
|                                                  |  | RMB                     |   | RMB  |  | RMB 
|Net assets acquired:                              |  |                         |   |      |  |      |   |  |  |  |         | 
|Fixed assets                                      |  |                         |  |      |  |      |  |  |  |  | 96,636  | 
|Cash and cash equivalents                         |  |                         |   |      |  |      |   |  |  |  | 17,355  | 
|Trade receivables and other current assets        |  |                         |  |      |  |      |  |  |  |  | 20,681  | 
|                                                  |  |                         |   |      |  |      |   |  |  |  |         | 
|                                                  |  |                         |  |      |  |      |  |  |  |  | 134,672 | 
|                                                  |  |                         |   |      |  |      |   |  |  |  |         | 
|Accounts payable                                  |  |                         |   |      |  |      |   |  |  |  | 3,623   | 
|Accrued expenses and other liabilities            |  |                         |  |      |  |      |  |  |  |  | 11,220  | 
|                                                  |  |                         |   |      |  |      |   |  |  |  |         | 
|                                                  |  |                         |  |      |  |      |  |  |  |  | 14,843  | 
|                                                  |  |                         |   |      |  |      |   |  |  |  |         | 
|Total net assets value                            |  |                         |  |      |  |      |  |  |  |  | 119,829 | 
|Minority interests share of net asset value      |  |                         |  |      |  |      |  |  |  |  | 11,983  | 
|                                                  |  |                         |   |      |  |      |   |  |  |  |         | 
|Net asset 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)

28.      PRINCIPAL SUBSIDIARIES AND AFFILIATED COMPANIES

Details of the Companys principal subsidiaries and affiliated companies
as of December 31, 2002 are as follows:

|                                                           |  |               |  |        |    |                 |  |            |       |  |  |                                                      |  |  |  | 
|---------------------------------------------------------- |  | ------------- |  | ------ | -- | --------------- |  | ---------- | ----- |  |  | ---------------------------------------------------- |  |  |  | 
|                                                           |  |               |  |        |    | Attributable    |  |            |       |  |  |                                                      |  | 
|                                                           |  |               |  |        |    | equity interest |  |            |       |  |  |                                                      |  | 
|                                                           |  | Place of      |  |        |    |                 |  |            |       |  |  |                                                     
|                                                           |  | establishment |  | Direct |    | Indirect        |  | Principal 
|Name of company                                            |  | /operation    |  | %      |    | %               |  | activities
|                                                           |  |               |  |        |    |                 |  |           
|Subsidiaries                                               |  |               |  |        |    |                 |  |            |       |  |  |                                                      |  |  |  | 
|Guangxi Airlines Company Limited                           |  | PRC           |  |        | 60 |                 |  |            |      |  |  | Airline                                             
|Southern Airlines Group Shantou
Airlines Company Limited   |  | PRC           |  |        | 60 |                 |  |            |      |  |  | Airline                                             
|Zhuhai Airlines Company Limited                            |  | PRC           |  |        | 60 |                 |  |            |      |  |  | Airline                                             
|Guizhou Airlines Company Limited                           |  | PRC           |  |        | 60 |                 |  |            |      |  |  | Airline                                             
|Xiamen Airlines Company Limited                            |  | PRC           |  |        | 60 |                 |  |            |      |  |  | Airline                                             
|Guangzhou Nanland Air Catering
Company Limited             |  | PRC           |  |        | 51 |                 |  |            |      |  |  | Air catering                                        
|Affiliated companies                                       |  |               |  |        |    |                 |  |            |       |  |  |                                                      |  |  |  | 
|Guangzhou Aircraft Maintenance
Engineering Company Limited |  | PRC           |  |        | 50 |                 |  |            |      |  |  | Provision of aircraft  repair and maintenance       
|Southern Airlines Group Finance
Company Limited            |  | PRC           |  |        | 30 |                 |  |            | 16.86 |  |  | Provision of
 financial services                    
|Sichuan Airlines Corporation Limited                       |  | PRC           |  |        | 39 |                 |  |            |      |  |  | Airline                                             
|Jointly controlled entities                                |  |               |  |        |    |                 |  |            |       |  |  |                                                      |  |  |  | 
|MTU Maintenance Zhuhai Co. Limited                         |  | PRC           |  |        | 50 |                 |  |            |      |  |  | Provision of engine  repair and maintenance services
|China Postal Airlines Limited                              |  | PRC           |  |        | 49 |                 |  |            |      |  |  | Airline                                             
|Zhuhai Xiang Yi Aviation Technology
Company Limited        |  | PRC           |  |        | 51 |                 |  |            |      |  |  | Provision of flight  simulation service             

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)

29.      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* |           | Total
|                             |  |          |            |           |  |                |           |      
|                             |  | RMB      |            | RMB       |  | RMB            |           | RMB  
|Year ended December 31, 2000 |  |          |            |           |  |                |           |       |  |  |           |  |  |  |            | 
|Traffic revenue              |  |          | 11,458,704 |           |  |                | 1,197,883 |       |  |  | 2,049,572 |  |  |  | 14,706,159 | 
|Other revenue                |  |          | 361,524    |           |  |                | 16,479    |       |  |  | 94,156    |  |  |  | 472,159    | 
|                             |  |          |            |           |  |                |           |       |  |  |           |  |  |  |            | 
|                             |  |          | 11,820,228 |           |  |                | 1,214,362 |       |  |  | 2,143,728 |  |  |  | 15,178,318 | 
|                             |  |          |            |           |  |                |           |       |  |  |           |  |  |  |            | 
|Operating income             |  |          | 899,082    |           |  |                | 179,640   |       |  |  | 103,379   |  |  |  | 1,182,101  | 
|                             |  |          |            |           |  |                |           |       |  |  |           |  |  |  |            | 
|Year ended December 31, 2001 |  |          |            |           |  |                |           |       |  |  |           |  |  |  |            | 
|Traffic revenue              |  |          | 12,924,892 |           |  |                | 1,182,492 |       |  |  | 2,354,148 |  |  |  | 16,461,532 | 
|Other revenue                |  |          | 359,895    |           |  |                | 58,231    |       |  |  |          |  |  |  | 418,126    | 
|                             |  |          |            |           |  |                |           |       |  |  |           |  |  |  |            | 
|                             |  |          | 13,284,787 |           |  |                | 1,240,723 |       |  |  | 2,354,148 |  |  |  | 16,879,658 | 
|                             |  |          |            |           |  |                |           |       |  |  |           |  |  |  |            | 
|Operating income             |  |          | 1,090,154  |           |  |                | 219,686   |       |  |  | 90,833    |  |  |  | 1,400,673  | 
|                             |  |          |            |           |  |                |           |       |  |  |           |  |  |  |            | 
|Year ended December 31, 2002 |  |          |            |           |  |                |           |       |  |  |           |  |  |  |            | 
|Traffic revenue              |  |          | 13,197,589 |           |  |                | 1,118,695 |       |  |  | 3,165,608 |  |  |  | 17,481,892 | 
|Other revenue                |  |          | 485,046    |           |  |                |          |       |  |  | 51,682    |  |  |  | 536,728    | 
|                             |  |          |            |           |  |                |           |       |  |  |           |  |  |  |            | 
|                             |  |          | 13,682,635 |           |  |                | 1,118,695 |       |  |  | 3,217,290 |  |  |  | 18,018,620 | 
|                             |  |          |            |           |  |                |           |       |  |  |           |  |  |  |            | 
|Operating income             |  |          | 1,614,975  |           |  |                | 193,440   |       |  |  | 217,662   |  |  |  | 2,026,077  | 
|                             |  |          |            |           |  |                |           |       |  |  |           |  |  |  |            | 



| |  |  | * Asian market accounted for approximately 76%, 75% and 70%,
respectively, of the Groups total international traffic revenue
for the years ended December 31, 2000, 2001 and 2002. 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.

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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.      SUPPLEMENTAL INFORMATION

Movements in allowance for doubtful accounts comprise:

|                                         |  |                         |        |      |  |      |         |   |  |  |        |  
|---------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------- | - |  |  | ------ | -
|                                         |  | Year ended December 31,
|                                         |  |                        
|                                         |  | 2000                    |        | 2001 |  | 2002
|                                         |  |                         |        |      |  |     
|                                         |  | RMB                     |        | RMB  |  | RMB 
|Balance at beginning of the year         |  |                         | 72,110 |      |  |      | 72,644  |   |  |  | 59,019 |  
|Provision for doubtful accounts (Note 9) |  |                         | 2,072  |      |  |      | 1,729   |   |  |  | 1,304  |  
|Doubtful accounts written-off            |  |                         | (1,538 | )    |  |      | (15,354 | ) |  |  | (205   | )
|                                         |  |                         |        |      |  |      |         |   |  |  |        |  
|Balance at end of the year (Note 11)     |  |                         | 72,644 |      |  |      | 59,019  |   |  |  | 60,118 |  
|                                         |  |                         |        |      |  |      |         |   |  |  |        |  

31.      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. Differences which have a significant effect
on consolidated net income and shareholders equity 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 arrangement

As disclosed in Note 12 to the consolidated financial statements, the
Group entered into an arrangement with certain independent third parties under
which the Group sold an aircraft and then immediately leased back the aircraft
for a minimum lease period of 16.6 years. As a result of the arrangement, the
Group received a net cash benefit of RMB51,682 which has been recognized as
income for the year under IFRS. Under U.S. GAAP, such benefit is deferred and
amortized over the minimum lease period. In addition, under the lease
arrangement, 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 sheet.
Under U.S. GAAP, such commitments and deposits would be recognized on the
consolidated balance sheet, as such commitments are not deemed as extinguished
by the placement of security deposits.

(c)      Capitalized interest

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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)

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, the fixed assets of the Group were
revalued as of December 31, 1996 (see Notes 1 and 12 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 income 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 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 six years ended
December 31, 2002, 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.

(e)     Investments in affiliated company and jointly controlled entity

During the year, the Company 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 Company. In the consolidated statement of income, 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.

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)

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 Company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 statement of income, the equity share of results
of the investees are measured based on the historical cost basis.

(f)      Acquisition of subsidiaries from CSAHC

In August 2002, the Company 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)      Financial statements presentation and disclosures

In the consolidated statements of income presented under IFRS, gain/(loss)
on sale of fixed assets is classified under Non-operating income/(expenses).
Under U.S. GAAP, such gain/(loss) would be classified under Operating
income/(expenses) -  General and administrative.

As disclosed in Note 14 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.

(h)      New accounting pronouncements

SFAS No. 143

In June 2001, the FASB issued SFAS No. 143 Accounting for Asset
Retirement Obligations. SFAS No. 143 requires the Group to record the fair
value of an asset retirement obligation as a liability in the period in which
it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and/or normal use of the assets. The Group is also required to record a
corresponding asset which is depreciated over the life of the asset. Subsequent
to the initial measurement of the asset retirement obligation, the obligation
will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated
future cash flows underlying the obligation. The Group adopted SFAS No. 143 on
January 1, 2003. The Group does not expect the adoption of SFAS No. 143 will
have a material impact on its consolidated financial statements.

SFAS No. 145

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CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4
Reporting Gains and Losses from Extinguishment of Debt, and an amendment of
that Statement, SFAS No. 64 Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No. 44 Accounting
for Intangible Assets of Motor Carriers. SFAS No. 145 amends SFAS No. 13
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions.

The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are
applied in fiscal years beginning after May 15, 2002. The provisions in
paragraphs 8 and 9(c) of SFAS No. 145 related to SFAS No. 13 were effective for
transactions occurring after May 15, 2002. All other provisions of SFAS No.
145 were effective for financial statements issued on or after May 15, 2002.
The Group does not expect the adoption of SFAS No. 145 will have a material
impact on its consolidated financial statements.

SFAS No. 146

In July 2002, the FASB issued SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities which applies to costs associated
with an exit activity (including restructuring) or with a disposal of
long-lived assets. SFAS No. 146 requires an entity to record a liability for
cost associated with an exit or disposal activity when that liability is
incurred and can be measured at fair value. Commitment to an exit plan or a
plan of disposal expresses only managements intended future actions and does
not meet the requirement for recognizing a liability and the related expense.
An entity is required to disclose information about its exit and disposal
activities, the related costs, and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an
exit or disposal activity is initiated and in any subsequent period until the
activity is completed. The Group is required to adopt SFAS No. 146 on January
1, 2003. The provisions of SFAS No. 146 are required to be applied
prospectively after the adoption date to newly exit or disposal activities.
Therefore, management cannot determine the potential effect that adoption of
SFAS No. 146 will have on the Groups consolidated financial statements.

SFAS No. 150

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity, and requires the classification of a financial instrument that is
within its scope as a liability (or an asset in some circumstances). SFAS No.
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15,
2003. Management believes the adoption of SFAS No. 150 will not have a
material effect on the Groups financial position or results of operations.

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CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

FIN No. 45

In November 2002, the FASB issued Interpretation No. 45 Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of
the Interpretation are applicable to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 31, 2002. As of
December 31, 2002, the Group did not have any significant guarantees which
would be required to be disclosed pursuant to this Interpretation. The Group
does not expect the application of this Interpretation will have a material
effect on its consolidated financial statements.

FIN No. 46

In January 2003, the FASB issued Interpretation No. 46 Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The Interpretation requires certain
disclosures in financial statements issued after January 31, 2003 if it is
reasonably possible that the Group will consolidate or disclose information
about variable interest entities when the Interpretation becomes effective. The
Group does not expect the application of this Interpretation will have a
material impact on its consolidated financial statements.

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CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

Effect on net income of significant differences between IFRS and U.S. GAAP
is as follows:

|                                                                             |  |      |    |      |  |                         |          |      |  |      |         |              |  |  |          |   |  |  |         |  
|---------------------------------------------------------------------------- |  | ---- | -- | ---- |  | ----------------------- | -------- | ---- |  | ---- | ------- | ------------ |  |  | -------- | - |  |  | ------- | -
|                                                                             |  |      |    |      |  | Year ended December 31,
|                                                                             |  |      |    |      |  |                        
|                                                                             |  | Note |    | 2000 |  | 2001                    |          | 2002 |  | 2002
|                                                                             |  |      |    |      |  |                         |          |      |  |     
|                                                                             |  |      |    |      |  | RMB                     |          | RMB  |  | RMB  |         | U.S. dollars
|Net income under IFRS                                                        |  |      |    |      |  |                         | 501,771  |      |  |      | 340,225 |              |  |  | 575,761  |   |  |  | 69,559  |  
|U.S. GAAP adjustments:                                                       |  |      |    |      |  |                         |          |      |  |      |         |              |  |  |          |   |  |  |         |  
|Sale and leaseback accounting                                                |  |      | (a | )    |  |                         | (281,101 | )    |  |      | 54,254  |              |  |  | (100,664 | ) |  |  | (12,161 | )
|Lease arrangement                                                            |  |      | (b | )    |  |                         |         |      |  |      |        |              |  |  | (49,960  | ) |  |  | (6,036  | )
|Capitalized interest                                                         |  |      | (c | )    |  |                         | (11,300  | )    |  |      | 18,000  |              |  |  | (31,473  | ) |  |  | (3,802  | )
|Reversal of additional depreciation
arising from revaluation of fixed assets |  |      | (d | )    |  |                         | 68,000   |      |  |      | 65,000  |              |  |  | 33,000   |   |  |  | 3,987   |  
|Investments in affiliated company and jointly
controlled entity              |  |      | (e | )    |  |                         | 10,630   |      |  |      | 3,546   |              |  |  | (541     | ) |  |  | (65     | )
|Deferred tax effects                                                         |  |      |    |      |  |                         | 66,440   |      |  |      | (50,369 | )            |  |  | 47,849   |   |  |  | 5,780   |  
|                                                                             |  |      |    |      |  |                         |          |      |  |      |         |              |  |  |          |   |  |  |         |  
|Net income under U.S. GAAP                                                   |  |      |    |      |  |                         | 354,440  |      |  |      | 430,656 |              |  |  | 473,972  |   |  |  | 57,262  |  
|                                                                             |  |      |    |      |  |                         |          |      |  |      |         |              |  |  |          |   |  |  |         |  
|Basic earnings per share under U.S. GAAP                                     |  |      |    |      |  |                         | 0.11     |      |  |      | 0.13    |              |  |  | 0.14     |   |  |  | 0.017   |  
|                                                                             |  |      |    |      |  |                         |          |      |  |      |         |              |  |  |          |   |  |  |         |  
|Basic earnings per ADS under U.S. GAAP*                                      |  |      |    |      |  |                         | 5.25     |      |  |      | 6.38    |              |  |  | 7.02     |   |  |  | 0.849   |  
|                                                                             |  |      |    |      |  |                         |          |      |  |      |         |              |  |  |          |   |  |  |         |  



|*Basic earnings 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:

|                                                                |  |      |    |      |  |      |           |      |  |              |           |   |  |  |           |  
|--------------------------------------------------------------- |  | ---- | -- | ---- |  | ---- | --------- | ---- |  | ------------ | --------- | - |  |  | --------- | -
|                                                                |  |      |    |      |  |      |           |      |  | December 31, |           |   |  | 
|                                                                |  |      |    |      |  |     
|                                                                |  | Note |    | 2001 |  | 2002 |           | 2002
|                                                                |  |      |    |      |  |      |           |     
|                                                                |  |      |    |      |  | RMB  |           | RMB  |  | U.S. Dollars
|Shareholders equity under IFRS                                 |  |      |    |      |  |      | 9,221,663 |      |  |              | 9,613,207 |   |  |  | 1,161,394 |  
|U.S. GAAP adjustments:                                          |  |      |    |      |  |      |           |      |  |              |           |   |  |  |           |  
|Sale and leaseback accounting                                   |  |      | (a | )    |  |      | (486,325  | )    |  |              | (586,989  | ) |  |  | (70,916   | )
|Lease arrangement                                               |  |      | (b | )    |  |      |          |      |  |              | (49,960   | ) |  |  | (6,036    | )
|Capitalized interest                                            |  |      | (c | )    |  |      | 412,494   |      |  |              | 381,021   |   |  |  | 46,032    |  
|Revaluation of fixed assets, net of depreciation                |  |      | (d | )    |  |      | (253,348  | )    |  |              | (46,120   | ) |  |  | (5,572    | )
|Investments in affiliated company
and jointly controlled entity |  |      | (e | )    |  |      | (40,346   | )    |  |              | (118,003  | ) |  |  | (14,256   | )
|Deferred tax asset adjustment
on revaluation of fixed assets    |  |      |    |      |  |      | 80,888    |      |  |              | 9,719     |   |  |  | 1,174     |  
|Deferred tax effects                                            |  |      |    |      |  |      | 22,933    |      |  |              | 84,456    |   |  |  | 10,203    |  
|                                                                |  |      |    |      |  |      |           |      |  |              |           |   |  |  |           |  
|Shareholders equity under U.S. GAAP                            |  |      |    |      |  |      | 8,957,959 |      |  |              | 9,287,331 |   |  |  | 1,122,023 |  
|                                                                |  |      |    |      |  |      |           |      |  |              |           |   |  |  |           |  

F-53



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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                       
|            |  |                                                   
|10.1        |  | Section 906 Certification